Filed Pursuant to Rule 424(b)(4)
Registration Nos. 333-102549 and 333-102549-01
PROSPECTUS
1,600,000 Preferred Securities
$40,000,000
[FIRST BANK LOGO]
FIRST PREFERRED CAPITAL TRUST IV
8.15% 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.
------------------------
The preferred securities represent undivided beneficial interests in
the assets of First Preferred Capital Trust IV. The trust will invest all of the
proceeds of this offering of preferred securities to purchase 8.15% subordinated
debentures due 2033 of First Banks, Inc.
For each of the preferred securities that you own, you will receive
cumulative cash distributions at an annual rate of 8.15% on March 31, June 30,
September 30 and December 31 of each year, beginning June 30, 2003 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. We did not have any senior and senior subordinated indebtedness
outstanding at March 26, 2003. The subordinated debentures mature and the
preferred securities must be redeemed by June 30, 2033. 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 June 30, 2008, or
earlier under circumstances specified in this prospectus.
The preferred securities have been approved for listing on the New York
Stock Exchange under the symbol "FBSPrA" subject to notice of issuance. We
expect trading in the preferred securities on the New York Stock Exchange to
begin within 30 days after the original issue date.
------------------------
Investing in the preferred securities involves risks. See "Risk Factors"
beginning on page 12.
------------------------
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 $40,000,000
Proceeds to the trust................................................. $25.00 $40,000,000
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This is a firm commitment underwriting. First Banks will pay
underwriting commissions of $0.8125 per preferred security, or a total of
$1,300,000, for arranging the investment in our subordinated debentures. The
underwriters have been granted a 30-day option to purchase up to an additional
240,000 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 Fahnestock & Co. Inc.
Incorporated
March 26, 2003
FIRST BANKS, INC. AND SUBSIDIARIES
MAP OF LOCATIONS
As of September 30, 2002
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First Bank
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Central and
Metro Regional Southern Northern
Missouri Missouri Illinois Illinois
-------- -------- -------- --------
[GRAPHIC OMITTED]
Arnold Beaufort Belleville (2) Bartonville
Ballwin Bismarck Breese Canton
Brentwood Dutzow Brighton Chicago
Chesterfield (2) Fulton Carbondale Des Plaines (3)
Clayton Gerald Chester (2) Elk Grove
Creve Coeur (3) Hermann Columbia Village
Ellisville Middletown East St. Louis Galesburg (2)
Florissant (3) Montgomery City Edwardsville Havana
Kirkwood Owensville Granite City Hillside
Lake St. Louis Park Hills (2) Greenville Jacksonville
Manchester Warrenton Jerseyville (2) Knoxville
O'Fallon Washington Johnston City Peoria (3)
Shrewsbury Wentzville Lawrenceville Pittsfield
St. Charles (3) Marine Quincy (2)
St. Louis City (2) O'Fallon (2) Roodhouse
St. Louis County (3) Red Bud Springfield
St. Peters Salem (2) Sterling
Warson Woods Shiloh Winchester
Webster Groves Swansea
Valmeyer
Vandalia
Waterloo
West Frankfort
First Bank & Trust
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Southern Northern
California California Texas
---------- ---------- -----
Beverly Hills Campbell Dallas
Costa Mesa Concord Denton
Encino Fairfield Garland
[GRAPHIC OMITTED] Fountain Valley Napa Houston (3)
Fullerton Oakland Irving
Gardena Rancho Cordova McKinney
Huntington Beach (3) Roseville (2)
Irvine Sacramento
Laguna Niguel San Francisco (2)
Lakewood San Jose
Long Beach (3) San Mateo
Los Angeles (2) San Pablo
Malibu San Rafael
Marina del Rey Vallejo
Mira Loma Walnut Creek
Newport Beach
Orange
Riverside
Santa Barbara
Santa Maria
Solvang
Torrance
Ventura
Westlake Village
Westminster
Woodland Hills
Yorba Linda
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. Since 1994, our organization has grown significantly,
primarily as a result of our acquisition strategy, as well as through internal
growth. We currently have banking operations in California, Illinois, Missouri
and Texas. At September 30, 2002, we had total assets of $7.17 billion, loans,
net of unearned discount, of $5.46 billion, total deposits of $6.03 billion and
total stockholders' equity of $506.2 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, internet banking, automated teller machines, telephone
banking, safe deposit boxes, escrow and bankruptcy deposit services, stock
option services, and trust, private banking and institutional money management
services.
We operate through two subsidiary banks, as follows:
Geographic (Number of) Locations Total Assets
Name at September 30, 2002 at September 30, 2002
- -------------------------------------------- ---------------------------------------- --------------------------
(dollars expressed
in thousands)
First Bank Missouri (43) and Illinois (51) $4,063,159
First Bank and Trust California (49) and Texas (8) 3,139,170
We anticipate merging our bank subsidiaries, First Bank and First Bank
& Trust, on March 31, 2003 to allow certain administrative and operational
economies not available while the two banks maintain separate charters.
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. In the early 1990's, however, the pricing of acquisitions in these
areas escalated beyond the levels we believed to be desirable, causing us to
explore acquisitions in other markets. This effort led to the acquisition of
BancTEXAS Group, Inc. in 1994, which had offices in Dallas and Houston, Texas,
and subsequent acquisitions of financial institutions that had offices located
in the San Francisco - Sacramento corridor in Northern California and Orange
County in Southern California during the six years ended December 31, 2000. Our
emphasis in recent acquisitions has been to enhance our presence in markets we
currently serve. In 2001, we completed two acquisitions in Southern California
that increased our market share in Los Angeles and Orange Counties, and extended
our market into neighboring Riverside County. In addition, in 2001 we completed
an acquisition in Swansea, Illinois of a bank holding company that increased our
presence in the Illinois areas immediately east and north of St. Louis. In 2002,
we completed an acquisition in Des Plaines, Illinois, in the Chicago
metropolitan area, and two branch offices in Denton and Garland, Texas, in the
Dallas metropolitan area. In addition, we currently have one pending acquisition
in Ste. Genevieve, Missouri that will further expand our Midwest franchise south
of St. Louis.
Various trusts, which were created by and are administered by and for
the benefit of Mr. James F. Dierberg, our Chairman of the Board and Chief
Executive Officer, and members of his immediate family, own all of our voting
stock. Mr. Dierberg and his family, therefore, control our management and
policies.
Growth Strategy
Our primary strategic objective remains to achieve progressive and
profitable growth through the continued development of our banking franchise, as
supplemented by periodic acquisitions of other financial institutions. 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. Our acquisitions may serve to enhance our presence in a given market,
to expand the extent of our market areas or to enable us to enter new markets.
Primary responsibility for managing our subsidiary banking units rests
with the officers and directors of each unit, but we centralize overall
corporate policies, procedures and administrative functions and provide
centralized 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.
Financial Summary
To support our growth strategy, we emphasize earnings performance, as
well as retaining and investing those earnings. Consequently, we have never
paid, and have no present intention to pay, dividends on our common stock.
Furthermore, the dividends paid on our Class A and B preferred stock currently
represent less than 2.0% of our current net income before dividends. As a
result, between December 31, 1997 and December 31, 2001, our common
stockholders' equity grew at a compound annual growth rate of approximately
18.8%.
Compound
Growth or
Average for the
As of or for the Five Years
Nine Months Ended Ended
September 30, December 31, As of or for the Year Ended December 31,
-------------------- ------------------------ ------------------------------------------
2002 2001 2001(1) 2001 2000 1999 1998 1997
--------- ---------- -------------- --------- --------- ----------- ---------- ---------
(dollars in thousands)
Net income................. $ 30,362 34,632 18.2% $ 64,514 56,107 44,178 33,510 33,027
Loans, net of unearned
discount.............. 5,464,020 4,774,300 15.9 5,408,869 4,752,265 3,996,324 3,580,105 3,002,200
Total assets............... 7,171,534 5,976,773 12.9 6,778,451 5,876,691 4,867,747 4,554,810 4,165,014
Common stockholders'
equity................ 493,131 425,766 18.8 435,594 339,783 281,842 250,300 218,474
Total stockholders'
equity................ 506,194 438,829 18.0 448,657 352,846 294,905 263,363 231,537
Return on average total
stockholders'
equity (2)............ 8.67% 11.88% 15.15% 15.96% 17.43% 15.79% 13.64% 12.91%
Number of locations........ 151 142 -- 150 140 135 135 131
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(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 and total stockholders' equity and average return on average total stockholders'
equity.
(2) Ratios for the nine-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 IV
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 sole revenues of the
trust will be payments that we make on the subordinated debentures. The trust
exists exclusively for the following purposes:
o issuing the preferred securities to the public for cash;
o issuing the common securities to us;
o investing the proceeds from the sale of the preferred and common
securities in an equivalent amount of 8.15% subordinated
debentures due June 30, 2033, to be issued by us; and
o 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.
The Offering
The issuer....................................... First Preferred Capital Trust IV
Securities being offered......................... 1,600,000 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 an 8.15% 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 June 30, 2003. 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 June 30, 2033. We have the
option, however, to shorten the maturity date to a date not
earlier than June 30, 2008. 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 June 30, 2033
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 June 30, 2008. In addition, we may redeem, at any
time, all of the subordinated debentures if:
o 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;
o existing laws or regulations change in a manner requiring
the trust to register as an investment company; or
o the capital adequacy guidelines of the Federal Reserve
change so that the preferred securities are not eligible
to be counted as Tier I capital.
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
June 30, 2033. If we defer interest payments on the
subordinated debentures:
o the trust will also defer distributions on the
preferred securities;
o the distributions you are entitled to will
accumulate; and
o these accumulated distributions will earn interest at
an annual rate of 8.15%, 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.
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:
o 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;
o 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, (2)
equal in priority to our subordinated debentures
associated with the $183.7 million of trust preferred
securities that four of our other financing
subsidiaries will have outstanding (after giving
effect to the redemption of $86.3 million of
subordinated debentures associated with trust
preferred securities that we anticipate will be
effected in part with the proceeds of this offering)
and (3) equal in priority to subordinated debentures
that we issued in connection with a private
placement of $25.0 million of trust preferred
securities by a newly formed financing subsidiary;
and
o 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.
Voting rights of the preferred Except in limited circumstances, holders of the preferred
securities................................ securities will have no voting rights.
New York Stock Exchange The Preferred Securities have been approved for listing on the
symbol.................................... New York Stock Exchange under the symbol FBSPrA subject to
notice of issuance.
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.
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 entire net proceeds to us from the sale of the
subordinated debentures to the trust, after deducting
underwriting expenses and commissions, will be approximately
$38.4 million. We expect to use the net proceeds from the
sale of the subordinated debentures to redeem the subordinated
debentures associated with the 9.25% trust preferred
securities issued by one of our financing subsidiaries in
1997. Currently, there is approximately $88.9 million in
principal amount of such subordinated debentures outstanding.
Remaining funds necessary to complete this redemption will be
provided from available cash, the issuance of $25.0 million in
principal amount of subordinated debentures in connection with
a private placement of trust preferred securities, and
borrowings under our revolving credit line with a group of
unaffiliated financial institutions.
Before purchasing the preferred securities being offered, you should carefully consider the "Risk Factors" beginning on
page 12.
SUMMARY CONSOLIDATED AND OTHER FINANCIAL DATA
The summary consolidated financial and other data set forth below, insofar as they relate to the five years ended
December 31, 2001, are derived from our consolidated financial statements, which have been audited by KPMG LLP. The summary
consolidated financial and other data set forth below for the nine-month periods ended September 30, 2002 and 2001, 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 nine-month periods indicated, have been included. This information is
qualified by reference to our consolidated financial statements included herein, and 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, 2002 are not necessarily indicative of results that may be expected for
the entire year ending December 31, 2002.
As of and for the
Nine Months Ended
September 30, (1) As of or for the Year Ended December 31, (1)
-------------------- ------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
--------- ---------- -------- --------- --------- --------- ---------
(dollars expressed in thousands, except per share data)
Income Statement Data:
Interest income.................................... $ 319,726 340,117 444,743 422,826 353,082 327,860 295,101
Interest expense................................... 121,735 164,840 209,604 200,852 170,751 172,021 156,153
---------- --------- --------- --------- --------- --------- ---------
Net interest income................................ 197,991 175,277 235,139 221,974 182,331 155,839 138,948
Provision for loan losses.......................... 38,700 13,910 23,510 14,127 13,073 9,000 11,300
---------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for loan losses 159,291 161,367 211,629 207,847 169,258 146,839 127,648
Noninterest income................................. 64,840 57,744 98,609 42,778 41,650 36,497 25,697
Noninterest expense................................ 175,232 157,361 211,671 157,990 138,757 128,862 102,965
---------- --------- --------- --------- --------- --------- ---------
Income before provision for income taxes,
minority interest in income of subsidiary
and cumulative effect of change
in accounting principle.......................... 48,899 61,750 98,567 92,635 72,151 54,474 50,380
Provision for income taxes......................... 17,471 24,120 30,048 34,482 26,313 19,693 16,083
---------- --------- --------- --------- --------- --------- ---------
Income before minority interest in income
of subsidiary and cumulative effect of
change in accounting principle................... 31,428 37,630 68,519 58,153 45,838 34,781 34,297
Minority interest in income of subsidiary.......... 1,066 1,622 2,629 2,046 1,660 1,271 1,270
---------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle............................. 30,362 36,008 65,890 56,107 44,178 33,510 33,027
Cumulative effect of change in accounting
principle, net of tax............................ -- (1,376) (1,376) -- -- -- --
---------- --------- --------- --------- --------- --------- ---------
Net income......................................... $ 30,362 34,632 64,514 56,107 44,178 33,510 33,027
========== ========= ========= ========= ========= ========= =========
Dividends:
Preferred stock.................................... $ 524 524 786 786 786 786 5,067
Common stock....................................... -- -- -- -- -- -- --
Ratio of total dividends declared to net income.... 1.73% 1.51% 1.22% 1.40% 1.78% 2.35% 15.34%
Balance Sheet Data:
Investment securities.............................. $ 914,875 533,149 631,068 563,534 451,647 534,796 795,530
Loans, net of unearned discount.................... 5,464,020 4,774,300 5,408,869 4,752,265 3,996,324 3,580,105 3,002,200
Total assets....................................... 7,171,534 5,976,773 6,778,451 5,876,691 4,867,747 4,554,810 4,165,014
Total deposits..................................... 6,025,703 5,072,090 5,683,904 5,012,415 4,251,814 3,939,985 3,684,595
Notes payable...................................... -- 29,500 27,500 83,000 64,000 50,048 55,144
Guaranteed preferred beneficial interests in
First Banks, Inc. and First Banks America,
Inc. subordinated debentures..................... 267,632 182,945 235,881 182,849 127,611 127,443 83,183
Common stockholders' equity........................ 493,131 425,766 435,594 339,783 281,842 250,300 218,474
Total stockholders' equity......................... 506,194 438,829 448,657 352,846 294,905 263,363 231,537
Earnings Ratios:
Return on average total assets (2)................. 0.58% 0.79% 1.08% 1.09% 0.95% 0.78% 0.87%
Return on average total stockholders' equity (2)... 8.67 11.88 15.96 17.43 15.79 13.64 12.91
Efficiency ratio (3)............................... 66.67 67.53 63.42 59.67 61.95 67.00 62.54
Net interest margin (2) (4)........................ 4.23 4.40 4.34 4.65 4.24 3.94 3.88
Asset Quality Ratios:
Allowance for loan losses to loans................. 2.01 1.69 1.80 1.72 1.72 1.70 1.68
Nonperforming loans to loans (5)................... 1.82 0.94 1.24 1.12 0.99 1.22 0.80
Allowance for loan losses to
nonperforming loans (5).......................... 110.72 179.05 144.36 153.47 172.66 140.04 209.88
Nonperforming assets to loans and
other real estate (6)............................ 1.87 1.02 1.32 1.17 1.05 1.32 1.04
Net loan charge-offs to average loans (2).......... 0.68 0.41 0.45 0.17 0.22 0.05 0.27
Capital Ratios:
Average total stockholders' equity to
average total assets............................. 6.71 6.63 6.74 6.25 6.01 5.74 6.71
Total risk-based capital ratio..................... 10.97 10.98 10.53 10.21 10.05 10.27 10.26
Leverage ratio..................................... 6.86 7.67 7.25 7.46 7.15 6.78 6.80
Ratio of Earnings to Fixed Charges: (7)
Including interest on deposits..................... 1.37x 1.36x 1.44x 1.44x 1.40x 1.31x 1.31x
Excluding interest on deposits..................... 2.46 3.07 3.47 3.75 3.22 3.16 3.25
------------------------------
(1) The comparability of the selected data presented is affected by the acquisitions of 13 banks and five purchases of branch
offices during the five-year period ended December 31, 2001, and the acquisition of one bank and two purchases of branch
offices during the nine-month period ended September 30, 2002. 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 nine-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.
RECENT DEVELOPMENTS
On January 28, 2003, we issued a press release reporting our unaudited
financial data as of December 31, 2002 and for the three months and year then
ended. We reported net income for the years ended December 31, 2002 and 2001 of
$45.2 million and $64.5 million, respectively. Results for 2002 reflect
increased net interest income offset by higher operating expenses primarily
resulting from our acquisitions completed in 2001 and 2002. We also experienced
increased provisions for loan losses, indicative of the current economic
environment, reflected in increased charge-off, past due and nonperforming
trends. For the three months ended December 31, 2002 and 2001, our net income
was $14.8 million and $29.9 million, respectively. Included in the fourth
quarter and year ended December 31, 2001 were a nonrecurring gain of $12.4
million, net of related income taxes, relating to the exchange of our investment
in an unaffiliated financial institution for cash and stock in another
unaffiliated financial institution, and a nonrecurring adjustment of the
deferred income tax valuation reserve of $8.1 million, both of which increased
net income.
The implementation of Statement of Financial Accounting Standards, or
SFAS, No. 142, Goodwill and Other Intangible Assets, on January 1, 2002,
resulted in the discontinuation of amortization of certain intangibles
associated with the purchase of subsidiaries. If we had implemented SFAS No. 142
at the beginning of 2001, net income for the three months and year ended
December 31, 2001 would have increased $2.6 million and $8.1 million,
respectively. In addition, the implementation of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, 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
would have been $65.9 million for the year ended December 31, 2001.
The decline in our earnings in 2002 primarily resulted from the reduced
interest rate environment and weak economic conditions within our market areas,
and the related decline in asset quality. Throughout 2002, we experienced
higher-than-normal loan charge-offs, loan delinquencies and nonperforming loans
that led to significant increases in the provision for loan losses, thereby
reducing net income. While we believe we have aggressively addressed the asset
quality problems that have arisen throughout the year, we continue to closely
monitor our operations to address the challenges posed by the current economic
environment, including reduced loan demand and lower prevailing interest rates.
We experienced continuing growth of net interest income primarily
resulting from increased earning assets generated through our acquisitions of
Union Financial Group, Ltd., or Union, completed in the fourth quarter of 2001,
which provided assets of $360.0 million, as well as Plains Financial
Corporation, or Plains, completed in January 2002 and two Texas branch purchases
completed in June 2002, which provided assets of $256.3 million and $63.7
million, respectively. In addition, the earnings on our interest rate swap
agreements that we entered into in conjunction with our interest rate risk
management program largely mitigated the effects of declining interest rates,
further contributing to our increased net interest income. The derivative
financial instruments used to hedge our interest rate risk contributed $15.1
million and $53.0 million to net interest income for the three months and year
ended December 31, 2002, respectively, compared to $10.6 million and $23.4
million for the comparable periods in 2001. Net interest income was also
affected by an increase in guaranteed preferred debentures expense resulting
from the issuance of trust preferred securities by First Preferred Capital Trust
III in November 2001 and First Bank Capital Trust in April 2002. The increase in
net interest income, however, was partially offset by reductions in prevailing
interest rates and generally weaker loan demand, resulting in the decline in our
net interest margin from 4.34% in 2001 to 4.24% in 2002.
We recorded provisions for loan losses of $16.8 million and $55.5
million for the three months and year ended December 31, 2002, respectively,
compared to $9.6 million and $23.5 million for the comparable periods in 2001.
The significant increase in the provision for loan losses during 2002 reflects a
higher level of problem loans and related loan charge-offs and past due loans
resulting from the economic conditions within our markets, additional problems
identified in certain acquired loan portfolios and continuing deterioration in
the portfolio of leases to the airline industry. Net loan charge-offs also
increased significantly to $27.2 million and $54.6 million for the three months
and year ended December 31, 2002, compared to $7.2 million and $22.0 million for
the comparable periods in 2001. Included in this total were charge-offs
aggregating $38.6 million on ten large credit relationships, representing nearly
71% of net loan charge-offs in 2002. Additionally, nonperforming assets at
December 31, 2002 increased $11.2 million to $82.8 million from $71.6 million at
December 31, 2001, further contributing to the need for increased provisions for
loan losses in 2002.
Noninterest income decreased to $24.6 million and $89.5 million for the
three months and year ended December 31, 2002, respectively, from $40.9 million
and $98.6 million for the comparable periods in 2001. A significant component of
the decrease in noninterest income was a $19.1 million gain recorded in the
fourth quarter of 2001 in conjunction with the exchange of an equity investment
in the common stock of an unaffiliated financial institution for cash and an
equity investment in the acquiring unaffiliated financial institution. The
decrease in 2002 also reflects the decline in net gains on derivative
instruments due primarily to $4.1 million of gains resulting from the
terminations of certain interest rate swap and floor agreements during 2001, and
changes in the fair value of interest rate cap agreements and fair value hedges.
In addition, we recorded a gain of $1.9 million on the sale of our credit card
portfolio in 2001. The overall decline in noninterest income was partially
offset by increases in service charges on deposit accounts and customer service
fees, loan servicing fees, gains on mortgage loans sold, income earned on
bank-owned life insurance, income associated with our Institutional Money
Management and International Banking Divisions and a gain on the sale of certain
operating lease equipment.
Operating expenses were $57.5 million and $232.8 million for the three
months and year ended December 31, 2002, respectively, compared to $54.3 million
and $211.7 million for the comparable periods in 2001. The increase in operating
expenses reflects increases in salaries and employee benefit expenses,
occupancy, furniture and equipment expenses associated with the expansion of
corporate and branch facilities, and information technology fees due to growth
and technological advancements in our product and service offerings. These
higher operating expenses reflect our acquisitions and significant investments
that have been made in personnel, technology, equipment, facilities and new
product and business lines as part of our overall strategic growth plan. The
overall increase in operating expenses was partially offset by the
implementation of SFAS 142 in January 2002 and the related discontinuation of
amortization of certain intangibles associated with the purchase of
subsidiaries. Amortization of intangibles for the three months and year ended
December 31, 2002 was $532,000 and $2.0 million, respectively, compared to $2.7
million and $8.2 million for the comparable periods in 2001.
The condensed consolidated financial data set forth below for the three
months and years ended December 31, 2002 and 2001, are derived from our
consolidated financial statements. The consolidated financial information is
unaudited and is qualified by reference to our consolidated financial statements
appearing elsewhere in this prospectus, 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." In our opinion, all adjustments, consisting of normal
recurring adjustments necessary for a fair presentation of results as of and for
the three months and year ended December 31, 2002, have been included. Results
for past periods are not necessarily indicative of results that may be expected
for future periods.
Condensed Consolidated Statements of Income - (Unaudited)
Three Months Ended Year Ended
December 31, December 31,
-------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
Interest income.......................................................... $ 105,184 104,626 424,910 444,743
Interest expense......................................................... 35,005 44,764 156,740 209,604
--------- -------- -------- --------
Net interest income................................................. 70,179 59,862 268,170 235,139
Provision for loan losses................................................ 16,800 9,600 55,500 23,510
--------- -------- -------- --------
Net interest income after provision for loan losses................. 53,379 50,262 212,670 211,629
Noninterest income....................................................... 24,615 40,865 89,455 98,609
Noninterest expense...................................................... 57,524 54,310 232,756 211,671
--------- -------- -------- --------
Income before provision for income taxes, minority
interest in income of subsidiary and cumulative
effect of change in accounting principle................... 20,470 36,817 69,369 98,567
Provision for income taxes............................................... 5,300 5,928 22,771 30,048
--------- -------- -------- --------
Income before minority interest in income of
subsidiary and cumulative effect of
change in accounting principle ................................... 15,170 30,889 46,598 68,519
Minority interest in income of subsidiary................................ 365 1,007 1,431 2,629
--------- -------- -------- --------
Income before cumulative effect of change in accounting principle... 14,805 29,882 45,167 65,890
Cumulative effect of change in accounting principle, net of tax.......... -- -- -- (1,376)
--------- -------- -------- --------
Net income.......................................................... 14,805 29,882 45,167 64,514
Preferred stock dividends................................................ 262 262 786 786
--------- -------- -------- --------
Net income available to common stockholders......................... $ 14,543 29,620 44,381 63,728
========= ======== ======== ========
Basic earnings per common share:
Income before cumulative effect of change in accounting principle... $ 614.64 1,251.86 1,875.69 2,751.54
Cumulative effect of change in accounting principle, net of tax..... -- -- -- (58.16)
--------- -------- -------- --------
Basic............................................................... $ 614.64 1,251.86 1,875.69 2,693.38
========= ======== ======== ========
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle... $ 609.63 1,225.79 1,853.64 2,684.93
Cumulative effect of change in accounting principle, net of tax..... -- -- -- (58.16)
--------- -------- -------- --------
Diluted............................................................. $ 609.63 1,225.79 1,853.64 2,626.77
========= ======== ======== ========
Condensed Consolidated Balance Sheet information - (Unaudited)
December 31, December 31,
2002 2001
---- ----
(dollars expressed in thousands)
Investment securities............................................................. $ 1,137,320 631,068
Loans, net of unearned discount.................................................... 5,432,588 5,408,869
Allowance for loan losses.......................................................... 99,439 97,164
Total assets....................................................................... 7,342,800 6,778,451
Total deposits..................................................................... 6,172,820 5,683,904
Notes payable...................................................................... 7,000 27,500
Guaranteed preferred beneficial interests in subordinated debentures............... 270,039 235,881
Total stockholders' equity......................................................... 519,041 448,657
Nonperforming assets............................................................... 82,774 71,624
Selected Financial Ratios - (Unaudited)
Three Months Ended Year Ended
December 31, December 31,
-------------------- ----------------
2002 2001 2002 2001
---- ---- ---- ----
Return on average assets................................................. 0.81% 1.87% 0.64% 1.08%
Return on average stockholders' equity................................... 11.52 26.50 9.44 15.96
Net interest margin...................................................... 4.27 4.19 4.24 4.34
Efficiency Ratio......................................................... 60.68 53.92 65.08 63.42
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. Acquisitions involve
varying degrees of inherent risk that could affect our profitability.
o Acquisitions of other banks or businesses may expose us to asset
quality problems, higher than anticipated expenses, operational
problems or unknown or contingent liabilities of the entities we
acquire. If the quantity of these problems exceeds our estimates,
our earnings and financial condition may be adversely affected.
o Acquisitions generally require integration of the acquired
entity's systems and procedures with ours 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 distance between our operations increases operating costs and makes
efforts to standardize operations more difficult.
We operate banking offices in California, Illinois, Missouri and Texas.
The noncontiguous nature of many of our geographic markets increases operating
costs and makes it more difficult for us to standardize our business practices
and procedures. As a result of our geographic dispersion, we face the following
challenges:
o Operation of information technology and item processing functions
at remote locations including the transportation of documents and
increased communications line charges from various service
providers;
o Control of correspondent accounts, reserve balances and wire
transfers in different time zones;
o Familiarizing personnel with our business environment, banking
practices and customer requirements at geographically dispersed
areas;
o Providing administrative support, including accounting, human
resources, loan servicing, internal audit and credit review at
significant distances; and
o Establishing and monitoring compliance with our corporate
policies and procedures in different areas.
Our emphasis in recent years on commercial real estate and construction lending
in lieu of residential mortgage lending has increased our credit risk.
Our expanded level of commercial real estate and construction lending
carries with it greater credit risk than the credit risk associated with
residential real estate lending. A substantial portion of the loans made by our
subsidiary banks is secured by commercial real estate. Commercial real estate
and real estate construction loans were $1.68 billion and $983.3 million at
September 30, 2002, representing 30.8% and 18.0% of our loan portfolio,
respectively. During the nine months ended September 30, 2002, we experienced
increasing amounts of nonperforming loans and loan charge-offs within our
portfolio of commercial real estate and real estate construction loan
portfolios. Adverse developments affecting real estate in one or more of our
markets could further increase the credit risk associated with our loan
portfolio. See "--Management's Discussion and Analysis of Financial Condition
and Results of Operations - Lending Activities" on page 57 and "--Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Balance Sheet - Loans and Allowance for Loan Losses" on page 66.
Decreases in interest rates could have a negative impact on our profitability.
Our earnings are principally dependent on net interest income. Net
interest income is affected by many factors that are partly or completely beyond
our control, including competition, general economic conditions and the policies
of regulatory authorities, including the monetary policies of the Federal
Reserve. Under our current interest rate risk position, our net interest income
could be negatively affected by a further decline in interest rates. See
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk Management" on page 47.
Our interest rate risk hedging activities may increase volatility in quarterly
earnings.
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. 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 fair value. The effect of certain of our hedging
strategies may result in volatility in our quarterly earnings as interest rates
change or as the volatility in the underlying derivatives markets increases or
decreases. The volatility in earnings is primarily a result of marking to market
certain of our hedging instruments and/or modifying our overall hedge position.
The financial services business is highly competitive, and we face competitive
disadvantages because of our size and the nature of banking regulation.
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 may have more flexibility than we do in
providing certain services.
We may not be able to implement technological change as effectively as our
competitors.
The financial services industry is undergoing rapid technological
change related to delivery and availability of products and services and
operating efficiencies. In many instances technological improvements require
significant capital expenditures. Many of our competitors have significantly
greater resources than we have available.
Competition for acquisitions in the financial services industry and our status
as a privately held company make our efforts to grow through acquisitions
difficult.
We face intense competition from other financial institutions in
pursuing acquisitions, particularly related to price. 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 we expect that this situation will
happen again. Because of our intention to remain a closely held company, we do
not use common stock to make acquisitions. Our use of cash as acquisition
consideration can be a disadvantage in acquisitions relative to other
prospective acquirers in those instances in which selling stockholders desire a
tax free exchange.
Further domestic terrorist attacks could adversely affect the domestic economy
and our business.
Additional terrorist attacks and further acts of violence in the United
States could cause deterioration of the domestic economy which in turn can cause
an increase in payment delinquencies and loan losses in our loan portfolio. The
attacks on New York and Washington D.C. on September 11, 2001 appear to have
prolonged a period of slow growth in the domestic economy, leading to low loan
demand and an economy generally resistant to price increases. This operating
environment has been difficult for many of our loan customers. In particular,
such events may lead to reduced levels of travel, which could adversely affect
our hotel loan and commercial airline equipment leasing portfolios. At September
30, 2002, we had $124.3 million in hotel loans and $47.3 million in commercial
airline equipment leases. Any terrorist attack, any response to such an attack
by the United States or any similar condition affecting the United States in
general or any of the geographic areas in which we conduct substantial business
could affect the value of the collateral underlying our loans and leases and
materially adversely affect our results of operations.
We operate in a highly regulated environment. Recently enacted, proposed and
future legislation and regulations may increase our cost of doing business.
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 including the Sarbanes-Oxley Act of 2002 and the USA
Patriot Act of 2001, could increase our costs of doing business, particularly
personnel and technology expenses necessary to maintain compliance with the
expanded regulatory requirements. Additionally, the legislative and regulatory
changes could reduce our ability to compete in certain markets. See "--Business
- - Supervision and Regulation" beginning on page 82.
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 by the ability of our subsidiaries to pay dividends or
by regulatory action.
Because we are a holding company, our ability to make interest payments
on the subordinated debentures will depend on the ability of our subsidiaries to
pay dividends to us, as well as available cash resources at the bank holding
company level. Additionally, our regulators also may preclude us from making
interest payments on the subordinated debentures in order to address any
perceived deficiencies in our liquidity or regulatory capital levels. We cannot
assure you that our subsidiaries will be able to pay dividends in the future
necessary to allow us to make interest payments on the subordinated debentures.
If we are unable to make interest payments on the subordinated debentures, the
trust will not have funds sufficient to make distributions on the preferred
securities. In the event that we are unable to make interest payments on the
subordinated debentures, we could 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. The ability of each of our subsidiaries to pay
dividends depends on its profitability and cash flow requirements and regulatory
limitations. These regulatory limitations generally are based on capital levels
and current and retained earnings. Based on applicable regulatory limitations,
our subsidiaries had the capacity to pay us a total of approximately $31.3
million in dividends as of December 31, 2002.
A deferral of interest payments on the subordinated debentures may result in
adverse federal income tax consequences to you.
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.
Our option to defer interest payments on the subordinated debentures, or the
exercise of that option, could adversely affect the market price of the
preferred securities.
As a result of 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 do not currently intend to exercise
our right to defer interest payments on the subordinated debentures, but 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.
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. We did not have any senior and
senior subordinated debt outstanding at March 26, 2003. In the event of a
default under the terms of any senior or senior subordinated debentures, we may
be precluded from making payments on the subordinated debentures. The issuance
of the subordinated debentures and the preferred securities does not
significantly limit our ability or the ability of our subsidiaries to incur
additional indebtedness, guarantees or other liabilities. See "--Description of
the Subordinated Debentures - Miscellaneous" on page 110.
Because we are a holding company, the creditors of our subsidiaries,
including depositors, 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 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 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 contain significant covenant or other
contractual protections to 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. 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.
You are subject to prepayment risk because we may redeem the subordinated
debentures before June 30, 2033.
o You should assume that we will redeem the subordinated debentures
within 180 days of the occurrence of the adverse tax event,
investment company or bank regulatory developments described
under "--Description of the Subordinated Debentures -
Redemption." o You also should assume that we will redeem the
subordinated debentures at any time after June 30, 2008 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 best
interest to redeem the subordinated debentures. If the
subordinated debentures are redeemed prior to their maturity, the
trust must redeem preferred securities having an aggregate
liquidation amount equal to the aggregate principal amount of the
subordinated debentures redeemed. If the preferred securities are
redeemed prior to their maturity, you may not be able to earn a
return on the proceeds of the redemption as high as you were
earning on the preferred securities.
o 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 relative to securities
issued such as the preferred securities. 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" on page 92.
We are allowed to 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 the stated maturity of
the subordinated debentures on June 30, 2033. In the event of dissolution, and
subject to the terms of the trust agreement, the trustees may distribute the
subordinated debentures to you.
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.
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 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 "Material United States Federal Income Tax
Consequences" beginning on page 116 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
New York Stock Exchange has approved the preferred securities for listing
subject to notice of issuance. We expect trading to commence on the New York
Stock Exchange within 30 days after the original issue date. There is no
assurance, however, that an active or liquid trading market will develop for the
preferred securities or that the listing of the preferred securities will
continue on the New York Stock Exchange. 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, which has initially been
set as the liquidation amount 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 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.
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 remedies available to
the holders of the subordinated debentures other than remedies available as the
result of our failure to pay interest and principal on the subordinated
debentures unless the property trustee fails to do so. See "--Description of
Preferred Securities -Events of Default; Notice" on page 96 and "--Description
of Subordinated Debentures - Enforcement of Certain Rights by Holders of the
Preferred Securities" on page 109.
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information appearing in this report, in documents incorporated by
reference herein and in documents subsequently filed with the SEC that are not
statements of historical fact are 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" beginning on
page 12 of 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: fluctuations in interest rates and the economy, including the negative
impact on the economy resulting from the events of September 11, 2001 in New
York City and Washington D.C. and the national response to those events as well
as the threat of future terrorist activities, potential wars and/or military
actions related thereto, and domestic responses to terrorism or threats of
terrorism; the impact of laws and regulations applicable to us and changes
therein; the impact of accounting pronouncements applicable to us and changes
therein; competitive conditions in the markets in which we conduct our
operations, including competition from banking and non-banking companies with
substantially greater resources than us, some of which may offer and develop
products and services not offered by us; our ability to control the composition
of our loan portfolio without adversely affecting interest income; 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; 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. We
do not have a duty to and will not update these forward-looking statements.
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
$38.4 million after deduction of offering expenses estimated to be $325,000 and
underwriting commissions.
We expect to use the entire net proceeds to redeem the subordinated
debentures associated with the 9.25% trust preferred securities issued by our
financing subsidiary, First Preferred Capital Trust, in 1997. Currently, there
is approximately $88.9 million in principal amount of such subordinated
debentures. Remaining funds necessary to complete this redemption of $50.5
million will be provided from available cash of approximately $10.4 million, the
issuance of $25.0 million of additional trust preferred securities in a private
placement to qualified institutional buyers, as described below, and borrowings
under our revolving credit line with a group of unaffiliated financial
institutions.
On March 20, 2003, we completed a $25.0 million private placement of
trust preferred securities pursuant to Rule 144A of the Securities Act of 1933.
In conjunction with this private placement, we formed a new Connecticut business
trust subsidiary, First Bank Statutory Trust, or FBST. We own all of the common
securities of FBST. The cumulative trust preferred securities of FBST are
privately held, and FBST utilized the proceeds from the issuance of the common
and preferred securities to purchase approximately $25.8 million of fixed rate
subordinated debentures from us. The subordinated debentures mature on March 20,
2033. The subordinated debentures are the sole asset of FBST. In connection with
the issuance of the preferred securities, we made certain guarantees and
commitments that, in the aggregate, constitute a full and unconditional
guarantee by us on a subordinated basis of the obligations of FBST under FBST's
preferred securities. Distributions on the FBST preferred securities are payable
quarterly in arrears on March 31, June 30, September 30 and December 31,
beginning on March 31, 2003. The net proceeds from the sale of the trust
preferred securities were approximately $24.5 million after deduction of
offering expenses and private placement commissions.
The revolving credit line initially provided a $90 million revolving
credit line and a $20 million letter of credit. On December 31, 2002, the
revolving credit line was amended, at the request of First Banks, to provide a
$45 million revolving credit line and a $20 million letter of credit.
Additionally, the revolving credit line was amended to reduce from 0.70% to
0.60% the minimum return on average assets ratio that First Banks is required to
meet for the year ended December 31, 2002 and to add a covenant providing that
for the quarter ending December 31, 2002 and each following quarter, First Banks
is required to maintain a minimum return on average assets ratio, computed with
respect to the current quarter annualized, of at least 0.80%. The revolving
credit line defines return on average assets as the percentage determined by
dividing First Banks' net income for the immediately preceding four calendar
quarters by total average assets as reflected on First Banks' balance sheet at
the end of the most recently completed calendar quarter. First Banks requested
this amendment because it anticipated that its minimum return on average assets
determined for the four quarters ended December 31, 2002 would be less than
0.70%. Interest is payable on outstanding principal loan balances at a floating
rate equal to, either the lender's prime rate or, at our option, the Eurodollar
rate plus a margin determined by the outstanding loan balances and our net
income for the preceding four calendar quarters. If the loan balances
outstanding under the revolving credit line are accruing at the prime rate,
interest is to be paid monthly. If the loan balances outstanding under the
revolving credit line are accruing at the London InterBank Offering Rate, or
LIBOR, interest is payable based on the one, two, three or six-month LIBOR rates
as selected by us. The revolving credit line matures on August 21, 2003 and is
secured by a pledge of the stock of our banking subsidiaries.
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 interest 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:
o the trust is wholly-owned;
o the sole assets of the trust are the subordinated debentures,
specifying the subordinated debentures' outstanding principal
amount, interest rate and maturity date; and
o 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 approved for listing on the New York
Stock Exchange under the symbol "FBSPrA" subject to notice of issuance. We
expect trading in the preferred securities on the New York Stock Exchange to
begin within 30 days after the original issue date. 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."
CAPITALIZATION
The following table sets forth (i) our consolidated capitalization at
September 30, 2002 and (ii) our consolidated capitalization giving effect to the
issuance of the preferred securities hereby offered by the trustand our receipt
and utilization of the net proceeds from the corresponding sale of the
subordinated debentures to the trust, and the issuance of $25.0 million of
preferred securities in a private placement to qualified institutional buyers
under Rule 144A of the Securities Act of 1933, as if both of the sales of
preferred securities had been consummated on September 30, 2002 to redeem the
subordinated debentures associated with the 9.25% trust preferred securities
issued by one of our financing subsidiaries 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.
September 30, 2002
---------------------------------------
Actual As Adjusted
----------------- ---------------
(dollars expressed in thousands)
Long-Term Debt:
Notes payable (1)..................................................... $ -- $ 13,000
---------- ----------
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 (2)(3)(4)................................. 227,789 206,759
Guaranteed preferred beneficial interests in First Banks America, Inc.
subordinated debentures (2)....................................... 46,336 46,336
---------- ----------
Total guaranteed preferred beneficial interests in subordinated
debentures................................................... 274,125 253,095
Less unamortized expenses relating to the issuance of the preferred
securities........................................................ (6,493) (8,643)
---------- ----------
Total guaranteed preferred beneficial interests in subordinated
debentures, net of expenses.................................. 267,632 244,452
---------- ----------
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....................................................... 5,950 5,950
Retained earnings..................................................... 419,146 419,146
Accumulated other comprehensive income................................ 62,120 62,120
---------- ----------
Total stockholders' equity........................................ 506,194 506,194
---------- ----------
Total capitalization.............................................. $ 773,826 $ 763,646
========== ==========
Capital Ratios: (5)(6)
Leverage ratio (7).................................................... 6.86% 6.86%
Tier I capital ratio.................................................. 7.79 7.78
Total risk based capital ratio........................................ 10.97 10.62
- -----------------------------
(1) The proceeds of this offering will be used in their entirety to redeem the
subordinated debentures associated with the $86.3 million issue of trust
preferred securities by our financing subsidiary in 1997. The remaining
funds necessary to complete this redemption ($47.9 million) will be
provided from available cash of approximately $10.4 million, the issuance
of $25.0 million of additional subordinated debentures in a private
placement and borrowings under First Banks' revolving credit line. See "Use
of Proceeds" beginning on page 19 of this prospectus for a description of
the private placement and the revolving credit line and the amounts
outstanding thereunder as of certain dates.
(2) Includes the effects of interest rate swap agreements. At September 30,
2002, the stated values of the guaranteed preferred beneficial interests in
the First Banks, Inc. subordinated debentures and the First Banks America,
Inc. subordinated debentures are $224.0 million and $46.0 million,
respectively.
(3) Amounts include $25.0 million of variable rate subordinated debentures
issued on April 10, 2002 by First Bank Capital Trust that rank equal in
priority to $143.8 million of our subordinated debentures and, effective
December 31, 2002, $46.0 million of FBA's subordinated debentures, and rank
junior in priority to $55.2 million of our subordinated debentures that
were issued in November 2001.
(4) The following is a reconciliation of the actual amount of guaranteed
beneficial interests in First Banks, Inc. subordinated debentures to the as
adjusted amount:
(dollars expressed
in thousands)
Actual amount as of September 30, 2002.................................................... $ 227,789
Termination of $86.3 million interest rate swap agreement on December 18, 2002............ 220
Redemption of subordinated debentures issued by First Preferred Capital Trust in 1997..... (86,250)
Issuance of subordinated debentures - First Bank Statutory Trust.......................... 25,000
Issuance of subordinated debentures - First Preferred Capital Trust IV.................... 40,000
---------
As adjusted amount as of September 30, 2002............................................... $ 206,759
=========
(5) 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.
(6) 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 because of the 25% limitation.
The preferred securities will, however, be included in total risk-based
capital.
(7) 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.
SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA
The selected consolidated financial and other data set forth below, insofar as they relate to the five years ended
December 31, 2001, are derived from our consolidated financial statements, which have been audited by KPMG LLP. The selected
consolidated financial and other data set forth below for the nine-month periods ended September 30, 2002 and 2001, 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 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, 2002 are not necessarily indicative of
results that may be expected for the entire year ending December 31, 2002.
As of or for the
Nine Months Ended
September 30, (1) As of or for the Year Ended December 31, (1)
------------------- ---------------------------------------------
2002 2001 2001 2000 1999 1998 1997
-------- ---------- ------- --------- --------- -------- --------
(dollars expressed in thousands, except per share data)
Income Statement Data:
Interest income.................................... $319,726 340,117 444,743 422,826 353,082 327,860 295,101
Interest expense................................... 121,735 164,840 209,604 200,852 170,751 172,021 156,153
-------- ------- -------- -------- --------- --------- ---------
Net interest income................................ 197,991 175,277 235,139 221,974 182,331 155,839 138,948
Provision for loan losses.......................... 38,700 13,910 23,510 14,127 13,073 9,000 11,300
-------- ------- -------- -------- --------- --------- ---------
Net interest income after provision for
loan losses...................................... 159,291 161,367 211,629 207,847 169,258 146,839 127,648
Noninterest income................................. 64,840 57,744 98,609 42,778 41,650 36,497 25,697
Noninterest expense................................ 175,232 157,361 211,671 157,990 138,757 128,862 102,965
-------- ------- -------- -------- --------- --------- ---------
Income before provision for income taxes,
minority interest in income of subsidiary
and cumulative effect of change
in accounting principle.......................... 48,899 61,750 98,567 92,635 72,151 54,474 50,380
Provision for income taxes......................... 17,471 24,120 30,048 34,482 26,313 19,693 16,083
-------- ------- -------- -------- --------- --------- ---------
Income before minority interest in income of
subsidiary and cumulative effect of change
in accounting principle.......................... 31,428 37,630 68,519 58,153 45,838 34,781 34,297
Minority interest in income of subsidiary.......... 1,066 1,622 2,629 2,046 1,660 1,271 1,270
-------- ------- -------- -------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle............................. 30,362 36,008 65,890 56,107 44,178 33,510 33,027
Cumulative effect of change in accounting
principle, net of tax............................ -- (1,376) (1,376) -- -- -- --
-------- ------- -------- -------- --------- --------- ---------
Net income......................................... $ 30,362 34,632 64,514 56,107 44,178 33,510 33,027
======== ======= ======== ======== ========= ========= =========
Dividends:
Preferred stock.................................... $ 524 524 786 786 786 786 5,067
Common stock....................................... -- -- -- -- -- -- --
Ratio of total dividends declared to net income.... 1.73% 1.51% 1.22% 1.40% 1.78% 2.35% 15.34%
Per Share Data:
Earnings per common share:
Basic:
Income before cumulative effect of
change in accounting principle............... $1,261.05 1,499.67 2,751.54 2,338.04 1,833.91 1,383.04 1,181.69
Cumulative effect of change in
accounting principle......................... -- (58.16) (58.16) -- -- -- --
--------- -------- -------- -------- --------- --------- ---------
Basic.......................................... $1,261.05 1,441.51 2,693.38 2,338.04 1,833.91 1,383.04 1,181.69
========= ======== ======== ======== ========= ========= =========
Diluted:
Income before cumulative effect of
change in accounting principle............... $1,246.05 1,468.14 2,684.93 2,267.41 1,775.47 1,337.09 1,134.28
Cumulative effect of change in
accounting principle......................... -- (58.16) (58.16) -- -- -- --
Diluted.................................. $1,246.05 1,409.98 2,626.77 2,267.41 1,775.47 1,337.09 1,134.28
========= ======== ======== ======== ========= ========= =========
Weighted average common stock outstanding.......... 23,661 23,661 23,661 23,661 23,661 23,661 23,661
Balance Sheet Data:
Investment securities.............................. $ 914,875 533,149 631,068 563,534 451,647 534,796 795,530
Loans, net of unearned discount.................... 5,464,020 4,774,300 5,408,869 4,752,265 3,996,324 3,580,105 3,002,200
Total assets....................................... 7,171,534 5,976,773 6,778,451 5,876,691 4,867,747 4,554,810 4,165,014
Total deposits..................................... 6,025,703 5,072,090 5,683,904 5,012,415 4,251,814 3,939,985 3,684,595
Notes payable...................................... -- 29,500 27,500 83,000 64,000 50,048 55,144
Guaranteed preferred beneficial interests
in First Banks, Inc. and First Banks
America, Inc. subordinated debentures............ 267,632 182,945 235,881 182,849 127,611 127,443 83,183
Common stockholders' equity........................ 493,131 425,766 435,594 339,783 281,842 250,300 218,474
Total stockholders' equity......................... 506,194 438,829 448,657 352,846 294,905 263,363 231,537
Earnings Ratios:
Return on average total assets (2)................. 0.58% 0.79% 1.08% 1.09% 0.95% 0.78% 0.87%
Return on average total stockholders' equity (2)... 8.67 11.88 15.96 17.43 15.79 13.64 12.91
Efficiency ratio (3)............................... 66.67 67.53 63.42 59.67 61.95 67.00 62.54
Net interest margin (2) (4)........................ 4.23 4.40 4.34 4.65 4.24 3.94 3.88
Asset Quality Ratios:
Allowance for loan losses to loans................. 2.01 1.69 1.80 1.72 1.72 1.70 1.68
Nonperforming loans to loans (5)................... 1.82 0.94 1.24 1.12 0.99 1.22 0.80
Allowance for loan losses to
nonperforming loans (5).......................... 110.72 179.05 144.36 153.47 172.66 140.04 209.88
Nonperforming assets to loans and
other real estate (6)............................ 1.87 1.02 1.32 1.17 1.05 1.32 1.04
Net loan charge-offs to average loans (2).......... 0.68 0.41 0.45 0.17 0.22 0.05 0.27
Capital Ratios:
Average total stockholders' equity
to average total assets.......................... 6.71 6.63 6.74 6.25 6.01 5.74 6.71
Total risk-based capital ratio..................... 10.97 10.98 10.53 10.21 10.05 10.27 10.26
Leverage ratio..................................... 6.86 7.67 7.25 7.46 7.15 6.78 6.80
Ratio of Earnings to Fixed Charges: (7)
Including interest on deposits..................... 1.37x 1.36x 1.44x 1.44x 1.40x 1.31x 1.31x
Excluding interest on deposits..................... 2.46 3.07 3.47 3.75 3.22 3.16 3.25
------------------------------
(1) The comparability of the selected data presented is affected by the acquisitions of 13 banks and five purchases of branch
offices during the five-year period ended December 31, 2001, and the acquisition of one bank and two purchases of branch
offices during the nine-month period ended September 30, 2002. 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 nine-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.
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."
RESULTS OF OPERATIONS
Overview
Net income was $30.4 million for the nine months ended September 30,
2002, compared to $34.6 million for the comparable period in 2001. Results for
2002 reflect increased net interest income and noninterest income, offset by
higher operating expenses and increased provisions for loan losses, reflecting
increased loan charge-off, delinquency and nonperforming trends. The overall
decline in our earnings for 2002 primarily results from the reduced interest
rate environment and lower loan demand attributable to weak economic conditions
within our market areas. The decline in earnings was partially offset by the
implementation of SFAS No. 142 on January 1, 2002, which resulted in the
discontinuation of amortization of certain intangibles associated with the
purchase of subsidiaries.
Net income was $64.5 million for the year ended December 31, 2001,
compared to $56.1 million and $44.2 million for 2000 and 1999, respectively. We
attribute the improved earnings for 2001 primarily to increased net interest
income and noninterest income, including a gain on the exchange of an equity
investment in an unaffiliated financial institution in October 2001, as well as
a reduced provision for income taxes. The improvement in our earnings for 2001
was significantly offset by reductions in prevailing interest rates throughout
2001, resulting in an overall decline in our net interest rate margin. Our
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 increases in prevailing interest rates which resulted in increased yields on
our interest-earning assets.
Financial Condition and Average Balances
Our average total assets were $6.97 billion for the nine months ended
September 30, 2002, compared to $5.87 billion for the nine months ended
September 30, 2001. Our total assets were $7.17 billion and $6.78 billion at
September 30, 2002 and December 31, 2001, respectively. The increase in total
assets is primarily attributable to our 2002 acquisitions of Plains and UP
branches, which provided total assets of $256.3 million and $63.7 million,
respectively. The increase in total assets was partially offset by lower loan
demand and an anticipated level of attrition associated with our acquisitions of
Charter Pacific Bank, BYL Bancorp and Union completed during the fourth quarter
of 2001, and of Plains. Federal funds sold increased by $23.6 million due to the
investment of excess funds resulting from reduced loan demand primarily due to
economic conditions. Investment securities increased $283.8 million to $914.9
million at September 30, 2002 from $631.1 million at December 31, 2001. We
attribute the increase in investment securities primarily to the purchase of
available-for-sale investment securities of $1.11 billion as well as the $81.0
million of investment securities acquired in conjunction with our acquisition of
Plains, offset by maturities of available-for-sale investment securities of
$855.1 million. Derivative instruments increased $47.0 million due to the
purchase of three interest rate swap agreements in May and June 2002 and
mark-to-market adjustments required under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was implemented in January
2001, as amended. See further discussion under "--Interest Rate Risk
Management." In addition, intangibles associated with the purchase of
subsidiaries increased $14.8 million, which reflects core deposit intangibles
and goodwill associated with our acquisition of Plains as well as core deposit
intangibles associated with our branch purchases. The overall increase in assets
was also due to the increase in loans, net of unearned discount, of $55.2
million. This increase primarily reflects the acquisitions that we completed in
2002 offset by an anticipated amount of attrition associated with those
acquisitions as well as an overall decline in loan demand, which are further
discussed under "--Loans and Allowance for Loan Losses." Total deposits
increased by $341.8 million to $6.03 billion at September 30, 2002 from $5.68
billion at December 31, 2001. The increase primarily reflects deposits of $213.4
million acquired in our Plains acquisition and $64.9 million acquired in our
branch purchases in addition to an increase in savings accounts due primarily to
general economic conditions resulting from the fact that consumers are generally
more inclined to retain a higher level of liquid assets during times of economic
uncertainty. The increase was offset by an anticipated level of attrition
associated with our acquisitions and continued aggressive competition within our
market areas. In addition, certain large commercial accounts, particularly
related to real estate title and escrow business, sharply reduced their deposit
levels in 2002, reflecting their reduced business activity during 2002.
Short-term borrowings decreased $29.1 million to $214.1 million at September 30,
2002 from $243.1 million at December 31, 2001, primarily due to a reduction in
federal funds purchased. Our note payable decreased by $27.5 million due to
repayments primarily funded through dividends from our subsidiaries and the
issuance of $25.0 million of additional trust preferred securities by First Bank
Capital Trust offset, by a $36.5 million advance utilized to fund our
acquisition of Plains in January 2002. Guaranteed preferred beneficial interests
in subordinated debentures also increased $31.8 million due to the issuance of
additional trust preferred securities and increased amortization of deferred
issuance costs.
Our average total assets were $5.99 billion for the year ended December
31, 2001, compared to $5.15 billion and $4.66 billion for the years ended
December 31, 2000 and 1999, respectively. We attribute the increase of $842.6
million in total average assets for 2001 primarily to our acquisitions completed
during the fourth quarter of 2000 and in 2001; internal loan growth generated
through the efforts of our business development staff; increased bank premises
and equipment associated with the expansion and renovation of various corporate
and branch offices; and, increased derivative instruments resulting from a
change in accounting principle in accordance with SFAS No. 133. The acquisition
of Union, which provided total assets of $360.0 million, was completed on
December 31, 2001, and therefore did not have a significant impact on our
average total assets for the year ended December 31, 2001.
Similarly, we attribute the $490.0 million increase 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, however, were
completed on December 29, 2000 and December 31, 2000, respectively, and
therefore did not have a significant impact on our average total assets for the
year ended December 31, 2000. These acquisitions alone provided $300.8 million,
or 44.9%, of the total assets we acquired in 2000.
The increase in assets for 2001 was primarily funded by an increase in
average deposits of $612.9 million to $5.09 billion for the year ended December
31, 2001, and an increase of $51.9 million in average short-term borrowings to
$158.0 million for the year ended December 31, 2001. We utilized the majority of
the funds generated from our deposit growth to fund a portion of our loan
growth, and the remaining funds were either temporarily invested in federal
funds sold or invested in available-for-sale investment securities, resulting in
increases in average federal funds sold and average investment securities of
$26.1 million and $19.4 million, respectively, to $93.6 million and $451.4
million, respectively, for the year ended December 31, 2001. Similarly, we
funded the increase in assets for 2000 by an increase in total average deposits
of $412.0 million to $4.48 billion for the year ended December 31, 2000, a
decrease in average investment securities of $22.5 million to $431.9 million for
the year ended December 31, 2000, and an increase of $18.7 million in average
short-term borrowings to $106.1 million for the year ended December 31, 2000.
Loans, net of unearned discount, averaged $5.42 billion and $4.84
billion for the nine months ended September 30, 2002 and 2001, respectively. The
increase in loans is primarily attributable to our 2001 and 2002 acquisitions as
well as an increase of $57.1 million in our loans held for sale portfolio due to
increased volumes of residential mortgage loans resulting from the current
interest rate environment. This increase was partially offset by a decline in
our consumer and installment portfolio, net of unearned discount, to $91.0
million at September 30, 2002 from $122.1 million at December 31, 2001. This
decrease reflects continued 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 declines in our commercial, financial and agricultural portfolio due
to an anticipated amount of attrition associated with our acquisitions completed
during the fourth quarter of 2001 and the first quarter of 2002, as well as
current economic conditions prevalent within our markets.
Loans, net of unearned discount, averaged $4.88 billion, $4.29 billion
and $3.81 billion for the years ended December 31, 2001, 2000 and 1999,
respectively. The acquisitions we completed during 2000 and 2001 provided loans,
net of unearned discount, of $440.0 million and $508.7 million, respectively. In
addition to the growth provided by these acquisitions, for 2001, $174.6 million
of net loan growth was provided by corporate banking business development,
consisting of increases of $24.9 million of lease financing loans, $145.8
million of commercial real estate loans and $8.4 million of real estate
construction and development loans, offset by a decrease of $4.5 million of
commercial, financial and agricultural loans. Furthermore, the
increase in loans is also attributable to an increase in residential real estate
lending, including loans held for sale, of $48.6 million for the year ended
December 31, 2001. We primarily attribute this increase to be the result of a
significantly higher volume of residential mortgage loans originated, including
both new fundings and refinancings, as a result of declining interest rates
experienced throughout 2001 as well as an expansion of our mortgage banking
activities. These overall increases were partially offset by continuing
reductions in consumer and installment loans, net of unearned discount, which
decreased $75.3 million to $122.1 million at December 31, 2001. This decrease
reflects the sale of our student loan and credit card loan portfolios,
reductions in new loan volumes and the repayment of principal on our existing
portfolio, and is also consistent with our objectives of de-emphasizing consumer
lending and expanding commercial lending. These changes result from the focus we
have placed on our business development efforts and the portfolio repositioning
which we originally began in the mid-1990s. This repositioning provided for
substantially all of our residential mortgage loan production to be sold in the
secondary mortgage market and the origination of indirect automobile loans to be
substantially reduced.
Investment securities averaged $766.1 million and $424.2 million for
the nine months ended September 30, 2002 and 2001, respectively. The significant
increase in 2002 is primarily attributable to an increase in the purchases of
available-for-sale investment securities due to reduced loan demand and our
acquisition of Plains, which provided us with $81.0 million in investment
securities. Investment securities averaged $451.4 million, $431.9 million and
$454.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively, reflecting an increase of $19.5 million for the year ended
December 31, 2001 and a decrease of $22.5 million for the year ended December
31, 2000. The increase for 2001 is primarily associated with the investment
securities that we acquired in conjunction with our 2000 and 2001 acquisitions
and the investment of excess funds available due to reduced loan demand. This
increase was partially offset by the liquidation of certain acquired investment
securities, a higher than normal level of calls of investment securities prior
to their normal maturity dates experienced throughout 2001 resulting from the
general decline in interest rates, and sales of certain available-for-sale
investment securities.
Nonearning assets averaged $676.7 million and $529.3 million for the
nine months ended September 30, 2002 and 2001, respectively. Our average
nonearning assets were $562.9 million for the year ended December 31, 2001,
compared to $359.2 million and $340.2 million for the years ended December 31,
2000 and 1999, respectively. The increases in average nonearning assets for the
nine months ended September 30, 2002 and the year ended December 31, 2001 are
primarily due to derivative instruments resulting from three new swap agreements
entered into in 2002 and the implementation of SFAS No. 133 in January 2001. In
addition, bank premises and equipment, net of depreciation and amortization,
increased $34.8 million to $149.6 million at December 31, 2001 from $114.8
million at December 31, 2000. We primarily attribute the increase in bank
premises and equipment to our acquisitions, the purchase and remodeling of a new
operations center and corporate administrative building, and the construction
and/or renovation of various branch offices. In addition, the increase in
intangibles associated with the purchase of subsidiaries is due to the cost in
excess of the fair value of the net assets acquired of our 2002 and 2001
acquisitions.
We use deposits as our primary funding source and acquire them from a
broad base of local markets, including both individual and corporate customers.
Deposits averaged $5.90 billion and $4.99 billion for the nine months ended
September 30, 2002 and 2001, respectively, and $5.09 billion, $4.48 billion and
$4.06 billion for the years ended December 31, 2001, 2000 and 1999,
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 increase for 2002 also
reflects an increase in savings accounts offset by a decline in certain large
commercial accounts due primarily to general economic conditions. The overall
increase for 2001 was partially offset by an anticipated level of account
attrition associated with our acquisitions during the fourth quarter of 2000 and
$50.0 million of time deposits of $100,000 or more that either matured or were
called in September 2001. The overall increase for 2000 was partially offset by
the divestiture of one of our central Illinois branches, which resulted in a
reduction in First Bank's deposit base of approximately $8.8 million.
Short-term borrowings averaged $187.6 million and $161.8 million for
the nine months ended September 30, 2002 and 2001, respectively, and $158.0
million, $106.1 million and $87.4 million for the years ended December 31, 2001,
2000 and 1999, respectively. The increase in the average balance for 2002
reflects an increase in securities sold under agreement to repurchase
principally in connection with the cash management activities of our commercial
deposit customers, offset by a decline in federal funds purchased. Short-term
borrowings increased by $102.5 million to $243.1 million at December 31, 2001
from $140.6 million at December 31, 2000. This increase reflects a $17.5 million
increase in securities sold under agreements to repurchase, a $15.1 million
increase in Federal Home Loan Bank advances acquired in conjunction with our
Union acquisition, and a $70.0 million increase in federal funds purchased.
Notes payable averaged $23.9 million and $45.5 million for the nine
months ended September 30, 2002 and 2001, respectively, and $41.6 million, $51.9
million and $56.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Our note payable decreased by $55.5 million to $27.5 million at
December 31, 2001 from $83.0 million at December 31, 2000 due to dividends from
our subsidiaries and the issuance of additional trust preferred securities. In
addition, the merger of our former subsidiary, First Bank & Trust, with and into
Bank of San Francisco, effective March 29, 2001, allowed us to further reduce
our note payable through a capital reduction of the combined bank of $23.0
million. In conjunction with this merger, Bank of San Francisco was renamed
First Bank & Trust. The balance of our note payable at December 31, 2001 results
from a $27.5 million advance drawn on December 31, 2001 to fund our purchase of
Union. The balance was paid off during the nine months ended September 30, 2002.
The repayments were funded primarily through dividends from our subsidiaries and
the issuance of additional trust preferred securities, offset by a $36.5 million
advance utilized to fund our acquisition of Plains in January 2002.
During October 2000, First Preferred Capital Trust II issued $57.5
million of 10.24% trust preferred securities. Proceeds from this offering, net
of underwriting fees and offering expenses, were approximately $55.1 million and
were used to reduce borrowings and subsequently to partially fund our
acquisitions of Commercial Bank of San Francisco in October 2000 and Millennium
Bank in December 2000. Distributions payable on these trust preferred securities
were $4.6 million for the nine months ended September 30, 2002, and $6.0 million
and $1.2 million for the years ended December 31, 2001 and 2000, respectively.
During November 2001, First Preferred Capital Trust III issued $55.2 million of
9.00% trust preferred securities. Proceeds from this offering, net of
underwriting fees and offering expenses, were approximately $52.9 million and
were used to reduce borrowings. Distributions payable on these trust preferred
securities were $3.8 million for the nine months ended September 30, 2002, and
$634,000 for the year ended December 31, 2001. On April 10, 2002, First Bank
Capital Trust issued $25.0 million of variable rate cumulative trust preferred
securities. Proceeds from this offering, net of underwriting fees and offering
expenses, were approximately $24.2 million and were used to reduce borrowings.
Distributions payable on these trust preferred securities were $828,000 for the
nine months ended September 30, 2002. The distributions on all issues of our
trust preferred securities are recorded as interest expense in our consolidated
financial statements.
Stockholders' equity averaged $468.2 million and $389.7 million for the
nine months ended September 30, 2002 and 2001, respectively, and $404.1 million,
$321.9 million and $279.8 million for the years ended December 31, 2001, 2000
and 1999, respectively. The increase in stockholders' equity for the nine months
ended September 30, 2002 is primarily attributable to net income of $30.4
million and a $27.8 million increase in accumulated other comprehensive income,
offset by dividends paid on our Class A and Class B preferred stock. The
increase in accumulated other comprehensive income reflects increases of $20.7
million associated with our derivative financial instruments as accounted for
under SFAS No. 133 and $7.1 million associated with the change in unrealized
gains and losses on available-for-sale investment securities as accounted for
under SFAS No. 115. We primarily attribute the increase for 2001 to net income
of $64.5 million and an increase in accumulated other comprehensive income of
$28.3 million. The increase in accumulated other comprehensive income reflects
an increase of $30.1 million associated with our derivative financial
instruments as accounted for under SFAS No. 133, offset by a $1.9 million
reduction in other comprehensive income resulting from the change in unrealized
gains and losses on available-for-sale investment securities. The overall
increase in stockholders' equity for 2001 also reflects an increase of $3.8
million associated with capital stock and certain other equity transactions of
FBA, partially offset by dividends paid on our Class A and Class B preferred
stock. We associate the increase in stockholders' equity for 2000 primarily to
net income of $56.1 million and a $3.7 million increase in accumulated other
comprehensive income, resulting from the change in unrealized gains and losses
on available-for-sale investment securities. The increase was partially offset
by FBA's stock repurchases during 2000 and dividends paid on our Class A and
Class B preferred stock.
The following table sets forth, on a tax-equivalent basis, certain
information relating to our average balance 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 nine months ended
September 30, 2002 and 2001:
Nine Months Ended September 30,
------------------------------------------------------------------------
2002 2001
---------------------------------- -----------------------------------
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............................... $5,400,519 293,217 7.26% $4,828,321 314,714 8.71%
Tax-exempt (4)........................ 15,427 1,057 9.16 7,889 591 10.01
Investment securities:
Taxable............................... 718,278 22,965 4.27 405,976 20,233 6.66
Tax-exempt (4)........................ 47,868 2,158 6.03 18,224 1,055 7.74
Federal funds sold and other............. 115,477 1,454 1.68 84,093 4,100 6.52
---------- -------- ---------- --------
Total interest-earning assets....... 6,297,569 320,851 6.81 5,344,503 340,693 8.52
-------- --------
Nonearning assets........................... 676,661 529,260
---------- ----------
Total assets........................ $6,974,230 $5,873,763
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits............................. $ 721,982 5,739 1.06% $ 482,891 5,372 1.49%
Savings deposits....................... 1,947,271 27,253 1.87 1,485,391 39,927 3.59
Time deposits (3)...................... 2,312,586 66,640 3.85 2,301,246 98,746 5.74
---------- -------- ---------- --------
Total interest-bearing deposits..... 4,981,839 99,632 2.67 4,269,528 144,045 4.51
Short-term borrowings.................... 187,634 2,635 1.88 161,755 5,000 4.13
Notes payable............................ 23,904 839 4.69 45,521 2,328 6.84
Guaranteed preferred debentures (3)...... 254,044 18,629 9.80 182,860 13,467 9.85
---------- -------- ---------- --------
Total interest-bearing liabilities.. 5,447,421 121,735 2.99 4,659,664 164,840 4.73
-------- --------
Noninterest-bearing liabilities:
Demand deposits.......................... 916,822 718,468
Other liabilities........................ 141,769 105,929
---------- ----------
Total liabilities................... 6,506,012 5,484,061
Stockholders' equity........................ 468,218 389,702
---------- ----------
Total liabilities and
stockholders' equity.............. $6,974,230 $5,873,763
========== ==========
Net interest income......................... 199,116 175,853
======== ========
Interest rate spread........................ 3.82 3.79
Net interest margin (5)..................... 4.23% 4.40%
==== ====
- --------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense includes the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $1.1 million and $576,000 for the nine months ended September 30, 2002 and 2001, respectively.
(5) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning
assets.
The following table sets forth, on a tax-equivalent basis, certain information relating to our average balance sheet,
and reflects the average yield earned on interest-earning assets, the average cost of interest-bearing liabilities and the
resulting net interest income for the periods indicated.
Years Ended December 31,
-------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ------------------------ ------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans: (1) (2) (3)
Taxable........................ $4,876,615 411,663 8.44% $4,281,290 389,687 9.10% $3,805,351 322,703 8.48%
Tax-exempt (4)................. 7,684 754 9.81 9,668 992 10.26 7,157 775 10.83
Investment securities:
Taxable........................ 433,454 26,244 6.05 412,932 27,331 6.62 435,189 26,206 6.02
Tax-exempt (4)................. 17,910 1,366 7.63 18,996 1,478 7.78 19,247 1,442 7.49
Federal funds sold and other...... 93,561 5,458 5.83 67,498 4,202 6.23 51,342 2,732 5.32
---------- ------- ---------- ------- ---------- -------
Total interest-earning
assets..................... 5,429,224 445,485 8.21 4,790,384 423,690 8.84 4,318,286 353,858 8.19
Nonearning assets..................... 562,918 ------- 359,196 ------- 340,226 -------
--------- ---------- ----------
Total assets................. $5,992,142 $5,149,580 $4,658,512
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing
demand deposits.............. $ 507,011 7,019 1.38% $ 421,986 5,909 1.40% $ 391,892 5,098 1.30%
Savings deposits............... 1,548,441 50,388 3.25 1,279,378 51,656 4.04 1,220,425 44,101 3.61
Time deposits (3).............. 2,278,263 125,131 5.49 2,139,305 120,257 5.62 1,899,218 101,653 5.35
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
deposits.................... 4,333,715 182,538 4.21 3,840,669 177,822 4.63 3,511,535 150,852 4.30
Short-term borrowings............. 158,047 5,847 3.70 106,123 5,881 5.54 87,374 4,220 4.83
Notes payable..................... 41,590 2,629 6.32 51,897 3,976 7.66 56,376 3,629 6.44
Guaranteed preferred debentures... 189,440 18,590 9.81 138,605 13,173 9.50 127,534 12,050 9.45
--------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities................. 4,722,792 209,604 4.44 4,137,294 200,852 4.85 3,782,819 170,751 4.51
------- ------- -------
Noninterest-bearing liabilities:
Demand deposits................... 754,763 634,886 552,029
Other liabilities................. 110,480 55,473 43,852
--------- ---------- ----------
Total liabilities............ 5,588,035 4,827,653 4,378,700
Stockholders' equity.................. 404,107 321,927 279,812
--------- ---------- ----------
Total liabilities and
stockholders' equity........ $5,992,142 $5,149,580 $4,658,512
========== ========== ==========
Net interest income................... 235,881 222,838 183,107
======= ======= =======
Interest rate spread.................. 3.77 3.99 3.68
Net interest margin (5)............... 4.34% 4.65% 4.24%
===== ===== =====
- ------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense includes the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $742,000, $864,000 and $776,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
(5) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning
assets.
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 period. 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:
---------------------------------------------------------------------------
Nine Months Ended Year Ended Year Ended
September 30, 2002 December 31, 2001 December 31, 2000
Compared to Compared to Compared to
Nine Months Ended Year Ended Year Ended
September 30, 2001 December 31, 2000 December 31, 1999
-------------------------- ---------------------- -----------------------
Net Net
Volume Rate Change Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Interest earned on:
Loans: (1) (2) (3)
Taxable........................... $49,288 (70,785) (21,497) 51,584 (29,608) 21,976 42,273 24,711 66,984
Tax-exempt (4).................... 551 (85) 466 (196) (42) (238) 260 (43) 217
Investment securities:
Taxable........................... 15,096 (12,364) 2,732 1,325 (2,412) (1,087) (1,389) 2,514 1,125
Tax-exempt (4).................... 1,520 (417) 1,103 (84) (28) (112) (19) 55 36
Federal funds sold and other......... 1,838 (4,484) (2,646) 1,540 (284) 1,256 952 518 1,470
------- ------- ------- ------ ------- ------ ------ ------ -------
Total interest income......... 68,293 (88,135) (19,842) 54,169 (32,374) 21,795 42,077 27,755 69,832
------- ------- ------- ------ ------- ------ ------ ------ ------
Interest paid on:
Interest-bearing demand deposits..... 2,855 (2,488) 367 1,194 (84) 1,110 405 406 811
Savings deposits..................... 15,123 (27,797) (12,674) 9,818 (11,086) (1,268) 2,180 5,375 7,555
Time deposits (3) ................... 809 (32,915) (32,106) 7,696 (2,822) 4,874 13,296 5,308 18,604
Short-term borrowings................ 1,115 (3,480) (2,365) 2,306 (2,340) (34) 986 675 1,661
Notes payable and other.............. (896) (593) (1,489) (716) (631) (1,347) (304) 651 347
Guaranteed preferred debentures (3).. (31,502) (594) (32,096) 4,974 443 5,417 1,058 65 1,123
------- ------- ------- ------ ------ ------ ------ ------ -------
Total interest expense........ (12,496) (67,867) (80,363) 25,272 (16,520) 8,752 17,621 12,480 30,101
------- ------- ------- ------ ------- ------ ------ ------ -------
Net interest income........... $80,789 (20,268) 60,521 28,897 (15,854) 13,043 24,456 15,275 39,731
======= ======= ======= ====== ======= ====== ====== ====== =======
- ------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense includes the effect of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%.
Net Interest Income
The primary source of our income is net interest income, which is the
difference between the interest earned on our interest-earning assets and the
interest paid on our interest-bearing liabilities. Net interest income
(expressed on a tax-equivalent basis) increased to $199.1 million, or 4.23% of
average interest-earning assets, for the nine months ended September 30, 2002,
from $175.9 million, or 4.40% of average interest-earning assets, for the
comparable period in 2001. We credit the increased net interest income primarily
to the net interest-earning assets provided by our acquisitions completed during
the fourth quarter of 2001 and in January 2002 as well as earnings on our
interest rate swap agreements that we entered into in conjunction with our
interest rate risk management program. These agreements provided net interest
income of $38.0 million and $12.8 million for the nine months ended September
30, 2002 and 2001, respectively. The increase in net interest income, however,
was partially offset by reductions in prevailing interest rates, generally
weaker loan demand and overall economic conditions, resulting in the decline in
our net interest margin. Guaranteed preferred debentures expense was $18.6
million for the nine months ended September 30, 2002, compared to $13.5 million
for the comparable period in 2001. The increase for 2002 is primarily
attributable to the issuance of trust preferred securities by our financing
subsidiaries. In November 2001, First Preferred Capital Trust III issued $55.2
million of trust preferred securities and in April 2002, First Bank Capital
Trust issued $25.0 million of trust preferred securities. The overall increase
also reflects a change in estimate reducing the period over which the deferred
issuance costs are being amortized from maturity date to call date. This change
in estimate was deemed necessary as a result of the significant decline in
prevailing interest rates experienced during 2001. Such decline increased the
likelihood that we would redeem certain of our trust preferred securities issues
prior to maturity and obtain replacement regulatory capital, probably through
the issuance of additional trust preferred securities at a lower interest rate.
The increase was partially offset by the earnings associated with our interest
rate swap agreements entered into in May and June 2002.
Net interest income (expressed on a tax-equivalent basis) increased to
$235.9 million, or 4.34% of average interest-earning assets, for the year ended
December 31, 2001, from $222.8 million, or 4.65% of average interest-earning
assets, and $183.1 million, or 4.24% of average interest-earning assets, for the
years ended December 31, 2000 and 1999, respectively. We credit the increased
net interest income for 2001 primarily to the net interest-earning assets
provided by our acquisitions completed during 2000 and 2001, internal loan
growth and earnings on our interest rate swap agreements that we entered into in
conjunction with our interest rate risk management program. The overall increase
in net interest income was significantly offset by reductions in prevailing
interest rates throughout 2001, resulting in the overall decline in our net
interest rate margin. We credit the increased net interest income for 2000
primarily to the net interest-earning assets provided by our acquisitions
completed during 1999 and 2000, internal loan growth and increases in prevailing
interest rates which resulted in increased yields on interest-earning assets.
However, the overall increase in net interest income for 2000 was partially
offset by the expense associated with our interest rate swap agreements. In
addition, guaranteed preferred debentures expense was $18.6 million and $13.2
million for the years ended December 31, 2001 and 2000, respectively. The
increase for 2001 is solely attributable to the issuance of $57.5 million of
trust preferred securities by First Preferred Capital Trust II in October 2000
and the issuance of $55.2 million of trust preferred securities in November 2001
by First Preferred Capital Trust III.
Average loans, net of unearned discount, were $5.42 billion for the
nine months ended September 30, 2002, in comparison to $4.84 billion for the
comparable period in 2001. The yield on our loan portfolio, however, decreased
to 7.26% for the nine months ended September 30, 2002, in comparison to 8.72%
for the comparable period in 2001. This was a major contributor to the decline
in our net interest margin of 17 basis points for the nine months ended
September 30, 2002, from the comparable period in 2001. We attribute the decline
in yields and our net interest margin primarily to the decreases in prevailing
interest rates throughout 2001. During the period from January 1, 2001 through
December 31, 2001, the Board of Governors of the Federal Reserve System
decreased the targeted federal funds rate 11 times, resulting in 11 decreases in
the prime rate of interest from 9.50% to 4.75%. This is reflected not only in
the rate of interest earned on loans that are indexed to the prime rate, but
also in other assets and liabilities which either have variable or adjustable
rates, or which matured or repriced during this period. As discussed above, the
reduced level of interest income earned on our loan portfolio as a result of
declining interest rates and increased competition within our market areas was
partially mitigated by the earnings associated with our interest rate swap
agreements.
Average total loans, net of unearned discount, increased by $593.3
million to $4.88 billion for the year ended December 31, 2001, from $4.29
billion and $3.81 billion for the years ended December 31, 2000 and 1999,
respectively. The yield on our loan portfolio, however, declined to 8.44% for
the year ended December 31, 2001, in comparison to 9.10% for 2000. This was a
major contributor to the 31 basis point decline in our net interest rate margin
for 2001. We attribute the decline in yields and our net interest rate margin
primarily to decreases in prevailing interest rates as discussed above. As
further discussed under "--Interest Rate Risk Management," the reduced level of
interest income earned on our loan portfolio as a result of declining interest
rates was partially mitigated by the earnings associated with our interest rate
swap agreements. For the year ended December 31, 2001, these agreements provided
net interest income of $23.4 million. In addition, increased competition within
our market areas led to reduced lending rates. Conversely, the yield on our loan
portfolio for the year ended December 31, 2000 increased to 9.10% from 8.48% for
the year ended December 31, 1999, principally as a result of increases in
prevailing interest rates. During the period from June 30, 1999 to December 31,
2000, the Board of Governors of the Federal Reserve System increased the
targeted federal funds rate six times, resulting in six increases in the prime
rate of interest from 7.75% to 9.50%, respectively. However the improved yield
on our loan portfolio was partially offset by the expense associated with our
interest rate swap agreements, which was $4.7 million for the year ended
December 31, 2000.
The aggregate weighted average rate paid on our deposit portfolio was
2.67% and 4.51% for the nine months ended September 30, 2002 and 2001,
respectively. We attribute the decline primarily to rates paid on savings and
time deposits, which have continued to decline in conjunction with the interest
rate reductions previously discussed. The decrease in rates paid for the nine
months ended September 30, 2002 is a result of generally decreasing interest
rates during 2001. However, the competitive pressures on deposits within our
market areas precluded us from fully reflecting the general interest rate
decreases in our deposit pricing while still providing an adequate funding
source for loans.
For the years ended December 31, 2001, 2000 and 1999, the aggregate
weighted average rate paid on our interest-bearing deposit portfolio was 4.21%,
4.63% and 4.30%, respectively. We attribute the decline in 2001 primarily to
rates paid on savings deposits, which have continued to decline with the
interest rate reductions previously discussed. The overall decrease in rates
paid is a result of generally decreasing interest rates in 2001 as compared to
generally increasing rates in 2000.
The aggregate weighted average rate paid on our note payable was 4.69%
and 6.84% for the nine months ended September 30, 2002 and 2001, respectively,
and 6.32%, 7.66% and 6.44% for the years ended December 31, 2001, 2000 and 1999,
respectively. The overall changes in the weighted average rates paid reflect
changing market interest rates during these periods. Amounts outstanding under
our $90.0 million revolving line of credit with a group of unaffiliated
financial institutions 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, our revolving credit line
represents a relatively high-cost funding source as increased advances have the
effect of increasing the weighted average rate of non-deposit liabilities. The
overall cost of this funding source, however, has been significantly mitigated
by the reductions in the prime lending rate during 2001 and in the outstanding
balance of the note payable in 2002. During 2000, we utilized the note payable
to fund our acquisitions of Commercial Bank of San Francisco, Millenium Bank and
Bank of San Francisco, thus resulting in a higher level of borrowings occurring
during the fourth quarter of 2000. During 2001, our note payable was fully
repaid from the proceeds of the trust preferred securities issued by First
Preferred Capital Trust III. However, on December 31, 2001, we obtained a $27.5
million advance to fund our acquisition of Union and in January 2002, we
utilized the note payable to fund our acquisition of Plains. The balance was
fully repaid in September 2002. The aggregate weighted average rate paid on our
short-term borrowings also declined to 1.88% for the nine months ended September
30, 2002, as compared to 4.13% for the comparable period in 2001, reflecting
reductions in the current interest rate environment.
The aggregate weighted average rate paid on our guaranteed preferred
debentures was 9.80% and 9.85% for the nine months ended September 30, 2002 and
2001, respectively, and 9.81%, 9.50% and 9.45% for the years ended December 31,
2001, 2000 and 1999, respectively. The decreased rates for 2002 primarily
reflect the earnings impact of our interest rate swap agreements entered into in
May and June 2002. The decline was partially offset by the additional expense of
our trust preferred securities issued in November 2001 and April 2002 as well as
a change in estimate regarding the period over which the deferred issuance costs
associated with these obligations are being amortized. The increase for the
years ended December 31, 2001 and 2000 primarily reflects the additional expense
of our trust preferred securities issued in November 2001 and October 2000,
respectively.
Comparison of Results of Operations for the Nine Months Ended September 30, 2002
and 2001
Net Income. Net income was $30.4 million for the nine months ended
September 30, 2002, compared to $34.6 million for the comparable period in 2001.
Results for 2002 reflect increased net interest income and noninterest income,
offset by higher operating expenses and increased provisions for loan losses,
reflecting the current economic environment and increased loan charge-off,
delinquency and nonperforming trends. See further discussion under "-- Provision
for Loan Losses." The implementation of SFAS No. 142 on January 1, 2002,
resulted in the discontinuation of amortization of certain intangibles
associated with the purchase of subsidiaries. If we had implemented SFAS No. 142
at the beginning of 2001, net income for the nine months ended September 30,
2001 would have increased $5.4 million. In addition, the implementation of SFAS
No. 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 in 2001. Excluding this item, net income would have
been $36.0 million for the nine months ended September 30, 2001. The accounting
for derivatives under the requirements of SFAS No. 133 will continue to have an
impact on future financial results as further discussed under "--Noninterest
Income."
The overall increase in operating expenses for 2002, as further
discussed under "--Noninterest Expense," was partially offset by the
discontinuation of amortization of certain intangibles associated with the
purchase of subsidiaries in accordance with the implementation of SFAS No. 142.
Amortization of intangibles for the nine months ended September 30, 2002 was
$1.5 million, respectively, compared to $5.6 million for the comparable period
in 2001. The higher operating expenses and increased provisions for loan losses
were partially offset by increased net interest income and noninterest income as
further discussed under "--Net Interest Income" and "--Noninterest Income."
Provision for Loan Losses. The provision for loan losses was $38.7 for
the nine months ended September 30, 2002, compared to $13.9 million for the
comparable period in 2001. The increase in the provision for loan losses
reflects the higher level of problem loans and related loan charge-offs and past
due loans experienced during the period. The increase in problem assets is a
result of the economic conditions within our markets, additional problems
identified in acquired loan portfolios and continuing deterioration in the
portfolio of leases to the airline industry as further discussed under
"--Lending Activities" and "Loans and Allowance for Loan Losses." Net loan
charge-offs were $27.4 million for the nine months ended September 30, 2002, in
comparison to $14.8 million for the comparable period in 2001. The increase in
net loan charge-offs reflects the general slowdown in economic conditions
prevalent within our markets as well as an aggregate of $15.0 million of loan
charge-offs on five large credit relationships, representing nearly 40% of loan
charge-offs in 2002. Loan recoveries were $11.7 for the nine months ended
September 30, 2002, in comparison to $7.2 million for the comparable period in
2001. In addition, nonperforming assets and loans past due 90 days or more and
still accruing have increased to $110.1 million at September 30, 2002 from $86.8
million at December 31, 2001, and are expected to remain at these
higher-than-normal levels in the near future. Our loan policy requires all loans
to be placed on a nonaccrual status once principal or interest payments become
90 days past due. Our general procedures for monitoring these loans allow
individual loan officers to submit a written request for approval to continue
the accrual of interest on loans that become 90 days past due. These requests
must be submitted for approval consistent with the authority levels provided in
our credit approval policies, and they are only granted if an expected near term
future event, such as a pending renewal or expected payoff, exists at the time
the loan becomes 90 days past due. If the expected near term future event does
not occur as anticipated, the loan is placed on nonaccrual status. Management
considered these trends in its overall assessment of the adequacy of the
allowance for loan losses. In addition, our acquisition of Plains in January
2002 provided $1.4 million in additional 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."
Noninterest Income and Expense. The following table summarizes
noninterest income and noninterest expense for the nine months ended September
30, 2002 and 2001:
September 30, Increase (Decrease)
----------------- -------------------
2002 2001 Amount %
---- ---- -------- ---------
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees.... $ 21,985 16,268 5,717 35.14%
Gain on mortgage loans sold and held for sale.................... 20,316 9,718 10,598 109.06
Gain on sale of credit card portfolio, net of expenses........... -- 1,853 (1,853) (100.00)
Net gain (loss) on sales of available-for-sale securities........ 90 (145) 235 162.07
Bank-owned life insurance investment income...................... 4,318 3,069 1,249 40.70
Net gain on derivative instruments............................... 1,714 14,401 (12,687) (88.10)
Other............................................................ 16,417 12,580 3,837 30.50
--------- -------- -------
Total noninterest income................................... $ 64,840 57,744 7,096 12.29
========= ======== ======= =========
Noninterest expense:
Salaries and employee benefits................................... $ 84,506 68,889 15,617 22.67%
Occupancy, net of rental income.................................. 15,938 12,379 3,559 28.75
Furniture and equipment.......................................... 12,730 8,845 3,885 43.92
Postage, printing and supplies................................... 4,205 3,528 677 19.19
Information technology fees...................................... 24,411 19,891 4,520 22.72
Legal, examination and professional fees......................... 6,463 5,415 1,048 19.35
Amortization of intangibles associated with the
purchase of subsidiaries...................................... 1,480 5,573 (4,093) (73.44)
Communications................................................... 2,375 2,223 152 6.84
Advertising and business development............................. 4,132 4,405 (273) (6.20)
Other............................................................ 18,992 26,213 (7,221) (27.55)
--------- -------- -------
Total noninterest expense.................................. $ 175,232 157,361 17,871 11.36
========= ======== ======= =========
Noninterest Income
Noninterest income was $64.8 million for the nine months ended
September 30, 2002, in comparison to $57.7 million for the comparable period in
2001. Noninterest income consists primarily of service charges on deposit
accounts and customer service fees, mortgage-banking revenues, bank-owned life
insurance investment income, net gains on derivative instruments and other
income.
Service charges on deposit accounts and customer service fees were
$22.0 million for the nine months ended September 30, 2002, in comparison to
$16.3 million for the comparable period in 2001. We attribute the increase in
service charges and customer service fees to:
o our acquisitions completed during 2001 and 2002;
o additional products and services available and utilized by our
expanding base of consumer and commercial customers;
o increased fee income resulting from revisions of customer service
charge rates, effective July 1, 2002, and enhanced control of fee
waivers; and
o increased income associated with automated teller machine
services and debit cards.
The gain on mortgage loans sold and held for sale was $20.3 million for
the nine months ended September 30, 2002, in comparison to $9.7 million for the
comparable period in 2001. The overall increase is primarily attributable to a
significant increase in the volume of loans originated and sold commensurate
with the reductions in mortgage loan rates experienced in 2001 as well as the
continued expansion of our mortgage banking activities.
During the nine months ended September 30, 2001, we recorded a $1.9
million gain on the sale, net of expenses, of our credit card portfolio. The
sale of this portfolio was consistent with our strategic decision to exit this
product line and enter into an agent relationship with a larger credit card
service provider.
Bank-owned life insurance investment income was $4.3 million for the
nine months ended September 30, 2002, in comparison to $3.1 million for the
comparable period in 2001. The increase for 2002 reflects changes in the
portfolio mix of the underlying investments, which improved our return on this
product, as well as the reinvestment of earnings.
The net gain on derivative instruments was $1.7 million for the nine
months ended September 30, 2002, in comparison to $14.4 million for the
comparable periods in 2001. The decrease in income from derivative instruments
reflects $3.8 million of gains resulting from the termination of certain
interest rate swap agreements during the second quarter of 2001, the sale of our
interest rate floor agreements in November 2001 and changes in the fair value of
our interest rate cap agreements and fair value hedges.
Other income was $16.4 million for the nine months ended September 30,
2002, in comparison to $12.6 million for the comparable period in 2001. We
attribute the primary components of the increase to:
o our acquisitions completed during 2001 and 2002;
o increased portfolio management fee income associated our
Institutional Money Management division;
o increased earnings associated with our international banking
products;
o increased rental income associated with our commercial leasing
activities;
o increased rental fees from First Services, L.P. for the use of
data processing and other equipment owned by First Banks; and
o a gain of approximately $448,000 in March 2002 on the sale of
certain operating lease equipment associated with equipment
leasing activities that we acquired in conjunction with our
acquisition of Bank of San Francisco in December 2000; offset by
o the write-down of approximately $943,000 on certain aircraft and
aircraft parts equipment associated with our commercial leasing
operation to its estimable recoverable value in June 2002. The
write-down of these assets became necessary as a result of the
continued decline in the airline industry, primarily associated
with the terrorist attacks on September 11, 2001, and the
oversupply in the market for liquidating this type of equipment.
Noninterest Expense
Noninterest expense was $175.2 million for the nine months ended
September 30, 2002, in comparison to $157.4 million for the comparable period in
2001. The increase for 2002 reflects the noninterest expense of our acquisitions
completed during 2001 and 2002, particularly information technology fees
associated with integrating the acquired entities' systems, as well as general
increases in salaries and employee benefit expenses, occupancy and furniture and
equipment expenses and information technology fees, offset by a decline in
amortization of intangibles associated with the purchase of subsidiaries and
other expense.
Salaries and employee benefits were $84.5 million for the nine months
ended September 30, 2002, in comparison to $68.9 million for the comparable
period in 2001. We primarily associate the increase with our 2001 and 2002
acquisitions and higher commissions paid to mortgage loan originators due to
increased loan volume. However, the increase also reflects higher salary and
employee benefit costs associated with employing and retaining qualified
personnel. In addition, the increase includes various additions to staff
throughout 2001 to enhance senior management expertise and expand our product
lines.
Occupancy, net of rental income, and furniture and equipment expense
totaled $28.7 million for the nine months ended September 30, 2002, in
comparison to $21.2 million for the comparable period in 2001. We primarily
attribute the increase to our aforementioned acquisitions, including certain
expenses associated with lease termination obligations, the relocation of
certain branches and operational areas, increased depreciation expense
associated with numerous capital expenditures and the continued
expansion and renovation of various corporate and branch offices, including our
facility that houses our centralized operations and certain corporate
administrative functions.
Information technology fees were $24.4 million for the nine months
ended September 30, 2002, in comparison to $19.9 million for the comparable
period in 2001. First Services, L.P. , a limited partnership indirectly owned by
our Chairman and members of his immediate family, provides information
technology and various operational support services to our subsidiaries and us
under the terms of information technology agreements. We attribute the increased
fees to growth and technological advancements consistent with our product and
service offerings, continued expansion and upgrades to technological equipment,
networks and communication channels and expenses of approximately $554,000
associated with the data processing conversions of Union and Plains, completed
in the first quarter of 2002, and of the Denton and Garland, Texas branch
purchases, completed in the second quarter of 2002.
Legal, examination and professional fees were $6.5 million for the nine
months ended September 30, 2002, in comparison to $5.4 million for the
comparable period in 2001. We primarily attribute the increase in these fees to
the continued expansion of overall corporate activities, the ongoing
professional services utilized by certain of our acquired entities and increased
legal fees associated with commercial loan documentation, collection efforts,
expanded corporate activities and certain defense litigation particularly
related to acquired entities.
Amortization of intangibles associated with the purchase of
subsidiaries was $1.5 million for the nine months ended September 30, 2002, in
comparison to $5.6 million for the comparable period in 2001. The significant
decrease for 2002 is attributable to the implementation of SFAS No. 142 in
January 2002.
Other expense was $19.0 million for the nine months ended September 30,
2002, in comparison to $26.2 million for the comparable period in 2001. Other
expense encompasses numerous general and administrative expenses including
travel, meals and entertainment, insurance, freight and courier services,
correspondent bank charges, miscellaneous losses and recoveries, memberships and
subscriptions, transfer agent fees and sales taxes.
We attribute the majority of the decrease in other expense for 2002 to
an $11.5 million nonrecurring litigation settlement charge in June 2001. This
litigation was initiated by an unaffiliated bank against one of our subsidiaries
and certain individuals and 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 nature of the litigation was not covered under the terms of either our
general liability or directors and officers liability insurance policies.
Consequently, when it became apparent that the trial was not proceeding as we
anticipated, a decision was made to settle the matter to avoid the risk of more
substantial expenses. Because of the uninsured nature of this litigation and the
unique circumstances leading to the litigation, we do not consider this charge
to be a recurring expense.
The decrease in other expense also reflects the establishment of a
specific reserve for an unfunded letter of credit in the amount of $1.8 million
during the nine months ended September 30, 2001. The letter of credit was issued
in connection with a participation in a credit for the development of a nuclear
waste remediation facility. The aggregate credit arrangement included a line of
credit, in which we participated, and the sale of bonds to various investors,
which were backed by the letters of credit, in which we also participated.
Because the development failed to meet remediation performance expectations, and
consequently the economic viability required, the bondholders required payment
from the issuers of the letters of credit. Upon funding the letter of credit,
the balance became an addition to the loan principal, which was then fully
charged-off.
The overall decrease in other expenses for the nine months ended
September 30, 2002 was offset by expenses associated with our acquisitions
completed during 2001 and 2002 as well as the continued growth and expansion of
our banking franchise.
Provision for Income Taxes
The provision for income taxes was $17.5 million for the nine months
ended September 30, 2002, representing an effective income tax rate of 35.7%, in
comparison to $24.1 million, representing an effective income tax rate of 39.1%
for the comparable period in 2001. The decrease in the effective income tax rate
for 2002 reflects the significant decline in amortization of intangibles
associated with the purchase of subsidiaries, in accordance with the
requirements of SFAS No. 142, which is not deductible for tax purposes.
Comparison of Results of Operations for 2001 and 2000
Net Income. Net income was $64.5 million for the year ended December
31, 2001, compared to $56.1 million for 2000. The implementation of SFAS No.
133, as amended, on January 1, 2001, resulted in the recognition of a cumulative
effect of change in accounting principle of $1.4 million, net of tax, which
reduced net income. Excluding this item, net income was $65.9 million for the
year ended December 31, 2001. The improved earnings primarily result from
increased net interest income and noninterest income, including a gain on the
exchange of an equity investment in an unaffiliated financial institution in
October 2001, as well as a reduced provision for income taxes. The reduced
provision for income taxes includes the effect of an $8.1 million reduction in
our deferred tax asset valuation allowance that was no longer deemed necessary
as our overall net deferred tax assets are expected to be recoverable through
future earnings. The overall improvement in earnings was partially offset by an
increased provision for loan losses and higher operating expenses, including
nonrecurring charges associated with the establishment of a specific reserve
related to a contingent liability and the settlement of certain litigation.
Net interest income (expressed on a tax-equivalent basis) improved to
$235.9 million for the year ended December 31, 2001, compared to $222.8 million
for 2000. However, our net interest rate margin declined to 4.34% for the year
ended December 31, 2001 from 4.65% for 2000. Net interest income increased
primarily as a result of increased earning assets generated through internal
loan growth along with our acquisitions completed throughout 2000 and 2001.
However, the improvement in net interest income was significantly mitigated by
continued reductions in prevailing interest rates throughout 2001. We funded the
overall loan growth primarily through deposits added through acquisitions and
internal deposit growth. During the year ended December 31, 2001, noninterest
income improved significantly to $98.6 million from $42.8 million for the years
ended December 31, 2001 and 2000, respectively as further discussed under
"--Noninterest Income."
The improvement in net interest income and noninterest income was
partially offset by a $53.7 million increase in operating expenses to $211.7
million for the year ended December 31, 2001, compared to $158.0 million for
2000. The increased operating expenses are primarily attributable to:
o the operating expenses of our 2000 and 2001 acquisitions
subsequent to their respective acquisition dates;
o increased salaries and employee benefit expenses;
o increased information technology fees;
o increased legal, examination and professional fees;
o increased amortization of intangibles associated with the
purchase of subsidiaries;
o a nonrecurring litigation settlement charge; and
o a charge to other expense associated with the establishment of a
specific reserve on an unfunded letter of credit.
These higher operating expenses, exclusive of the litigation settlement
and the specific reserve on the unfunded letter of credit, are reflective of
significant investments that we have made in personnel, technology, capital
expenditures and new business lines in conjunction with our overall strategic
growth plan. The payback on these investments is expected to occur over a longer
period of time through higher and more diversified revenue streams.
Provision for Loan Losses. The provision for loan losses was $23.5
million and $14.1 million for the years ended December 31, 2001 and 2000,
respectively. We attribute the increase in the provision for loan losses
primarily to the overall growth in our loan portfolio, both internal and through
acquisitions, a general increase in risk associated with the continued changing
composition of our loan portfolio and a significant increase in nonperforming
assets and past due loans, which is further discussed under "--Loans and
Allowance for Loan Losses." Loan charge-offs were $31.5 million for the year
ended December 31, 2001, in comparison to $17.1 million for the year ended
December 31, 2000. The increase in loan charge-offs is due to $6.7 million in
charge-offs related to our commercial leasing business, a single loan in the
amount of $4.5 million that was charged-off due to suspected fraud on the part
of the borrower, $3.6 million in charge-offs on a shared national credit
relationship as well as the effects of the general slowdown in economic
conditions prevalent within our markets. Loan recoveries were $9.5 million for
the year ended December 31, 2001, in comparison to $9.8 million for 2000.
Nonperforming assets and past-due loans have increased significantly during
2001, and we anticipate these trends will continue in the near future.
Management considered these trends in its overall assessment of the adequacy of
the allowance for loan losses. Our acquisitions during 2000 and 2001 provided
$6.1 million and $14.0 million, respectively, in additional allowance for loan
losses at their respective acquisition dates.
Noninterest Income and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31, 2001
and 2000:
December 31, Increase (Decrease)
------------------- -------------------
2001 2000 Amount %
---- ---- ------ -------
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees.... $ 22,865 19,794 3,071 15.51%
Gain on mortgage loans sold and held for sale.................... 14,983 7,806 7,177 91.94
Gain on sale of credit card portfolio, net of expenses........... 1,853 -- 1,853 100.00
Net gain on sales of available-for-sale securities............... 18,722 168 18,554 --
Gain on sales of branches, net of expenses....................... -- 1,355 (1,355) (100.00)
Bank-owned life insurance investment income...................... 4,415 4,314 101 2.34
Gain on derivative instruments, net.............................. 18,583 -- 18,583 100.00
Other............................................................ 17,188 9,341 7,847 84.01
--------- -------- -------
Total noninterest income................................... $ 98,609 42,778 55,831 130.51
========= ======== ======= =========
Noninterest expense:
Salaries and employee benefits................................... $ 93,452 73,391 20,061 27.33%
Occupancy, net of rental income.................................. 17,432 14,675 2,757 18.79
Furniture and equipment.......................................... 12,612 11,702 910 7.78
Postage, printing and supplies................................... 4,869 4,431 438 9.88
Information technology fees...................................... 26,981 22,359 4,622 20.67
Legal, examination and professional fees......................... 6,988 4,523 2,465 54.50
Amortization of intangibles associated with the
purchase of subsidiaries...................................... 8,248 5,297 2,951 55.71
Communications................................................... 3,247 2,625 622 23.70
Advertising and business development............................. 5,237 4,331 906 20.92
Other............................................................ 32,605 14,656 17,949 122.47
--------- -------- -------
Total noninterest expense.................................. $ 211,671 157,990 53,681 33.98
========= ======== ======= ========
Noninterest Income
Noninterest income was $98.6 million for the year ended December 31,
2001, compared to $42.8 million for 2000. Noninterest income consists primarily
of service charges on deposit accounts and customer service fees, mortgage
banking revenues, net gains on sales of available-for-sale securities, net gains
on derivative instruments and other income.
Service charges on deposit accounts and customer service fees increased
to $22.9 million for 2001, from $19.8 million for 2000. We attribute the
increase in service charges and customer service fees to:
o increased deposit balances provided by internal growth;
o our acquisitions completed during 2000 and, to a lesser degree,
2001;
o additional products and services available and utilized by our
expanding base of retail and commercial customers;
o increased fee income resulting from revisions of customer service
charge rates effective September 30, 2000, and July 1, 2001, and
enhanced control of fee waivers; and
o increased income associated with automated teller machine
services and debit cards.
The gain on mortgage loans sold and held for sale increased to $15.0
million from $7.8 million for the years ended December 31, 2001 and 2000,
respectively. We attribute the increase to a significant increase in the volume
of loans originated and sold commensurate with the continued reductions in
mortgage loan rates experienced during 2001 as well as the continued expansion
of our mortgage banking activities into new and existing markets.
During 2001, we recorded a $1.9 million pre-tax gain on the sale of our
credit card portfolio, which results from our strategic decision to exit this
product line and enter into an agent relationship with a larger credit card
service provider.
Noninterest income for the years ended December 31, 2001 and 2000
included net gains on the sale of available-for-sale investment securities of
$18.7 million and $168,000, respectively. The significant increase in 2001
results from a $19.1 million gain recognized in conjunction with the exchange of
an equity investment in the common stock of an unaffiliated publicly-traded
financial institution for $10.0 million in cash and a $14.4 million equity
investment in the acquiring unaffiliated financial institution. In 1993, we
acquired an equity investment in the common stock of Southside Bancshares
Corporation, or Southside, located in St. Louis, Missouri, and we increased our
investment through additional purchases of common stock over time. At December
31, 2000, we owned 18.87% of Southside. In 2001, Southside was acquired by
Allegiant Bancorp, Inc., or Allegiant, located in St. Louis, Missouri. Upon
consummation of that business combination, we exchanged our Southside common
stock for $10.0 million in cash and a $14.4 million equity investment in the
common stock of Allegiant. The $19.1 million gain recorded as a result of this
transaction was measured as the difference between the sum of the fair value of
the equity investment in Allegiant's common stock on the transaction closing
date and the cash received, and our cumulative cost basis in the equity
investment in Southside. We owned 7.93% of the outstanding shares of common
stock of Allegiant at December 31, 2001. This gain was partially offset by a net
loss that resulted from the liquidation of certain equity investment securities.
The net gain for 2000 resulted primarily from the sales of certain investment
securities held by acquired institutions that did not meet our overall
investment objectives.
The gain on sales of branches, net of expenses, was $1.4 million for
the year ended December 31, 2000, and results from the divestiture of one of our
branch locations in central Illinois. In 2001, we did not sell any existing
branches.
The net gain on derivative instruments of $18.6 million for the year
ended December 31, 2001 includes $4.1 million of gains resulting from the
terminations of certain interest rate floor and swap agreements to adjust our
interest rate hedge position consistent with changes in the portfolio structure
and mix. In addition, the net gain reflects changes in the fair value of our
interest rate cap agreements, interest rate floor agreements and fair value
hedges, in accordance with the requirements of SFAS No. 133, as amended.
Other income was $17.2 million and $9.3 million for the years ended
December 31, 2001 and 2000, respectively. We attribute the primary components of
this increase to:
o our acquisitions completed during 2000 and, to a lesser extent,
2001;
o increased portfolio management fee income of $3.4 million
associated with our Institutional Money Management Division,
which was formed in August 2000;
o increased brokerage revenue of $1.1 million, which is primarily
associated with the stock option services acquired in conjunction
with our acquisition of Bank of San Francisco in December 2000;
o increased rental income of $2.1 million associated with our
commercial leasing activities that were acquired in conjunction
with our acquisition of a leasing company in February 2000; and
o income of approximately $1.1 million associated with equipment
leasing activities that were acquired in conjunction with our
acquisition of Bank of San Francisco.
Noninterest Expense
Noninterest expense was $211.7 million for the year ended December 31,
2001, in comparison to $158.0 million for 2000. The increase reflects:
o the noninterest expense associated with our acquisitions
completed during 2000 and 2001, particularly information
technology fees;
o increased salaries and employee benefit expenses;
o increased information technology fees;
o increased legal, examination and professional fees;
o increased amortization of intangibles associated with the
purchase of subsidiaries; and
o increased other expense.
We record the majority of integration costs attributable to our
acquisitions as of the consummation date of our purchase business combinations.
These costs include, but are not limited to, items such as:
o write-downs and impairments of assets of the acquired entities
that will no longer be usable subsequent to the consummation
date, primarily data processing equipment, incompatible hardware
and software, bank signage, etc. These adjustments are generally
recorded as of the consummation date as an allocation of the
purchase price with the offsetting adjustment recorded as an
increase to goodwill. In addition, for all periods presented,
these adjustments are not material to our operations;
o costs associated with a planned exit of an activity of the
acquired entity that is not associated with or is not expected to
generate revenues after the consummation date (e.g. credit card
lending). These costs are generally recorded as of the
consummation date through the establishment of an accrued
liability with the offsetting adjustment recorded as an increase
to goodwill. These costs are infrequently encountered and, for
all periods presented, are not material to our operations;
o planned involuntary employee termination benefits (i.e. severance
costs) as further discussed under "-Acquisitions - Acquisition and
Integration Costs"; and
o contractual obligations of the acquired entities that existed
prior to the consummation date that either have no economic
benefit to the combined entity or have a penalty that we will
incur to cancel the contractual obligation. These contractual
obligations generally relate to existing data processing
contracts of the acquired entities that include penalties for
early termination. In conjunction with the merger and integration
of our acquisitions, the acquired entities are converted to our
existing data processing and information technology systems.
Consequently, the costs associated with terminating the existing
contracts of the acquired entities are generally recorded as of
the consummation date through the establishment of an accrued
liability with the offsetting adjustment recorded as an increase
to goodwill as further discussed under "-Acquisitions -
Acquisition and Integration Costs."
We make adjustments to the fair value of the acquired entities' assets
and liabilities for these items as of the consummation date and include them in
the allocation of the overall acquisition cost. We also incur costs associated
with our acquisitions that are expensed in our statements of income. These
costs relate specifically to additional costs incurred in conjunction with the
date processing conversions of the acquired entities as further described and
quantified below.
Salaries and employee benefits increased by $20.1 million to $93.5
million from $73.4 million for the years ended December 31, 2001 and 2000,
respectively. We primarily associate the increase with our 2000 and 2001
acquisitions and our Institutional Money Management Division, which was formed
in August 2000. However, the increase also reflects the competitive environment
in the employment market that has resulted in a higher demand for limited
resources, thus escalating industry salary and employee benefit costs associated
with employing and retaining qualified personnel. In addition, the increase
includes various additions to staff throughout 2000 to enhance executive and
senior management expertise, improve technological support, strengthen
centralized operational functions and expand our product lines.
Occupancy, net of rental income, and furniture and equipment expense
totaled $30.0 million and $26.4 million for the years ended December 31, 2001
and 2000, respectively. The increase is attributable to our acquisitions, the
relocation of certain branches and operational areas and increased depreciation
expense associated with numerous capital expenditures, including our new
facility that houses various centralized operations and certain corporate and
administrative functions.
Information technology fees were $27.0 million and $22.4 million for
the years ended December 31, 2001 and 2000, respectively. We attribute the
increased information technology fees to growth and technological advancements
consistent with our product and service offerings, continued expansion and
upgrades to technological equipment, networks and communication channels, and
expenses of approximately $1.8 million associated with the data processing
conversions of Century Bank, Lippo Bank, Commercial Bank of San Francisco, Bank
of San Francisco, Millennium Bank, Charter Pacific Bank and BYL completed in
2001.
Legal, examination and professional fees were $7.0 million and $4.5
million for the years ended December 31, 2001 and 2000, respectively. We
primarily attribute the increase in these fees to the ongoing professional
services utilized by certain of our acquired entities, increased professional
fees associated with our Institutional Money Management Division and increased
legal fees associated with commercial loan documentation, collection efforts,
expanded corporate activities and certain defense litigation.
Amortization of intangibles associated with the purchase of
subsidiaries was $8.2 million and $5.3 million for the years ended December 31,
2001 and 2000, respectively. The increase for 2001 is primarily attributable to
amortization of the cost in excess of the fair value of the net assets acquired
for the nine acquisitions that we completed during 2000.
Other expense was $32.6 million and $14.7 million for the years ended
December 31, 2001 and 2000, respectively. Other expense encompasses numerous
general and administrative expenses including travel, meals and entertainment,
insurance, freight and courier services, correspondent bank charges, advertising
and business development, miscellaneous losses and recoveries, memberships and
subscriptions, transfer agent fees and sales taxes. We attribute the majority of
the increase in other expense to:
o our acquisitions completed during 2000 and 2001;
o increased advertising and business development expenses
associated with various product and service initiatives and
enhancements;
o increased travel expenses primarily associated with business
development efforts and the ongoing integration of the recently
acquired entities into our corporate culture and systems;
o a nonrecurring litigation settlement charge in the amount of
$11.5 million associated with a lawsuit brought by an
unaffiliated bank against one of our subsidiaries and certain
individuals related to allegations arising from the
employment by our subsidiary of individuals previously employed
by the plaintiff bank, as well as the conduct of those
individuals while employed by the plaintiff bank;
o the establishment of a $1.8 million specific reserve on an
unfunded letter of credit; and
o overall continued growth and expansion of our banking franchise.
Provision for Income Taxes
The provision for income taxes was $30.0 million for the year ended
December 31, 2001, representing an effective income tax rate of 30.5%, in
comparison to $34.5 million, representing an effective income tax rate of 37.2%,
for the year ended December 31, 2000. The decrease in the effective income tax
rate is primarily attributable to:
o a reduction of our deferred tax asset valuation allowance of
$13.1 million recorded in December 2001. This reduction, of which
$8.1 million represented a reduction in our provision for income
taxes and $5.0 million represented an increase in capital
surplus, reflects the recognition of deferred tax assets for net
operating loss carryforwards and the expectation of future
taxable income sufficient to realize the net deferred tax assets;
partially offset by
o the increase in amortization of intangibles associated with the
purchase of subsidiaries, which is not deductible for tax
purposes.
Comparison of Results of Operations for 2000 and 1999
Net Income. Net income was $56.1 million for the year ended December
31, 2000, compared to $44.2 million for 1999. The earnings progress for 2000 was
primarily driven by increased net interest income generated from our
acquisitions completed throughout 1999 and 2000; the continued growth and
diversification in the composition of our loan portfolio; and increased yields
on interest-earning assets. We funded the overall loan growth primarily through
deposits added through acquisitions and internal deposit growth. Net interest
income (expressed on a tax-equivalent basis) 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 information technology fees
and increased amortization of intangibles associated with the purchase of
subsidiaries. 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.
Noninterest Income and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31, 2000
and 1999:
December 31, Increase (Decrease)
-------------------- -------------------
2000 1999 Amount %
---- ---- ------ -
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees.... $ 19,794 17,676 2,118 11.98%
Gain on mortgage loans sold and held for sale.................... 7,806 6,909 897 12.98
Net gain on sales of available-for-sale securities............... 168 791 (623) (78.76)
Gain on sales of branches, net of expenses....................... 1,355 4,406 (3,051) (69.25)
Bank-owned life insurance investment income...................... 4,314 3,919 395 10.08
Other............................................................ 9,341 7,949 1,392 17.51
--------- -------- -------
Total noninterest income................................... $ 42,778 41,650 1,128 2.71
========= ======== ======= ========
Noninterest expense:
Salaries and employee benefits................................... $ 73,391 61,524 11,867 19.29%
Occupancy, net of rental income.................................. 14,675 12,518 2,157 17.23
Furniture and equipment.......................................... 11,702 8,520 3,182 37.35
Postage, printing and supplies................................... 4,431 4,244 187 4.41
Information technology fees...................................... 22,359 18,567 3,792 20.42
Legal, examination and professional fees......................... 4,523 9,109 (4,586) (50.35)
Amortization of intangibles associated with
the purchase of subsidiaries................................... 5,297 4,401 896 20.36
Communications................................................... 2,625 2,488 137 5.51
Advertising and business development............................. 4,331 3,734 597 15.99
Other............................................................ 14,656 13,652 1,004 7.35
--------- -------- -------
Total noninterest expense.................................. $ 157,990 138,757 19,233 13.86
========= ======== ======= ========
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:
o increased deposit balances provided by internal growth;
o our acquisitions completed throughout 1999 and 2000;
o additional products and services available and utilized by our
expanding base of retail and commercial customers;
o increased fee income resulting from revisions of customer service
charge rates effective April 1, 1999 and September 30, 2000, and
enhanced control of fee waivers; and
o 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 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.
Bank-owned life insurance income was $4.3 million and $3.9 million for
the years ended December 31, 2000 and 1999, respectively. The increase for 2000
reflects an increased rate of return on this product primarily associated with
the current interest rate environment as well as the reinvestment of product
earnings.
Other income was $9.3 million and $7.9 million for the years ended
December 31, 2000 and 1999, respectively. The increase in other income is
primarily attributable to rental income associated with 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 $158.0 million for the year ended December 31,
2000, in comparison to $138.8 million for 1999. The increase reflects:
o the noninterest expense associated with our acquisitions
completed throughout 1999 and 2000 subsequent to their respective
acquisition dates;
o increased salaries and employee benefit expenses;
o increased information technology fees;
o increased amortization of intangibles associated with the
purchase of subsidiaries; and
o increased expenses associated with our internal restructuring
process.
The overall increase in noninterest expense was partially offset by a
decrease in legal, examination and professional fees.
During 1999, we began an internal restructuring process designed to
better position us for future growth and opportunities expected to become
available as consolidation and changes continue in the delivery of financial
services. The magnitude of this project was extensive and covered almost every
area of our organization. The primary objectives of the restructuring process
were to:
o redesign the corporate organization to provide clearer lines of
authority which are more conducive to the effective delivery of
services to customers;
o 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;
o establish the infrastructure necessary to better support our
service delivery and business development efforts, and to provide
more efficient, better quality services to customers;
o increase the depth and abilities of all levels of our management
and provide supervision to lead its efforts to accomplish our
corporate objectives; and
o 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.
Information technology fees were $22.4 million and $18.6 million for
the years ended December 31, 2000 and 1999, respectively. We attribute the
increased information technology fees to growth and technological advancements
consistent with our product and service offerings and upgrades to technological
equipment, networks and communication channels.
Legal, examination and professional fees were $4.5 million and $9.1
million for the years ended December 31, 2000 and 1999, respectively. The
decrease in these fees results from a decline in our utilization of external
consultants who provided assistance throughout 1999 associated with the
development and expansion of selected business initiatives. The decrease also
reflects the settlement of certain litigation completed in 1999.
Amortization of intangibles associated with the purchase of
subsidiaries was $5.3 million and $4.4 million for the years ended December 31,
2000 and 1999, respectively. The increase for 2000 is primarily attributable to
amortization of the cost in excess of the fair value of the net assets acquired
of the nine acquisitions that we completed during 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:
o continued growth and expansion of our banking franchise;
o a $700,000 provision for an estimated loss on equipment
underlying leases associated with a previously acquired entity;
and
o a $200,000 provision for estimated losses associated with certain
pending litigation.
Offsetting the overall increase in other expenses in 2000 were
recoveries of $1.8 million from loans of acquired entities that had been fully
charged off prior to the acquisition dates.
Provision for Income Taxes
The provision for income taxes was $34.5 million for the year ended
December 31, 2000, representing an effective income tax rate of 37.2%, in
comparison to $26.3 million, representing an effective income tax rate of 36.5%,
for the year ended December 31, 1999. The increase in the effective income tax
rate is primarily attributable to:
o the increase in amortization of intangibles associated with the
purchase of subsidiaries, which is not deductible for tax
purposes; and
o 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.
Interest Rate Risk Management
For financial institutions, the maintenance of a satisfactory level of
net interest income is a primary factor in achieving acceptable income levels.
However, the maturity and repricing characteristics of the institution's loan
and investment portfolios may differ significantly from those within its deposit
structure. The nature of the loan and deposit markets within which a financial
institution operates, and its objectives for business development within those
markets at any point in time influence these characteristics. In addition, the
ability of borrowers to repay loans and depositors to withdraw funds prior to
stated maturity dates introduces divergent option characteristics, which operate
primarily as interest rates change. These factors cause various elements of the
institution's balance sheet to react in different manners and at different times
relative to changes in interest rates, thereby leading to increases or decreases
in net interest income over time. Depending upon the direction and velocity of
interest rate movements and their effect on the specific components of the
institution's balance sheet, the effects on net interest income can be
substantial. Consequently, managing a financial institution requires
establishing effective control of the exposure of the institution to changes in
interest rates.
We strive to manage our interest rate risk by:
o 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;
o maintaining an effective simulation model to determine our
exposure to changes in interest rates;
o coordinating the lending, investing and deposit-generating
functions to control the assumption of interest rate risk; and
o 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 that are either specifically directed by the ALCO or established by
policy guidelines.
In managing sensitivity, we strive to reduce the adverse impact on
earnings by managing interest rate risk within internal policy constraints. Our
policy is to manage exposure to potential risks associated with changing
interest rates by maintaining a balance sheet posture in which annual net
interest income is not significantly impacted by reasonably possible near-term
changes in interest rates. To measure the effect of interest rate changes, we
project our net income over two one-year horizons on a pro forma basis. The
analysis assumes various scenarios for increases and decreases in interest rates
including both instantaneous and gradual, and parallel and non-parallel shifts
in the yield curve, in varying amounts. For purposes of arriving at reasonably
possible near-term changes in interest rates, we include scenarios based on
actual changes in interest rates, which have occurred over a two-year period,
simulating both a declining and rising interest rate scenario. We are
"asset-sensitive," indicating that our assets would generally reprice with
changes in rates more rapidly than our liabilities, and our simulation model
indicates a loss of projected net interest income should interest rates decline.
While a decline in interest rates of less than 100 basis points has a relatively
minimal impact on our net interest income, an instantaneous parallel decline in
the interest yield curve of 100 basis points indicates a pre-tax projected loss
of approximately 7.0% of net interest income, based on assets and liabilities at
September 30, 2002. Although we do not anticipate that instantaneous shifts in
the yield curve as projected in our simulation model are likely, these are
indications of the effects that changes in interest rates would have over time.
We also prepare and review a more traditional interest rate sensitivity
position in conjunction with the results of our simulation model. The following
table presents the projected maturities and periods to repricing of our rate
sensitive assets and liabilities as of September 30, 2002, adjusted to account
for anticipated prepayments:
Over Over
three six Over
Three through through one Over
months six twelve through five
or less months months five years years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
Loans (1)...................................... $4,138,762 498,904 477,730 345,698 2,926 5,464,020
Investment securities.......................... 312,769 60,545 107,507 329,834 104,220 914,875
Federal funds sold and other................... 81,393 -- -- -- -- 81,393
---------- --------- --------- --------- --------- ---------
Total interest-earning assets.............. 4,532,923 559,449 585,237 675,532 107,146 6,460,288
Effect of interest rate swap agreements........ (1,050,000) -- -- 1,050,000 -- --
---------- --------- --------- --------- --------- ---------
Total interest-earning assets after
the effect of interest rate
swap agreements......................... $3,482,923 559,449 585,237 1,725,532 107,146 6,460,288
========== ========= ========= ========= ========= =========
Interest-bearing liabilities:
Interest-bearing demand accounts............... $ 283,194 176,040 114,809 84,193 107,155 765,390
Money market demand accounts................... 80,712 66,469 56,973 80,712 189,911 474,777
Savings accounts............................... 1,551,957 -- -- -- -- 1,551,957
Time deposits.................................. 551,490 419,240 630,244 678,075 514 2,279,562
Other borrowed funds........................... 200,054 -- 2,000 9,000 3,000 214,054
---------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities......... 2,667,407 661,749 804,025 851,980 300,579 5,285,740
Effect of interest rate swap agreements........ 200,000 -- -- (200,000) -- --
---------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities
after the effect of interest rate
swap agreements......................... $2,867,407 661,749 804,025 651,980 300,579 5,285,740
========== ========= ========= ========= ========= =========
Interest-sensitivity gap:
Periodic....................................... $ 615,516 (102,300) (218,788) 1,073,552 (193,433) 1,174,548
=========
Cumulative..................................... 615,516 513,217 294,429 1,367,981 1,174,548
========== ========= ========= ========= =========
Ratio of interest-sensitive assets
to interest-sensitive liabilities:
Periodic..................................... 1.21 0.85 0.73 2.65 0.36 1.22
Cumulative................................... 1.21 1.15 1.07 1.27 1.22 ==========
========== ========= ========= ========= =========
----------------------
(1) Loans are presented net of unearned discount.
Management made certain assumptions in preparing the foregoing table.
These assumptions included:
o loans will repay at projected repayment rates;
o mortgage-backed securities, included in investment securities,
will repay at projected repayment rates;
o interest-bearing demand accounts and savings accounts are
interest-sensitive at rates ranging from 11% to 37% and 12% to
40%, respectively, of the remaining balance for each period
presented; and
o fixed maturity deposits will not be withdrawn prior to maturity.
A significant variance in actual results from one or more of these
assumptions could materially affect the results reflected in the table.
At September 30, 2002, our asset-sensitive position on a cumulative
basis through the twelve-month time horizon was $294.4 million, or 4.11% of
total assets, in comparison to our asset-sensitive position on a cumulative
basis through the twelve-month time horizon of $313.8 million, or 4.63% of total
assets at December 31, 2001. The asset-sensitive positions for 2002 and 2001
reflect the effects of our interest rate swap agreements entered into in
conjunction with our interest rate risk management program.
The interest-sensitivity position is one of several measurements of the
impact of interest rate changes on net interest income. Its usefulness in
assessing the effect of potential changes in net interest income varies with the
constant change in the composition of our assets and liabilities and changes in
interest rates. For this reason, we place greater emphasis on our simulation
model for monitoring our interest rate risk exposure.
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:
September 30, 2002 December 31, 2001 December 31, 2000
---------------------- --------------------- ---------------------
Notional Credit Notional Credit Notional Credit
Amount Exposure Amount Exposure Amount Exposure
------ -------- ------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges................. $1,050,000 1,883 900,000 1,764 1,055,000 3,449
Fair value hedges................ 387,450 7,866 200,000 6,962 50,000 758
Interest rate floor agreements... -- -- -- -- 35,000 6
Interest rate cap agreements..... 450,000 426 450,000 2,063 450,000 3,753
Interest rate lock commitments... 106,000 -- 88,000 -- 4,100 --
Forward commitments to sell
Mortgage-backed securities..... 243,000 -- 209,000 -- 32,000 --
========== ===== ======= ===== ========= =====
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
our credit exposure through 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 nine months ended September 30, 2002 and 2001, the net
interest income realized on our derivative financial instruments was $38.0
million and $12.8 million, respectively. The increase is primarily due to
interest income associated with the additional swap agreements entered into
during May and June 2002 as well as the decline in prevailing interest rates. In
addition, we recorded a net gain on derivative instruments, which is included in
noninterest income in the consolidated statements of income, of $1.7 million and
$14.4 million for the nine months ended September 30, 2002 and 2001,
respectively. The net decrease in income from 2001 reflects $3.8 million of
gains resulting from the termination of certain interest rate swap agreements
during the second quarter of 2001, the sale of our interest rate floor
agreements in November 2001 and changes in the fair value of our interest rate
cap agreements and fair value hedges. During 2001 and 1999, we recorded net
interest income on derivative financial instruments of $23.4 million and
$430,000, respectively, in comparison to net interest expense of $4.7 million in
2000. In addition, we realized a net gain on derivative instruments, which is
included in noninterest income in the consolidated statements of income, of
$18.6 million for the year ended December 31, 2001.
Cash Flow Hedges
We entered into the following interest rate swap agreements, designated
as cash flow hedges, to effectively lengthen the repricing characteristics of
certain interest-earning assets to correspond more closely with their funding
source with the objective of stabilizing cash flow, and accordingly, net
interest income over time:
o During 1998, we entered into $280.0 million notional amount of
interest rate swap agreements that provided for us to receive a
fixed rate of interest and pay an adjustable rate of interest
equivalent to the daily weighted average prime lending rate minus
2.705%. The underlying hedged assets were certain loans within
our commercial loan portfolio. The terms of the swap agreements
provided for us to pay quarterly and receive payment
semiannually. In June 2001 and November 2001, we terminated
$205.0 million and $75.0 million notional amount, respectively,
of these swap agreements, which would have expired in 2002, in
order to appropriately modify our overall hedge position in
accordance with our interest rate risk management program. In
conjunction with these terminations, we recorded gains of $2.8
million and $1.7 million, respectively.
o During September 1999, we entered into $175.0 million notional
amount of interest rate swap agreements that provided for us to
receive a fixed rate of interest and pay an adjustable rate
equivalent to the weighted average prime lending rate minus
2.70%. The underlying hedged assets were certain loans within our
commercial loan portfolio. The terms of the swap agreements
provided for us to pay and receive interest on a quarterly basis.
In April 2001, we terminated these swap agreements, which would
have expired in September 2001, and replaced them with similar
swap agreements with extended maturities in order to lengthen the
period covered by the swaps. In conjunction with the termination
of these swap agreements, we recorded a gain of $985,000.
o During September 2000, March 2001, April 2001 and March 2002, we
entered into $600.0 million, $200.0 million, $175.0 million and
$150.0 million notional amount, respectively, of interest rate
swap agreements. The underlying hedged assets are certain loans
within our commercial loan portfolio. 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 2.70%, 2.82%, 2.82% and 2.80%, respectively. The terms of
the swap agreements provide for us to pay and receive interest on
a quarterly basis. In November 2001, we terminated $75.0 million
notional amount of the swap agreements originally entered into in
April 2001, which would have expired in April 2006, in order to
appropriately modify our overall hedge position in accordance
with our interest rate risk management program. We recorded a
gain of $2.6 million in conjunction with the termination of these
swap agreements. The amount receivable by us under the swap
agreements was $3.0 million and $2.9 million at September 30,
2002 and December 31, 2001, respectively, and the amount payable
by us was $1.1 million at September 30, 2002 and December 31,
2001.
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 September 30, 2002 and December 31, 2001 were as follows:
Notional Interest rate Interest rate Fair
Maturity date amount paid received value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
September 30, 2002:
March 14, 2004.................................. $ 150,000 1.95% 3.93% $ 4,357
September 20, 2004.............................. 600,000 2.05 6.78 53,927
March 21, 2005.................................. 200,000 1.93 5.24 14,043
April 2, 2006................................... 100,000 1.93 5.45 9,054
---------- ---------
$1,050,000 2.00 5.95 $ 81,381
========== ===== ===== =========
December 31, 2001:
September 20, 2004.............................. $ 600,000 2.05% 6.78% 40,980
March 21, 2005.................................. 200,000 1.93 5.24 4,951
April 2, 2006................................... 100,000 1.93 5.45 2,305
---------- ---------
$ 900,000 2.01 6.29 $ 48,236
========== ===== ===== =========
Fair Value Hedges
We entered into the following interest rate swap agreements, designated
as fair value hedges, to effectively shorten the repricing characteristics of
certain interest-bearing liabilities to correspond more closely with their
funding source with the objective of stabilizing net interest income over time:
o During September 2000, we entered into $25.0 million notional
amount of one-year interest rate swap agreements and $25.0
million notional amount of five and one-half year interest rate
swap agreements that provided for us to receive fixed rates of
interest ranging from 6.60% to 7.25% and pay an adjustable rate
equivalent to the three-month London Interbank Offering Rate
minus rates ranging from 0.02% to 0.11%. The underlying hedged
liabilities were a portion of our time deposits of $100,000 or
more. The terms of the swap agreements provided for us to pay
interest on a quarterly basis and receive interest on either a
semiannual basis or an annual basis. In September 2001, the
one-year interest rate swap agreements matured, and we terminated
the five and one-half year interest rate swap agreements because
the underlying interest-bearing liabilities had either matured or
been called by their respective counterparties. There was no gain
or loss recorded as a result of the terminations.
o During January 2001, we entered into $50.0 million notional
amount of three-year interest rate swap agreements and $150.0
million notional amount of five-year interest rate swap
agreements that provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
three-month London Interbank Offering Rate. The underlying hedged
liabilities are a portion of our other time deposits. The terms
of the swap agreements provide for us to pay interest on a
quarterly basis and receive interest on a semiannual basis. The
amount receivable by us under the swap agreements was $2.5
million and $5.2 million at September 30, 2002 and December 31,
2001, respectively, and the amount payable by us under the swap
agreements was $868,000 and $1.2 million at September 30, 2002
and December 31, 2001, respectively.
o During May 2002 and June 2002, we entered into $55.2 million and
$86.3 million notional amount, respectively, of interest rate
swap agreements that provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
three-month London Interbank Offering Rate plus 2.30% and 2.75%,
respectively. In addition, during June 2002, FBA entered into
$46.0 million notional amount of interest rate swap agreements
that provide for us to receive a fixed rate of interest and pay
an adjustable rate of interest equivalent to the three-month
London Interbank Offering Rate plus 1.97%. The underlying hedged
liabilities are our guaranteed preferred beneficial interests in
First Banks, Inc. subordinated debentures and First Banks
America, Inc. subordinated debentures. The terms of the swap
agreements provide for us to pay and receive interest on a
quarterly basis. There were no amounts receivable or payable by
us at September 30, 2002. The $86.3 million notional amount
interest rate swap agreement was called by its counterparty on
November 8, 2002 resulting in final settlement of this interest
rate swap agreement on December 18, 2002.
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 September 30, 2002 and December 31, 2001 were as follows:
Notional Interest rate Interest rate Fair
Maturity date amount paid received value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
September 30, 2002:
January 9, 2004................................. $ 50,000 1.86% 5.37% $ 2,221
January 9, 2006................................. 150,000 1.86 5.50 13,406
March 31, 2027.................................. 86,250 4.61 9.25 (220)
June 30, 2028................................... 46,000 3.83 8.50 336
December 31, 2031............................... 55,200 4.16 9.00 4,060
---------- ---------
$ 387,450 3.03 7.17 $ 19,803
========== ===== ===== =========
December 31, 2001:
January 9, 2004................................. $ 50,000 2.48% 5.37% $ 1,761
January 9, 2006................................. 150,000 2.48 5.50 3,876
---------- ---------
$ 200,000 2.48 5.47 $ 5,637
========== ===== ===== =========
Interest Rate Floor Agreements
During January 2001 and March 2001, we entered into $200.0 million and
$75.0 million notional amount, respectively, of four-year interest rate floor
agreements to further stabilize net interest income in the event of a falling
rate scenario. The interest rate floor agreements provided for us to receive a
quarterly adjustable rate of interest equivalent to the differential between the
three-month London Interbank Offering Rate and the strike prices of 5.50% or
5.00%, respectively, should the three-month London Interbank Offering Rate fall
below the respective strike prices. In November 2001, we terminated these
interest rate floor agreements in order to appropriately modify our overall
hedge position in accordance with our interest rate risk management program. In
conjunction with the termination, we recorded a pre-tax adjustment of $4.0
million representing the decline in fair value from our previous month-end
measurement date. These agreements provided net interest income of $2.1 million
for the year ended December 31, 2001.
Interest Rate Cap Agreements
In conjunction with the interest rate swap agreements maturing
September 20, 2004, 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
September 30, 2002 and December 31, 2001, the carrying value of these interest
rate cap agreements, which is included in derivative instruments in the
consolidated balance sheets, was $426,000 and $2.1 million, respectively.
Pledged Collateral
At September 30, 2002 and December 31, 2001, we had pledged investment
securities available for sale with a carrying value of $5.9 million and $1.1
million, respectively, in connection with our interest rate swap agreements. In
addition, at September 30, 2002, and December 31, 2001, we had accepted, as
collateral in connection with our interest rate swap agreements, cash of $97.5
million and $4.9 million, respectively. At December 31, 2001, we had also
accepted investment securities with a fair value of $53.9 million 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 September 30, 2002 and December 31, 2001, we had not done so.
Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-
Backed Securities
Derivative financial instruments issued by us consist of interest rate
lock commitments to originate fixed-rate loans. Commitments to originate
fixed-rate loans consist primarily of residential real estate loans. These net
loan commitments and loans held for sale are hedged with forward contracts to
sell mortgage-backed securities.
Mortgage Banking Activities
Our mortgage banking activities consist of the origination, purchase
and servicing of residential mortgage loans. The purchase of loans to be held
for sale is limited to loans held for sale that we acquire in conjunction with
our acquisition of other financial institutions. Exclusive of these acquired
loans, we do not purchase loans to be held for sale. 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 nine months ended September 30, 2002 and 2001, we originated
and purchased loans for resale totaling $1.30 billion and $1.09 billion, and
sold loans totaling $1.09 billion and $982.2 million, respectively. For the
three years ended December 31, 2001, 2000 and 1999, we originated and purchased
loans for resale totaling $1.52 billion, $532.2 million and $452.9 million and
sold loans totaling $1.35 billion, $413.2 million and $507.1 million,
respectively. The origination and purchase of residential mortgage loans and the
related sale of the loans provides us with additional sources of income
including the gain or loss realized upon sale, the interest income earned while
the loan is held awaiting sale and the ongoing loan servicing fees from the
loans sold with servicing rights retained. Mortgage loans serviced for investors
aggregated $1.26 billion at September 30, 2002, and $1.07 billion, $957.2
million and $957.1 million at December 31, 2001, 2000 and 1999, respectively.
The gain on mortgage loans originated for resale, including loans sold
and held for sale, was $20.3 million and $9.7 million for the nine months ended
September 30, 2002 and 2001, respectively, and $15.0 million, $7.8 million and
$6.9 million for the years ended December 31, 2001, 2000 and 1999, respectively.
We determine these gains, net of losses, on a lower of cost or market basis.
These gains are realized at the time of sale. The cost basis reflects: (1)
adjustments of the carrying values of loans held for sale to the lower of cost,
adjusted to include the cost of hedging the loans held for sale, or current
market values; and (2) adjustments for any gains or losses on loan commitments
for which the interest rate has been established, net of anticipated
underwriting "fallout" (loans not funded due to issues discovered during the
underwriting process) adjusted for the cost of hedging these loan commitments.
The overall increase for the nine months ended September 30, 2002 and for 2001
is primarily attributable to a significant increase in the volume of loans
originated and sold commensurate with the prevailing interest rate environment
experienced throughout 2001, including continued reductions in mortgage loan
rates and our growth in mortgage banking activities. The increases for 2000 and
1999 reflect the expansion of our mortgage banking activities into our
California and Texas markets.
The interest income on loans held for sale was $10.1 million for the
nine months ended September 30, 2002, compared to $7.8 million for the
comparable period in 2001. The interest income on loans held for sale was $11.1
million for the year ended December 31, 2001, in comparison to $3.5 million and
$4.9 million for the years ended December 31, 2000 and 1999, respectively. The
amount of interest income realized on loans held for sale is a function of the
average balance of loans held for sale, the period for which the loans are held
and the prevailing interest rates when the loans are made. The average balance
of loans held for sale was $177.0 million and $144.8 million for the nine months
ended September 30, 2002 and 2001, respectively, and $150.8 million, $47.0
million and $79.1 million for the years ended December 31, 2001, 2000 and 1999,
respectively. On an annualized basis, our yield on the portfolio of loans held
for sale was 7.66% and 7.23% for the nine months ended September 30, 2002 and
2001, respectively, and 7.38%, 7.49% and 6.23% for the years ended December 31,
2001, 2000 and 1999, respectively. This compares with our cost of funds, as a
percentage of average interest-bearing liabilities, of 2.99% and 4.73% for the
nine months ended September 30, 2002 and 2001, respectively, and 4.44%, 4.85%
and 4.51% for the years ended December 31, 2001, 2000 and 1999, respectively.
We report mortgage loan servicing fees net of amortization of mortgage
servicing rights, interest shortfall and mortgage-backed security guarantee fee
expense. Interest shortfall equals the difference between the interest collected
from a loan-servicing customer upon prepayment of the loan and a full month's
interest that is required to be remitted to the security owner. Loan servicing
fees, net, which are included in other noninterest income in the statements of
operations, were $553,000 and $302,000 for the nine months ended September 30,
2002 and 2001, respectively, and $222,000, $486,000 and $657,000 for the years
ended December 31, 2001, 2000 and 1999, respectively. The increase in loan
servicing fees in 2002 primarily reflects the significant increase in the volume
of loans originated and sold commensurate with the reductions in mortgage loan
rates experienced in 2001. We attribute the decrease in loan servicing fees for
2001, 2000 and 1999 primarily to increased amortization of mortgage servicing
rights, reduced late charge fees and our strategy of selling the new production
of adjustable-rate and nonconforming residential mortgage loans on a servicing
released basis. Amortization of mortgage servicing rights was $2.7 million for
the nine months ended September 30, 2002 and 2001, and $3.7 million, $3.1
million and $2.8 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
Our interest rate risk management policy provides certain hedging
parameters to reduce the interest rate risk exposure arising from changes in
loan prices from the time of commitment until the sale of the security or loan.
To reduce this exposure, we use forward commitments to sell fixed-rate
mortgage-backed securities at a specified date in the future. At September 30,
2002 and December 31, 2001, 2000 and 1999, we had $235.5 million, $197.5
million, $37.6 million and $31.5 million, respectively, of loans held for sale
and related commitments, net of committed loan sales and estimated underwriting
fallout, of which $243.1 million, $209.9 million, $32.0 million and $33.0
million, respectively, were hedged through the use of such forward commitments.
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. Since 1994, our organization has grown significantly,
primarily as a result of our acquisition strategy, as well as through internal
growth. We currently operate banking subsidiaries with branches in California,
Illinois, Missouri and Texas. At September 30, 2002, we had total assets of
$7.17 billion, loans, net of unearned discount, of $5.46 billion, total deposits
of $6.03 billion and total stockholders' equity of $506.2 million.
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.
Due to the nature of our ownership, we have elected to only engage in those
acquisitions that can be accomplished for cash. 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 advantages of tax-free exchanges to the selling
shareholders. Our acquisition activities are generally somewhat sporadic because
we may consummate multiple transactions in a particular period, followed by a
substantially less active acquisition period. Furthermore, the intangible assets
recorded in conjunction with these acquisitions create an immediate reduction in
regulatory capital. This reduction, as required by regulatory policy, provides
further financial disincentives to paying large premiums in cash acquisitions.
Recognizing these facts, we follow certain patterns in our
acquisitions. First, we typically acquire several smaller institutions,
sometimes over an extended period of time, rather than a single larger one. We
attribute this approach to the constraints imposed by the amount of funds
required for a larger transaction, as well as the opportunity to minimize the
aggregate premium required through smaller individual transactions. Secondly, in
some acquisitions, we may acquire institutions having significant asset-quality,
ownership, regulatory or other problems. We seek to address the risks of these
issues by adjusting the acquisition pricing, accompanied by appropriate remedial
attention after consummation of the transaction. In these institutions, these
issues may diminish their attractiveness to other potential acquirers, and
therefore may reduce the amount of acquisition premium required. Finally, we may
pursue our acquisition strategy in other geographic areas, or pursue internal
growth more aggressively because cash transactions may not be economically
viable in extremely competitive acquisition markets.
During the five years ended December 31, 2001, we primarily
concentrated our acquisitions in California, completing 13 acquisitions of banks
and five purchases of branch offices, which provided us with an aggregate of
$2.05 billion in total assets and 47 banking locations as of the dates of
acquisition. More recent acquisitions have occurred in our other geographic
markets. On January 15, 2002, we completed our acquisition of a bank in Des
Plaines, Illinois, which provided us with $256.3 million in total assets and
four banking locations and on June 22, 2002, we completed our assumption of the
deposits and certain liabilities and the purchase of certain assets of two
branch offices in Denton and Garland, Texas, which provided us with deposits of
$64.9 million. We are also planning on further expanding our Midwest banking
franchise with an acquisition in the Ste. Genevieve, Missouri market, which is
expected to be completed on March 31, 2003. These acquisitions have allowed us
to significantly expand our presence throughout our geographic areas, improve
operational efficiencies, convey a more consistent image and quality of service
and more cohesively market and deliver our products and services. Management
continues to meld the acquired entities into our operations, systems and
culture.
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 various areas including, but not limited to:
o improving asset quality;
o reducing unnecessary, duplicative and/or excessive expenses
including personnel, information technology and certain other
operational and administrative expenses;
o maintaining, repairing and, in some cases, refurbishing bank
premises necessitated by the deferral of such projects by some
of the acquired entities;
o 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;
o relocating branch offices which are not adequate, conducive or
convenient for banking operations; and
o 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 includes the combining of separate
and distinct entities together to form a cohesive organization with common
objectives and focus. We invest 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, 2001 and, to a lesser extent, the nine months
ended September 30, 2002, 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 prospects for improving future profitability.
In conjunction with our acquisition strategy, we have also focused on
building and reorganizing the infrastructure necessary to accomplish our
objectives for internal growth. This process has required significant increases
in the resources dedicated to commercial and consumer business development,
financial service product line and delivery systems, branch development and
training, advertising and marketing programs, and administrative and operational
support. In addition, during 1999, we began an internal restructuring process
designed to better position us for future growth and opportunities expected to
become available as consolidation and changes continue in the delivery of
financial services. The magnitude of this project was extensive and covered
almost every area of our organization. We continue to focus on modifying and
effectively repositioning our internal and external resources to better serve
the markets in which we operate. Although these efforts have primarily led to
increased capital expenditures and noninterest expenses, we anticipate they will
lead to additional internal growth, more efficient operations and improved
profitability over the long term.
In February 1997, our initial financing subsidiary, First Preferred
Capital Trust, issued $86.25 million of 9.25% trust preferred securities, and,
in October 2000, our second financing subsidiary, First Preferred Capital Trust
II, issued $57.5 million of 10.24% trust preferred securities. In November 2001,
our third financing subsidiary, First Preferred Capital Trust III, issued $55.2
million of 9.00% trust preferred securities, and, on April 10, 2002, First Bank
Capital Trust, our fourth financing subsidiary, issued $25.0 million of variable
rate cumulative trust preferred securities. In addition, in July 1998, FBA's
financing subsidiary, First America Capital Trust, issued $46.0 million of 8.50%
trust preferred securities. Each of these financing subsidiaries operates as a
Delaware statutory trust. The trust preferred securities issued by First
Preferred Capital Trust, First Preferred Capital Trust II and First Preferred
Capital Trust III are publicly held and traded on the Nasdaq National Market.
The trust preferred securities issued by First Bank Capital Trust were issued in
a private placement and rank equal to the trust preferred securities issued by
our other three financing subsidiaries and junior to the trust preferred
securities issued by First Preferred Capital Trust III. 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. With the exception of the First
Bank Capital Trust preferred securities, we pay distributions on these trust
preferred securities quarterly in arrears on March 31st, June 30th, September
30th, and December 31st of each year. Distributions on the First Bank Capital
Trust preferred securities are payable semi-annually in arrears on April 22nd
and October 22nd of each year. The distributions payable on all issues of trust
preferred securities are included in interest expense in the consolidated
statements of income.
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 the portfolios and to achieve a higher interest yield on
our loan portfolio, we reduced a substantial portion of the loans which were
acquired during this time through payments, refinancing with other financial
institutions, charge-offs, and, in certain instances, sales of loans. As a
result, our portfolio of one-to-four family residential real estate loans, after
reaching a high of $1.20 billion at December 31, 1995, has decreased to $798.1
million at December 31, 2001, and $703.9 million at September 30, 2002.
Similarly, our portfolio of consumer and installment loans, net of unearned
discount, decreased significantly from $279.3 million at December 31, 1997 to
$122.1 million at December 31, 2001, and $91.0 million at September 30, 2002.
The decrease in 2002 reflects 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 expanding
commercial lending and reducing the amount of less profitable loan types. For
the year ended December 31, 2001, the overall decline in our consumer and
installment portfolio, exclusive of loans held for sale, also reflects the sale
of our student loan and credit card portfolios, which totaled approximately
$16.9 million and $13.5 million, respectively, at the time of sale. We recorded
gains of $1.9 million and $229,000 on the sale of the credit card portfolio and
student loan portfolio, respectively, and we do not have any continuing
involvement in the transferred assets.
As these components of our loan portfolio decreased, we replaced them
with higher yielding loans that were internally generated by our business
development function. With our acquisitions, we expanded our business
development function into the new market areas in which we were then operating.
Consequently, in spite of relatively large reductions in acquired portfolios,
our aggregate loan portfolio, net of unearned discount, increased from $3.00
billion at December 31, 1997 to $5.41 billion at December 31, 2001 and $5.46
billion at September 30, 2002.
Our business development efforts are focused on the origination of
loans in three general types: (a) commercial, financial and agricultural loans,
which totaled $1.47 billion at September 30, 2002; (b) commercial real estate
mortgage loans, which totaled $1.68 billion at September 30, 2002; and (c)
construction and land development loans, which totaled $983.3 million at
September 30, 2002.
The primary component of commercial, financial and agricultural loans
is commercial loans which are made based on the borrowers' general credit
strength and ability to generate cash flows for repayment from income sources.
Most of these loans are made on a secured basis, most often involving the use of
company equipment, inventory and/or accounts receivable as collateral. For
reporting purposes, this category of loans includes only those commercial loans
that do not include real estate as collateral. Regardless of collateral,
substantial emphasis is placed on the borrowers' ability to generate cash flow
sufficient to operate the business and provide coverage of debt servicing
requirements. Commercial loans are frequently renewable annually, although some
terms may be as long as three years. These loans typically require the borrower
to maintain certain operating covenants appropriate for the specific business,
such as profitability, debt service coverage and current asset and leverage
ratios, which are generally reported and monitored on a quarterly basis and
subject to more detailed annual reviews. Commercial loans are made to customers
primarily located in the geographic trade areas of our subsidiary banks in
Missouri, Illinois, Texas and California, and who are engaged in manufacturing,
retailing, wholesaling and other service businesses. This portfolio is not
concentrated in large specific industry segments that are characterized by
sufficient homogeneity that would result in significant concentrations of credit
exposure. Rather, it is a highly diversified portfolio that encompasses many
industry segments. The largest general concentration in this portfolio, which is
not homogeneous in nature, is agricultural which totals approximately $44.1
million, representing approximately 3% of the commercial, financial and
agricultural portfolio. This portfolio, however, is diverse in geography and
collateral, secured by a mixture of agricultural equipment, livestock and crop
production. The largest homogeneous industry segment included within this
portfolio is the fast-food restaurant segment, in which we had total loans
outstanding of approximately $50.0 million, representing approximately 3% of
this portfolio at September 30, 2002. Diversity in this segment of the portfolio
is represented by both geography and a mixture of loans to both franchisors and
franchisees, with approximately 70% of the portfolio involving loans to
franchisees and 30% to franchisors. Within both real estate and commercial
lending portfolios, we strive for the highest degree of diversity that is
practicable. We also emphasize the development of other service relationships
with our commercial borrowers, particularly deposit accounts.
Commercial real estate loans include loans for which the intended
source of repayment is the rental and other income from the real estate,
including both commercial real estate developed for lease and owner occupied
commercial real estate. The underwriting of owner occupied commercial real
estate loans generally follows the procedures for commercial lending described
above, except that the collateral is real estate, and the loan term may be
longer. The primary emphasis in underwriting loans for which the primary source
of repayment is the performance of the collateral is the projected cash flow
from the real estate and its adequacy to cover the operating costs of the
project and the debt service requirements. Secondary emphasis is placed on the
appraised value of the real estate, although the appraised liquidation value of
the collateral must be adequate to repay the debt and related interest in the
event the cash flow becomes insufficient to service the debt. Generally,
underwriting terms require the loan principal not to exceed 75% of the appraised
value of the collateral and the loan maturity not to exceed seven years.
Commercial real estate loans are made for commercial office space, retail
properties, hospitality, industrial and warehouse facilities and recreational
properties. We rarely finance commercial real estate or rental properties that
do not have lease commitments from substantial tenants.
Construction and land development loans include commitments for
construction of both residential and commercial properties. Commercial real
estate projects require commitments for permanent financing from other lenders
upon completion of the project or, more typically, include a short-term
amortizing component of the financing from the bank. Commitments for
construction of multi-tenant commercial and retail projects require lease
commitments from a substantial primary tenant or tenants prior to commencement
of construction. We finance some projects for borrowers whose home office is
within our trade area for which the particular project may be outside our normal
trade area. We do not, however, engage in developing commercial and residential
construction lending business outside of our trade area. Residential real estate
construction and development loans are made based on the cost of land
acquisition and development, as well as the construction of the residential
units. Although we finance the cost of display units and units held for sale,
approximately 40% of the loans for individual residential units have purchase
commitments prior to funding.
In addition to underwriting based on estimates and projection of
financial strength, collateral values and future cash flows, most loans to
borrowing entities other than individuals require the personal guarantees of the
principals of the borrowing entity.
Our commercial leasing portfolio totaled $141.8 million at September
30, 2002 and $149.0 million at December 31, 2001. This portfolio consists of
leases originated by our former subsidiary, First Capital Group, Inc.,
Albuquerque, New Mexico, primarily through third parties, on commercial
equipment including aircraft parts and equipment. During 2002, we changed the
nature of this business, resulting in the discontinuation of the operations of
First Capital Group, Inc. and the transfer of all responsibilities for the
existing portfolio to a new leasing staff in St. Louis, Missouri.
At December 31, 2001, within the commercial leasing portfolio, there
were approximately $60.1 million of leases of parts and equipment to the
commercial airline industry and related aircraft service providers. This
equipment consisted primarily of engines, landing gear and replacement parts,
most of which is used in maintenance operations by commercial airlines or by
third party vendors performing maintenance for the airlines. In addition, there
were several leases for smaller aircraft used by charter services. Earlier in
2001, it became apparent that the airline industry in general was experiencing
problems with overcapacity, and as a result, had begun reducing its requirements
for new and replacement aircraft. This was evidenced by airlines taking portions
of their fleets, particularly older less efficient aircraft, out of service and
reducing orders for new equipment. This affected maintenance operations because
as the usage of aircraft decreased, the maintenance requirements were also
reduced. Consequently, by late 2001, we discontinued new leases of equipment
related to the airline industry.
While some of the leases in our portfolio had evidenced problems by
early 2001, overcapacity problems and resulting financial distress in the
commercial airline industry became more critical after the terrorist attacks of
September 11, 2001. Following these events, we re-evaluated our aviation related
lease portfolio to examine our overall exposure to the industry, the effects of
recent trends on valuations of equipment and the financial strength of our
lessees. As a result of our review, for the year ended December 31, 2001, we
incurred $4.5 million of charge-offs in connection with the aircraft leasing
portfolio and had $2.6 million of nonperforming aviation related leases. The
evaluation process has evolved into an ongoing monitoring of this portfolio
through continuous communication with lessees to establish information
concerning their use of equipment under lease, monitoring the use of that
equipment, and tracking of changes in equipment and related residual valuations.
When problems are detected, we obtain new valuations of the equipment, and
recognize any impairment in valuation by adjustments to reserves or income as
appropriate depending upon the type of lease. Sources of information for valuing
our leased assets include the Aircraft Bluebook, other public information from a
variety of sources, consultation with other lessors and brokers of aviation
equipment and specific engagement of an independent asset management company for
equipment valuation as well as management of repossessed assets. Specifically
with respect to residual values, and to establish formality in our process, we
have also arranged for appraisal of leased assets that involve residual risk by
an International Society of Transport Aircraft Trading certified appraiser of
aviation assets. The information received from these various specialized sources
assists us in valuing our lease portfolio and recognizing any impairment on
these assets. By September 30, 2002, the portfolio of leases on commercial
aircraft and parts and equipment had been reduced to $54.0 million, with $5.4
million of nonperforming aviation related leases, and $514,000 of charge-offs in
connection with the aircraft leasing portfolio for the nine months ended at that
date.
Our expanded level of commercial lending carries with it greater credit
risk, which we manage through uniform loan policies, procedures, underwriting
and credit administration. As a consequence of such greater risk, the growth of
the loan portfolio must also be accompanied by adequate allowances for loan
losses. We associate the increased level of commercial lending activities and
our acquisitions with the increase of $31.9 million and $14.1 million in
nonperforming loans for the nine months ended September 30, 2002 and the year
ended December 31, 2001, respectively. In addition, the loan portfolios of
Millennium Bank and Union, which we acquired in 2000 and 2001, respectively,
exhibited significant distress, which further contributed to the overall
increase in nonperforming loans.
Millennium Bank, which we acquired on December 29, 2000, operated a
factoring business for doctors, hospitals and other health care professionals.
This business had been started by Millennium Bank the year before our
acquisition, and had approximately $11.0 million of receivables at the time of
our acquisition. Due to the relatively short life of this operation, the
portfolio did not exhibit signs of problems at that time. Consequently, we
allowed the business to continue after the acquisition to determine whether it
would be an appropriate line of business in the future. However, in late 2001,
the factoring receivables began to exhibit signs of problems, and in early 2002,
we determined one of the larger borrowers was incorrectly accounting for its
receivables, causing the factored balance to be substantially overfunded. After
this, other asset quality issues arose, causing us to discontinue this business
in June 2002. During the nine months ended September 30, 2002, we charged-off
approximately $1.8 million, or 21.7%, of the health care factoring portfolio. At
September 30, 2002, we had approximately $10.9 million of factoring business
receivables, which are expected to decline over time given the discontinuation
of this line of business. Since no value was assigned to goodwill or other
intangible assets of this line of business in the acquisition, and the problems
appeared to arise subsequent to the acquisition, we determined that this did not
create an impairment of the goodwill that we recorded in connection with the
acquisition.
In evaluating the loan portfolios of Union's two subsidiary banks prior
to its acquisition, it was clear that substantial problems existed in those
portfolios. Generally, credit documentation was poor, underwriting standards
were lax and loan terms were aggressive. As we conducted our due diligence
review, we applied the same asset quality standards, risk rating system and
allowance methodology that we apply to our own loan portfolio. Based on this
review, and to address concerns we had regarding Union's loan portfolios and the
level of its allowance for loan and lease losses, an escrow account of
approximately $1.6 million was established by withholding that amount from the
purchase price. This escrow account was available to absorb losses during the
two-year period following the acquisition from the Union Bank loan portfolio
that were in excess of Union Bank's allowance for loan and lease losses at the
time of the due diligence review. Union's consolidated allowance for loan losses
was $8.6 million relative to an aggregate loan portfolio of $262.3 million at
December 31, 2001, the date of acquisition.
While we believed there were substantial problems with the Union
portfolios, few of these had been identified or addressed by Union as of
December 31, 2001. Consequently, when we assimilated these loans into our
systems and procedures, the problems in the portfolios surfaced, causing an
increase in the amount of problem assets, as well as contributing to the level
of loans charged-off during the nine months ended September 30, 2002. For the
nine months ended September 30, 2002, loan charge-offs from the Union portfolios
were $3.3 million, including an amount within the Union Bank portfolio that was
in excess of the allowance at the date of our due diligence review and the
entire $1.6 million escrow account. Furthermore, at September 30, 2002,
nonperforming loans in the Union portfolios were $7.5 million. Because these
problems had been anticipated in negotiating the acquisition price, they did not
affect the amount of goodwill recorded in connection with this acquisition.
For the nine months ended September 30, 2002, our nonperforming loans
increased $31.9 million to $99.2 million as of September 30, 2002, compared to
$67.3 million at December 31, 2001. The increase is primarily attributable to
general economic conditions, additional problems identified in the acquired loan
portfolios, continuing deterioration in the portfolio of leases to the airline
industry and the addition of a $16.1 million borrowing relationship to
nonaccrual real estate construction and development loans during the second
quarter of 2002. This relationship relates to a residential and recreational
development project that had significant financial difficulties and experienced
inadequate project financing, project delays and weak project management. This
relationship had previously been on nonaccrual status and was removed from
nonaccrual status during the third quarter of 2001 due to financing being recast
with a new borrower, who appeared able to meet ongoing developmental
expectations. Subsequent to that time, the new borrower encountered internal
management problems, which negatively impacted and further delayed development
of the project. We believe these increases, while partially attributable to the
overall risk in our loan portfolio, are reflective of cyclical trends
experienced within the banking industry as a result of the economic slow down.
During 2001 and 2002, the nation generally experienced a relatively
mild, but prolonged economic slow down that has affected much of the banking
industry, including us. This was exacerbated by the terrorist attacks in
September 2001 and the effects the attacks and related governmental responses
had on economic activity. The effects of the downturn have been inconsistent
between various geographic areas of the country, as well as different segments
of the economy. To us, the effects of the downturn can be observed in generally
lower interest rates, which have a negative impact on our net interest income,
and on the performance of our loan portfolio, which is reflected in higher
delinquencies, non-performing assets, charge-offs and provisions for loan
losses, as well as reduced loan demand from customers. The impact of lower
interest rates has been significantly reduced through the use of various
financial derivative instruments to provide hedges of this interest rate risk.
See "--Interest Rate Risk Management." However, during 2001 and 2002, we
incurred increasing asset quality issues that were at least partially
attributable to economic conditions.
Within our market areas, the impact of the economy has become evident
at different times. In our midwestern markets, a perceptible increase in loan
delinquencies began in late 2000 and continued throughout 2001. The increase in
delinquencies was primarily focused in commercial, financial and agricultural
loans and, to a lesser extent, commercial real estate loans, and initially
involved borrowers that had already encountered some operating problems that
continued to deteriorate as the economy became weaker. Included in this were
loans on hotels and leases to the commercial airline industry. In both
instances, the industry had been suffering from overcapacity prior to 2001,
which then became much worse with the economic downturn and the events of
September 11, 2001. As the recession continued, the effects expanded to
companies that had been stronger, but succumbed to the ongoing effects of slowed
economic activity. First Bank, our midwestern subsidiary bank, incurred net loan
charge-offs of $16.3 million for the year ended December 31, 2001, and had
non-performing loans and leases of $47.7 million at December 31, 2001. In
comparison, for the nine months ended September 30, 2002, net loan charge-offs
had decreased to $8.6 million, while non-performing loans had increased to $65.3
million at September 30, 2002. The increase in non-performing loans primarily
reflects the single real estate construction and development relationship of
$16.1 million that became non-performing during the second quarter of 2002, as
previously discussed.
Generally, the effects on us of the economic downturn in California
have been limited to the San Francisco Bay area, including the area known as
"Silicon Valley." Although we have a substantial banking presence in the San
Francisco Bay area, we have relatively little direct exposure to the high
technology companies. Consequently, the decline in that industry beginning in
2000 had little direct effect on our California operations. However, as the
magnitude of the problems in the high technology sector increased, the effects
spread to companies that were suppliers and servicers of the high technology
sector, and to commercial real estate in the area. As a result, our asset
quality issues in California have been concentrated within the San Francisco Bay
area, and generally do not involve Southern California or the
Sacramento-Roseville area in Northern California. Furthermore, these issues have
primarily arisen during 2002. Consequently, while our California banking
operation incurred net loan charge-offs of $5.4 million, and had non-performing
loans and leases of $14.1 million at December 31, 2001, during the nine months
ended September 30, 2002, these increased to $19.4 million and $25.0 million,
respectively, most of which related to the San Francisco Bay area.
Our Texas banking operation represents a somewhat smaller portion of
our overall lending function. However, the Texas economy has generally continued
to be fairly strong, resulting in relatively few asset quality issues.
Consequently, we had net loans charged-off of $343,000 during the year ended
December 31, 2001 and net recoveries for the nine months ended September 30,
2002 of $585,000. Total non-performing loans were $7.0 million and $3.5 million
at September 30, 2002 and December 31, 2001, respectively. Included in
non-performing loans at September 30, 2002 was a single loan of $6.7 million to
a company engaged in leasing equipment, primarily to manufacturers. This company
encountered significant operating problems resulting from rapid expansion,
primarily through acquisition, accompanied by the economic downturn, which
particularly affected the manufacturing sector.
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. This
growth is accomplished by cross-selling various products and services, packaging
account types and offering incentives to deposit customers on other deposit or
non-deposit services. In addition, commercial borrowers are encouraged to
maintain their operating deposit accounts with us. At December 31, 1997, total
time deposits were $1.90 billion, or 51.68% of total deposits. Although time
deposits have increased to $2.30 billion at December 31, 2001 and decreased
slightly to $2.28 billion at September 30, 2002, they represented only 40.5% and
37.8% of total deposits at December 31, 2001 and September 30, 2002,
respectively, reflecting our continued focus on transactional accounts and full
service deposit relationships with our customers.
Despite the significant expenses we incurred in the amalgamation of the
acquired entities into our corporate culture and systems, and in the expansion
of our organizational capabilities, the earnings of the acquired entities and
the 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, 2001 and 2000, net income was $64.5
million and $56.1 million, respectively, compared with $44.2 million, $33.5
million and $33.0 million in 1999, 1998 and 1997, respectively. For the nine
months ended September 30, 2002, net income was $30.4 million, compared to $34.6
million for the comparable period in 2001. The factors that led to the decline
in earnings for 2002 include the current interest rate environment, asset
quality issues requiring additional provisions for loan losses, and increased
operating expenses. The increased provisions for loan losses reflect the current
economic environment and significantly increased loan charge-off, delinquency
and nonperforming trends as further discussed under "--Comparison of Results of
Operations for the Nine Months Ended September 30, 2002 and 2001." Although we
anticipate certain short-term adverse effects on our operating results
associated with acquisitions, we believe the long-term benefits of our
acquisition program will exceed the short-term issues encountered with some
acquisitions. As such, in addition to concentrating on internal growth through
continued efforts to further develop our corporate infrastructure and product
and service offerings, we expect to continue to identify and pursue
opportunities for growth through acquisitions.
Acquisitions
In the development of our banking franchise, we emphasize acquiring
other financial institutions as one means of achieving our growth objectives.
Acquisitions may serve to enhance our presence in a given market, to expand the
extent of our market area or to enable us to enter new or noncontiguous 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 and the issuance of trust preferred securities to meet
our growth objectives under our acquisition program.
During the three years ended December 31, 2001, we completed ten
acquisitions of banks, one branch office purchase and the acquisition of certain
assets and assumption of certain liabilities of a leasing company. As
demonstrated below, our acquisitions during the three years ended December 31,
2001 have primarily served to increase our presence in the California markets
that we originally entered during 1995 and to further augment our existing
markets and our Midwest banking franchise. In 2002, we also completed an
acquisition in the Chicago metropolitan area and the purchase of two branch
offices in the Dallas metropolitan area. Additionally, we currently have one
pending acquisition that will further expand our Midwest banking franchise.
These transactions are summarized as follows:
Number
Loans, Net of of
Total Unearned Investment Banking
Entity Closing Date Assets (1) Discount (1) Securities (1) Deposits (1) Locations (1)
------ ------------ ---------- ------------- -------------- ------------ -------------
(dollars expressed in thousands)
Pending Acquisition
- -------------------
Bank of Ste. Genevieve
Ste. Genevieve, Missouri -- $ 111,100 60,900 38,700 91,100 2
=========== ======== ======== ========= ====
2002
- ----
Union Planters Bank, N.A.
Denton and Garland, Texas
branch offices June 22, 2002 $ 63,700 600 -- 64,900 2
Plains Financial Corporation
Des Plaines, Illinois January 15, 2002 256,300 150,400 81,000 213,400 4
---------- -------- -------- --------- ----
$ 320,000 151,000 81,000 278,300 6
========== ======== ======== ========= ====
2001
- ----
Union Financial Group, Ltd.
Swansea, Illinois December 31, 2001 $ 360,000 263,500 1,150 283,300 9
BYL Bancorp
Orange, California October 31, 2001 281,500 175,000 12,600 251,800 7
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 70,200 7,500 89,000 2
---------- -------- -------- -------- ----
$ 743,000 508,700 21,250 624,100 18
========== ======== ======== ======== ====
2000
- ----
The San Francisco Company
San Francisco, California December 31, 2000 $ 183,800 115,700 38,300 137,700 1
Millennium Bank
San Francisco, California December 29, 2000 117,000 81,700 21,100 104,200 2
Commercial Bank of San Francisco
San Francisco, California October 31, 2000 155,600 97,700 45,500 109,400 1
Bank of Ventura
Ventura, California August 31, 2000 63,800 39,400 15,500 57,300 1
First Capital Group, Inc.
Albuquerque, New Mexico February 29, 2000 64,600 64,600 -- -- 1
Lippo Bank
San Francisco, California February 29, 2000 85,300 40,900 37,400 76,400 3
---------- -------- -------- -------- ----
$ 670,100 440,000 157,800 485,000 9
========== ======== ======== ======== ====
1999
- ----
Brentwood Bank of California
Malibu, California 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
========== ======== ======== ======== ====
- -------------------------
(1) For our pending acquisition that is expected to close on March 31, 2003, amounts are as of September 30, 2002. For closed
acquisitions, amounts are as of the respective closing dates.
We funded the completed acquisitions from available cash reserves,
proceeds from the sales and maturities of available-for-sale investment
securities, borrowings under our revolving credit line with a group of
unaffiliated banks and the proceeds of the issuance of trust preferred
securities.
Pending Acquisition
On September 17, 2002, First Banks and Allegiant Bancorp, Inc., or
Allegiant, signed an agreement and plan of exchange that provides for First
Banks to acquire Allegiant's wholly owned banking subsidiary, Bank of Ste.
Genevieve. Bank of Ste. Genevieve operates two locations in Ste. Genevieve,
Missouri, and reported total assets of $111.1 million and total deposits of
$91.1 million at September 30, 2002. Under the terms of the agreement, First
Banks will acquire Bank of Ste. Genevieve in exchange for approximately 974,150
shares of Allegiant common stock that are currently held by First Banks. The
value of $18.375 per share assigned to each share of Allegiant common stock to
be exchanged in the transaction was determined by the parties based upon the
existing market price of the shares and detailed negotiations. The transaction
is expected to be completed on March 31, 2003. First Banks will continue to own
approximately 232,000 shares of Allegiant common stock subsequent to completion
of the transaction.
Closed Acquisitions and Other Corporate Transactions
On January 15, 2002, we completed our acquisition of Plains Financial
Corporation, or Plains, and its wholly owned banking subsidiary, PlainsBank of
Illinois, National Association, Des Plaines, Illinois, in exchange for $36.5
million in cash. Plains operated a total of three banking facilities in Des
Plaines, Illinois, and one banking facility in Elk Grove Village, Illinois. At
the time of the transaction, Plains had $256.3 million in total assets, $150.4
million in loans, net of unearned discount, $81.0 million in investment
securities and $213.4 million in deposits. This transaction was accounted for
using the purchase method of accounting. The excess of the cost over the fair
value of the net assets acquired was approximately $12.6 million and will not be
amortized, but instead will be periodically tested for impairment in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and
Other Intangible Assets. The core deposit intangibles were approximately $2.9
million and are being amortized over seven years utilizing the straight-line
method. Plains was merged with and into Union and PlainsBank of Illinois was
merged with and into First Bank.
On June 22, 2002, First Bank & Trust completed its assumption of the
deposits and certain liabilities and the purchase of certain assets of the
Garland and Denton, Texas branch offices of Union Planters Bank, National
Association, or UP branches. The transaction resulted in the acquisition of
$15.3 million in deposits and one branch office in Garland and $49.6 million in
deposits and one branch office, and a detached drive-thru facility, in Denton.
The core deposit intangibles associated with the branch purchases were $1.4
million and are being amortized over seven years utilizing the straight-line
method.
On December 31, 2002, we completed our acquisition of all of FBA's
outstanding capital stock that we did not already own for a price of $40.54 per
share, or approximately $32.4 million. At December 31, 2002, there were 798,753
shares, or approximately 6.22% of FBA's outstanding stock, held publicly. We
owned the other 93.78%. In conjunction with this transaction, FBA became a
wholly owned subsidiary of ours, and was merged with and into First Banks. This
transaction was accounted for using the purchase method of accounting. The
excess of the cost over the fair value of the net assets acquired was
approximately $12.4 million and will not be amortized, but instead will be
periodically tested for impairment in accordance with SFAS No. 142.
Acquisition and Integration Costs
We accrue certain costs associated with our acquisitions as of the
respective consummation dates. Essentially all of these accrued costs relate
either to adjustments to the staffing levels of the acquired entities or to the
anticipated termination of information technology or item processing contracts
of the acquired entities prior to their stated contractual expiration dates. The
most significant costs that we incur relate to salary continuation agreements,
or other similar agreements, of executive management and certain other employees
of the acquired entities that were in place prior to the acquisition dates.
These agreements provide for payments over periods ranging from one to nine
years and are triggered as a result of the change in control of the acquired
entity. Other severance benefits for employees that are terminated in
conjunction with the integration of the acquired entities into our existing
operations are normally paid to the recipients within 90 days of the respective
consummation date. The balance of our accrued severance of $2.6 million
identified in the following table is comprised of contractual obligations under
salary continuation agreements to 13 individuals and have remaining terms
ranging from eight months to approximately 14 years. Payments made under these
agreements are paid from accrued liabilities and consequently, do not have any
impact on our statements of income.
A summary of acquisition and integration costs attributable to the
acquisitions included in the foregoing table, which were accrued as of the
consummation dates of the respective acquisition, is listed below. These
acquisition and integration costs are reflected in accrued and other liabilities
in our consolidated financial statements.
Information
Severance Technology Fees Total
--------- --------------- -----
Balance at December 31, 1998......................... $ 1,100,000 -- 1,100,000
Year Ended December 31, 1999:
Amounts accrued at acquisition date............... 1,633,768 -- 1,633,768
Payments.......................................... (124,742) -- (124,742)
----------- ------------ -----------
Balance at December 31, 1999......................... $ 2,609,026 -- 2,609,026
Year Ended December 31, 2000:
Amounts accrued at acquisition date............... 3,331,600 -- 3,331,600
Reversal to goodwill.............................. (278,974) -- (278,974)
Payments.......................................... (2,492,319) -- (2,492,319)
----------- ------------ -----------
Balance at December 31, 2000......................... $ 3,169,333 -- 3,169,333
Year Ended December 31, 2001:
Amounts accrued at acquisition date............... 3,884,800 515,638 4,400,438
Payments.......................................... (3,119,602) (363,138) (3,482,740)
----------- ------------ -----------
Balance at December 31, 2001......................... $ 3,934,531 152,500 4,087,031
Nine Months Ended September 30, 2002:
Amounts accrued at acquisition date............... 238,712 250,000 488,712
Payments.......................................... (1,582,772) (375,032) (1,957,804)
----------- ------------ -----------
Balance at September 30, 2002........................ $ 2,590,471 27,468 2,617,939
=========== ============ ===========
As further discussed and quantified under "--Comparison of Results of
Operations for the Nine Months Ended September 30, 2002," "--Comparison of
Results of Operations for 2001 and 2000," and "--Comparison of Results of
Operations for 2000 and 1999," we also incur costs associated with our
acquisitions that are expensed in our statements of income. These costs relate
exclusively to additional costs incurred in conjunction with the data processing
conversions of the respective entities.
Balance Sheet
Investment Securities
We classify the securities within our investment portfolio as held to
maturity or available for sale. We do not engage in the trading of investment
securities. Our investment security portfolio consists primarily of securities
designated as available for sale. The investment security portfolio was $914.9
million and $631.1 million at September 30, 2002 and December 31, 2001,
respectively, compared to $563.5 million and $451.6 million at December 31, 2000
and 1999, respectively. We attribute the increases in investment securities to
securities acquired through acquisitions and the overall level of loan demand
within our market areas, which affects the amount of funds available for
investment. In addition, the increase for 2001 was partially offset by the
liquidation of certain investment securities and a significant increase in calls
of investment securities prior to their normal maturity dates resulting from the
general decline in interest rates during 2001.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source
of income for our subsidiary banks. Interest and fees on loans were 91.9% and
92.6% of total interest income for the nine months ended September 30, 2002 and
2001, respectively, and 92.7%, 92.3% and 91.5% of total interest income for the
years ended December 31, 2001, 2000 and 1999, respectively. We recognize
interest and fees on loans as income using the interest method of accounting.
Loan origination fees are deferred and accreted to interest income over the
estimated life of the loans using the interest method of accounting. 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. We
generally record payments received on nonaccrual and impaired loans as principal
reductions, and defer the recognition of interest income on loans until all
principal has been repaid or an improvement in the condition of the loan has
occurred which would warrant the resumption of interest accruals.
Loans, net of unearned discount, increased $55.2 million to $5.46
billion, or 76.2% of total assets, at September 30, 2002, compared to $5.41
billion, or 79.8% of total assets as of December 31, 2001. Exclusive of our
acquisition of Plains, which provided loans, net of unearned discount, of $150.4
million, loans decreased $95.2 million at September 30, 2002 compared to
December 31, 2001. The decrease primarily results from:
o Weaker loan demand from our commercial customers, which is indicative
of the current economic conditions prevalent within most of our
markets;
o Continued reductions in new consumer and installment loan volumes and
the repayment of principal on our existing portfolio consistent with
our objectives of de-emphasizing consumer lending and expanding
commercial lending; and
o Declines in our commercial, financial and agricultural portfolio due
to an anticipated amount of attrition associated with our acquisitions
completed during the fourth quarter of 2001 and the first quarter of
2002.
In our evaluation of acquisitions, it is anticipated that as we apply
our standards for credit structuring, underwriting, documentation and approval,
a portion of the existing borrowers will elect to refinance with another
financial institution, because there may be an aggressive effort by other
financial institutions to attract them, because they do not accept the changes
involved, or because they are unable to meet our credit requirements. In
addition, another portion of the portfolio may either enter our remedial
collection process to reduce undue credit exposure or improve problem loans, or
may be charged-off. The amount of this attrition will vary substantially among
acquisitions depending on: (a) the strength and discipline within the credit
function of the acquired institution; (b) the magnitude of problems contained in
the acquired portfolio; (c) the aggressiveness of competing institutions to
attract business; and (d) the significance of the acquired institution to the
overall banking market. Typically, in acquisitions of institutions that have
strong credit cultures prior to their acquisitions and operate in relatively
large markets, there is relatively little attrition that occurs after the
acquisition. However, in those acquisitions in which the credit discipline has
been weak, and particularly those in small metropolitan or rural areas, in our
experience substantially greater attrition can occur. Generally, this process
occurs within approximately three to six months after completion of the
acquisition.
The decrease in loans was offset by a $57.1 million increase in loans
held for sale, which is primarily attributable to increased volumes of
residential mortgage loans resulting from the current interest rate environment
and the continuing expansion of our mortgage banking business.
During the five years ended December 31, 2001, total loans, net of
unearned discount, increased significantly from $2.77 billion at December 31,
1996 to $5.41 billion at December 31, 2001. Throughout this period, we have
substantially enhanced our capabilities for achieving and managing internal
growth. A key element of this process has been the expansion of our corporate
business development staff, which is responsible for the internal development
and management of both loan and deposit relationships with commercial customers.
While this process was occurring, in an attempt to achieve more diversification,
a higher level of interest yield and a reduction in interest rate risk within
our loan portfolio, we also focused on repositioning our portfolio. As the
corporate business development effort continued to originate a substantial
volume of new loans, substantially all of our conforming residential mortgage
loan production has been sold in the secondary mortgage market. We have also
substantially reduced our consumer lending by discontinuing the origination of
indirect automobile loans and the sale of our student loan and credit card loan
portfolios. This allowed us to fund part of the growth in corporate lending
through reductions in residential real estate, indirect automobile and other
consumer-related loans.
In addition, our acquisitions added substantial portfolios of new
loans. Some of these portfolios contained significant loan problems, which we
had anticipated and considered in our acquisition pricing. As we resolved the
asset quality issues, the portfolios of the acquired entities tended to decline
due to the elimination of problem loans and because many of the resources that
would otherwise be directed toward generating new loans were concentrated on
improving or eliminating existing relationships. We continue to experience this
trend as a result of our acquisitions of Millennium Bank and Union completed in
December 2000 and 2001, respectively.
This table summarizes the effects of these factors on our loan
portfolio for the nine months ended September 30, 2002 and five years ended
December 31, 2001:
(Decrease) Increase Increase (Decrease)
For the Nine Months For the Year Ended December 31,
-------------------------------------------------
Ended September 30, 2002 2001 2000 1999 1998 1997
------------------------ ---- ---- ---- ---- ----
(dollars expressed in thousands)
Internal loan volume (decrease) increase:
Commercial lending..................... $ (20,337) 174,568 360,410 363,486 633,660 378,882
Residential real estate lending (1).... (43,335) 48,616 20,137 (126,418) (152,849) (144,707)
Consumer lending, net of
unearned discount.................... (32,177) (75,280) (64,606) (56,349) (30,506) (54,305)
Loans provided by acquisitions............. 151,000 508,700 440,000 235,500 127,600 54,361
--------- ------- ------- -------- -------- --------
Total increase in loans, net of
unearned discount.............. $ 55,151 656,604 755,941 416,219 577,905 234,231
========= ======= ======= ======== ======== ========
-------------------------
(1) Includes loans held for sale, which increased $57.1 million for the nine months ended September 30, 2002.
Our lending strategy emphasizes quality, growth and diversification.
Throughout our organization, we employ a common credit underwriting policy. Our
commercial lenders focus principally on small to middle-market companies.
Consumer lenders focus principally on residential loans, including home equity
loans, automobile financing and other consumer financing opportunities arising
out of our branch banking network.
Commercial, financial and agricultural loans include loans that are
made primarily based on the borrowers' general credit strength and ability to
generate cash flows for repayment from income sources even though such loans may
also be secured by real estate or other assets. Real estate construction and
development loans, primarily relating to residential properties and commercial
properties, represent financing secured by real estate under construction. Real
estate mortgage loans consist primarily of loans secured by single-family,
owner-occupied properties and various types of commercial properties on which
the income from the property is the intended source of repayment. Consumer and
installment loans are loans to individuals and consist primarily of loans
secured by automobiles. Loans held for sale are primarily fixed and adjustable
rate residential loans pending sale in the secondary mortgage market in the form
of a mortgage-backed security, or to various private third-party investors.
The following table 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:
September 30, 2002
------------------
Amount %
------ -
Commercial, financial
and agricultural.............................. $1,468,228 28.2%
Real estate construction and development......... 983,346 18.9
Real estate mortgage:
One-to-four-family
residential loans........................... 703,902 13.5
Multi-family
residential loans........................... 131,845 2.6
Commercial real estate loans.................. 1,682,627 32.3
Lease financing.................................. 141,834 2.7
Consumer and installment,
net of unearned discount...................... 90,980 1.8
---------- -----
Total loans, excluding
loans held for sale...................... 5,202,762 100.0%
=====
Loans held for sale.............................. 261,258
----------
Total loans................................ $5,464,020
==========
December 31,
----------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- ---------------- --------------- -------------- ----------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
(dollars expressed in thousands)
Commercial, financial
and agricultural........... $1,532,875 29.5% $1,372,196 29.3% $1,086,919 27.4% $ 920,007 26.7% $ 621,618 21.1%
Real estate construction
and development............ 954,913 18.4 809,682 17.3 795,081 20.1 720,910 20.9 413,107 14.0
Real estate mortgage:
One-to-four-family
residential loans........ 798,089 15.3 726,474 15.5 720,630 18.2 739,442 21.5 915,205 31.1
Multi-family
residential loans........ 148,684 2.9 80,220 1.7 73,864 1.9 63,679 1.8 61,531 2.1
Commercial real
estate loans............. 1,499,074 28.8 1,396,163 29.8 1,057,075 26.7 726,056 21.1 652,379 22.2
Lease financing............... 148,971 2.8 124,088 2.7 -- -- -- -- -- --
Consumer and installment,
net of unearned discount... 122,057 2.3 174,337 3.7 225,343 5.7 274,392 8.0 279,279 9.5
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, excluding
loans held for sale... 5,204,663 100.0% 4,683,160 100.0% 3,958,912 100.0% 3,444,486 100.0% 2,943,119 100.0%
===== ===== ===== ===== =====
Loans held for sale........... 204,206 69,105 37,412 135,619 59,081
---------- ---------- ---------- ---------- ----------
Total loans............. $5,408,869 $4,752,265 $3,996,324 $3,580,105 $3,002,200
========== ========== =========== ========== ==========
Loans at December 31, 2001 mature as follows:
Over One Year
Through Five
Years Over Five Years
----- ---------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
Commercial, financial and agricultural (1)................ $ 1,432,117 207,884 22,956 17,382 1,507 1,681,846
Real estate construction and development.................. 907,907 43,162 2,345 1,499 -- 954,913
Real estate mortgage...................................... 1,410,772 623,413 243,841 162,081 5,740 2,445,847
Consumer and installment, net of unearned discount........ 32,198 66,099 771 22,989 -- 122,057
Loans held for sale....................................... 204,206 -- -- -- -- 204,206
----------- -------- -------- ------- ------- ---------
Total loans......................................... $ 3,987,200 940,558 269,913 203,951 7,247 5,408,869
=========== ======== ======== ======= ======= =========
- ---------------
(1) Commercial, financial and agricultural includes lease financing.
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:
September 30, December 31,
---------------------- -------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual............................ $ 31,881 16,458 17,141 21,424 18,397 15,385 4,017
Restructured terms.................... -- -- -- 22 29 -- --
Real estate construction and development:
Nonaccrual............................ 25,645 465 3,270 11,068 1,886 3,858 4,097
Real estate mortgage:
One-to-four-family real estate loans:
Nonaccrual............................ 21,383 7,361 20,780 5,645 7,703 9,929 8,613
Restructured terms.................... 15 21 20 28 18 50 29
Multi-family real estate loans:
Nonaccrual............................ 772 483 476 593 722 2,706 --
Restructured terms.................... -- 896 -- 908 923 1,562 1,587
Commercial real estate loans:
Nonaccrual............................ 10,788 8,065 20,642 10,286 7,989 6,223 1,789
Restructured terms.................... 1,941 2,001 1,993 2,016 2,038 3,609 3,840
Lease financing:
Nonaccrual............................ 5,532 8,944 2,185 1,013 -- -- --
Consumer and installment:
Nonaccrual............................ 1,276 396 794 155 32 216 94
Restructured terms.................... -- 7 7 8 -- -- --
---------- --------- --------- --------- --------- --------- ---------
Total nonperforming loans...... 99,233 45,097 67,308 53,166 39,737 43,538 24,066
Other real estate......................... 3,125 3,707 4,316 2,487 2,129 3,709 7,324
---------- --------- --------- --------- --------- --------- ---------
Total nonperforming assets.... $ 102,358 48,804 71,624 55,653 41,866 47,247 31,390
========== ========= ========= ========= ========= ========= =========
Loans, net of unearned discount........... $5,464,020 4,774,300 5,408,869 4,752,265 3,996,324 3,580,105 3,002,200
========== ========= ========= ========= ========= ========= =========
Loans past due 90 days or more
and still accruing.................... $ 7,778 8,514 15,156 3,009 5,844 4,674 2,725
========== ========= ========= ========= ========= ========= =========
Ratio of:
Allowance for loan losses to loans.... 2.01% 1.69% 1.80% 1.72% 1.72% 1.70% 1.68%
Nonperforming loans to loans.......... 1.82 0.94 1.24 1.12 0.99 1.22 0.80
Allowance for loan losses to
nonperforming loans................ 110.72 179.05 144.36 153.47 172.66 140.04 209.88
Nonperforming assets to loans and
other real estate.................. 1.87 1.02 1.32 1.17 1.05 1.32 1.04
========== ========= ========= ========= ========= ========= =========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $99.2 million at September 30, 2002 and $67.3
million at December 31, 2001, in comparison to $53.2 million and $39.7 million
at December 31, 2000 and 1999, respectively. As further discussed under
"--Lending Activities," the increase in nonperforming loans in 2002 is primarily
attributable to the economic slow down previously discussed, additional problems
identified in acquired loan portfolios, continuing deterioration in the
portfolio of leases to the airline industry and the addition of a $16.1 million
borrowing relationship to nonaccrual real estate construction and development
loans during the second quarter of 2002. The relationship relates to a
residential and recreational development project that had significant financial
difficulties and experienced inadequate project financing, project delays and
weak project management. This relationship had previously been on nonaccrual
status and was removed from nonaccrual status during the third quarter of 2001
due to financing being recast with a new borrower, who appeared able to meet
ongoing developmental expectations. Subsequent to that time, the new borrower
encountered internal management problems, which negatively impacted and further
delayed development of the project. Loan charge-offs also increased
significantly to $39.0 million for the nine months ended September 30, 2002,
from $22.0 million for the comparable period in 2001. Included in this were
charge-offs aggregating $15.0 million on five large credit relationships,
representing nearly 40% of loan charge-offs in 2002. We anticipate this trend of
higher nonperforming and delinquent loans will continue in the near future. The
increase in nonperforming loans for 2001 reflects cyclical trends experienced
within the banking industry as a result of economic slowdown, as well as the
asset quality of acquired institutions. Our Union acquisition, completed in
December 2001, resulted in the addition of approximately $8.9 million of
nonperforming loans and $3.6 million of loans past due 90 days or more. The
increase in nonperforming loans in 2000 reflected a small number of credit
relationships that were placed on nonaccrual during the year and the overall
growth of the loan portfolio.
As of September 30, 2002, December 31, 2001 and 2000, $96.4 million,
$123.2 million and $50.2 million, respectively, of loans not included in the
table above were identified by management as having potential credit problems
(problem loans). The significant increase in problem loans for the year ended
December 31, 2001 is primarily due to problem loans included in the acquisitions
of Millenium Bank and Union, completed in December 2000 and 2001, respectively,
continuing deterioration of leases to the airline industry, portfolio growth
(both internal and external) and the gradual slow down and uncertainties that
have recently occurred in the economy surrounding the markets in which we
operate. As previously discussed under "--Lending Activities," certain acquired
loan portfolios 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 of December 31, 1999, 1998 and 1997, problem loans totaled
$36.3 million, $21.3 million and $27.9 million, respectively.
Our credit management policies and procedures focus on identifying,
measuring and controlling credit exposure. These procedures employ a
lender-initiated system of rating credits, which is ratified in the loan
approval process and subsequently tested in internal loan reviews, external
audits and regulatory bank examinations. The system requires rating all loans at
the time they are originated, except for homogeneous categories of loans, such
as residential real estate mortgage loans and 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, 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.
The allocation of the allowance for loan losses by loan category is a
result of the application of our risk rating system. As such, the same
procedures we employ to determine the overall risk in our loan portfolio and our
requirements for the allowance for loan losses determines the distribution of
the allowance by loan category. Consequently, the distribution of the allowance
will change from period to period due to:
o Changes in the aggregate loan balances by loan category;
o Changes in the identified risk in each loan in the portfolio over
time, excluding those homogeneous categories of loans such as
consumer and installment loans and residential real estate loans
for which risk ratings are changed based on payment performance;
and
o Changes in loan concentrations by borrower.
Since the methods of calculating the allowance requirements have not
changed over time, the reallocations among different categories of loans that
appear between periods are the result of the redistribution of the individual
loans that comprise the aggregate portfolio due to the factors listed above.
However, the perception of risk with respect to particular loans within the
portfolio will change over time as a result of the characteristics and
performance of those loans, as well as the overall economic trends and market
trends, including our actual and expected trends in nonperforming loans.
Consequently, while there are no specific allocations of the allowance resulting
from economic or market conditions or actual or expected trends in nonperforming
loans, these factors are considered in the initial assignment of risk ratings to
loans and in subsequent changes to those risk ratings.
The following table is a summary of loan loss experience for the nine months ended September 30, 2002 and 2001, and
for the five years ended December 31, 2001:
As of or For the Nine
Months Ended September 30, As of or For the Years Ended December 31,
-------------------------- -------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses,
beginning of period..................... $ 97,164 81,592 81,592 68,611 60,970 50,509 46,781
Acquired allowances for loan losses......... 1,366 -- 14,046 6,062 3,008 3,200 30
---------- --------- --------- --------- --------- --------- ---------
98,530 81,592 95,638 74,673 63,978 53,709 46,811
---------- --------- --------- --------- --------- --------- ---------
Loans charged-off:
Commercial, financial
and agricultural...................... (29,876) (17,019) (21,085) (9,690) (10,855) (3,908) (2,308)
Real estate construction
and development....................... (1,302) (65) (108) (2,229) (577) (185) (2,242)
Real estate mortgage:
One-to-four-family residential loans.. (859) (531) (802) (452) (1,010) (1,786) (1,103)
Multi-family residential loans........ (109) (4) (4) -- (19) (78) (924)
Commercial real estate................ (2,766) (460) (1,012) (1,761) (1,532) (525) (4,223)
Lease financing.................. ...... (2,834) (2,703) (6,749) (78) -- -- --
Consumer and installment................ (1,301) (1,174) (1,693) (2,840) (3,728) (3,701) (6,032)
---------- --------- --------- --------- --------- --------- ---------
Total............................. (39,047) (21,956) (31,453) (17,050) (17,721) (10,183) (16,832)
---------- --------- --------- --------- --------- --------- ---------
Recoveries of loans previously
charged-off:
Commercial, financial and agricultural.. 5,443 3,120 4,015 5,556 3,602 3,417 2,091
Real estate construction
and development....................... 628 1,219 1,171 319 849 342 269
Real estate mortgage:
One-to-four-family residential loans.. 571 651 755 536 407 564 387
Multi-family residential loans........ 792 15 15 93 286 45 169
Commercial real estate................ 2,696 570 1,332 1,308 1,664 1,420 3,165
Lease financing.................. ...... 298 336 435 65 -- -- --
Consumer and installment................ 1,264 1,291 1,746 1,965 2,473 2,656 3,149
---------- --------- --------- --------- --------- --------- ---------
Total............................. 11,692 7,202 9,469 9,842 9,281 8,444 9,230
---------- --------- -------- --------- --------- --------- ---------
Net loans charged-off............. (27,355) (14,754) (21,984) (7,208) (8,440) (1,739) (7,602)
---------- --------- --------- ---------- --------- --------- --------
Provision for loan losses................... 38,700 13,910 23,510 14,127 13,073 9,000 11,300
---------- --------- --------- --------- --------- --------- ---------
Allowance for loan losses, end of period.... $ 109,875 80,748 97,164 81,592 68,611 60,970 50,509
========== ========= ========= ========= ========= ========= =========
Loans outstanding, net of
unearned discount:
Average................................. $5,415,946 4,836,210 4,884,299 4,290,958 3,812,508 3,250,719 2,846,157
End of period........................... 5,464,020 4,774,300 5,408,869 4,752,265 3,996,324 3,580,105 3,002,200
End of period, excluding
loans held for sale................... 5,202,762 4,640,063 5,204,663 4,683,160 3,958,912 3,444,486 2,943,119
========== ========= ========= ========= ========= ========= =========
Ratio of allowance for loan losses
to loans outstanding:
Average................................. 2.03% 1.67% 1.99% 1.90% 1.80% 1.88% 1.77%
End of period........................... 2.01 1.69 1.80 1.72 1.72 1.70 1.68
End of period, excluding loans
held for sale.......................... 2.11 1.74 1.87 1.74 1.73 1.77 1.72
Ratio of net charge-offs to average loans
outstanding (1)......................... 0.68 0.41 0.45 0.17 0.22 0.05 0.27
Ratio of current period recoveries to
preceding period's total charge-offs (1) 49.70 56.48 55.54 55.54 91.14 50.17 31.81
========== ========= ========= ========== ========= ========= =========
- --------------------
(1) Ratios for the nine-month periods are annualized.
The following table is a summary of the allocation of the allowance for loan losses for the five years ended
December 31, 2001:
2001 2000 1999 1998 1997
--------------- ---------------- ---------------- ---------------- -----------------
Percent Percent Percent Percent Percent
of of of of of
Category Category Category Category Category
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars expressed in thousands)
Commercial, financial
and agricultural................. $40,161 28.34% $32,130 28.87% $24,898 27.20% $19,239 25.70% $14,879 20.71%
Real estate construction
and development.................. 21,598 17.65 14,667 17.04 13,264 19.90 15,073 20.14 7,148 13.76
Real estate mortgage:
One-to-four family
residential loans.............. 5,349 14.76 4,334 15.29 3,449 18.03 5,037 20.65 6,055 30.48
Multi-family residential loans... 81 2.75 12 1.69 3 1.85 5 1.78 45 2.05
Commercial real estate loans..... 25,167 27.71 20,345 29.38 17,138 26.45 13,193 20.28 11,972 21.73
Lease financing..................... 3,062 2.75 1,114 2.61 -- -- -- -- -- --
Consumer and installment............ 937 2.26 2,028 3.67 4,390 5.64 5,180 7.66 5,089 9.30
Loans held for sale................. 809 3.78 222 1.45 160 0.93 539 3.79 245 1.97
Unallocated (1)..................... -- -- 6,740 -- 5,309 -- 2,704 -- 5,076 --
---------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total.......................... $97,164 100.00% $81,592 100.00% $68,611 100.00% $60,970 100.00% $50,509 100.00%
========== ====== ======= ====== ======= ====== ======= ====== ======= ======
- ----------------------
(1) During 2001, we reviewed our practice of maintaining unallocated reserves in light of continuing refinement in our loss
estimation processes. We concluded the use of unallocated reserves would be discontinued. Consequently, reserves were
aligned with their respective portfolios.
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:
Nine Months Ended Year Ended December 31,
------------------------------------------------------------------------
September 30, 2002 2001 2000 1999
----------------------- --------------------- -------------------- ------------------------
Percent Percent Percent Percent
of of of of
Amount deposits Rate Amount deposits Rate Amount deposits Rate Amount deposits Rate
------ -------- ---- ------- -------- ---- ------ --------- ---- ------ -------- ----
(dollars expressed in thousands)
Noninterest-bearing demand.. $ 916,822 15.54% --% $ 754,763 14.83% --% $ 634,886 14.18% --% $ 552,029 13.59% --%
Interest-bearing demand..... 721,982 12.24 1.06 507,011 9.97 1.38 421,986 9.43 1.40 391,892 9.65 1.30
Savings..................... 1,947,271 33.01 1.87 1,548,441 30.43 3.25 1,279,378 28.59 4.04 1,220,425 30.03 3.61
Time deposits .............. 2,312,586 39.21 3.85 2,278,263 44.77 5.49 2,139,305 47.80 5.62 1,899,218 46.73 5.35
--------- ------ ===== ---------- ------ ===== ---------- ------ ==== ---------- ------ ====
Total average deposits.. $5,898,661 100.00% $5,088,478 100.00% $4,475,555 100.00% $4,063,564 100.00%
========== ====== ========== ====== ========== ====== ========== ======
Capital and Dividends
Historically, we have accumulated capital to support our acquisitions
by retaining most of our earnings. We pay relatively small dividends on our
Class A convertible, adjustable rate preferred stock and our Class B adjustable
rate preferred stock, totaling $524,000 for the nine months ended September 30,
2002, and $786,000 for the years ended December 31, 2001, 2000 and 1999. We have
never paid, and have no present intention to pay, dividends on our common stock.
Management believes as of September 30, 2002, December 31, 2001 and
2000, our subsidiary banks and we were "well capitalized" as defined by the
Federal Deposit Insurance Corporation Improvement Act of 1991.
In December 1996, we formed our initial financing subsidiary, First
Preferred Capital Trust, for the purpose of issuing $86.25 million of trust
preferred securities, and in October 2000, we formed our second financing
subsidiary, First Preferred Capital Trust II, for the purpose of issuing $57.5
million of trust preferred securities. In October 2001, we formed our third
financing subsidiary, First Preferred Capital Trust III, for the purpose of
issuing $55.2 million of trust preferred securities, and on April 10, 2002, we
formed First Bank Capital Trust and issued $25.0 million of trust preferred
securities in a private placement offering. In June 1998, FBA formed its
financing subsidiary, First America Capital Trust, for the purpose of issuing
$46.0 million of trust preferred securities. For regulatory reporting purposes,
these preferred securities are eligible for inclusion, subject to certain
limitations, in our Tier 1 capital. Because of these limitations, as of
September 30, 2002, $115.3 million of these preferred securities were not
includable in Tier 1 capital, although this entire 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 that 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 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
$710.2 million, $754.8 million and $723.5 million at September 30, 2002,
December 31, 2001 and 2000, respectively.
The following table presents the maturity structure of these other
sources of funds, which consists of certificates of deposit of $100,000 or more,
short-term borrowings and our revolving note payable, at September 30, 2002:
September 30, 2002
----------------------------------------------
Certificates of Deposit Other
of $100,000 or More Borrowings Total
----------------------- ---------- -----
(dollars expressed in thousands)
Three months or less........................ $ 145,045 200,054 345,099
Over three months through six months........ 100,119 -- 100,119
Over six months through twelve months....... 129,532 2,000 131,532
Over twelve months.......................... 121,422 12,000 133,422
--------- ------- -------
Total.................................. $ 496,118 214,054 710,172
========= ======= =======
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 September 30, 2002 and December 31, 2001, the
borrowing capacity of our subsidiary banks under these agreements was
approximately $1.19 billion and $1.21 billion, respectively. In addition, our
subsidiary banks' borrowing capacity through their relationships with the
Federal Home Loan Banks was approximately $387.3 million and $234.6 million at
September 30, 2002 and December 31, 2001, respectively. Exclusive of the Federal
Home Loan Bank advances outstanding at First Bank of $10.0 million and $20.1
million at September 30, 2002 and December 31, 2001, respectively, our
subsidiaries had no amounts outstanding under either of these agreements at
September 30, 2002 and December 31, 2001. Under a separate Federal Home Loan
Bank agreement, First Bank & Trust had advances outstanding of $10.0 million and
$10.5 million at September 30, 2002 and December 31, 2001, 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, First Preferred Capital Trust I, First Preferred Capital Trust II,
First Preferred Capital Trust III and First Bank Capital Trust, and First
America Capital Trust.
Critical Accounting Policies
Our financial condition and results of operations presented in the
consolidated financial statements, accompanying notes to the consolidated
financial statements, selected consolidated and other financial data appearing
elsewhere within this prospectus, and management's discussion and analysis of
financial condition and results of operations are, to large degree, dependent
upon our accounting policies. The selection and application of our accounting
policies involve judgments, estimates and uncertainties that are susceptible to
change.
We have identified the following accounting policies that we believe
are the most critical to the understanding of our financial condition and
results of operations. These critical accounting policies require management's
most difficult, subjective and complex judgments about matters that are
inherently uncertain. In the event that different assumptions or conditions were
to prevail, and depending upon the severity of such changes, the possibility of
a materially different financial condition and/or results of operations could be
a reasonable likelihood. The impact and any associated risks related to our
critical accounting policies on our business operations is discussed throughout
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations," where such policies affect our reported and expected financial
results.
Loans and Allowance for Loan Losses. We maintain an allowance for loan
losses at a level we consider adequate to provide for probable losses in our
loan portfolio. The determination of our allowance for loan losses requires
management to make significant judgments and estimates based upon a periodic
analysis of our loans held for portfolio and held for sale considering, among
other factors, current economic conditions, loan portfolio composition, past
loan loss experience, independent appraisals, the fair value of underlying loan
collateral, our customers' ability to pay and selected key financial ratios. If
actual events prove the estimates and assumptions we used in determining our
allowance for loan losses were incorrect, we may need to make additional
provisions for loan losses.
Derivative Financial Instruments. We utilize derivative financial
instruments to assist in our management of interest rate sensitivity by
modifying the repricing, maturity and option characteristics of certain assets
and liabilities. The judgments and assumptions that are most critical to the
application of this critical accounting policy are those affecting the
estimation of fair value and hedge effectiveness. Fair value is based on quoted
market prices where available. If quoted market prices are unavailable, fair
value is based upon quoted market prices of comparable derivative instruments.
Factors that affect hedge effectiveness include the initial selection of the
derivative that will be used as a hedge and how well changes in its cash flow or
fair value have correlated and are expected to correlate with changes in the
cash flow or fair value of the underlying hedged asset or liability. Past
correlation is easy to demonstrate, but expected correlation depends upon
projections and trends that may not always hold true within acceptable limits.
Changes in assumptions and conditions could result in greater than expected
inefficiencies that, if large enough, could reduce or eliminate the economic
benefits anticipated when the hedges were established and/or invalidate
continuation of hedge accounting. Greater inefficiency and/or discontinuation of
hedge accounting is likely to result in increased volatility to reported
earnings. For cash flow hedges, this would result as more or all of the change
in the fair value of the affected derivative would be reported in noninterest
income. For fair value hedges, this would result as less or none of the change
in the fair value of the derivative would be offset by changes in the fair value
of the underlying hedged asset or liability.
Deferred Tax Assets. We recognize deferred tax assets and liabilities
for the estimated future tax effects of temporary differences, net operating
loss carryforwards and tax credits. We recognize deferred tax assets subject to
management's judgment based upon available evidence that realization is more
likely than not. Our deferred tax assets are reduced, if necessary, by a
deferred tax asset valuation allowance. In the event that we determine we would
not be able to realize all or part of our net deferred tax assets in the future,
we would need to adjust the recorded value of our deferred tax assets, which
would result in a direct charge to our provision for income taxes in the period
in such determination is made.
Business Combinations. We emphasize acquiring other financial
institutions as an important means of achieving our growth objectives. The
determination of the fair value of the assets and liabilities acquired in these
transactions as well as the returns on investment that may be achieved requires
management to make significant judgments and estimates based upon detailed
analyses of the existing and future economic value of such assets and
liabilities and/or the related income steams, including the resulting intangible
assets. If actual events prove the estimates and assumptions we used in
determining the fair values of the acquired assets and liabilities or the
projected income were incorrect, we may need to make additional adjustments to
the recorded values of such assets and liabilities, which could result in
increased volatility to reported earnings. In addition, we may need to make
additional adjustments to the recorded value of our intangible assets, which
directly impact our regulatory capital levels.
Effects of New Accounting Standards
In July 2001, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 142 -- Goodwill and Other Intangible Assets. 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. 144 -- Accounting for the Impairment or Disposal of
Long-Lived Assets, as discussed below. The amortization of goodwill ceased upon
adoption of SFAS No. 142, which for calendar year-end companies was January 1,
2002.
On January 1, 2002, First Banks adopted SFAS No. 142. At the date of
adoption, First Banks had unamortized goodwill of $115.9 million and core
deposit intangibles of $9.6 million, which were subject to the transition
provisions of SFAS No. 142. Under SFAS No. 142, First Banks continues to
amortize, on a straight-line basis, its core deposit intangibles and goodwill
associated with purchases of branch offices. Goodwill associated with the
purchase of subsidiaries will no longer be amortized, but instead, will be
tested annually for impairment following First Banks' existing methods of
measuring and recording impairment losses.
First Banks completed the transitional goodwill impairment test
required under SFAS No. 142, to determine the potential impact, if any, on the
consolidated financial statements. The results of the transitional goodwill
impairment testing did not identify any goodwill impairment losses.
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at September 30, 2002 and December
31, 2001:
September 30, 2002 December 31, 2001
---------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles.............. $ 13,871 (1,372) 9,580 --
Goodwill associated with
purchases of branch offices......... 2,210 (684) 2,210 (576)
--------- ------- ------- -------
Total............................ $ 16,081 (2,056) 11,790 (576)
========= ======= ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 126,234 114,226
========= =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $1.5 million for the nine months ended
September 30, 2002 and $5.6 million for the comparable period in 2001.
Amortization of intangibles associated with the purchase of subsidiaries,
including amortization of core deposit intangibles and branch purchases, has
been estimated through 2007 in the following table, and does not take into
consideration any potential future acquisitions or branch purchases.
(dollars expressed
in thousands)
Year ending December 31:
2002 (1)..................................... $ 2,012
2003......................................... 2,129
2004......................................... 2,129
2005......................................... 2,129
2006......................................... 2,129
2007......................................... 2,129
---------
Total..................................... $ 12,657
=========
--------------
(1) Includes $1.5 million of amortization for the nine months ended
September 30, 2002.
Changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 were as follows:
Nine Months Ended September 30, 2002
---------------------------------------
First Bank First Bank & Trust Total
---------- ------------------ -----
(dollars expressed in thousands)
Balance, beginning of period.................... $ 19,165 96,695 115,860
Goodwill acquired during period................. 12,577 -- 12,577
Acquisition-related adjustments................. (569) -- (569)
Amortization - purchases of branch offices...... -- (108) (108)
-------- ------ --------
Balance, end of period.......................... $ 31,173 96,587 127,760
======== ====== ========
The following is a reconciliation of reported net income to net income
adjusted to reflect the adoption of SFAS No. 142, as if it had been implemented
on January 1, 2001:
Nine Months Ended
September 30,
------------------------------
2002 2001
---- ----
(dollars expressed in thousands)
Net income:
Reported net income...................................... $ 30,362 34,632
Add back - goodwill amortization......................... -- 5,438
-------- --------
Adjusted net income.................................... $ 30,362 40,070
========= ========
Basic earnings per share:
Reported net income...................................... $1,261.05 1,441.51
Add back - goodwill amortization......................... -- 229.86
--------- --------
Adjusted net income.................................... $1,261.05 1,671.37
========= ========
Diluted earnings per share:
Reported net income...................................... $1,246.05 1,409.98
Add back - goodwill amortization......................... -- 221.50
--------- --------
Adjusted net income.................................... $1,246.05 1,631.48
========= ========
In August 2001, the FASB issued SFAS No. 144 -- Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No.
121 -- Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and requires that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS No. 144 broadens the
presentation of discontinued operations to include more disposal transactions.
Therefore, the accounting for similar events and circumstances will be the same.
The provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years, with early application encouraged. The provisions of SFAS No. 144
generally are to be applied prospectively. On January 1, 2002, First Banks
implemented SFAS No. 144, which did not have a material effect on the
consolidated financial statements.
On October 1, 2002, the FASB issued SFAS No. 147 -- Acquisitions of
Certain Financial Institutions, an amendment of SFAS No. 72 -- Accounting for
Certain Acquisitions of Banking or Thrift Institutions and SFAS No. 144 --
Accounting for the Impairment or Disposal of Long-Lived Assets and FASB
Interpretation No. 9 -- Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method. SFAS No. 147 addresses the financial
accounting and reporting for the acquisition of all or part of a financial
institution, except for transactions between two or more mutual enterprises.
SFAS No. 147 removes acquisitions of financial institutions, other than
transactions between two or more mutual enterprises, from the scope of SFAS No.
72. SFAS No. 147 also provides guidance on the accounting for impairment or
disposal of acquired long-term customer-relationship intangible assets,
including those acquired in transactions between two or more mutual enterprises.
The provisions of SFAS No. 147 are effective for acquisitions on or after
October 1, 2002. On October 1, 2002, First Banks implemented SFAS No. 147, which
did not have a material effect on the 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.
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. Since 1994, our organization has grown significantly,
primarily as a result of our acquisition strategy, as well as through internal
growth. We currently operate banking subsidiaries with branches in California,
Illinois, Missouri and Texas. At September 30, 2002, we had total assets of
$7.17 billion, loans, net of unearned discount, of $5.46 billion, total deposits
of $6.03 billion and total stockholders' equity of $506.2 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, internet banking, automated teller machines, telephone
banking, safe deposit boxes, escrow and bankruptcy deposit services, stock
option services, and trust, private banking and institutional money management
services.
We operate through two subsidiary banks as follows:
Geographic (Number of) Locations Total Assets
Name at September 30, 2002 at September 30, 2002
----------------------------------------- ------------------------------------- ---------------------
(dollars expressed
in thousands)
First Bank Missouri (43) and Illinois (51) $4,063,159
First Banks America, Inc., and its
subsidiary:
First Bank & Trust California (49) and Texas (8) 3,139,170
Our subsidiary banks are wholly owned by their respective parent
companies and we owned 93.76% of First Banks America, Inc., or FBA, at September
30, 2002. On December 31, 2002, we completed our acquisition of all of FBA's
outstanding capital stock that we did not already own for a price of $40.54 per
share, or approximately $32.4 million. In conjunction with this transaction, FBA
became a wholly owned subsidiary of ours, and was merged with and into First
Banks. We anticipate merging our bank subsidiaries, First Bank and First Bank &
Trust, on March 31, 2003 to allow certain administrative and operational
economies not available while the two banks maintain separate charters.
Various trusts, which were created by and are administered by and for
the benefit of Mr. James F. Dierberg, our Chairman of the Board and Chief
Executive Officer, and members of his immediate family, own all of our voting
stock. Mr. Dierberg and his family, therefore, control our management, policies
and the election of our directors.
Primary responsibility for managing our subsidiary banking units rests
with the officers and directors of each unit, but we centralize overall
corporate policies, procedures and administrative functions and provide
centralized 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.
Acquisitions
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. In the early 1990's, however, the pricing of acquisitions
in these areas escalated beyond the levels we believed were desirable, causing
us to explore acquisitions in other markets. This effort led to the acquisition
of BancTEXAS Group, Inc. in 1994, which had offices in Dallas and Houston,
Texas, and subsequent acquisitions of financial institutions that had offices
located in the San Francisco - Sacramento corridor in Northern California and
Orange County in Southern California during the six years ended December 31,
2000. Our emphasis in recent acquisitions has been to enhance our presence in
markets we currently serve. In 2001, we completed two acquisitions in Southern
California that increased our market share in Los Angeles and Orange Counties,
and extended our market into neighboring Riverside County. In addition, in 2001
we completed an acquisition in Swansea, Illinois of a bank holding company that
increased our presence in the Illinois areas immediately east and north of St.
Louis. In 2002, we completed an acquisition in Des Plaines, Illinois, in the
Chicago metropolitan area, and two branch offices in Denton and Garland, Texas,
in the Dallas metropolitan area. In addition, we currently have one pending
acquisition in Ste. Genevieve, Missouri that will further expand our Midwest
franchise south of St. Louis.
Pending Acquisition
On September 17, 2002, First Banks and Allegiant Bancorp, Inc., or
Allegiant, signed an agreement and plan of exchange that provides for First
Banks to acquire Allegiant's wholly owned banking subsidiary, Bank of Ste.
Genevieve. Bank of Ste. Genevieve operates two locations in Ste. Genevieve,
Missouri, and reported total assets of $111.1 million and total deposits of
$91.1 million at September 30, 2002. Under the terms of the agreement, First
Banks will acquire Bank of Ste. Genevieve in exchange for approximately 974,150
shares of Allegiant common stock that are currently held by First Banks. The
transaction is expected to be completed on March 31, 2003. First Banks will
continue to own approximately 232,000 shares of Allegiant common stock
subsequent to completion of the transaction.
Closed Acquisitions and Other Corporate Transactions
On January 15, 2002, we completed our acquisition of Plains Financial
Corporation, or Plains, and its wholly owned banking subsidiary, PlainsBank of
Illinois, National Association, Des Plaines, Illinois, in exchange for $36.5
million in cash. Plains operated a total of three banking facilities in Des
Plaines, Illinois, and one banking facility in Elk Grove Village, Illinois. At
the time of the transaction, Plains had $256.3 million in total assets, $150.4
million in loans, net of unearned discount, $81.0 million in investment
securities and $213.4 million in deposits. This transaction was accounted for
using the purchase method of accounting. The excess of the cost over the fair
value of the net assets acquired was approximately $12.6 million and will not be
amortized, but instead will be periodically tested for impairment in accordance
with SFAS No. 142. The core deposit intangibles were approximately $2.9 million
and are being amortized over seven years utilizing the straight-line method.
Plains was merged with and into Union, and PlainsBank of Illinois was merged
with and into First Bank.
On June 22, 2002, First Bank & Trust completed its assumption of the
deposits and certain liabilities and the purchase of certain assets of the
Garland and Denton, Texas branch offices of Union Planters Bank, National
Association, or UP branches. The transaction resulted in the acquisition of
$15.3 million in deposits and one branch office in Garland and $49.6 million in
deposits and one branch office, and a detached drive-thru facility, in Denton.
The core deposit intangibles associated with the branch purchases were $1.4
million and are being amortized over seven years utilizing the straight-line
method.
On December 31, 2002, we completed our acquisition of all of FBA's
outstanding capital stock that we did not already own for a price of $40.54 per
share, or approximately $32.4 million. At December 31, 2002, there were 798,753
shares, or approximately 6.22% of FBA's outstanding stock, held publicly. We
owned the other 93.78%. In conjunction with this transaction, FBA became a
wholly owned subsidiary of ours, and was merged with and into First Banks. This
transaction was accounted for using the purchase method of accounting. The
excess of the cost over the fair value of the net assets acquired was
approximately $12.4 million and will not be amortized, but instead will be
periodically tested for impairment in accordance with SFAS No. 142.
Market Area
As of September 30, 2002, our subsidiary banks' 151 banking facilities
were located in California, eastern Missouri, Illinois and Texas. Our primary
market area is the St. Louis, Missouri metropolitan area. Our second and third
largest market areas are southern and northern California and central and
southern Illinois, respectively. We also have locations in the Houston, Dallas,
Irving, McKinney and Denton, 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 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 operating 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, 2002, we employed approximately 2,300 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 existing 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 our subsidiary
banks and us primarily to protect depositors and customers of our subsidiary
banks. To the extent this discussion refers to statutory or regulatory
provisions, it is not intended to summarize all such provisions and is qualified
in its entirety by reference to the relevant statutory and regulatory
provisions. Changes in applicable laws, regulations or regulatory policies may
have a material effect on our business and prospects. We are unable to predict
the nature or extent of the effects on our business and earnings that new
federal and state legislation or regulation may have. The enactment of the
legislation described below has significantly affected the banking industry
generally and is likely to have ongoing effects on us and our subsidiary banks
in the future.
We are a registered bank holding company under the Bank Holding Company
Act of 1956. Consequently, the Board of Governors of the Federal Reserve System,
or Federal Reserve, regulates, supervises and examines us. We file annual
reports with the Federal Reserve and provide to the Federal Reserve additional
information as it may require.
Since First Bank is an institution chartered by the State of Missouri
and a member of the Federal Reserve, both the State of Missouri Division of
Finance and the Federal Reserve supervise, regulate and examine First Bank.
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, or FDIC, which provides deposit insurance of up
to $100,000 for each insured depositor.
Bank Holding Company Regulation. Our activities and those of our
subsidiary banks have in the past been limited to the business of banking and
activities "closely related" or "incidental" to banking. Under the
Gramm-Leach-Bliley Act, or GLB Act, which was enacted in November 1999 and is
discussed below, bank holding companies now have the opportunity to seek
broadened authority, subject to limitations on investment, to engage in
activities that are "financial in nature" if all of their subsidiary depository
institutions are well capitalized, well managed and have at least a satisfactory
rating under the Community Reinvestment Act (discussed briefly below).
We are also subject to capital requirements applied on a consolidated
basis which are substantially similar to those required of our subsidiary banks
(briefly summarized below). The Bank Holding Company Act also requires a bank
holding company to obtain approval from the Federal Reserve before:
o acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls a majority of such
shares);
o acquiring all or substantially all of the assets of another bank
or bank holding company; or
o merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anti-competitive result, unless
the anti-competitive effects of the proposed transaction are clearly outweighed
by a greater public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve also considers capital adequacy and
other financial and managerial factors in reviewing acquisitions and mergers.
Safety and Soundness and Similar Regulations. We are subject to various
regulations and regulatory policies directed at the financial soundness of our
subsidiary banks. These include, but are not limited to, the Federal Reserve's
source of strength policy, which obligates a bank holding company such as us to
provide financial and managerial strength to its subsidiary banks; restrictions
on the nature and size of certain affiliate transactions between a bank holding
company and its subsidiary depository institutions; and restrictions on
extensions of credit by our subsidiary banks to executive officers, directors,
principal stockholders and the related interests of such persons.
Regulatory Capital Standards. The federal bank regulatory agencies have
adopted substantially similar risk-based and leverage capital guidelines for
banking organizations. Risk-based capital ratios are determined by classifying
assets and specified off-balance-sheet obligations and financial instruments
into weighted categories, with higher levels of capital being required for
categories deemed to represent greater risk. Federal Reserve policy also
provides that banking organizations generally, and in particular those that are
experiencing internal growth or actively making acquisitions, are expected to
maintain capital positions that are substantially above the minimum supervisory
levels, without significant reliance on intangible assets.
Under the risk-based capital standard, the minimum consolidated ratio
of total capital to risk-adjusted assets required for bank holding companies is
8%. At least one-half of the total capital must be composed of common equity,
retained earnings, qualifying noncumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual preferred stock and minority interests
in the equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets, which amount is referred to as
"Tier I capital." The remainder may consist of qualifying hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier I
capital and a limited amount of loan and lease loss reserves, which amount,
together with Tier I capital, is referred to as "Total Risk-Based Capital."
In addition to the risk-based standard, we are subject to minimum
requirements with respect to the ratio of our Tier I capital to our average
assets less goodwill and certain other intangible assets, or the Leverage Ratio.
Applicable requirements provide for a minimum Leverage Ratio of 3% for bank
holding companies that have the highest supervisory rating, while all other bank
holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%.
The Office of the Comptroller of the Currency, or 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.
As of September 30, 2002, the most recent notification from our primary
regulator categorized our subsidiary banks and us as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, we and our subsidiary banks must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table below.
The following table sets forth our required and actual capital ratios,
as well as those of our subsidiary banks at September 30, 2002 and December 31,
2001:
Actual
----------------------------- To be Well
For Capital Capitalized Under
September 30, December 31, Adequacy Prompt Corrective
2002 2001 Purposes Action Provisions
---- ---- -------- -----------------
Total capital (to risk-weighted assets):
First Banks............................ 10.97% 10.53% 8.0% 10.0%
First Bank............................. 10.49 10.14 8.0 10.0
First Bank & Trust..................... 10.43 11.27 8.0 10.0
Tier I capital (to risk-weighted assets):
First Banks............................ 7.79 7.57 4.0 6.0
First Bank............................. 9.23 8.89 4.0 6.0
First Bank & Trust..................... 9.17 10.02 4.0 6.0
Tier I capital (to average assets):
First Banks............................ 6.86 7.25 3.0 5.0
First Bank............................. 7.82 8.67 3.0 5.0
First Bank & Trust..................... 8.59 9.47 3.0 5.0
Prompt Corrective Action. The FDIC Improvement Act requires the federal
bank regulatory agencies to take prompt corrective action in respect to
depository institutions that do not meet minimum capital requirements. A
depository institution's status under the prompt corrective action provisions
depends upon how its capital levels compare to various relevant capital measures
and other factors as established by regulation.
The federal regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. Under the regulations, a
bank will be:
o "well capitalized" if it has a total capital ratio of 10% or
greater, a Tier I capital ratio of 6% or greater and a
Leverage Ratio of 5% or greater and is not subject to any
order or written directive by any such regulatory authority to
meet and maintain a specific capital level for any capital
measure;
o "adequately capitalized" if it has a total capital ratio of 8%
or greater, a Tier I capital ratio of 4% or greater and a
Leverage Ratio of 4% or greater (3% in certain circumstances);
o "undercapitalized" if it has a total capital ratio of less than
8%, a Tier I capital ratio of less than 4% or a Leverage
Ratio of less than 4% (3% in certain circumstances);
o "significantly undercapitalized" if it has a total capital ratio
of less than 6%, a Tier I capital ratio of less than 3% or a
Leverage Ratio of less than 3%; and
o "critically undercapitalized" if its tangible equity is equal to
or less than 2% of average quarterly tangible assets.
Under certain circumstances, a depository institution's primary federal
regulatory agency may use its authority to lower the institution's capital
category. The banking agencies are permitted to establish individualized minimum
capital requirements exceeding the general requirements described above.
Generally, failing to maintain the status of "well capitalized" or "adequately
capitalized" subjects a bank to restrictions and limitations on its business
that become progressively more severe as the capital levels decrease.
A bank is prohibited from making any capital distribution (including
payment of a dividend) or paying any management fee to its holding company if
the bank would thereafter be "undercapitalized." Limitations exist for
"undercapitalized" depository institutions, regarding, among other things, asset
growth, acquisitions, branching, new lines of business, acceptance of brokered
deposits and borrowings from the Federal Reserve System. These institutions are
also required to submit a capital restoration plan that includes a guarantee
from the institution's holding company. "Significantly undercapitalized"
depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
"adequately capitalized," requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. The appointment of a receiver or
conservator may be required for "critically undercapitalized" institutions.
Dividends. Our primary source of funds in the future is the dividends,
if any, paid by our subsidiary banks. The ability of our subsidiary banks to pay
dividends is limited by federal laws, by regulations promulgated by the bank
regulatory agencies and by principles of prudent bank management.
Customer Protection. Our subsidiary banks are also subject to consumer
laws and regulations intended to protect consumers in transactions with
depository institutions, as well as other laws or regulations affecting
customers of financial institutions generally. These laws and regulations
mandate various disclosure requirements and substantively regulate the manner in
which financial institutions must deal with their customers. Our subsidiary
banks must comply with numerous regulations in this regard and are subject to
periodic examinations with respect to their compliance with the requirements.
Community Reinvestment Act. The Community Reinvestment Act of 1977
requires that, in connection with examinations of financial institutions within
their jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered in evaluating
mergers, acquisitions and other applications to expand.
The Gramm-Leach-Bliley Act. The GLB Act, enacted in 1999, amended and
repealed portions of the Glass-Steagall Act and other federal laws restricting
the ability of bank holding companies, securities firms and insurance companies
to affiliate with each other and to enter new lines of business. The GLB Act
established a comprehensive framework to permit financial companies to expand
their activities, including through such affiliations, and to modify the federal
regulatory structure governing some financial services activities. This
authority of financial firms to broaden the types of financial services offered
to customers and to affiliates with other types of financial services companies
may lead to further consolidation in the financial services industry. However,
it may lead to additional competition in the markets in which we operate by
allowing new entrants into various segments of those markets that are not the
traditional competitors in those segments. Furthermore, the authority granted by
the GLB Act may encourage the growth of larger competitors.
The GLB Act also adopted consumer privacy safeguards requiring
financial services providers to disclose their policies regarding the privacy of
customer information to their customers and, subject to some exceptions,
allowing customers to "opt out" of policies permitting such companies to
disclose confidential financial information to non-affiliated third parties.
Final regulations implementing the new privacy standards became effective in
2001.
The Sarbanes-Oxley Act. On July 30, 2002, President Bush signed into
law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act imposes a myriad of
corporate governance and accounting measures designed to ensure that the
shareholders of corporate America are treated fairly and have full and accurate
information about the public companies in which they invest. All public
companies, including companies that file periodic reports with the SEC such as
First Banks, are affected by the Sarbanes-Oxley Act.
Certain provisions of the Sarbanes-Oxley Act became effective
immediately, while other provisions will become effective as the SEC adopts
rules to implement those provisions. Some of the principal provisions of the
Sarbanes-Oxley Act which may affect us include:
o the creation of an independent accounting oversight board to
oversee the audit of public companies and auditors who perform
such audits;
o auditor independence provisions which restrict non-audit services
that independent accountants may provide to their audit clients;
o additional corporate governance and responsibility measures which
(i) require the chief executive officer and chief financial
officer to certify financial statements and to forfeit salary and
bonuses in certain situations, and (ii) protect whistleblowers and
informants;
o expansion of the audit committee's authority and responsibility by
requiring that the audit committee (i) have direct control of the
outside auditor, (ii) be able to hire and fire the auditor, and
(iii) approve all non-audit services;
o mandatory disclosure by analysts of potential conflicts of
interest; and
o enhanced penalties for fraud and other violations.
The Sarbanes-Oxley Act is expected to increase the administrative costs
and burden of doing business for public companies; however, we cannot predict
the significance of any increase at this time.
The USA Patriot Act. In October 2001, the Patriot Act was enacted in
response to the terrorist attacks in New York, Pennsylvania and Washington, D.C.
which occurred on September 11, 2001. The Patriot Act is intended to strengthen
the ability of U.S. law enforcement agencies and the intelligence communities to
work cohesively to combat terrorism on a variety of fronts. The potential impact
of the Patriot Act on financial institutions of all kinds is significant and
wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and imposes various regulations, including standards
for verifying client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering. The Patriot Act is expected to increase the administrative costs and
burden of doing business for financial institutions; however, we cannot predict
the significance of any increase at this time.
Reserve Requirements; Federal Reserve System and Federal Home Loan Bank
System. The Federal Reserve requires all depository institutions to maintain
reserves against their transaction accounts and non-personal time deposits. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve may be used to satisfy liquidity requirements. Institutions are
authorized to borrow from the Federal Reserve Bank "discount window," but
Federal Reserve regulations require institutions to exhaust other reasonable
alternative sources of funds, including advances from Federal Home Loan Banks,
before borrowing from the Federal Reserve Bank.
First Bank is a member of the Federal Reserve System. Both First Bank
and First Bank & Trust are members of the Federal Home Loan Bank System. As
members, they are required to hold investments in regional banks within those
systems. Our subsidiary banks were in compliance with these requirements at
September 30, 2002, with investments of $9.7 million in stock of the Federal
Home Loan Bank of Des Moines held by First Bank, $500,000 in stock of the
Federal Home Loan Bank of Chicago held by First Bank (associated with the
acquisition of Union completed on December 31, 2001), $2.4 million in stock of
the Federal Home Loan Bank of San Francisco held by First Bank & Trust, and $7.5
million in stock of the Federal Reserve Bank of St. Louis held by First Bank.
Monetary Policy and Economic Control. The commercial banking business
is affected by legislation, regulatory policies and general economic conditions
as well as the monetary policies of the Federal Reserve. The instruments of
monetary policy available to the Federal Reserve include the following:
o changes in the discount rate on member bank borrowings and the
targeted federal funds rate;
o the availability of credit at the "discount window;"
o open market operations;
o the imposition of changes in reserve requirements against
deposits of domestic banks;
o the imposition of changes in reserve requirements against deposits
and assets of foreign branches; and
o the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates.
These monetary policies are used in varying combinations to influence
overall growth and distributions of bank loans, investments and deposits, and
this use may affect interest rates charged on loans or paid on liabilities. The
monetary policies of the Federal Reserve have had a significant effect on the
operating results of commercial banks and are expected to do so in the future.
Such policies are influenced by various factors, including inflation,
unemployment, and short-term and long-term changes in the international trade
balance and in the fiscal policies of the U.S. Government. We cannot predict the
effect that changes in monetary policy or in the discount rate on member bank
borrowings will have on our future business and earnings or those of our
subsidiary banks.
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 65 Chairman of the Board of Directors and Chief Executive Officer
Allen H. Blake 60 Director and President, Chief Financial Officer and Secretary
Michael J. Dierberg (1) 31 Director and General Counsel
Gordon A. Gundaker (2) 68 Director
David L. Steward (2) 51 Director
Hal J. Upbin (2) 63 Director
Douglas H. Yaeger (2) 53 Director
Donald W. Williams 55 Director and Senior Executive Vice President and Chief Credit Officer
Executive Officers Not
Serving as Directors:
Terrance M. McCarthy 48 Senior Executive Vice President and Chief Operating Officer
Mark T. Turkcan 46 Executive Vice President -- Mortgage Banking
- -----------------------------
(1) Michael J. Dierberg is the son of James F. Dierberg.
(2) 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 served as the Chairman of the
Board of Directors, President and Chief Executive Officer of FBA from 1994 until
its merger with First Banks on December 31, 2002 and has been a trustee of our
other financing subsidiaries since 1997, 1998, 2000 and 2001, respectively.
Allen H. Blake has served as our President since October 1999. He
served as our Chief Financial Officer from 1984 to 1999 and again since May 2001
and our Secretary since 1988. Mr. Blake has held various executive positions
with us since 1984. Mr. Blake served as Executive Vice President of FBA from
1998 until its merger with First Banks, its Chief Operating Officer from 1999 to
July 2002, its Chief Financial Officer from 1994 to September 1999 and from June
2001 until its merger with First Banks, and its Secretary from 1994 until its
merger with First Banks. Mr. Blake has served as a trustee of our other
financing subsidiaries since 1997, 1998, 2000 and 2001, respectively.
Michael J. Dierberg serves as Director and General Counsel. Mr.
Dierberg previously served as Senior Vice President (Northern California Region)
of First Bank & Trust since July 2001. Prior to joining First Banks, 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.
Coldwell Banker Gundaker is a provider of full-service real estate brokerage
company and has more than 3,000 independently owned and operated residential and
commercial real estate offices globally.
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. World Wide Technology, Inc.
is an electronic procurement and logistics company in the information technology
industry.
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. Kellwood Company manufactures and markets apparel and related
soft goods.
Douglas H. Yaeger serves as a Director. Mr. Yaeger is Chairman of the Board
of Directors, President and Chief Executive Officer of The Laclede Group, Inc.
in St. Louis, Missouri. The Laclede Group, Inc. provides natural gas service
through its regulated core utility operations.
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 also served as Executive Vice President and Chief Credit
Officer of FBA until its merger with First Banks and serves as Chairman of the
Board of Directors of First Bank.
Terrance M. McCarthy has served as our Senior Executive Vice President
and Chief Operating Officer since June 2002, and has been employed in various
executive capacities with us since 1995. Mr. McCarthy is also President and
Chief Executive Officer of First Bank and Chairman of the Board of Directors,
President and Chief Executive Officer of First Bank & Trust.
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
and Chairman of the Board of Directors, President and Chief Executive Officer of
First Banc Mortgage, Inc.
DESCRIPTION OF THE TRUST
The trust is a statutory trust formed pursuant to the Delaware
Statutory 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 trust
agreement provides that to the fullest extent permitted by law, we may not
transfer the common securities except in connection with a merger or
consolidation of First Banks into another corporation. The common securities,
together with the preferred securities, are called the trust securities.
The trust exists exclusively for the purposes of:
o issuing the preferred securities to the public for cash;
o issuing its common securities to us in exchange for our
capitalization of the trust;
o investing the proceeds from the sale of the trust securities in
an equivalent amount of subordinated debentures; and
o engaging in other activities that are incidental to those listed
above.
We have formed the trust and determined to issue the preferred
securities because we consider issuance of the preferred securities to be an
efficient means of raising capital relative to other alternatives. We have
reached this conclusion primarily because we are able to treat the preferred
securities as regulatory capital for purposes of the current capital adequacy
guidelines of the Federal Reserve and we are able to obtain a deduction for
federal income tax purposes of interest payments on the subordinated debentures.
The rights of the holders of the trust securities are as set forth in
the trust agreement, the Delaware Statutory 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 Allen H. Blake, Terrance M. McCarthy and Lisa
K. Vansickle. The fourth trustee must 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 Fifth Third Bank. 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, Fifth Third Bank 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 Fifth Third Bank 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 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 89 of this prospectus. Fifth Third Bank 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 8.15% 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 June 30, 2003.
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 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 June 30, 2033 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 8.15% 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:
o 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);
o 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;
o 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
o 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:
o in whole at any time, or in part from time to time, on or after
June 30, 2008; or
o 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.
o 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 June 30, 2033 or earlier, the
property trustee will apply the 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:
o those trust securities will no longer be deemed to be
outstanding;
o 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;
o we will use our best efforts to list the subordinated debentures
on the New York Stock Exchange or a national exchange;
o 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
o 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:
o 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;
o 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
o 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 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 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:
o our bankruptcy, dissolution or liquidation;
o 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;
o redemption of all of the preferred securities as described on
page 92 under "--Redemption or Exchange -- Mandatory Redemption;"
or
o the entry of a court order for the dissolution of the trust.
With the exception of a redemption as described on page 92 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:
o in an aggregate stated principal amount equal to the aggregate
stated liquidation amount of the trust securities;
o with an interest rate identical to the distribution rate on the
trust securities; and
o 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. 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.
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:
o the occurrence of an event of default under the indenture (see
"Description of the Subordinated Debentures -- Subordinated
Debenture Events of Default");
o 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;
o a default by the trust in the payment of the redemption price of
any of the trust securities when it becomes due and payable;
o 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
o 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 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:
o 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;
o 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;
o 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;
o 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;
o the successor entity has a purpose substantially identical to
that of the trust;
o 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 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
o 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:
o with respect to acceptance of appointment by a successor trustee;
o 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
o 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:
o 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;
o waive any past default that is waivable under the indenture;
o exercise any right to rescind or annul a declaration that the
principal of all the subordinated debentures will be due and
payable; or
o 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:
o 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;
o we execute and deliver to the indenture trustee a written order
stating that we elect to terminate the book-entry system through
DTC; or
o 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.
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."
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:
o the trust will not be deemed to be an "investment company"
required to be registered under the Investment Company Act;
o the trust will not be classified as an association taxable as a
corporation for federal income tax purposes; and
o 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 on the New York Stock
Exchange or on a national securities exchange.
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 Fifth Third Bank, 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 $41,237,125 or $47,422,700 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 8.15% of the principal amount. The interest
will be payable quarterly on March 31, June 30, September 30 and December 31 of
each year, beginning June 30, 2003, 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 8.15%, compounded quarterly.
The subordinated debentures will mature on June 30, 2033, the stated
maturity date. We may shorten this date once at any time to any date not earlier
than June 30, 2008, 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 June
30, 2008, except if (a) a Tax Event, an Investment Company Event or a Capital
Treatment Event, which terms are defined on page 92, 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 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.
Option to Extend 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 8.15%, 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 include as taxable income each year amounts approximately equal to the
accrued but unpaid interest. See "Material United States Federal Income Tax
Consequences."
During an extension period, neither we nor any of our subsidiaries may:
o 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);
o 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 three other
financing subsidiaries), or junior to the subordinated
debentures;
o 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
o 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 New York Stock
Exchange, 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.
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:
o in whole at any time, or in part from time to time, on or after
June 30, 2008; or
o 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 list the subordinated debentures on the New York Stock
Exchange 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.
If any of these events occur, neither we nor any of our subsidiaries
will:
o 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);
o 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 four
other financing subsidiaries), or junior to the subordinated
debentures;
o 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
o 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:
o every obligation of the person for money borrowed;
o 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;
o every reimbursement obligation of the person with respect to
letters of credit, bankers' acceptances or similar facilities
issued for the account of the person;
o 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;
o every capital lease obligation of the person; and
o 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:
o 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 (which will be redeemed in their
entirety following consummation of this offering), our 10.24%
subordinated debentures due 2030, our 9.0% subordinated
debentures due 2031 and our variable rate subordinated debentures
due 2032 issued to our other financing subsidiaries;
o any of our debt that when incurred and without regard to any
election under the federal bankruptcy laws, was without recourse
to us;
o any debt owed to any of our employees;
o 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
o 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:
o any of our debt which when incurred and without regard to any
election under the federal bankruptcy laws was without recourse
to us;
o any debt of ours owed to any of our subsidiaries;
o any debt owed to any of our employees;
o 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;
o debt which constitutes senior debt; and
o 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 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, the approximately $56.9 million of 9.00% subordinated
debentures due 2031 that we issued to one of our other financing
subsidiaries in 2001, the approximately $25.8 million of variable
rate subordinated debentures due 2032 issued to one of our other
financing subsidiaries in 2002 and the approximately $47.4
million of 8.5% 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 did not have any consolidated senior and senior
subordinated debt outstanding at March 26, 2003.
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 Cincinnati,
Ohio. 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 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:
o extend the maturity date of the subordinated debentures; or
o reduce the principal amount or the rate or extend the time of
payment of interest; or
o 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:
o 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;
o our failure to pay any principal on the subordinated debentures
when due whether at maturity, upon redemption or otherwise;
o 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
o 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.
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:
o 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;
o 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
o 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:
o have become due and payable; or
o 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.
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:
o 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;
o not to voluntarily terminate, wind up or liquidate the trust
without prior approval of the Federal Reserve, if required;
o to use our reasonable efforts to cause the trust (a) to remain a
statutory 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;
o 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;
o to use our best efforts to maintain the eligibility of the
preferred securities for inclusion, quotation or listing on the
New York Stock Exchange or on any national securities exchange or
other organization for as long as the preferred securities are
outstanding;
o not to issue or incur, directly or indirectly, additional trust
preferred securities that are senior in right of payment to the
preferred securities;
o 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 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
o not to pay dividends on, purchase, redeem, retire or make any
distributions with respect to our common stock if doing so would
cause the quotient referred to in the immediately preceding point
to 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 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.
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. Fifth Third
Bank, 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:
o any accumulated and unpaid distributions required to be paid on
the preferred securities;
o with respect to any preferred securities called for redemption,
the redemption price; and
o 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 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:
o full payment of the redemption price of the preferred securities;
o full payment of the amounts payable upon liquidation of the
trust; or
o 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 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:
o the aggregate principal amount of the subordinated debentures
will be equal to the sum of the aggregate stated liquidation
amount of the trust securities;
o 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;
o 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
o 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.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
This discussion outlines the material United States federal income tax
consequences of the purchase, ownership and disposition of the preferred
securities. It is only a general discussion and may not apply to your particular
circumstances for any of the following, or other, reasons:
o It is based on authorities in effect as of the date of this
prospectus, including the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"), applicable Treasury
regulations and related administrative and judicial
pronouncements. Changes in these authorities after the date of
this prospectus could alter the consequences described in this
discussion, possibly on a retroactive basis.
o It addresses only preferred securities acquired upon the closing
of this offering at their original issue price and held as
capital assets, within the meaning of the Internal Revenue Code.
o It does not discuss all of the United States federal income tax
consequences that may be relevant to a holder of preferred
securities. Nor does it discuss United States federal income tax
consequences to holders subject to special rules, such as banks,
thrift institutions, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities
or currencies, certain securities traders, tax-exempt investors,
persons holding a preferred security as a position in a straddle,
hedge, conversion or constructive sale transaction, and (except
for the discussion under the caption "-Non-United States
Persons") persons who are not United States Persons as defined
below.
o It does not discuss the United States federal income tax
consequences to stockholders in, or partners or beneficiaries of,
a purchaser of preferred securities; the United States
alternative minimum tax consequences or other collateral tax
consequences of purchasing, owning and disposing of preferred
securities; or 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 either the Internal Revenue Service (the "IRS") or
the courts could take a contrary position. No rulings have been or will be
sought from the IRS with respect to the matters described in this discussion. No
assurance can be given that the IRS will not challenge the conclusions expressed
herein or that a court would not sustain such a challenge.
Accordingly, you are urged to consult your own tax advisors regarding
the tax consequences of purchasing, owning and disposing of the preferred
securities based on your particular circumstances.
For purposes of this discussion, a United States Person generally
means:
o a citizen or individual resident of the United States;
o a corporation or partnership created or organized in or under the
laws of the United States or any political subdivision;
o 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
o 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.
Characterization of First Preferred Capital Trust IV
It is the opinion of Jackson Walker L.L.P., First Banks' counsel, that
First Preferred Capital Trust IV will be characterized for United States federal
income tax purposes as a grantor trust, based on and subject to the facts and
assumptions set forth in its opinion, including the assumption that there will
be full compliance with the terms of the trust agreement and other relevant
documents. Accordingly, you will be considered the beneficial owner of an
undivided interest in the subordinated debentures owned by First Preferred
Capital Trust IV, and you will be required to include in your gross income all
income or gain recognized for United States federal income tax purposes with
respect to your share of the subordinated debentures. We cannot assure you that
the IRS will not challenge this position.
Characterization of the Subordinated Debentures
It is the opinion of Jackson Walker L.L.P., First Banks' counsel, that
the subordinated debentures will be classified as debt of First Banks for United
States federal income tax purposes, based on and subject to the facts and
assumptions set forth in its opinion. By acceptance of a beneficial interest in
a preferred security, you agree to treat the subordinated debentures as debt of
First Banks and the preferred securities as evidence of a beneficial ownership
interest in the subordinated debentures. We cannot assure you that the IRS will
not challenge this position. The remainder of this discussion assumes that the
subordinated debentures will be classified as debt of First Banks for United
States federal income tax purposes.
Interest Income and Original Issue Discount
We anticipate that the subordinated debentures will not be issued with
an issue price that is less than their stated redemption price at maturity.
Under certain circumstances, we have the ability to defer payments of interest
on the subordinated debentures. Treasury regulations provide that a debt
instrument that is subject to a contingency that interest may not be paid will
not be considered to have been issued with original issue discount ("OID") if
the likelihood of the occurrence of the contingency is remote. It is the opinion
of Jackson Walker L.L.P., First Banks' counsel, that because exercise of our
deferral option would, among other matters, prevent us from declaring dividends
on our common stock and from making any payments with respect to our debt
securities that rank equally with or junior to the subordinated debentures, the
likelihood of our exercise of the deferral option is remote. Accordingly,
although the IRS could challenge our position, we will take the position that
the deferral option does not cause the subordinated debentures to be issued with
OID and, therefore, you will be taxed on stated interest on the subordinated
debentures when it is paid or accrued in accordance with your regular method of
accounting.
If we do exercise our right to defer payments of interest on the
subordinated debentures, the subordinated debentures would be treated as issued
with OID at the time of such exercise. If our deferral option was determined not
to be remote, the subordinated debentures would be treated as having been
originally issued with OID. In either case, you would be subject to the special
OID accrual rules. Under those rules, regardless of your method of accounting,
you would accrue an amount of interest income each year that approximates the
stated interest payments called for under the terms of your preferred securities
using the constant-yield-to-maturity method of accrual. Cash payments to you in
respect of the accrued OID would not be reported separately as taxable income.
OID included in your gross income would increase your adjusted tax basis in the
preferred securities and payments to you in respect of the accrued OID would
reduce your adjusted tax basis in the preferred securities. Under the OID rules,
you may be required to include OID in income before receipt of cash interest
payments. Also, if you sell or otherwise dispose of a preferred security you
will be subject to income tax on OID accrued through the date of the sale.
Dividends-Received Deduction
Assuming that the subordinated debentures are properly classified as
debt of First Banks for United States federal income tax purposes, 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.
Liquidating Distributions and Redemptions
Under certain circumstances, First Preferred Capital Trust IV may
distribute a pro-rata share of the subordinated debentures to you in liquidation
of the trust. Because the trust is to be classified as a grantor trust, such a
distribution would not be a taxable event and, consequently, your holding period
and adjusted tax basis for the preferred securities would become your holding
period and adjusted tax basis for the subordinated debentures received. After a
distribution of subordinated debentures, a holder of subordinated debentures
would recognize interest income or OID in respect of the subordinated debentures
received in the manner described above under "Interest Income and Original Issue
Discount."
Under certain circumstances, we may redeem subordinated debentures for
cash, the proceeds of which would be distributed to you in redemption of your
preferred securities. In such case, you would recognize gain or loss for United
States federal income tax purposes as if you had sold the preferred securities
for cash. See "Sales of Preferred Securities" below.
Sales of Preferred Securities
Upon a sale or other taxable disposition (including a redemption for
cash) of preferred securities, you will recognize gain or loss equal to the
difference between your adjusted tax basis in the preferred securities and the
amount realized on the sale or other disposition. Unless a subordinated
debenture is treated as having OID, any portion of the amount you receive that
is attributable to accrued interest will be treated as interest income and will
not be treated as part of the amount realized for purposes of determining your
gain or loss on the disposition. If, however, the subordinated debentures are
treated as having OID, the adjusted tax basis of the preferred securities would
be increased by OID included in your gross income to the date of disposition,
and decreased by payments received on the preferred securities in respect of the
OID. Any gain or loss generally will be capital gain or loss, and generally will
be a long-term capital gain or loss if you have held the preferred securities as
a capital asset for more than one year. In the case of individuals, trusts and
estates, long-term capital gains generally are taxed at a lower rate than
short-term capital gains. Subject to certain limited exceptions, capital losses
generally cannot be applied to offset ordinary income.
Non-United States Persons
The following discussion applies only to beneficial owners of preferred
securities who are not United States Persons as defined above under "General."
Under present United States federal income tax law, if you are not engaged in a
trade or business in the United States, no withholding of United States federal
income tax will be required with respect to payments of principal or interest,
including any OID, on the preferred securities or the subordinated debentures,
provided that:
o you do not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock entitled
to vote;
o you are not a controlled foreign corporation as defined in the
Internal Revenue Code that is related to us through stock
ownership;
o you are not a foreign private foundation;
o you are not a bank whose receipt of interest is described in
Section 881(c)(3)(A) of the Internal Revenue Code; and
o either (a) you provide your name and address on IRS Form W-8BEN
or other appropriate form and certify, under penalties of
perjury, that you are not a United States Person, or (b)
generally, a financial institution holding the preferred
securities (or subordinated debentures) on your behalf certifies,
under penalties of perjury, that it has received an IRS Form
W-8BEN or other appropriate form from you and provides us a copy.
If you do not satisfy the requirements described above, or if it were
determined that the subordinated debentures should be classified as equity and
not debt, payments made to you will be subject to a 30% United States federal
withholding tax, unless you provide us or our paying agent with a properly
executed (a) IRS Form W-8BEN or other appropriate form claiming an exemption
from, or a reduction of, withholding tax under the benefit of an applicable tax
treaty; or (b) IRS Form W-8ECI or other appropriate form stating that interest
received on the preferred securities or subordinated debentures is not subject
to withholding tax because it is effectively connected with your conduct of a
trade or business in the United States.
No withholding of United States federal income tax will be required
with respect to any gain realized by you upon the sale or other disposition of
preferred securities or subordinated debentures if you provide appropriate
documentation that you are not a United States Person.
If you are engaged in a trade or business in the United States and
income on the preferred securities or the subordinated debentures is effectively
connected with the conduct of that trade or business, you will be subject to
United States federal income tax on that income on a net income basis in the
same manner as if you were a United States Person. In addition, if you are a
foreign corporation, you may be subject to a 30% branch profits tax. Any gain
realized upon the sale or disposition of preferred securities or subordinated
debentures generally will not be subject to United States federal income tax
unless (a) the gain is effectively connected with a United States trade or
business conducted by you; or (b) if you are a non-United States Person who is
an individual, you are present in the United States for 183 days or more in the
taxable year of the sale or other disposition.
The consequences of acquiring, owning and disposing of the preferred
securities or subordinated debentures by non-United States Persons may be
modified by an applicable tax treaty. Non-United States Persons should consult
their tax advisors about the rules concerning the tax consequences to them of
acquiring, owning and disposing of the preferred securities or debentures,
including withholding on payments to non-United States Persons and the potential
application of tax treaties.
Information Reporting and Backup Withholding
The amount of interest paid and any OID accrued on the subordinated
debentures held directly or through the preferred securities by United States
Persons, other than corporations and other exempt recipients, will be reported
annually to the IRS. The amount of such income will be reported to holders by
January 31st following each calendar year.
Backup withholding will apply to payments of interest, dividends and
payments of redemption or other disposition proceeds to you if you are a
non-exempt United States Person unless you furnish your taxpayer identification
number in the manner prescribed in applicable Treasury regulations (generally,
on an IRS Form W-9), certify, under penalties of perjury, that this number is
correct and meet certain other conditions. The backup withholding rate is 30% in
2003, 29% in 2004 and 2005, and 28% in 2006. Any amounts withheld under the
backup withholding rules will be allowable as a refund or a credit against your
United States federal income tax liability, provided that the required
information is furnished to the IRS.
Proposed Legislation and Other Possible Changes in Tax Laws
On January 24, 2002, Representative Charles B. Rangel introduced in the
United States House of Representatives proposed legislation known as the
Emergency Worker and Investor Protection Act of 2002. The proposed legislation
would, among other things, disallow an interest deduction for United States
federal income tax purposes for certain indebtedness, including in the case of a
United States Securities and Exchange Commission registrant: (a) any
indebtedness of such registrant if such indebtedness is not shown in the
certified annual report as part of the total liabilities of such registrant, and
(b) any indebtedness of an off-balance-sheet entity if the proceeds from the
issuance of such indebtedness are used directly or indirectly to acquire stock
(or other ownership interests) in such registrant. This legislation is proposed
to be effective for instruments issued on or after the date of enactment. As
drafted, this legislation would not affect the subordinated debentures or
preferred securities or otherwise result in a Tax Event. However, there can be
no assurance that the proposed legislation, final legislation or any other
future legislative proposals, or future administrative or judicial
pronouncements, will not adversely affect our ability to deduct interest on the
subordinated debentures or otherwise affect the tax treatment of the
transactions described in this Prospectus. Such a change could, if applicable to
the preferred securities or subordinated debentures, give rise to a Tax Event,
which would permit us to cause a redemption of the debentures as described
above.
This discussion is included for general information only and may not be
applicable depending upon your particular situation. You should consult your own
tax advisors with respect to the tax consequences of the purchase, ownership and
disposition of preferred securities, including the tax consequences under state,
local foreign and other tax laws, and the possible effects of changes in federal
or other tax laws.
Opinion of Counsel
The opinion of Jackson Walker L.L.P. referred to in the foregoing
discussion of material federal income tax considerations (the "Tax Opinion") is
filed as an exhibit to the Registration Statement on Form S-2 of which this
prospectus forms a part. The foregoing discussion of material federal income tax
considerations includes a complete summary of the Tax Opinion.
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 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 1,600,000 preferred securities in the amounts set forth below
opposite their respective names.
Number of
Preferred
Underwriters Securities
----------
Stifel, Nicolaus & Company, Incorporated..................................... 1,200,000
Fahnestock & Co. Inc......................................................... 400,000
----------------
Total................................................................... 1,600,000
================
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 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 240,000 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 $325,000 payable by
First Banks.
Per Preferred
Security Total
------------- ------------
Public Offering Price...................................... $25.00 $40,000,000
Proceeds to First Preferred Capital Trust IV............... $25.00 $40,000,000
First Banks has agreed to pay the underwriters $0.8125 per preferred
security, or a total of $1,300,000 as compensation for arranging the investment
in the subordinated debentures. Should the underwriters exercise the
over-allotment option, an aggregate of $1,495,000 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 approved for listing on the New York
Stock Exchange subject to notice of issuance. The Representatives have advised
the trust that they presently intend to make a market in the preferred
securities prior to the commencement of trading on the New York Stock Exchange,
but are not obligated to do so and may discontinue market making at any time
without notice. However, we cannot assure you 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.
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:
o 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;
o the underwriters may elect to cover any short position by
purchasing preferred securities in the open market or by
exercising the over-allotment option;
o the underwriters may stabilize or maintain the price of the
preferred securities by bidding; and
o 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 on the New York Stock
Exchange or otherwise and, if commenced, may be discontinued at any time.
Because they 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. An affiliate of James F.
Dierberg, our Chairman and Chief Executive Officer, is the owner of 300,000
shares of common stock (or approximately 4.23% of the outstanding common stock)
of Stifel Financial Corp., the parent company of Stifel, Nicolaus & Company,
Incorporated.
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.
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, 2001 and 2000, and for each of the years in the three-year period
ended December 31, 2001, 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. We
incorporate by reference the documents listed below:
(a) our Annual Report on Form 10-K for the year ended December 31,
2001, filed with the SEC on March 25, 2002;
(b) our Quarterly Report on Form 10-Q for the quarter ended March
31, 2002, filed with the SEC on May 13, 2002;
(c) our Quarterly Report on Form 10-Q for the quarter ended June
30, 2002, filed with the SEC on August 12, 2002;
(d) our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, filed with the SEC on November 12, 2002;
and
(e) our Current Reports on Form 8-K, filed with the SEC on
January 29, 2002 and January 3, 2003.
You may request, and we will provide, a copy of these filings at no
cost by contacting Lisa K. Vansickle, our Senior Vice President and Controller,
at the following address and phone number:
First Banks, Inc.
600 James S. McDonnell Blvd.
Mail Stop M1-199-014
Hazelwood, Missouri 63042
(314) 592-5000
THIS PAGE LEFT BLANK INTENTIONALLY
First Banks, Inc.
Index to Consolidated Financial Statements
First Banks, Inc. and Subsidiaries Consolidated Financial Statements
Independent Auditors' Report................................................................ F-1
Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001 and 2000........................................................... F-2
Consolidated Statements of Income for the nine months ended September 30,
2002 and 2001 (unaudited) and for the years
ended December 31, 2001, 2000 and 1999................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the nine months ended September 30, 2002
(unaudited) and for the years ended
December 31, 2001, 2000 and 1999......................................................... F-5
Consolidated Statements of Cash Flows for the nine months ended September
30, 2002 and 2001 (unaudited) and for
the years ended December 31, 2001, 2000 and 1999......................................... F-6
INDEPENDENT AUDITORS' REPORT
[KPMG LOGO]
The Board of Directors and Stockholders
First Banks, Inc.:
We have audited the accompanying consolidated balance sheets of First Banks,
Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of First Banks, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities in 2001.
/s/ KPMG LLP
------------
St. Louis, Missouri
March 15, 2002
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
December 31,
September 30, -----------------
2002 2001 2000
---- ---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks.............................................. $ 165,251 181,522 167,474
Interest-bearing deposits with other financial institutions
with maturities of three months or less............................ 2,093 4,664 4,005
Federal funds sold................................................... 79,300 55,688 26,800
---------- --------- ---------
Total cash and cash equivalents................................. 246,644 241,874 198,279
---------- --------- ---------
Investment securities:
Available for sale, at fair value.................................... 895,491 610,466 539,386
Held to maturity, at amortized cost (fair value of $20,037
at September 30, 2002, $20,812 and $24,507 at
December 31, and 2000, respectively)............................... 19,384 20,602 24,148
---------- --------- ---------
Total investment securities..................................... 914,875 631,068 563,534
---------- --------- --------
Loans:
Commercial, financial and agricultural............................... 1,468,228 1,532,875 1,372,196
Real estate construction and development............................. 983,346 954,913 809,682
Real estate mortgage................................................. 2,518,374 2,445,847 2,202,857
Lease financing...................................................... 141,834 148,971 124,088
Consumer and installment............................................. 98,376 124,542 181,602
Loans held for sale.................................................. 261,258 204,206 69,105
---------- --------- ---------
Total loans..................................................... 5,471,416 5,411,354 4,759,530
Unearned discount.................................................... (7,396) (2,485) (7,265)
Allowance for loan losses............................................ (109,875) (97,164) (81,592)
---------- --------- ---------
Net loans....................................................... 5,354,145 5,311,705 4,670,673
---------- --------- ---------
Derivative instruments.................................................... 101,872 54,889 3,759
Bank premises and equipment, net of accumulated
depreciation and amortization........................................ 155,419 149,604 114,771
Goodwill ................................................................. 127,760 115,860 85,021
Bank owned life insurance................................................. 91,216 87,200 83,292
Accrued interest receivable............................................... 33,953 37,349 45,226
Deferred income taxes..................................................... 97,182 94,546 77,956
Other assets.............................................................. 48,468 54,356 34,180
---------- --------- --------
Total assets.................................................... $7,171,534 6,778,451 5,876,691
========== ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(dollars expressed in thousands, except share and per share data)
December 31,
September 30, -----------------------
2002 2001 2000
---- ---- ----
(unaudited)
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing............................................... $ 954,017 921,455 808,251
Interest-bearing................................................... 765,390 629,015 448,146
Savings.............................................................. 2,026,734 1,832,939 1,447,898
Time:
Time deposits of $100 or more...................................... 496,118 484,201 499,956
Other time deposits................................................ 1,783,444 1,816,294 1,808,164
---------- ---------- ---------
Total deposits.................................................. 6,025,703 5,683,904 5,012,415
Short-term borrowings..................................................... 214,054 243,134 140,569
Note payable.............................................................. -- 27,500 83,000
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debentures............................ 222,259 191,539 138,569
First Banks America, Inc. subordinated debentures.................... 45,373 44,342 44,280
Accrued interest payable.................................................. 13,466 16,006 23,227
Deferred income taxes..................................................... 63,016 43,856 15,031
Accrued expenses and other liabilities.................................... 61,685 61,515 52,687
Minority interest in subsidiary........................................... 19,784 17,998 14,067
---------- ---------- ---------
Total liabilities............................................... 6,665,340 6,329,794 5,523,845
---------- ---------- ---------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares
issued and outstanding at September 30, 2002, December 31, 2001
and 2000........................................................... -- -- --
Class A convertible, adjustable rate, $20.00 par value, 750,000
shares authorized, 641,082 shares issued and outstanding........... 12,822 12,822 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
Additional paid-in capital................................................ 5,950 6,074 2,267
Retained earnings......................................................... 419,146 389,308 325,580
Accumulated other comprehensive income.................................... 62,120 34,297 6,021
---------- ---------- --------
Total stockholders' equity...................................... 506,194 448,657 352,846
---------- ---------- --------
Total liabilities and stockholders' equity...................... $7,171,534 6,778,451 5,876,691
========== ========== =========
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars expressed in thousands, except per share data)
Nine Months Ended
September 30, Years Ended December 31,
------------------------ ----------------------------
2002 2001 2001 2000 1999
---- ---- ---- ---- ----
(unaudited) (unaudited)
Interest income:
Interest and fees on loans........................... $ 293,904 315,098 412,153 390,332 323,207
Investment securities:
Taxable............................................ 22,965 20,233 26,244 27,331 26,206
Nontaxable......................................... 1,403 686 888 961 937
Federal funds sold and other......................... 1,454 4,100 5,458 4,202 2,732
--------- -------- ------- ------- -------
Total interest income........................... 319,726 340,117 444,743 422,826 353,082
--------- -------- ------- ------- -------
Interest expense:
Deposits:
Interest-bearing demand............................ 5,739 5,372 7,019 5,909 5,098
Savings............................................ 27,253 39,927 50,388 51,656 44,101
Time deposits of $100 or more...................... 14,803 22,117 28,026 20,654 11,854
Other time deposits................................ 51,837 76,629 97,105 99,603 84,639
Interest rate exchange agreements, net............... -- -- -- -- 5,397
Short-term borrowings................................ 2,635 5,000 5,847 5,881 3,983
Note payable......................................... 839 2,328 2,629 3,976 3,629
Guaranteed preferred debentures...................... 18,629 13,467 18,590 13,173 12,050
--------- -------- ------- ------- -------
Total interest expense.......................... 121,735 164,840 209,604 200,852 170,751
--------- -------- ------- ------- -------
Net interest income............................. 197,991 175,277 235,139 221,974 182,331
Provision for loan losses................................. 38,700 13,910 23,510 14,127 13,073
--------- -------- ------- ------- -------
Net interest income after provision
for loan losses............................. 159,291 161,367 211,629 207,847 169,258
--------- -------- ------- ------- -------
Noninterest income:
Service charges on deposit accounts and
customer service fees.............................. 21,985 16,268 22,865 19,794 17,676
Gain on mortgage loans sold and held for sale........ 20,316 9,718 14,983 7,806 6,909
Gain on sale of credit card portfolio,
net of expenses.................................... -- 1,853 1,853 -- --
Net gain (loss) on sales of
available-for-sale securities...................... 90 (145) 18,722 168 791
Gain on sales of branches, net of expenses........... -- -- -- 1,355 4,406
Bank-owned life insurance investment income.......... 4,318 3,069 4,415 4,314 3,919
Net gain on derivative instruments................... 1,714 14,401 18,583 -- --
Other................................................ 16,417 12,580 17,188 9,341 7,949
--------- -------- ------- ------- -------
Total noninterest income........................ 64,840 57,744 98,609 42,778 41,650
--------- -------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits....................... 84,506 68,889 93,452 73,391 61,524
Occupancy, net of rental income...................... 15,938 12,379 17,432 14,675 12,518
Furniture and equipment.............................. 12,730 8,845 12,612 11,702 8,520
Postage, printing and supplies....................... 4,205 3,528 4,869 4,431 4,244
Information technology fees.......................... 24,411 19,891 26,981 22,359 18,567
Legal, examination and professional fees............. 6,463 5,415 6,988 4,523 9,109
Amortization of intangibles associated with the
purchase of subsidiaries........................... 1,480 5,573 8,248 5,297 4,401
Communications....................................... 2,375 2,223 3,247 2,625 2,488
Advertising and business development................. 4,132 4,405 5,237 4,331 3,734
Other................................................ 18,992 26,213 32,605 14,656 13,652
--------- -------- ------- ------- -------
Total noninterest expense....................... 175,232 157,361 211,671 157,990 138,757
--------- -------- ------- ------- -------
Income before provision for income
taxes, minority interest in income
of subsidiary and cumulative effect
of change in accounting principle............ 48,899 61,750 98,567 92,635 72,151
Provision for income taxes................................ 17,471 24,120 30,048 34,482 26,313
--------- -------- ------- ------- -------
Income before minority interest in income
of subsidiary and cumulative effect of
change in accounting principle............... 31,428 37,630 68,519 58,153 45,838
Minority interest in income of subsidiary................. 1,066 1,622 2,629 2,046 1,660
--------- -------- ------- ------- -------
Income before cumulative effect of change in
accounting principle......................... 30,362 36,008 65,890 56,107 44,178
Cumulative effect of change in accounting principle,
net of tax........................................... -- (1,376) (1,376) -- --
--------- -------- ------- ------- -------
Net income...................................... 30,362 34,632 64,514 56,107 44,178
Preferred stock dividends................................. 524 524 786 786 786
--------- -------- ------- ------- -------
Net income available to common stockholders..... $ 29,838 34,108 63,728 55,321 43,392
========= ======== ======= ======= =======
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(dollars expressed in thousands, except per share data)
Nine Months Ended
September 30, Years Ended December 31,
------------------------ ----------------------------
2002 2001 2001 2000 1999
---- ---- ---- ---- ----
(unaudited) (unaudited)
Earnings per common share:
Basic:
Income before cumulative effect of change in
accounting principle............................ $1,261.05 1,499.67 2,751.54 2,338.04 1,833.91
Cumulative effect of change in accounting
principle, net of tax.......................... -- (58.16) (58.16) -- --
--------- --------- -------- -------- --------
Basic.............................................. $1,261.05 1,441.51 2,693.38 2,338.04 1,833.91
========= ========= ======== ======== ========
Diluted:
Income before cumulative effect of change in
accounting principle............................ $1,246.05 1,468.14 2,684.93 2,267.41 1,775.47
Cumulative effect of change in accounting
principle, net of tax........................... -- (58.16) (58.16) -- --
--------- --------- -------- -------- --------
Diluted............................................ $1,246.05 1,409.98 2,626.77 2,267.41 1,775.47
========= ========= ======== ======== ========
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.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Nine Months Ended September 30, 2002 and Three Years Ended December 31, 2001
(dollars expressed in thousands, except per share data)
Adjustable Rate Accu-
Preferred Stock mulated
--------------- Other Total
Class A Additional Compre- Compre- Stock-
Conver- Common Paid-in hensive Retained hensive holders'
tible Class B Stock Capital Income Earnings Income Equity
----- ------- ----- ------- ------ -------- ------ --------
Consolidated balances, January 1, 1999........... $12,822 241 5,915 780 231,867 11,738 263,363
Year ended December 31, 1999:
Comprehensive income:
Net income................................. -- -- -- -- 44,178 44,178 -- 44,178
Other comprehensive income, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1).......... -- -- -- -- (9,388) -- (9,388) (9,388)
-------
Comprehensive income....................... 34,790
=======
Class A preferred stock dividends,
$1.20 per share........................... -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share........................... -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- (3,273) -- -- (3,273)
Reclassification of retained earnings........ -- -- -- 5,000 (5,000) -- --
Reduction of deferred tax asset
valuation allowance....................... -- -- -- 811 -- -- 811
------- ---- ------ ------ -------- ------ -------
Consolidated balances, December 31, 1999......... 12,822 241 5,915 3,318 270,259 2,350 294,905
Year ended December 31, 2000:
Comprehensive income:
Net income................................. -- -- -- -- 56,107 56,107 -- 56,107
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1).......... -- -- -- -- 3,671 -- 3,671 3,671
-------
Comprehensive income....................... 59,778
=======
Class A preferred stock dividends,
$1.20 per share........................... -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share........................... -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- (1,051) -- -- (1,051)
------- ---- ----- ------ ------- ------ -------
Consolidated balances, December 31, 2000......... 12,822 241 5,915 2,267 325,580 6,021 352,846
Year ended December 31, 2001:
Comprehensive income:
Net income................................. -- -- -- -- 64,514 64,514 -- 64,514
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- (1,871) -- (1,871) (1,871)
Derivative instruments:
Cumulative effect of change in
accounting principle, net............. -- -- -- -- 9,069 9,069 9,069
Current period transactions............ -- -- -- -- 27,021 27,021 27,021
Reclassification to earnings........... -- -- -- -- (5,943) (5,943) (5,943)
-------
Comprehensive income....................... 92,790
=======
Class A preferred stock dividends,
$1.20 per share........................... -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share........................... -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- 3,807 -- -- 3,807
------- ---- ----- ------ ------- ------ -------
Consolidated balances, December 31, 2001......... 12,822 241 5,915 6,074 389,308 34,297 448,657
Nine months ended September 30, 2002 (unaudited):
Comprehensive income:
Net income................................. -- -- -- -- 30,362 30,362 -- 30,362
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 7,121 -- 7,121 7,121
Derivative instruments:
Current period transactions............ -- -- -- -- 20,702 -- 20,702 20,702
-------
Comprehensive income....................... 58,185
=======
Class A preferred stock dividends,
$0.80 per share........................... -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share........................... -- -- -- -- (11) -- (11)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- (124) -- -- (124)
------- ---- ----- ------ ------- ------ -------
Consolidated balances, September 30, 2002
(unaudited).................................. $12,822 241 5,915 5,950 419,146 62,120 506,194
======= ==== ===== ====== ======= ====== =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Nine Months Ended
September 30, Years Ended December 31,
------------------- ----------------------------
2002 2001 2001 2000 1999
---- ---- ---- ---- ----
Unrealized gains (losses) on investment
securities arising during the period...................... $ 7,180 10,461 10,298 3,780 (8,874)
Less reclassification adjustment for
gains (losses) included in net income..................... 59 (94) 12,169 109 514
------- ------ ------ ----- ------
Unrealized gains (losses) on
investment securities..................................... $ 7,121 10,555 (1,871) 3,671 (9,388)
======= ====== ====== ===== ======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars expressed in thousands)
Nine Months Ended
September 30, Years Ended December 31,
---------------------- ---------------------------
2002 2001 2001 2000 1999
---- ---- ---- ---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net income................................................. $ 30,362 34,632 64,514 56,107 44,178
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Cumulative effect of change in
accounting principle, net of tax.................. -- 1,376 1,376 -- --
Depreciation and amortization of
bank premises and equipment....................... 13,857 8,954 12,713 9,536 7,609
Amortization, net of accretion........................ 11,869 6,641 11,203 8,370 12,632
Originations and purchases of loans held for sale.....(1,299,522) (1,088,069) (1,524,156) (532,178) (452,941)
Proceeds from sales of loans held for sale............ 1,092,359 982,205 1,348,772 413,247 507,077
Provision for loan losses............................. 38,700 13,910 23,510 14,127 13,073
Provision for income taxes............................ 17,471 24,120 30,048 34,482 26,313
Payments of income taxes.............................. (18,096) (21,290) (19,297) (10,525) (23,904)
Decrease (increase) in accrued interest receivable.... 3,891 5,488 11,513 (7,338) (3,164)
Interest accrued on liabilities....................... 121,735 164,840 209,604 200,852 170,751
Payments of interest on liabilities................... (125,303) (165,105) (218,329) (190,937) (166,106)
Gain on mortgage loans sold and held for sale......... (20,316) (9,718) (14,983) (7,806) (6,909)
Gain on sale of credit card portfolio,
net of expenses................................... -- (1,853) (1,853) -- --
Net (gain) loss on sales of available-for-sale
investment securities............................. (90) 145 (18,722) (168) (791)
Gain on sales of branches, net of expenses............ -- -- -- (1,355) (4,406)
Net gain on derivative instruments.................... (1,714) (14,401) (18,583) -- --
Other operating activities, net....................... 13,381 (18,928) 4,690 (3,978) 8,330
Minority interest in income of subsidiary............. 1,066 1,622 2,629 2,046 1,660
---------- ---------- ---------- ------- --------
Net cash (used in) provided by
operating activities.......................... (120,350) (75,431) (95,351) (15,518) 133,402
---------- ---------- ---------- -------- --------
Cash flows from investing activities:
Cash received (paid) for acquired entities, net of
cash and cash equivalents (paid) received................ 44,097 -- 6,351 (86,106) (15,961)
Proceeds from sales of investment securities............... 55,130 74,991 85,824 46,279 63,938
Maturities of investment securities available for sale..... 855,121 425,492 762,548 347,642 350,940
Maturities of investment securities held to maturity....... 3,456 2,765 4,292 1,169 2,708
Purchases of investment securities available for sale...... (957,312) (455,190) (822,593) (289,875) (288,023)
Purchases of investment securities held to maturity........ (2,260) (240) (750) (3,806) (2,627)
Proceeds from terminations of derivative instruments....... -- 5,396 22,203 -- --
Net decrease (increase) in loans........................... 114,333 57,944 (6,252) (339,575) (268,238)
Recoveries of loans previously charged-off................. 11,692 7,202 9,469 9,842 9,281
Purchases of bank premises and equipment................... (13,576) (29,212) (36,452) (30,856) (17,099)
Other investing activities................................. 8,622 3,147 (331) 5,052 (10)
---------- ---------- ---------- ------- --------
Net cash provided by (used in)
investing activities........................... 119,303 92,295 24,309 (340,234) (165,091)
---------- ---------- ---------- -------- --------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits......... 213,963 148,576 299,466 155,058 (72,895)
(Decrease) increase in time deposits....................... (157,154) (95,111) (254,748) 129,008 144,499
(Decrease) increase in federal funds purchased............. (81,000) -- 70,000 (27,100) --
Decrease in Federal Home Loan Bank advances................ (10,600) -- (5,000) -- (50,000)
Increase (decrease) in securities sold
under agreements to repurchase........................... 44,399 (5,417) 8,438 52,015 2,223
Advances drawn on note payable............................. 36,500 5,000 69,500 137,000 32,000
Repayments of note payable................................. (64,000) (58,500) (125,000) (118,000) (18,048)
Proceeds from issuance of guaranteed preferred
subordinated debentures.................................. 24,233 -- 52,767 55,050 --
Sales of branch deposits................................... -- -- -- 892 (49,172)
Payment of preferred stock dividends....................... (524) (524) (786) (786) (786)
Other financing activities, net............................ -- (94) -- -- --
---------- ---------- ---------- -------- --------
Net cash provided by (used in)
financing activities........................... 5,817 (6,070) 114,637 383,137 (12,179)
---------- ---------- ---------- -------- --------
Net increase (decrease) in cash
and cash equivalents........................... 4,770 10,794 43,595 27,385 (43,868)
Cash and cash equivalents, beginning of period.................. 241,874 198,279 198,279 170,894 214,762
---------- ---------- ---------- -------- --------
Cash and cash equivalents, end of period........................$ 246,644 209,073 241,874 198,279 170,894
========== ========== ========== ======== ========
Noncash investing and financing activities:
Reduction of deferred tax asset valuation reserve..........$ -- 565 4,971 1,267 --
Loans transferred to other real estate..................... 3,584 2,821 3,493 1,761 4,039
Loans exchanged for and transferred to available-for-sale
investment securities.................................... -- -- -- 37,634 --
Loans held for sale exchanged for and transferred
to available-for-sale investment securities.............. 149,830 753 -- 19,805 3,985
Loans held for sale transferred to loans................... 2,923 35,074 38,343 72,847 32,982
========== ========== ========== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies
followed by First Banks, Inc. and subsidiaries (First Banks or the Company):
Basis of Presentation. The accompanying consolidated financial
statements of First Banks have been prepared in accordance with accounting
principles generally accepted in the United States of America and conform to
predominant practices within the banking industry. Management of First Banks has
made a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities to
prepare the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America. Actual results
could differ from those estimates.
Principles of Consolidation. The consolidated financial statements
include the accounts of the parent company and its subsidiaries, net of minority
interest, as more fully described below. All significant intercompany accounts
and transactions have been eliminated. Certain reclassifications of 2000 and
1999 amounts have been made to conform with the 2001 presentation.
First Banks operates through its subsidiary bank holding companies and
subsidiary financial institutions (collectively referred to as the Subsidiary
Banks) as follows:
Union Financial Group, Ltd., headquartered in Swansea, Illinois (UFG)
and its wholly owned subsidiary:
First Bank, headquartered in St. Louis County, Missouri
(First Bank);
First Capital Group, Inc., headquartered in Albuquerque, New Mexico
(FCG);
First Banks America, Inc., headquartered in San Francisco, California
(FBA) and its wholly owned subsidiaries:
The San Francisco Company, headquartered in San Francisco,
California (SFC), and its wholly owned subsidiary:
First Bank & Trust, headquartered in San Francisco,
California (FB&T).
The Subsidiary Banks are wholly owned by their respective parent
companies except FBA, which was 83.37% owned by First Banks at December 31,
1999. On October 31, 2000, FBA issued 6,530,769 shares of its common stock to
First Banks in conjunction with FBA's acquisition of First Bank & Trust, a
wholly owned subsidiary of First Banks. This transaction increased First Banks'
ownership interest in FBA to approximately 92.82%. On October 31, 2001, FBA
issued 803,757 shares of its common stock to First Banks in conjunction with
FBA's acquisition of BYL Bancorp. First Banks owned 93.69% of FBA at December
31, 2001.
Cash and Cash Equivalents. Cash, due from banks, federal funds sold and
interest-bearing deposits with original maturities of three months or less are
considered to be cash and cash equivalents for purposes of the consolidated
statements of cash flows.
The Subsidiary Banks are required to maintain certain daily reserve
balances on hand in accordance with regulatory requirements. These reserve
balances maintained in accordance with such requirements were $24.2 million and
$22.3 million at December 31, 2001 and 2000, respectively.
Investment Securities. The classification of investment securities
available for sale or held to maturity is determined at the date of purchase.
First Banks does not engage in the trading of investment securities.
Investment securities designated as available for sale, which include
any security that First Banks has no immediate plan to sell but which may be
sold in the future under different circumstances, are stated at fair value.
Realized gains and losses are included in noninterest income upon commitment to
sell, based on the amortized cost of the individual security sold. Unrealized
gains and losses are recorded, net of related income tax effects, in accumulated
other comprehensive income. All previous fair value adjustments included in the
separate component of accumulated other comprehensive income are reversed upon
sale.
Investment securities designated as held to maturity, which include any
security that First Banks has the positive intent and ability to hold to
maturity, are stated at cost, net of amortization of premiums and accretion of
discounts computed on the level-yield method taking into consideration the level
of current and anticipated prepayments.
Loans Held for Portfolio. Loans held for portfolio are carried at cost,
adjusted for amortization of premiums and accretion of discounts using the
interest method. Interest and fees on loans are recognized as income using the
interest method. Loan origination fees are deferred and accreted to interest
income over the estimated life of the loans using the interest method. Loans
held for portfolio are stated at cost as First Banks has the ability and it is
management's intention to hold them to maturity.
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal course of
business. Generally, payments received on nonaccrual and impaired loans are
recorded as principal reductions. Interest income is recognized after all
principal has been repaid or an improvement in the condition of the loan has
occurred which would warrant resumption of interest accruals.
A loan is considered impaired when it is probable that First Banks will
be unable to collect all amounts due, both principal and interest, according to
the contractual terms of the loan agreement. When measuring impairment, the
expected future cash flows of an impaired loan are discounted at the loan's
effective interest rate. Alternatively, impairment is measured by reference to
an observable market price, if one exists, or the fair value of the collateral
for a collateral-dependent loan. Regardless of the historical measurement method
used, First Banks measures impairment based on the fair value of the collateral
when foreclosure is probable. Additionally, impairment of a restructured loan is
measured by discounting the total expected future cash flows at the loan's
effective rate of interest as stated in the original loan agreement.
In addition, First Banks monitors the fair value of the underlying
collateral on its lease portfolio to identify any impairment as a result of a
decline in the residual value of the underlying collateral, which may not be
apparent from the payment performance of the lease.
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. The
amount by which cost exceeds market value is recorded in a valuation allowance
as a reduction of loans held for sale. Changes in the valuation allowance are
reflected as part of the gain on mortgage loans sold and held for sale in the
statements of income in the periods in which the change occurs. Gains or losses
on the sale of loans held for sale are determined on a specific identification
method. Loans held for sale transferred to loans held for portfolio or
available-for-sale investment securities are transferred at fair value.
Loan Servicing Income. Loan servicing income represents fees earned for
servicing real estate mortgage loans owned by investors, net of federal agency
guarantee fees, interest shortfall and amortization of mortgage servicing
rights. Such fees are generally calculated on the outstanding principal balance
of the loans serviced and are recorded as income when earned.
Allowance for Loan Losses. The allowance for loan losses is maintained
at a level considered adequate to provide for probable losses. The provision for
loan losses is based on a periodic analysis of the loans held for portfolio and
held for sale, considering, among other factors, current economic conditions,
loan portfolio composition, past loan loss experience, independent appraisals,
loan collateral, payment experience and selected key financial ratios. As
adjustments become necessary, they are reflected in the results of operations in
the periods in which they become known. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowance for loan losses. Such agencies may require First Banks to increase
its allowance for loan losses based on their judgment about information
available to them at the time of their examination.
Derivative Instruments and Hedging Activities. In June 1998, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133 -- Accounting for Derivative Instruments and
Hedging Activities (SFAS 133). In June 1999 and June 2000, the FASB issued SFAS
No. 137 - Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133, and SFAS No. 138 - Accounting for Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133, respectively. SFAS
133, as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133, as amended, requires an entity
to recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge in
one of three categories. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. Under SFAS 133, as amended, an entity
that elects to apply hedge accounting is required to establish, at the inception
of the hedge, the method it will use for assessing the effectiveness of the
hedging derivative and the measurement approach for determining the ineffective
aspect of the hedge. Those methods must be consistent with the entity's approach
to managing risk.
On January 1, 2001, First Banks implemented SFAS 133, as amended. The
implementation of SFAS 133, as amended, resulted in an increase in derivative
instruments of $12.5 million, an increase in deferred tax liabilities of $5.1
million and an increase in other comprehensive income of $9.1 million. In
addition, First Banks recorded a cumulative effect of change in accounting
principle of $1.4 million, net of taxes of $741,000, as a reduction of net
income.
First Banks utilizes derivative instruments and hedging activities to
assist in the management of interest rate sensitivity and to modify the
repricing, maturity and option characteristics of certain assets and
liabilities. First Banks uses such derivative instruments solely to reduce its
interest rate risk exposure. First Banks' accounting policies for derivative
instruments and hedging activities under SFAS 133, as amended, are as follows:
o Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate
swap agreements designated as cash flow hedges are accounted for
at fair value. The effective portion of the change in the cash
flow hedge's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into
noninterest income when the underlying transaction affects
earnings. The ineffective portion of the change in the cash flow
hedge's gain or loss is recorded in noninterest income on each
monthly measurement date. The net interest differential is
recognized as an adjustment to interest income or interest
expense of the related asset or liability being hedged. In the
event of early termination, the net proceeds received or paid on
the interest rate swap agreements are recognized immediately in
noninterest income.
o Interest Rate Swap Agreements - Fair Value Hedges. Interest rate
swap agreements designated as fair value hedges are accounted for
at fair value. Changes in the fair value of the swap agreements
are recognized currently in noninterest income. The change in the
fair value of the underlying hedged item attributable to the
hedged risk adjusts the carrying amount of the underlying hedged
item and is also recognized currently in noninterest income. All
changes in fair value are measured on a monthly basis. The net
interest differential is recognized as an adjustment to interest
income or interest expense of the related asset or liability. In
the event of early termination, the net proceeds received or paid
are recognized immediately in noninterest income. The cumulative
change in the fair value of the underlying hedged item is
deferred and amortized or accreted to noninterest income over the
weighted average life of the related asset or liability. If,
however, the underlying hedged item is repaid, the cumulative
change in the fair value of the underlying hedged item is
recognized immediately in noninterest income.
o Interest Rate Cap and Floor Agreements. Interest rate cap and
floor agreements are accounted for at fair value. Changes in the
fair value of interest rate cap and floor agreements are
recognized in noninterest income on each monthly measurement
date.
o Interest Rate Lock Commitments. Commitments to originate loans
(interest rate lock commitments), which primarily consist of
commitments to originate fixed rate residential mortgage loans,
are recorded at fair value. Changes in the fair value are
recognized in noninterest income on a monthly basis.
o Forward Contracts to Sell Mortgage-Backed Securities. Forward
commitments to sell mortgage-backed securities are recorded at
fair value. Changes in the fair value of forward contracts to
sell mortgage-backed securities are recognized in noninterest
income on a monthly basis.
Prior to the implementation of SFAS 133, interest rate swap, floor and
cap agreements were accounted for on an accrual basis with the net interest
differential being recognized as an adjustment to interest income or interest
expense of the related asset or liability. Premiums and fees paid upon the
purchase of interest rate swap, floor and cap agreements were amortized over the
life of the agreements using the straight-line method. In the event of early
termination of the derivative financial instruments, the net proceeds received
or paid were deferred and amortized over the shorter of the remaining contract
life of the derivative financial instrument or the maturity of the related asset
or liability. If, however, the amount of the underlying asset or liability was
repaid, then the gains or losses on the agreements were recognized immediately
in the consolidated statements of income. The unamortized premiums and fees paid
are included in derivative instruments in the accompanying consolidated balance
sheets.
In addition, interest rate lock commitments represented
off-balance-sheet items and, therefore, were not reflected in the consolidated
balance sheets. Gains and losses on forward contracts to sell mortgage-backed
securities, which qualified as hedged, were deferred. The net unamortized
balance of such deferred gains and losses was applied to the carrying value of
the loans held for sale as part of the lower of cost or market valuation.
Bank Premises and Equipment. Bank premises and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation is computed
primarily using the straight-line method over the estimated useful lives of the
related assets. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the useful life of the improvement or
term of the lease. Bank premises and improvements are depreciated over five to
40 years and equipment over three to seven years.
Intangibles Associated With the Purchase of Subsidiaries. Intangibles
associated with the purchase of subsidiaries include goodwill and core deposit
intangibles. Goodwill is amortized using the straight-line method over the
estimated periods to be benefited, which range from 10 to 15 years. The core
deposit intangibles are amortized using the straight-line method over the
estimated periods to be benefited, which has been estimated at seven years.
First Banks reviews intangible assets for impairment whenever events or changes
in circumstances indicate the carrying value of an underlying asset may not be
recoverable. First Banks measures recoverability based upon the future cash
flows expected to result from the use of the underlying asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying value of the underlying
asset, First Banks recognizes an impairment loss. The impairment loss recognized
represents the amount by which the carrying value of the underlying asset
exceeds the fair value of the underlying asset. If an asset being tested for
recoverability was acquired in a business combination accounted for using the
purchase method, goodwill that arose in the transaction is included as part of
the asset grouping in determining recoverability. If some but not all of the
assets acquired in that transaction are being tested, goodwill is allocated to
the assets being tested for recoverability on a pro rata basis using the
relative fair values of the long-lived assets and identifiable intangibles
acquired at the acquisition dates. In instances where goodwill is identified
with assets that are subject to an impairment loss, the carrying amount of the
identified goodwill is eliminated before reducing the carrying amounts of
impaired long-lived assets and identifiable intangibles. 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 ten
years. The value of mortgage servicing rights is adversely affected when
mortgage interest rates decline and/or mortgage loan prepayments increase. First
Banks assesses impairment using stratifications based on the predominant risk
characteristics of the underlying mortgage loans, including size, interest rate,
weighted average original term, weighted average remaining term and estimated
prepayment speeds. The amount by which the carrying value of the mortgage
servicing rights for each stratum exceeds the fair value is recorded in a
valuation allowance as a reduction of mortgage servicing rights. Changes in the
valuation allowance are reflected in the statements of income in the periods in
which the change occurs.
Other Real Estate. Other real estate, consisting of real estate
acquired through foreclosure or deed in lieu of foreclosure, is stated at the
lower of cost or fair value less applicable selling costs. The excess of cost
over fair value of the property at the date of acquisition is charged to the
allowance for loan losses. Subsequent reductions in carrying value, to reflect
current fair value or costs incurred in maintaining the properties, are charged
to expense as incurred.
Income Taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in the tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
First Banks, Inc. and its eligible subsidiaries file a consolidated
federal income tax return and unitary or consolidated state income tax returns
in all applicable states.
Financial Instruments. A financial instrument is defined as cash,
evidence of an ownership interest in an entity, or a contract that conveys or
imposes on an entity the contractual right or obligation to either receive or
deliver cash or another financial instrument.
Financial Instruments With Off-Balance-Sheet Risk. First Banks utilizes
financial instruments to reduce the interest rate risk arising from its
financial assets and liabilities. These instruments involve, in varying degrees,
elements of interest rate risk and credit risk in excess of the amount
recognized in the consolidated balance sheets. "Interest rate risk" is defined
as the possibility that interest rates may move unfavorably from the perspective
of First Banks. The risk that a counterparty to an agreement entered into by
First Banks may default is defined as "credit risk."
First Banks is party to commitments to extend credit and commercial and
standby letters of credit in the normal course of business to meet the financing
needs of its customers. These commitments involve, in varying degrees, elements
of interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets.
Earnings Per Common Share. Basic earnings per share (EPS) are computed
by dividing the income available to common stockholders (the numerator) by the
weighted average number of common shares outstanding (the denominator) during
the year. The computation of dilutive EPS is similar except the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential shares had been issued. In addition, in
computing the dilutive effect of convertible securities, the numerator is
adjusted to add back: (a) any convertible preferred dividends and (b) the
after-tax amount of interest recognized in the period associated with any
convertible debt.
(2) ACQUISITIONS AND DIVESTITURES
During the three years ended December 31, 2001, First Banks completed
the following acquisitions:
Total Purchase
Entity Date Assets Price Goodwill
------ ---- ------ ----- --------
(dollars expressed in thousands)
2001
----
Union Financial Group, Ltd.
Swansea, Illinois December 31, 2001 $ 360,000 26,700 11,500
BYL Bancorp
Orange, California October 31, 2001 281,500 49,000 19,000
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 18,900 6,300
--------- -------- --------
$ 743,000 94,600 36,800
========= ======== ========
2000
----
The San Francisco Company
San Francisco, California December 31, 2000 $ 183,800 62,200 16,300
Millennium Bank
San Francisco, California December 29, 2000 117,000 20,700 8,700
Commercial Bank of San Francisco
San Francisco, California October 31, 2000 155,600 26,400 9,300
Bank of Ventura
Ventura, California August 31, 2000 63,800 14,200 7,200
First Capital Group, Inc.
Albuquerque, New Mexico February 29, 2000 64,600 66,100 1,500
Lippo Bank
San Francisco, California February 29, 2000 85,300 17,200 4,800
--------- -------- --------
$ 670,100 206,800 47,800
========= ======== ========
1999
----
Century Bank
Beverly Hills, California August 31, 1999 156,000 31,500 4,500
Redwood Bancorp
San Francisco, California March 4, 1999 183,900 26,000 9,500
--------- -------- --------
$ 339,900 57,500 14,000
========= ======== ========
Goodwill associated with the acquisitions included in the table above
is not expected to be deductible for tax purposes. In 2001 and 2000, goodwill in
the amounts of $11.5 million and $1.5 million was assigned to First Bank. In
2001, 2000 and 1999, goodwill in the amounts of $25.3 million, $46.3 million and
$14.0 million was assigned to FB&T, respectively.
In addition to the acquisitions included in the table above, in
September 1999, First Banks also completed one branch office purchase in Malibu,
California. Furthermore, on January 15, 2002, First Banks completed its
acquisition of Plains Financial Corporation, or PFC, and its wholly owned
banking subsidiary, PlainsBank of Illinois, National Association, Des Plaines,
Illinois, in exchange for $36.5 million in cash. PFC operated a total of three
banking facilities in Des Plaines, Illinois, and one banking facility in Elk
Grove Village, Illinois. At the time of the transaction, PFC had $256.3 million
in total assets, $150.4 million in loans, net of unearned discount, $81.0
million in investment securities and $213.4 million in deposits.
The aforementioned acquisition transactions were accounted for using
the purchase method of accounting and, accordingly, the consolidated financial
statements include the financial position and results of operations for the
periods subsequent to the respective acquisition dates, and the assets acquired
and liabilities assumed were recorded at fair value at the acquisition dates.
These acquisitions were funded from available cash reserves, proceeds from sales
and maturities of available-for-sale investment securities, borrowings under
First Banks' $120.0 million revolving credit agreement and the proceeds from the
issuance of trust preferred securities. Due to the immaterial effect on
previously reported financial information, pro forma disclosures have not been
prepared for the aforementioned transactions.
In April 2000, First Bank completed its divestiture of one branch
office in central Illinois. In March and April 1999, First Bank completed its
divestiture of seven branches in the northern and central Illinois market areas.
For the years ended December 31, 2000 and 1999, these branch divestitures
resulted in a reduction of the deposit base of approximately $8.8 million and
$54.8 million, resulting in pre-tax gains of $1.4 million and $4.4 million,
respectively.
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities Available for Sale. The amortized cost, contractual
maturity, gross unrealized gains and losses and fair value of investment
securities available for sale at December 31, 2001 and 2000 were as follows:
Maturity Total Gross
----------------------------- After Amor Unrealized Weighted
1 Year 1-5 5-10 10 tized ---------------- Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2001:
Carrying value:
U.S. Treasury.................. $136,326 -- -- -- 136,326 3 (39) 136,290 1.76%
U.S. Government agencies
and corporations:
Mortgage-backed......... 88 21,650 18,224 262,846 302,808 2,422 -- 305,230 6.00
Other................... 22,284 99,353 6,612 974 129,223 2,235 (16) 131,442 4.58
State and political
subdivisions............... 317 1,191 46 -- 1,554 -- -- 1,554 3.92
Corporate debt securities...... -- 1,985 -- -- 1,985 107 -- 2,092 6.76
Equity investments in other
financial institutions
(no stated maturity)........ 15,916 -- -- -- 15,916 2,171 (272) 17,815 8.55
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)........ 16,043 -- -- -- 16,043 -- -- 16,043 6.49
-------- ------- ------ ------- ------- ------ ------ -------
Total................... $190,974 124,179 24,882 263,820 603,855 6,938 (327) 610,466 4.75
======== ======= ====== ======= ======= ====== ====== ======= ====
Fair value:
Debt securities................ $159,303 126,673 25,378 265,254
Equity securities.............. 33,858 -- -- --
-------- ------- ------ -------
Total................... $193,161 126,673 25,378 265,254
======== ======= ====== =======
Weighted average yield............ 3.25% 4.67% 5.76% 5.92%
======== ======= ====== =======
December 31, 2000:
Carrying value:
U.S. Treasury.................. $ 89,229 801 -- -- 90,030 30 (37) 90,023 5.85%
U.S. Government agencies
and corporations:
Mortgage-backed......... 1,078 29,625 12,472 159,143 202,318 826 (160) 202,984 7.02
Other................... 22,059 151,242 10,131 20,256 203,688 2,028 (1,521) 204,195 6.70
Corporate debt securities...... 912 1,961 -- 500 3,373 -- (20) 3,353 7.65
Equity investments in other
financial institutions
(no stated maturity)........ 11,299 -- -- -- 11,299 8,121 (369) 19,051 7.98
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)........ 19,780 -- -- -- 19,780 -- -- 19,780 6.69
-------- ------- ------ ------- ------- ------ ------ -------
Total................... $144,357 183,629 22,603 179,899 530,488 11,005 (2,107) 539,386 6.60
======== ======= ====== ======= ======= ====== ====== ======= ====
Fair value:
Debt securities................ $113,277 184,942 22,798 179,538
Equity securities.............. 38,831 -- -- --
-------- ------- ------ -------
Total................... $152,108 184,942 22,798 179,538
======== ======= ====== =======
Weighted average yield............ 6.19% 6.73% 6.89% 7.09%
======== ======= ====== =======
Securities Held to Maturity. The amortized cost, contractual maturity,
gross unrealized gains and losses and fair value of investment securities held
to maturity at December 31, 2001 and 2000 were as follows:
Maturity
---------------------------------------- Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized -------------- Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2001:
Carrying value:
Mortgage-backed securities..... $ -- -- -- 4,051 4,051 67 (10) 4,108 6.83%
State and political
subdivisions................. 1,943 8,802 5,806 -- 16,551 300 (147) 16,704 4.93
-------- ------- ------ ------- ------ ------ ------- ------
Total................. $ 1,943 8,802 5,806 4,051 20,602 367 (157) 20,812 5.25
======== ======= ====== ======= ====== ===== ====== ======= ====
Fair value:
Debt securities................ $ 1,930 9,071 5,703 4,108
======== ======= ====== =======
Weighted average yield............ 4.58% 4.98% 4.98% 6.83%
======== ======= ====== =======
December 31, 2000:
Carrying value:
Mortgage-backed securities..... $ -- -- -- 5,130 5,130 3 (63) 5,070 6.72%
State and political
subdivisions................. 950 11,692 5,896 270 18,808 419 -- 19,227 5.03
Other.......................... 210 -- -- -- 210 -- -- 210 6.90
-------- ------- ------ ------- ------ ----- ------ -------
Total................. $ 1,160 11,692 5,896 5,400 24,148 422 (63) 24,507 5.33
======== ======= ====== ======= ====== ===== ====== ======= ====
Fair value:
Debt securities................ $ 1,167 11,854 6,124 5,362
======== ======= ====== =======
Weighted average yield............ 4.64% 4.98% 5.16% 6.74%
======== ======= ====== =======
Proceeds from sales of available-for-sale investment securities were
$85.8 million, $46.3 million and $63.9 million for the years ended December 31,
2001, 2000 and 1999, respectively. Gross gains of $19.1 million, $565,000 and
$791,000 were realized on these sales during the years ended December 31, 2001,
2000 and 1999, respectively. Gross losses of $384,000 and $396,000 were realized
on these sales during the years ended December 31, 2001 and 2000, respectively.
There were no losses realized on these sales in 1999.
Proceeds from calls of investment securities were $121.8 million,
$111,000 and $20,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. Gross gains of $6,800 and $300 were realized on these called
securities during the years ended December 31, 2001 and 2000, respectively.
There were no gross gains on called securities in 1999. Gross losses of $1,400,
$1,800 and $1,200 were realized on these called securities during the years
ended December 31, 2001, 2000 and 1999, respectively.
The Subsidiary Banks maintain investments in the Federal Home Loan Bank
(FHLB) and/or the Federal Reserve Bank (FRB). These investments are recorded at
cost, which represents redemption value. The investment in FHLB stock is
maintained at a minimum amount equal to the greater of 1% of the aggregate
outstanding balance of the applicable Subsidiary Bank's loans secured by
residential real estate, or 5% of advances from the FHLB to each Subsidiary
Bank. First Bank and FB&T are members of the FHLB system. The investment in FRB
stock is maintained at a minimum of 6% of the applicable Subsidiary Bank's
capital stock and capital surplus. First Bank is a member of the FRB system.
Investment securities with a carrying value of approximately $300.0
million and $180.5 million at December 31, 2001 and 2000, respectively, were
pledged in connection with deposits of public and trust funds, securities sold
under agreements to repurchase and for other purposes as required by law.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December
31 were as follows:
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year..................................... $ 81,592 68,611 60,970
Acquired allowances for loan losses............................ 14,046 6,062 3,008
-------- -------- ---------
95,638 74,673 63,978
-------- -------- ---------
Loans charged-off.............................................. (31,453) (17,050) (17,721)
Recoveries of loans previously charged-off..................... 9,469 9,842 9,281
-------- -------- ---------
Net loans charged-off....................................... (21,984) (7,208) (8,440)
-------- -------- ---------
Provision charged to operations................................ 23,510 14,127 13,073
-------- -------- ---------
Balance, end of year........................................... $ 97,164 81,592 68,611
======== ======== =========
At December 31, 2001 and 2000, First Banks had $67.3 million and $53.2
million of impaired loans, including $65.3 million and $50.2 million,
respectively, of loans on nonaccrual status. At December 31, 2001 and 2000,
impaired loans also include $2.0 million and $3.0 million, respectively, of
restructured loans. Interest on nonaccrual loans, which would have been recorded
under the original terms of the loans, was $8.2 million, $5.8 million and $5.8
million for the years ended December 31, 2001, 2000 and 1999, respectively. Of
these amounts, $2.9 million, $1.9 million and $2.7 million was actually recorded
as interest income on such loans in 2001, 2000 and 1999, respectively. The
allowance for loan losses includes an allocation for each impaired loan. The
aggregate allocation of the allowance for loan losses related to impaired loans
was approximately $16.5 million and $10.3 million at December 31, 2001 and 2000,
respectively. The average recorded investment in impaired loans was $62.4
million, $45.1 million and $46.0 million for the years ended December 31, 2001,
2000 and 1999, respectively. The amount of interest income recognized using a
cash basis method of accounting during the time these loans were impaired was
$5.8 million, $2.2 million and $2.8 million in 2001, 2000 and 1999,
respectively.
First Banks' primary market areas are the states of Missouri, Illinois,
Texas and California. At December 31, 2001 and 2000, approximately 92% and 91%
of the total loan portfolio, respectively, and 80% and 83% of the commercial,
financial and agricultural loan portfolio, respectively, were made to borrowers
within these states.
Real estate lending constituted the only significant concentration of
credit risk. Real estate loans comprised approximately 67% and 65% of the loan
portfolio at December 31, 2001 and 2000, of which 28% and 26%, respectively,
were made to consumers in the form of residential real estate mortgages and home
equity lines of credit.
First Banks is, in general, a secured lender. At December 31, 2001 and
2000, 96% of the loan portfolio was secured. Collateral is required in
accordance with the normal credit evaluation process based upon the
creditworthiness of the customer and the credit risk associated with the
particular transaction.
(5) DERIVATIVE INSTRUMENTS
First Banks utilizes derivative financial instruments to assist in the
management of interest rate sensitivity by modifying the repricing, maturity and
option characteristics of certain assets and liabilities. The use of such
derivative financial instruments is limited to reducing First Banks' interest
rate exposure. Derivative financial instruments held by First Banks for purposes
of managing interest rate risk are summarized as follows:
December 31,
------------------------------------------------
2001 2000
---------------------- ----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
-------- -------- -------- --------
(dollars expressed in thousands)
Cash flow hedges.............................. $900,000 1,764 1,055,000 3,449
Fair value hedges............................. 200,000 6,962 50,000 758
Interest rate floor agreements................ -- -- 35,000 6
Interest rate cap agreements.................. 450,000 2,063 450,000 3,753
Interest rate lock commitments................ 88,000 -- 4,100 --
Forward commitments to sell
mortgage-backed securities............... 209,000 -- 32,000 --
======== ===== ========= ======
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
First Banks' credit exposure through its use of these instruments. The credit
exposure represents the accounting loss First Banks would incur in the event the
counterparties failed completely to perform according to the terms of the
derivative financial instruments and the collateral held to support the credit
exposure was of no value.
During 2001 and 1999, First Banks realized net interest income on
derivative financial instruments of $23.4 million and $430,000, respectively, in
comparison to net interest expense of $4.7 million in 2000. In addition, First
Banks realized a net gain on derivative instruments, which is included in
noninterest income in the consolidated statements of income, of $18.6 million
for the year ended December 31, 2001.
Cash Flow Hedges
Previously, First Banks utilized interest rate swap agreements to
extend the repricing characteristics of certain interest-bearing liabilities to
more closely correspond with its assets, with the objective of stabilizing cash
flow, and accordingly, net interest income, over time. These swap agreements
were terminated prior to 1998. The net interest expense associated with these
agreements, consisting primarily of amortization of deferred losses, was $5.7
million for the year ended December 31, 1999. There were no remaining
unamortized deferred losses on the terminated swap agreements at December 31,
1999.
First Banks entered into the following interest rate swap agreements,
designated as cash flow hedges, to effectively lengthen the repricing
characteristics of certain interest-earning assets to correspond more closely
with their funding source with the objective of stabilizing cash flow, and
accordingly, net interest income over time:
o During 1998, First Banks entered into $280.0 million notional
amount of interest rate swap agreements that provided for First
Banks to receive a fixed rate of interest and pay an adjustable
rate of interest equivalent to the daily weighted average prime
lending rate minus 2.705%. The terms of the swap agreements
provided for First Banks to pay quarterly and receive payment
semiannually. In June 2001 and November 2001, First Banks
terminated $205.0 million and $75.0 million notional amount,
respectively, of these swap agreements, which would have expired
in 2002, in order to appropriately modify its overall hedge
position in accordance with its interest rate risk management
program. In conjunction with these terminations, First Banks
recorded pre-tax gains of $2.8 million and $1.7 million,
respectively.
o During September 1999, First Banks entered into $175.0 million
notional amount of interest rate swap agreements that provided
for First Banks to receive a fixed rate of interest and pay an
adjustable rate equivalent to the weighted average prime lending
rate minus 2.70%. The terms of the swap agreements provided for
First Banks to pay and receive interest on a quarterly basis. In
April 2001, First Banks terminated these swap agreements, which
would have expired in September 2001, and replaced them with
similar swap agreements with extended maturities in order to
lengthen the period covered by the swaps. In conjunction with the
termination of these swap agreements, First Banks recorded a
pre-tax gain of $985,000.
o During September 2000, March 2001 and April 2001, First Banks
entered into $600.0 million, $200.0 million, and $175.0 million
notional amount, respectively, of interest rate swap agreements
that provide for First Banks to receive a fixed rate of interest
and pay an adjustable rate equivalent to the weighted average
prime lending rate minus either 2.70% or 2.82%. The terms of the
swap agreements provide for First Banks to pay and receive
interest on a quarterly basis. In November 2001, First Banks
terminated $75.0 million notional amount of these swap
agreements, which would have expired in April 2006, in order to
appropriately modify its overall hedge position in accordance
with its interest rate risk management program. First Banks
recorded a pre-tax gain of $2.6 million in conjunction with the
termination of these swap agreements. The amount receivable by
First Banks under the remaining swap agreements was $2.9 million
at December 31, 2001, and the amount payable by First Banks under
the swap agreements was $1.1 million at December 31, 2001. The
amount receivable and payable by First Banks under the swap
agreements was $1.2 million at December 31, 2000.
The maturity dates, notional amounts, interest rates paid and received
and fair value of First Banks' interest rate swap agreements designated as cash
flow hedges as of December 31, 2001 and 2000 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- -------- ------------- ------------ -----
(dollars expressed in thousands)
December 31, 2001:
September 20, 2004....................... $ 600,000 2.05% 6.78% $40,980
March 21, 2005........................... 200,000 1.93 5.24 4,951
April 2, 2006............................ 100,000 1.93 5.45 2,305
---------- --------
$ 900,000 2.01 6.29 $ 48,236
========== ==== ==== ========
December 31, 2000:
September 27, 2001....................... $ 175,000 6.80% 6.14% $ 65
June 11, 2002............................ 15,000 6.80 6.00 7
September 16, 2002....................... 195,000 6.80 5.36 (1,776)
September 18, 2002....................... 70,000 6.80 5.33 (690)
September 20, 2004....................... 600,000 6.80 6.78 16,869
---------- --------
$1,055,000 6.80 5.92 $ 14,475
========== ==== ==== ========
Fair Value Hedges
First Banks entered into the following interest rate swap agreements,
designated as fair value hedges, to effectively shorten the repricing
characteristics of certain interest-bearing liabilities to correspond more
closely with their funding source with the objective of stabilizing net interest
income over time:
o During September 2000, First Banks entered into $25.0 million
notional amount of one-year interest rate swap agreements and
$25.0 million notional amount of five and one-half year interest
rate swap agreements that provided for First Banks to receive
fixed rates of interest ranging from 6.60% to 7.25% and pay an
adjustable rate equivalent to the three-month London Interbank
Offering Rate minus rates ranging from 0.02% to 0.11%. The terms
of the swap agreements provided for First Banks to pay interest
on a quarterly basis and receive interest on either a semiannual
basis or an annual basis. In September 2001, the one-year
interest rate swap agreements matured, and First Banks terminated
the five and one-half year interest rate swap agreements because
the underlying interest-bearing liabilities had either matured or
been called by their respective counterparties. There was no gain
or loss recorded as a result of the terminations.
o During January 2001, First Banks entered into $50.0 million
notional amount of three-year interest rate swap agreements and
$150.0 million notional amount of five-year interest rate swap
agreements that provide for First Banks to receive a fixed rate
of interest and pay an adjustable rate of interest equivalent to
the three-month London Interbank Offering Rate. The terms of the
swap agreements provide for First Banks to pay and receive
interest on a quarterly basis. The amount receivable and payable
by First Banks under the swap agreements was $5.2 million and
$1.2 million at December 31, 2001, respectively.
The maturity dates, notional amounts, interest rates paid and received
and fair value of First Banks' interest rate swap agreements designated as fair
value hedges as of December 31, 2001 and 2000 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- -------- ------------- ------------- -----
(dollars expressed in thousands)
December 31, 2001:
January 9, 2004.......................... $ 50,000 2.48% 5.37% $1,761
January 9, 2006.......................... 150,000 2.48 5.50 3,876
-------- ------
$200,000 2.48 5.47 $5,637
======== ==== ==== ======
December 31, 2000:
September 13, 2001....................... $ 12,500 6.56% 6.80% $ 42
September 21, 2001....................... 12,500 6.47 6.60 43
March 13, 2006........................... 12,500 6.47 7.25 5
March 22, 2006........................... 12,500 6.39 7.20 6
-------- --
$ 50,000 6.47 6.96 $ 96
======== ==== ==== ======
Interest Rate Floor Agreements
During January 2001 and March 2001, First Banks entered into $200.0
million and $75.0 million notional amount, respectively, of four-year interest
rate floor agreements to further stabilize net interest income in the event of a
falling rate scenario. The interest rate floor agreements provided for First
Banks to receive a quarterly adjustable rate of interest equivalent to the
differential between the three-month London Interbank Offering Rate and the
strike prices of 5.50% or 5.00%, respectively, should the three-month London
Interbank Offering Rate fall below the respective strike prices. In November
2001, First Banks terminated these interest rate floor agreements in order to
appropriately modify its overall hedge position in accordance with its interest
rate risk management program. In conjunction with the termination, First Banks
recorded a pre-tax adjustment of $4.0 million representing a decline in the fair
value from the previous month-end measurement date. These agreements provided
net interest income of $2.1 million for the year ended December 31, 2001.
Interest Rate Cap Agreements
In conjunction with the interest rate swap agreements entered into in
September 2000, First Banks also entered into $450.0 million notional amount of
four-year interest rate cap agreements to limit the net interest expense
associated with the interest rate swap agreements in the event of a rising rate
scenario. The interest rate cap agreements provide for First Banks to receive a
quarterly adjustable rate of interest equivalent to the differential between the
three-month London Interbank Offering Rate and the strike price of 7.50% should
the three-month London Interbank Offering Rate exceed the strike price. At
December 31, 2001 and 2000, the carrying value of these interest rate cap
agreements, which is included in derivative instruments in the consolidated
balance sheets, was $2.1 million and $3.8 million, respectively.
Pledged Collateral
At December 31, 2001 and 2000, First Banks had pledged investment
securities available for sale with a carrying value of $1.1 and $8.6 million,
respectively, in connection with the interest rate swap agreements. In addition,
at December 31, 2001 and 2000, First Banks had accepted, as collateral in
connection with the interest rate swap agreements, cash of $4.9 million and
$400,000, respectively, and investment securities with a fair value of $53.9
million and $18.6 million, respectively. First Banks is permitted by contract to
sell or repledge the collateral accepted from counterparties; however, at
December 31, 2001 and 2000, First Banks had not done so.
Interest Rate Lock Commitments / Forward Commitments to Sell
Mortgage-Backed Securities
Derivative financial instruments issued by First Banks consist of
interest rate lock commitments to originate fixed-rate loans. Commitments to
originate fixed-rate loans consist primarily of residential real estate loans.
These net loan commitments and loans held for sale are hedged with forward
contracts to sell mortgage-backed securities.
(6) MORTGAGE BANKING ACTIVITIES
At December 31, 2001 and 2000, First Banks serviced loans for others
amounting to $1.07 billion and $957.2 million, respectively. Borrowers' escrow
balances held by First Banks on such loans were $485,000 and $653,000 at
December 31, 2001 and 2000, respectively.
Changes in mortgage servicing rights, net of amortization, for the
years ended December 31 were as follows:
2001 2000
---- ----
(dollars expressed
in thousands)
Balance, beginning of year.................. $ 7,048 8,665
Originated mortgage servicing rights........ 6,802 1,455
Amortization................................ (3,725) (3,072)
--------- --------
Balance, end of year........................ $ 10,125 7,048
========= ========
The fair value of mortgage servicing rights was $15.8 million and $13.0
million at December 31, 2001 and 2000, respectively. The predominant risk
characteristics of the underlying mortgage loans used to stratify mortgage
servicing rights for purposes of measuring impairment include size, interest
rate, weighted average original term, weighted average remaining term and
estimated prepayment speeds.
First Banks did not incur any impairment of mortgage servicing rights
during the years ended December 31, 2001, 2000 and 1999, respectively. First
Banks capitalizes its mortgage servicing rights by allocating the total cost of
the mortgage loans to mortgage servicing rights and the loans (without mortgage
servicing rights) based on the relative fair values of the two components. Upon
capitalizing the mortgage servicing rights, they are amortized, in proportion to
the related estimated net servicing income on a disaggregated, discounted basis,
over the expected lives of the related loans, which averages approximately seven
years. When loans are prepaid or refinanced, the related unamortized balance of
the mortgage servicing rights is charged to amortization expense. The
determination of the fair value of the mortgage servicing rights is performed
internally each quarter, with an independent valuation completed annually. Based
on these analyses, a comparison of the fair value of the mortgage servicing
rights with the carrying value of the mortgage servicing rights is made
quarterly, with impairment, if any, recognized at that time. The internal and
external impairment analyses are prepared using stratifications of the mortgage
servicing rights based on the predominant risk characteristics of the
underlying mortgage loans, including size, interest rate, weighted average
original term, weighted average remaining term and estimated prepayment speeds.
As part of these analyses, the fair value of the mortgage servicing rights for
each stratum is compared to the carrying value of the mortgage servicing rights
for each stratum. To the extent the carrying value of the mortgage servicing
rights exceeds the fair value of the mortgage servicing rights for a stratum,
First Banks recognizes impairment equal to the amount by which the carrying
value of the mortgage servicing rights for a stratum exceeds their fair value.
Impairment is recognized through a valuation allowance that is recorded as a
reduction of mortgage servicing rights. Changes in the valuation allowance
are reflected in the statements of income in the periods in which the change
occurs. First Banks does not, however, recognize fair value of the mortgage
servicing rights in excess of the carrying value of mortgage servicing rights
for any stratum.
During 2001, the excess of the fair value of mortgage servicing rights
over the carrying value decreased from $6.0 million at December 31, 2000 to $5.7
million at December 31, 2001, representing the declining mortgage interest rate
environment that resulted in a significant increase in the number of mortgages
being prepaid or refinanced. In addition, the increased prepayment experience
that occurred as a result of the reduced mortgage interest rate environment
during 2001 and 2000 resulted in a decline in the fair value of the remaining
mortgage servicing rights. However, the decline in the fair value of the
mortgage servicing rights did not result in the fair value being reduced below
the carrying value.
(7) BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following at December 31:
2001 2000
---- ----
(dollars expressed in thousands)
Land................................................................ $ 22,063 18,266
Buildings and improvements........................................... 87,372 66,474
Furniture, fixtures and equipment.................................... 95,626 66,460
Leasehold improvements............................................... 28,400 23,794
Construction in progress............................................. 13,865 15,655
-------- -------
Total............................................................ 247,326 190,649
Less accumulated depreciation and amortization....................... 97,722 75,878
-------- -------
Bank premises and equipment, net................................. $149,604 114,771
======== =======
Depreciation and amortization expense for the years ended December 31,
2001, 2000 and 1999 totaled $12.7 million, $9.5 million and $7.6 million,
respectively.
First Banks leases land, office properties and equipment under
operating leases. Certain of the leases contain renewal options and escalation
clauses. Total rent expense was $12.9 million, $10.7 million and $7.4 million
for the years ended December 31, 2001, 2000 and 1999, respectively. Future
minimum lease payments under noncancellable operating leases extend through 2084
as follows:
(dollars expressed
in thousands)
Year ending December 31:
2002............................................... $ 8,681
2003............................................... 7,760
2004............................................... 5,880
2005............................................... 5,058
2006............................................... 4,137
Thereafter......................................... 22,385
--------
Total future minimum lease payments............ $ 53,901
========
First Banks leases to unrelated parties a portion of its banking
facilities. Total rental income was $4.8 million, $2.6 million and $2.6 million
for the years ended December 31, 2001, 2000 and 1999, respectively.
(8) MATURITIES OF TIME DEPOSITS
A summary of maturities of time deposits of $100,000 or more and other
time deposits as of December 31, 2001 is as follows:
Time deposits of Other time
$100,000 or more deposits Total
---------------- -------- -----
Year ending December 31:
2002............................................ $ 397,952 1,326,947 1,724,899
2003............................................ 47,500 280,725 328,225
2004............................................ 5,347 54,009 59,356
2005............................................ 27,730 129,305 157,035
2006............................................ 5,457 24,799 30,256
Thereafter...................................... 215 509 724
----------- ---------- ----------
Total....................................... $ 484,201 1,816,294 2,300,495
=========== ========== ==========
(9) SHORT-TERM BORROWINGS
Short-term borrowings were comprised of the following at December 31:
2001 2000
---- ----
(dollars expressed in thousands)
Securities sold under agreements to repurchase....................... $ 142,534 125,025
Federal funds purchased.............................................. 70,000 --
FHLB borrowings...................................................... 30,600 15,544
--------- --------
Total short-term borrowings...................................... $ 243,134 140,569
========= ========
The average balance of short-term borrowings was $158.0 million and
$106.1 million, respectively, and the maximum month-end balance of short-term
borrowings was $243.1 million and $158.4 million, respectively, for the years
ended December 31, 2001 and 2000. The average rates paid on short-term
borrowings during the years ended December 31, 2001, 2000 and 1999 were 3.70%,
5.54% and 4.83%, respectively. The assets underlying the securities sold under
agreements to repurchase and FHLB borrowings are under First Banks' physical
control.
(10) NOTE PAYABLE
First Banks has a $120.0 million revolving line of credit with a group
of unaffiliated banks (Credit Agreement). The Credit Agreement, dated August 23,
2001, replaced a similar revolving credit agreement dated August 24, 2000.
Interest under the Credit Agreement is payable on a monthly basis at the lead
bank's corporate base rate or, at the option of First Banks, is payable at the
Eurodollar Rate plus a margin based upon the outstanding loans and First Banks'
profitability. The interest rate for borrowings under the Credit Agreement was
2.94% at December 31, 2001, and was based on the applicable Eurodollar Rate plus
a margin of 1.00%. Amounts may be borrowed under the Credit Agreement until
August 23, 2002, at which time the principal and accrued interest is due and
payable.
Loans under the Credit Agreement are secured by First Banks' ownership
interest in the capital stock of FBA and First Bank, and a $100.0 million
intercompany promissory note receivable due from FBA. Under the Credit
Agreement, there were outstanding borrowings of $27.5 million at December 31,
2001. At December 31, 2000, there were outstanding borrowings of $83.0 million
under the previous credit agreement.
The Credit Agreement requires maintenance of certain minimum capital
ratios for First Banks and each of the Subsidiary Banks, certain maximum
nonperforming assets ratios for First Banks and each of the Subsidiary Banks and
a minimum return on assets ratio for First Banks and the Subsidiary Banks. In
addition, it prohibits the payment of dividends on First Banks' common stock. At
December 31, 2001 and 2000, First Banks and the Subsidiary Banks were in
compliance with all restrictions and requirements of the respective credit
agreements.
The average balance and maximum month-end balance of advances
outstanding under the Credit Agreement during the years ended December 31 were
as follows:
2001 2000
---- ----
(dollars expressed in thousands)
Average balance........................ $ 41,590 51,897
Maximum month-end balance.............. 66,500 83,000
======== ======
The average rates paid on the outstanding advances during the years
ended December 31, 2001, 2000 and 1999 were 6.32%, 7.66% and 6.44%,
respectively.
(11) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBENTURES
In February 1997, First Preferred Capital Trust (First Preferred I), a
newly formed Delaware business trust subsidiary of First Banks, issued 3.45
million shares of 9.25% cumulative trust preferred securities at $25 per share
in an underwritten public offering, and issued 106,702 shares of common
securities to First Banks at $25 per share. First Banks owns all of First
Preferred I's common securities. The gross proceeds of the offering were used by
First Preferred I to purchase $88.9 million of 9.25% subordinated debentures
from First Banks, maturing on March 31, 2027. The maturity date may be shortened
to a date not earlier than March 31, 2002 or extended to a date not later than
March 31, 2046 if certain conditions are met. The subordinated debentures are
the sole asset of First Preferred I. In connection with the issuance of the
preferred securities, First Banks made certain guarantees and commitments that,
in the aggregate, constitute a full and unconditional guarantee by First Banks
of the obligations of First Preferred I under the First Preferred I preferred
securities. First Banks' proceeds from the issuance of the subordinated
debentures to First Preferred I, net of underwriting fees and offering expenses,
were $83.1 million. Distributions on First Preferred I's preferred securities,
which are payable quarterly in arrears, were $8.0 million for the years ended
December 31, 2001, 2000 and 1999.
In July 1998, First America Capital Trust (FACT), a newly formed
Delaware business trust subsidiary of FBA, issued 1.84 million shares of 8.50%
cumulative trust preferred securities at $25 per share in an underwritten public
offering, and issued 56,908 shares of common securities to FBA at $25 per share.
FBA owns all of FACT's common securities. The gross proceeds of the offering
were used by FACT to purchase $47.4 million of 8.50% subordinated debentures
from FBA, maturing on June 30, 2028. The maturity date may be shortened to a
date not earlier than June 30, 2003 or extended to a date not later than June
30, 2037 if certain conditions are met. The subordinated debentures are the sole
asset of FACT. In connection with the issuance of the FACT preferred securities,
FBA made certain guarantees and commitments that, in the aggregate, constitute a
full and unconditional guarantee by FBA of the obligations of FACT under the
FACT preferred securities. FBA's proceeds from the issuance of the subordinated
debentures to FACT, net of underwriting fees and offering expenses, were $44.0
million. Distributions payable on the FACT preferred securities, which are
payable quarterly in arrears, were $4.0 million for years ended December 31,
2001, 2000 and 1999, respectively.
In October 2000, First Preferred Capital Trust II (First Preferred II),
a newly formed Delaware business trust subsidiary of First Banks, issued 2.3
million shares of 10.24% cumulative trust preferred securities at $25 per share
in an underwritten public offering, and issued 71,135 shares of common
securities to First Banks at $25 per share. First Banks owns all of First
Preferred II's common securities. The gross proceeds of the offering were used
by First Preferred II to purchase $59.3 million of 10.24% subordinated
debentures from First Banks, maturing on September 30, 2030. The maturity date
may be shortened to a date not earlier than September 30, 2005, if certain
conditions are met. The subordinated debentures are the sole asset of First
Preferred II. In connection with the issuance of the preferred securities, First
Banks made certain guarantees and commitments that, in the aggregate, constitute
a full and unconditional guarantee by First Banks of the obligations of First
Preferred II under the First Preferred II preferred securities. First Banks'
proceeds from the issuance of the subordinated debentures to First Preferred II,
net of underwriting fees and offering expenses, were $55.1 million.
Distributions on First Preferred II's preferred securities, which are payable
quarterly in arrears, were $6.0 million and $1.2 million for the years ended
December 31, 2001 and 2000, respectively.
On November 15, 2001, First Preferred Capital Trust III (First
Preferred III), a newly formed Delaware business trust subsidiary of First
Banks, issued 2.2 million shares of 9.00% cumulative trust preferred securities
at $25 per share in an underwritten public offering, and issued 68,290 shares of
common securities to First Banks at $25 per share. First Banks owns all of First
Preferred III's common securities. The gross proceeds of the offering were used
by First Preferred III to purchase $56.9 million of 9.00% subordinated
debentures from First Banks, maturing on September 30, 2031. The maturity date
may be shortened to a date not earlier than September 30, 2006, if certain
conditions are met. The subordinated debentures are the sole asset of First
Preferred III. In connection with the issuance of the preferred securities,
First Banks made certain guarantees and commitments that, in the aggregate,
constitute a full and unconditional guarantee by First Banks of the obligations
of First Preferred III under the First Preferred III preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to First
Preferred III, net of underwriting fees and offering expenses, were $52.9
million. Distributions on First Preferred III's preferred securities, which are
payable quarterly in arrears, were $634,000 for the year ended December 31,
2001.
The distributions payable on all issues of First Banks' and FBA's trust
preferred securities are included in interest expense in the consolidated
statements of income.
(12) INCOME TAXES
Income tax expense attributable to income from continuing operations
for the years ended December 31 consists of:
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Current income tax expense:
Federal.................................................... $22,252 28,215 19,731
State...................................................... 1,583 2,731 2,247
------- ------ ------
23,835 30,946 21,978
------- ------ ------
Deferred income tax expense:
Federal.................................................... 13,691 4,001 5,056
State...................................................... 626 (60) 14
------- ------ ------
14,317 3,941 5,070
------- ------ ------
Reduction in deferred valuation allowance...................... (8,104) (405) (735)
------- ------ ------
Total.................................................. $30,048 34,482 26,313
======= ====== ======
The effective rates of federal income taxes for the years ended
December 31 differ from statutory rates of taxation as follows:
Years Ended December 31,
----------------------------------------------------------
2001 2000 1999
---------------- ---------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Income before provision for income taxes,
minority interest in income of subsidiary
and cumulative effect of change in
accounting principle......................... $98,567 $92,635 $ 72,151
======= ======= ========
Provision for income taxes calculated
at federal statutory income tax rates........ $34,498 35.0% $32,422 35.0% $ 25,253 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income, net of
tax preference adjustment................ (539) (0.5) (587) (0.6) (439) (0.6)
State income taxes........................... 1,436 1.5 1,736 1.8 1,470 2.0
Amortization of intangibles associated
with the purchase of subsidiaries........ 2,827 2.9 1,567 1.7 1,261 1.8
Reduction in deferred valuation allowance.... (8,104) (8.2) (405) (0.4) (735) (1.0)
Other, net................................... (70) (0.2) (251) (0.3) (497) (0.7)
------- ----- ------- ------ -------- ------
Provision for income taxes............. $30,048 30.5% $34,482 37.2% $ 26,313 36.5%
======= ===== ======= ====== ======== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
December 31,
------------
2001 2000
---- ----
(dollars expressed in thousands)
Deferred tax assets:
Net operating loss carryforwards................................ $ 44,100 47,043
Allowance for loan losses....................................... 36,000 29,965
Alternative minimum tax credits................................. 2,841 3,319
Disallowed losses on investment securities...................... 1,287 3,197
Quasi-reorganization adjustment of bank premises................ 1,176 1,226
Interest on non-accrual loans................................... 2,084 1,673
Mortgage servicing rights....................................... 4,161 1,547
Other real estate............................................... 184 65
Other........................................................... 2,713 2,996
-------- --------
Gross deferred tax assets................................... 94,546 91,031
Valuation allowance............................................. -- (13,075)
-------- --------
Deferred tax assets, net of valuation allowance............. 94,546 77,956
-------- --------
Deferred tax liabilities:
Depreciation on bank premises and equipment..................... 6,936 6,151
Net fair value adjustment for securities available for sale..... 2,314 3,258
Net fair value adjustment for derivative instruments............ 16,883 --
Operating leases................................................ 6,424 1,313
Deposit base premiums........................................... 2,777 --
Discount on loans............................................... 2,900 2,257
Equity investments in other financial institutions.............. 3,656 --
FHLB stock dividends............................................ 462 890
State taxes..................................................... 766 568
Other........................................................... 738 594
-------- --------
Deferred tax liabilities.................................... 43,856 15,031
-------- --------
Net deferred tax assets..................................... $ 50,690 62,925
======== ========
The realization of First Banks' net deferred tax assets is based on the
availability of carrybacks to prior taxable periods, the expectation of future
taxable income and the utilization of tax planning strategies. Based on these
factors, management believes it is more likely than not that First Banks will
realize the recognized net deferred tax asset of $50.7 million. The net change
in the valuation allowance, related to deferred tax assets, was a decrease of
$13.1 million for the year ended December 31, 2001. The decrease was comprised
of the reversal of valuation allowances resulting from the utilization of net
operating losses and the reversal of the valuation allowances due to
management's expectation of future taxable income sufficient to realize the net
deferred assets of $50.7 million.
Changes to the deferred tax asset valuation allowance for the years
ended December 31 were as follows:
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year......................................... $ 13,075 14,746 17,179
Current year deferred provision, change in
deferred tax valuation allowance............................... (8,104) (405) (735)
Reduction attributable to utilization of deferred tax assets:
Adjustment to additional paid-in capital........................ (4,971) -- (811)
Adjustment to intangibles associated with the
purchase of subsidiaries..................................... -- (1,266) (887)
-------- ------- -------
Balance, end of year............................................... $ -- 13,075 14,746
======== ======= =======
The valuation allowances were established by First Banks in connection
with three separate acquisitions that occurred in 1994 and 1995. First Banks
acquired BancTEXAS Group, Inc. in 1994 and CCB Bancorp, Inc. and First
Commercial Bancorp, Inc. in 1995.
The ability to utilize the deferred tax assets recorded in connection
with these acquisitions was subject to a number of limitations. Among these
limitations was the restriction that net operating losses and other attributes
can only be used against income generated by the acquired subsidiaries and,
also, limitations were placed on the amount of net operating losses utilized
during a specified period. The requirement that BancTEXAS Group, Inc. file
separate Federal income tax returns placed further limitations on the ability to
utilize the deferred tax assets. The prior operating history of the three
acquired entities did not provide First Banks with adequate assurances to
conclude at the time of the acquisition that it was more likely than not that
the deferred tax assets would be realized.
During the years 1995 through 2000 to the extent that certain of the
deferred tax assets were realized, the valuation allowances were reduced
accordingly.
During 2001, based on management's analysis, it was determined that the
remaining valuation allowances were no longer needed. The reversal of the
valuation allowances that were established in connection with the acquisition of
BancTEXAS Group, Inc. and First Commercial Bancorp, Inc. were credited to
additional paid-in capital as a result of the entities' implementation of
quasi-reorganizations in 1994 and 1996. The reversal of the valuation allowance
established as a result of the acquisition of CCB Bancorp, Inc. was credited to
the provision for income taxes as there was no positive goodwill or other
intangibles associated with the purchase of CCB Bancorp, Inc.
The valuation allowance for deferred tax assets at December 31, 1999
included $1.3 million that was recognized in 2000 and credited to intangibles
associated with the purchase of subsidiaries. In addition, the valuation
allowance for deferred tax assets at December 31, 2000 included $5.0 million
which was credited to additional paid-in capital in 2001 under the terms of the
quasi-reorganizations implemented for FBA and First Commercial Bancorp, Inc. as
of December 31, 1994 and 1996, respectively.
At December 31, 2001 and 2000, the accumulation of prior years'
earnings representing tax bad debt deductions were approximately $30.8 million.
If these tax bad debt reserves were charged for losses other than bad debt
losses, First Bank and FB&T would be required to recognize taxable income in the
amount of the charge. It is not contemplated that such tax-restricted retained
earnings will be used in a manner that would create federal income tax
liabilities.
At December 31, 2001 and 2000, for federal income taxes purposes, First
Banks had net operating loss carryforwards of approximately $126.0 million and
$134.4 million, respectively. The net operating loss carryforwards for First
Banks expire as follows:
(dollars expressed
in thousands)
Year ending December 31:
2002................................................. $ 1,362
2003................................................. 1,854
2004................................................. 2,407
2005................................................. 16,523
2006................................................. 3,461
2007 - 2020.......................................... 100,392
---------
Total............................................ $ 125,999
=========
(13) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for the periods indicated:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except per share data)
Year ended December 31, 2001:
Basic EPS - income before cumulative effect..................... $ 65,104 23,661 $2,751.54
Cumulative effect of change in accounting principle, net of tax. (1,376) -- (58.16)
--------- ------- ---------
Basic EPS - income available to common stockholders............. 63,728 23,661 $2,693.38
Effect of dilutive securities:
Class A convertible preferred stock........................... 769 893 (66.61)
--------- ------- ---------
Diluted EPS - income available to common stockholders........... $ 64,497 24,554 $2,626.77
========= ======= =========
Year ended December 31, 2000:
Basic EPS - income available to common stockholders............. $ 55,321 23,661 $2,338.04
Effect of dilutive securities:
Class A convertible preferred stock........................... 769 1,076 (70.63)
--------- ------- ---------
Diluted EPS - income available to common stockholders........... $ 56,090 24,737 $2,267.41
========= ======= =========
Year ended December 31, 1999:
Basic EPS - income available to common stockholders............. $ 43,392 23,661 $1,833.91
Effect of dilutive securities:
Class A convertible preferred stock........................... 769 1,212 (58.44)
--------- ------- ---------
Diluted EPS - income available to common stockholders........... $ 44,161 24,873 $1,775.47
========= ======= =========
(14) CREDIT COMMITMENTS
First Banks is a party to commitments to extend credit and commercial
and standby letters in credit in the normal course of business to meet the
financing needs of its customers. These instruments involve, in varying degrees,
elements of credit risk and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The interest rate risk associated
with these credit commitments relates primarily to the commitments to originate
fixed-rate loans. As more fully discussed in Note 5 to the accompanying
consolidated financial statements, the interest rate risk of the commitments to
originate fixed-rate loans has been hedged with forward contracts to sell
mortgage-backed securities. The credit risk amounts are equal to the contractual
amounts, assuming the amounts are fully advanced and the collateral or other
security is of no value. First Banks uses the same credit policies in granting
commitments and conditional obligations as it does for on-balance-sheet items.
Commitments to extend credit at December 31 were as follows:
December 31,
------------
2001 2000
---- ----
(dollars expressed in thousands)
Commitments to extend credit.......................................... $ 1,723,568 1,484,278
Commercial and standby letters of credit.............................. 137,345 94,802
----------- --------
$ 1,860,913 1,579,080
=========== =========
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, income-producing commercial properties or
single family residential properties. Collateral is generally required except
for consumer credit card commitments.
Commercial and standby letters of credit are conditional commitments
issued to guarantee the performance of a customer to a third party. The letters
of credit are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. Most letters of credit extend for less than one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Upon issuance of the
commitments, First Banks typically holds marketable securities, certificates of
deposit, inventory, real property or other assets as collateral supporting those
commitments for which collateral is deemed necessary.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is management's estimate of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including the mortgage
banking operation, deferred tax assets, bank premises and equipment and
intangibles associated with the purchase of subsidiaries. Further, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on the fair value estimates and have not been
considered in any of the estimates.
The estimated fair value of First Banks' financial instruments at
December 31 were as follows:
2001 2000
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(dollars expressed in thousands)
Financial Assets:
Cash and cash equivalents.......................... $ 241,874 241,874 198,279 198,279
Investment securities:
Available for sale............................... 610,466 610,466 539,386 539,386
Held to maturity................................. 20,602 20,812 24,148 24,507
Net loans.......................................... 5,311,705 5,346,853 4,670,673 4,694,594
Derivative instruments............................. 54,889 54,889 3,759 16,208
Accrued interest receivable........................ 37,349 37,349 45,226 45,226
Forward contracts to sell
mortgage-backed securities....................... 545 545 -- (202)
========= ========= ========= =========
Financial Liabilities:
Deposits:
Demand:
Non-interest-bearing........................... $ 921,455 921,455 808,251 808,251
Interest-bearing............................... 629,015 629,015 448,146 448,146
Savings and money market......................... 1,832,939 1,832,939 1,447,898 1,447,898
Time deposits.................................... 2,300,495 2,342,892 2,308,120 2,351,418
Short-term borrowings............................ 243,134 243,134 140,569 140,569
Note payable..................................... 27,500 27,500 83,000 83,000
Accrued interest payable......................... 16,006 16,006 23,227 23,227
Interest rate lock commitments................... 1,048 1,048 -- 4,183
Guaranteed preferred beneficial interests
in subordinated debentures..................... 235,881 256,278 182,849 185,608
========== ========== ========== ==========
Off-Balance Sheet - Credit commitments............... $ -- -- -- --
========== ========== ========== ==========
The following methods and assumptions were used in estimating the fair
value of financial instruments:
Financial Assets:
Cash and cash equivalents and accrued interest receivable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Investment securities: The fair value of investment securities
available for sale is the amount reported in the consolidated balance sheets.
The fair value of investment securities held to maturity is based on quoted
market prices where available. If quoted market prices were not available, the
fair value was based upon quoted market prices of comparable instruments.
Net loans: The fair value of most loans held for portfolio was
estimated utilizing discounted cash flow calculations that applied interest
rates currently being offered for similar loans to borrowers with similar risk
profiles. The fair value of loans held for sale, which is the amount reported in
the consolidated balance sheets, is based on quoted market prices where
available. If quoted market prices were not available, the fair value was based
upon quoted market prices of comparable instruments. The carrying value of loans
is net of the allowance for loan losses and unearned discount.
Derivative instruments: The fair value of derivative instruments is
based on quoted market prices where available. If quoted market prices were not
available, the fair value was based upon quoted market prices of comparable
instruments.
Forward contracts to sell mortgage-backed securities: The fair value of
forward contracts to sell mortgage-backed securities is based upon quoted market
prices. The fair value of these contracts has been reflected in the consolidated
balance sheets in the carrying value of the loans held for sale portfolio.
Financial Liabilities:
Deposits: The fair value disclosed for deposits generally payable on
demand (i.e., non-interest-bearing and interest-bearing demand, savings and
money market accounts) is considered equal to their respective carrying amounts
as reported in the consolidated balance sheets. The fair value disclosed for
demand deposits does not include the benefit that results from the low-cost
funding provided by deposit liabilities compared to the cost of borrowing funds
in the market. The fair value disclosed for certificates of deposit was
estimated utilizing a discounted cash flow calculation that applied interest
rates currently being offered on similar certificates to a schedule of
aggregated monthly maturities of time deposits.
Short-term borrowings, note payable, accrued interest payable and
interest rate lock commitments: The carrying values reported in the consolidated
balance sheets approximate fair value.
Guaranteed preferred beneficial interests in subordinated debentures:
The fair value is based on quoted market prices.
Off-Balance-Sheet:
Credit commitments: The majority of the commitments to extend credit
and commercial and standby letters of credit contain variable interest rates and
credit deterioration clauses and, therefore, the carrying value of these credit
commitments reported in the consolidated balance sheets approximates fair value.
(16) EMPLOYEE BENEFITS
First Banks' 401(k) plan is a self-administered savings and incentive
plan covering substantially all employees. Under the plan, employer-matching
contributions are determined annually by First Banks' Board of Directors.
Employee contributions are limited to 15% of the employee's annual compensation,
not to exceed $10,500 for 2001. Total employer contributions under the plan were
$1.3 million, $1.1 million and $863,000 for the years ended December 31, 2001,
2000 and 1999, respectively. The plan assets are held and managed under a trust
agreement with First Bank's trust department.
(17) PREFERRED STOCK
First Banks has two classes of preferred stock outstanding. The Class A
preferred stock is convertible into shares of common stock at a rate based on
the ratio of the par value of the preferred stock to the current market value of
the common stock at the date of conversion, to be determined by independent
appraisal at the time of conversion. Shares of Class A preferred stock may be
redeemed by First Banks at any time at 105.0% of par value. The Class B
preferred stock may not be redeemed or converted. The redemption of any issue of
preferred stock requires the prior approval of the Federal Reserve Board.
The holders of the Class A and Class B preferred stock have full voting
rights. Dividends on the Class A and Class B preferred stock are adjustable
quarterly based on the highest of the Treasury Bill Rate or the Ten Year
Constant Maturity Rate for the two-week period immediately preceding the
beginning of the quarter. This rate shall not be less than 6.0% nor more than
12.0% on the Class A preferred stock, or less than 7.0% nor more than 15.0% on
the Class B preferred stock. The annual dividend rates for the Class A and Class
B preferred stock were 6.0% and 7.0%, respectively, for the years ended December
31, 2001, 2000 and 1999.
In addition to the Class A and Class B preferred stock, First Banks has
three issues of trust preferred securities outstanding and FBA has one issue of
trust preferred securities outstanding. The structure of the trust preferred
securities, as further described in Note 10, satisfies the regulatory
requirements for inclusion, subject to certain limitation, in First Banks'
capital base.
(18) TRANSACTIONS WITH RELATED PARTIES
Outside of normal customer relationships, no directors or officers of
First Banks, no stockholders holding over 5% of First Banks' voting securities
and no corporations or firms with which such persons or entities are associated
currently maintain or have maintained, since the beginning of the last full
fiscal year, any significant business or personal relationships with First Banks
or its subsidiaries, other than that which arises by virtue of such position or
ownership interest in First Banks or its subsidiaries, except as described in
the following paragraphs.
During 2001, 2000 and 1999, Tidal Insurance Limited (Tidal), a
corporation owned indirectly by First Banks' Chairman and his adult children,
received approximately $132,000, $212,000 and $316,000, respectively, in
insurance premiums for accident, health and life insurance policies purchased by
loan customers of First Banks. The insurance policies are issued by an
unaffiliated company and subsequently ceded to Tidal. First Banks believes the
premiums paid by the loan customers of First Banks are comparable to those that
such loan customers would have paid if the premiums were subsequently ceded to
an unaffiliated third-party insurer.
During 2001, 2000 and 1999, First Securities America, Inc. (FSA), a
corporation established and administered by and for the benefit of First Banks'
Chairman and members of his immediate family, received approximately $316,000,
$235,000 and $194,000, respectively, in commissions and insurance premiums for
policies purchased by First Banks or customers of the Subsidiary Banks from
unaffiliated, third-party insurors. The insurance premiums on which the
aforementioned commissions were earned were competitively bid, and First Banks
deems the commissions FSA earned from unaffiliated third-party companies to be
comparable to those that would have been earned by an unaffiliated third-party
agent.
First Brokerage America, L.L.C., a limited liability corporation which
is indirectly owned by First Banks' Chairman and members of his immediate
family, received approximately $3.0 million, $2.1 million and $2.3 million for
the years ended December 31, 2001, 2000 and 1999, respectively, in commissions
paid by unaffiliated third-party companies. The commissions received were
primarily in connection with the sales of annuities, securities and other
insurance products to customers of the Subsidiary Banks.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and his adult children, provides information technology and
various related services to First Banks, Inc. and its Subsidiary Banks. Fees
paid under agreements with First Services, L.P., were $23.1 million, $19.3
million and $16.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively. During 2001, 2000 and 1999, First Services, L.P. paid First Banks
$2.0 million, $1.8 million and $1.2 million, respectively, in rental fees for
the use of data processing and other equipment owned by First Banks.
(19) CAPITAL STOCK OF FIRST BANKS AMERICA, INC.
First Banks owned 2,500,000 shares of FBA's Class B common stock and
9,545,107 shares of FBA's common stock at December 31, 2001, representing 93.69%
of FBA's outstanding voting stock. In comparison, First Banks owned 2,500,000
shares of FBA's Class B common stock and 8,741,350 shares of FBA's common stock
at December 31, 2001, representing 92.86% of FBA's outstanding voting stock. The
increase for 2001 is attributable to FBA's issuance of 803,757 shares of its
common stock to First Banks in conjunction with FBA's purchase of BYL Bancorp on
October 31, 2001. FBA's common stock is publicly traded on the New York Stock
Exchange.
(20) BUSINESS SEGMENT RESULTS
First Banks' business segments are its Subsidiary Banks. The reportable
business segments are consistent with the management structure of First Banks,
the Subsidiary Banks and the internal reporting system that monitors
performance.
Through the respective branch networks, the Subsidiary Banks provide
similar products and services in their defined geographic areas. The products
and services offered include a broad range of commercial and personal deposit
products, including demand, savings, money market and time deposit accounts. In
addition, the Subsidiary Banks market combined basic services for various
customer groups, including packaged accounts for more affluent customers, and
sweep accounts, lock-box deposits and cash management products for commercial
customers. The Subsidiary Banks also offer both consumer and commercial loans.
Consumer lending includes residential real estate, home equity and installment
lending. Commercial lending includes commercial, financial and agricultural
loans, real estate construction and development loans, commercial real estate
loans, asset-based loans, commercial leasing and trade financing.
First Bank FB&T (1)
--------------------------------- ----------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $ 245,365 214,005 241,624 368,207 330,478 192,357
Loans, net of unearned discount......... 3,086,023 2,694,005 2,527,649 2,323,263 2,058,628 1,469,093
Goodwill................................ 19,165 9,281 12,143 96,695 74,609 32,342
Total assets............................ 3,707,081 3,152,885 3,028,046 3,057,920 2,733,545 1,854,827
Deposits................................ 3,142,676 2,729,489 2,689,671 2,555,396 2,306,469 1,590,490
Note payable............................ -- -- -- -- -- --
Stockholders' equity.................... 321,336 273,848 263,466 398,713 333,186 204,617
========== ========== ========= ========= ========= =========
Income statement information:
Interest income......................... $ 236,889 247,290 221,195 208,291 176,902 132,407
Interest expense........................ 111,410 115,421 105,231 78,547 71,167 51,544
---------- ---------- --------- --------- --------- ---------
Net interest income................ 125,479 131,869 115,964 129,744 105,735 80,863
Provision for loan losses............... 18,500 12,250 8,890 5,010 1,877 4,183
---------- ---------- --------- --------- --------- ---------
Net interest income after
provision for loan losses........ 106,979 119,619 107,074 124,734 103,858 76,680
Noninterest income...................... 53,623 32,152 32,260 27,469 12,343 10,774
Noninterest expense..................... 105,550 90,746 77,786 89,112 65,567 54,992
---------- ---------- --------- --------- --------- ---------
Income before provision for
income taxes, minority interest
in income of subsidiary and
cumulative effect of change in
accounting principle............. 55,052 61,025 61,548 63,091 50,634 32,462
Provision for income taxes.............. 19,246 20,889 20,811 16,972 20,064 12,353
---------- ---------- --------- --------- --------- ---------
Income before minority interest
in income of subsidiary and
cumulative effect of change
in accounting principle.......... 35,806 40,136 40,737 46,119 30,570 20,109
Minority interest in income
of subsidiary...................... -- -- -- -- -- --
---------- ---------- --------- --------- -------- ---------
Income before cumulative effect
of change in accounting
principle........................ 35,806 40,136 40,737 46,119 30,570 20,109
Cumulative effect of change in
accounting principle, net of tax..... (917) -- -- (459) -- --
---------- ---------- --------- --------- --------- ---------
Net income......................... $ 34,889 40,136 40,737 45,660 30,570 20,109
========== ========== ========= ========= ========= =========
- ------------------------
(1) Includes BSF, which was acquired by FBA on December 31, 2000.
(2) Corporate and other includes $12.1 million, $8.6 million and $7.9 million of guaranteed preferred debentures interest expense,
after applicable income tax benefit of $6.5 million, $4.6 million and $4.2 million, for the years ended December 31, 2001, 2000
and 1999, respectively.
Other financial services include mortgage banking, debit cards,
brokerage services, credit-related insurance, automated teller machines,
telephone banking, safe deposit boxes, escrow and bankruptcy deposit services,
stock option services, and trust, private banking and institutional money
management services. The revenues generated by each business segment consist
primarily of interest income, generated from the loan and investment security
portfolios, and service charges and fees, generated from the deposit products
and services. The geographic areas include Missouri, Illinois, southern and
northern California and Houston, Dallas, Irving and McKinney Texas. The products
and services are offered to customers primarily within their respective
geographic areas, with the exception of loan participations executed between the
Subsidiary Banks.
The business segment results are consistent with First Banks' internal
reporting system and, in all material respects, with generally accepted
accounting principles and practices predominant in the banking industry. Such
principles and practices are summarized in Note 1 to the consolidated financial
statements.
Corporate, Other and
Total Segments Intercompany Reclassifications (2) Consolidated Totals
- ------------------------------------ --------------------------------------- -----------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
613,572 544,483 433,981 17,496 19,051 17,666 631,068 563,534 451,647
5,409,286 4,752,633 3,996,742 (417) (368) (418) 5,408,869 4,752,265 3,996,324
115,860 83,890 44,485 -- 1,131 1,440 115,860 85,021 45,925
6,765,001 5,886,430 4,882,873 13,450 (9,739) (15,126) 6,778,451 5,876,691 4,867,747
5,698,072 5,035,958 4,280,161 (14,168) (23,543) (28,347) 5,683,904 5,012,415 4,251,814
-- -- -- 27,500 83,000 64,000 27,500 83,000 64,000
720,049 607,034 468,083 (271,392) (254,188) (173,178) 448,657 352,846 294,905
========== ========= ========= ========= ========= ========= ========== ========== ==========
445,180 424,192 353,602 (437) (1,366) (520) 444,743 422,826 353,082
189,957 186,588 156,775 19,647 14,264 13,976 209,604 200,852 170,751
- ---------- --------- --------- --------- --------- --------- ---------- ---------- ----------
255,223 237,604 196,827 (20,084) (15,630) (14,496) 235,139 221,974 182,331
23,510 14,127 13,073 -- -- -- 23,510 14,127 13,073
- ---------- --------- --------- --------- --------- --------- ---------- ---------- ----------
231,713 223,477 183,754 (20,084) (15,630) (14,496) 211,629 207,847 169,258
81,092 44,495 43,034 17,517 (1,717) (1,384) 98,609 42,778 41,650
194,662 156,313 132,778 17,009 1,677 5,979 211,671 157,990 138,757
- ---------- --------- --------- --------- --------- --------- ---------- ---------- ----------
118,143 111,659 94,010 (19,576) (19,024) (21,859) 98,567 92,635 72,151
36,218 40,953 33,164 (6,170) (6,471) (6,851) 30,048 34,482 26,313
- ---------- --------- --------- --------- --------- --------- ---------- ---------- ----------
81,925 70,706 60,846 (13,406) (12,553) (15,008) 68,519 58,153 45,838
-- -- -- 2,629 2,046 1,660 2,629 2,046 1,660
- ---------- --------- --------- --------- --------- -------- ---------- ---------- ---------
81,925 70,706 60,846 (16,035) (14,599) (16,668) 65,890 56,107 44,178
(1,376) -- -- -- -- -- (1,376) -- --
- ---------- --------- --------- --------- --------- --------- ---------- ---------- ----------
80,549 70,706 60,846 (16,035) (14,599) (16,668) 64,514 56,107 44,178
========== ========= ========= ========= ========= ========= ========== ========== ==========
(21) REGULATORY CAPITAL
First Banks and the Subsidiary Banks are subject to various regulatory
capital requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on First Banks' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, First Banks and the Subsidiary Banks must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and the Subsidiary Banks to maintain minimum
amounts and ratios of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 2001, First Banks and the Subsidiary Banks were
each well capitalized.
As of December 31, 2001, the most recent notification from First Banks'
primary regulator categorized First Banks and the Subsidiary Banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, First Banks and the Subsidiary Banks must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table below.
At December 31, 2001 and 2000, First Banks' and the Subsidiary Banks'
required and actual capital ratios were as follows:
To be Well
Actual Capitalized Under
------ For Capital Prompt Corrective
2001 2000 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.53 10.21% 8.0% 10.0%
First Bank.............................. 10.14 10.71 8.0 10.0
FB&T.................................... 11.27 10.58 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 7.57 7.56 4.0 6.0
First Bank.............................. 8.89 9.46 4.0 6.0
FB&T.................................... 10.02 9.32 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 7.25 7.46 3.0 5.0
First Bank.............................. 8.67 8.49 3.0 5.0
FB&T.................................... 9.47 9.27 3.0 5.0
(22) DISTRIBUTION OF EARNINGS OF THE SUBSIDIARY BANKS
The Subsidiary Banks are restricted by various state and federal
regulations, as well as by the terms of the Credit Agreement described in Note
9, as to the amount of dividends which are available for payment to First Banks,
Inc. Under the most restrictive of these requirements, the future payment of
dividends from the Subsidiary Banks is limited to approximately $12.3 million at
December 31, 2001, unless prior permission of the regulatory authorities and/or
the lending banks is obtained.
(23) PARENT COMPANY ONLY FINANCIAL INFORMATION
Following are condensed balance sheets of First Banks, Inc. as of
December 31, 2001 and 2000, and condensed statements of income and cash flows
for the years ended December 31, 2001, 2000 and 1999:
CONDENSED BALANCE SHEETS
December 31,
------------
2001 2000
---- ----
(dollars expressed in thousands)
Assets
------
Cash deposited in subsidiary banks........................................... $ 4,894 8,079
Investment securities........................................................ 17,497 14,309
Investment in subsidiaries................................................... 594,152 461,753
Advances to FBA.............................................................. 71,000 98,000
Other assets................................................................. 10,232 15,333
---------- --------
Total assets........................................................... $ 697,775 597,474
========== ========
Liabilities and Stockholders' Equity
------------------------------------
Note payable................................................................ $ 27,500 83,000
Subordinated debentures..................................................... 205,103 148,196
Accrued expenses and other liabilities...................................... 16,515 13,432
---------- --------
Total liabilities..................................................... 249,118 244,628
Stockholders' equity........................................................ 448,657 352,846
---------- --------
Total liabilities and stockholders' equity............................ $ 697,775 597,474
========== ========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Income:
Dividends from subsidiaries........................................ $ 53,500 43,000 25,250
Management fees from subsidiaries.................................. 20,443 17,325 12,977
Gain on sale of securities......................................... 19,134 -- --
Other.............................................................. 6,008 1,956 1,313
--------- ------ ------
Total income................................................... 99,085 62,281 39,540
--------- ------ ------
Expense:
Interest........................................................... 17,759 13,511 11,958
Salaries and employee benefits..................................... 13,309 12,180 8,999
Legal, examination and professional fees........................... 2,895 2,031 7,006
Other.............................................................. 20,339 4,422 4,617
--------- ------ ------
Total expense.................................................. 54,302 32,144 32,580
--------- ------ ------
Income before income tax benefit and equity
in undistributed earnings of subsidiary..................... 44,783 30,137 6,960
Income tax benefit................................................... (2,418) (3,922) (5,649)
--------- ------ ------
Income before equity in undistributed earnings of subsidiary... 47,201 34,059 12,609
Equity in undistributed earnings of subsidiary....................... 17,313 22,048 31,569
--------- ------ ------
Net income..................................................... $ 64,514 56,107 44,178
========= ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------
2001 2000 1999
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
Net income...................................................... $ 64,514 56,107 44,178
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income of subsidiaries.................................. (70,730) (64,937) (56,676)
Dividends from subsidiaries................................. 53,500 43,000 25,250
Other, net.................................................. (3,875) 272 1,900
--------- -------- -------
Net cash provided by operating activities................ 43,409 34,442 14,652
--------- -------- -------
Cash flows from investing activities:
Increase in investment securities............................... (9,382) (860) (100)
Investment in common securities of First Preferred III and II... (1,707) (1,778) --
Acquisitions of subsidiaries.................................... (63,767) -- (31,500)
Capital contributions to subsidiaries........................... (5,900) (6,100) (3,000)
Return of subsidiary capital.................................... -- -- 10,000
Decrease (increase) in advances to subsidiary................... 27,000 (98,000) --
Other, net...................................................... 6,540 (1,464) (3,646)
--------- -------- -------
Net cash used in investing activities.................... (47,216) (108,202) (28,246)
--------- -------- -------
Cash flows from financing activities:
(Decrease) increase in note payable............................. (55,500) 19,000 13,952
Proceeds from issuance of First Preferred III and II
subordinated debentures....................................... 56,908 59,278 --
Payment of preferred stock dividends............................ (786) (786) (786)
--------- -------- -------
Net cash provided by financing activities................ 622 77,492 13,166
--------- -------- -------
Net (decrease) increase in cash and cash equivalents..... (3,185) 3,732 (428)
Cash deposited in subsidiary banks, beginning of year............. 8,079 4,347 4,775
--------- -------- -------
Cash deposited in subsidiary banks, end of year................... $ 4,894 8,079 4,347
========= ======== =======
Noncash investing activities:
Cash paid for interest.......................................... $ 21,068 10,410 11,750
Reduction of deferred tax valuation reserve..................... 636 -- 811
========= ======== =======
(24) CONTINGENT LIABILITIES
In the ordinary course of business, First Banks and its subsidiaries
become involved in legal proceedings. Management, in consultation with legal
counsel, believes the ultimate resolution of these proceedings will not have a
material adverse effect on the financial condition or results of operations of
First Banks and/or its subsidiaries.
(25) SUBSEQUENT EVENTS
On January 15, 2002, First Banks completed its acquisition of Plains
Financial Corporation (PFC) and its wholly owned banking subsidiary, PlainsBank
of Illinois, National Association (PlainsBank), Des Plaines, Illinois, in
exchange for $36.5 million in cash. PFC operated a total of three banking
facilities in Des Plaines, Illinois, and one banking facility in Elk Grove
Village, Illinois. The acquisition was funded from borrowings under First Banks'
credit agreement with a group of unaffiliated financial institutions. At the
time of the transaction, PFC had $256.3 million in total assets, $150.4 million
in loans, net of unearned discount, $81.0 million in investment securities and
$213.4 million in deposits. This transaction was accounted for using the
purchase method of accounting. Goodwill was approximately $11.1 million and is
not expected to be tax deductible. Goodwill will not be amortized, but instead
will be periodically tested for impairment in accordance with the requirements
of SFAS 142. The core deposit intangibles were approximately $2.9 million and
will be amortized over approximately seven years utilizing the straight-line
method. PFC was merged with and into UFG, and PlainsBank was merged with and
into First Bank.
(26) 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 nine months
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002.
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 2001 amounts have been made to
conform with the 2002 presentation. In particular, the guaranteed preferred
beneficial interests in First Banks, Inc. and First Banks America, Inc.
subordinated debentures have been reclassified into the liabilities section on
the consolidated balance sheets rather than presented as a separate line item
excluded from the calculation of total liabilities. Consequently, the guaranteed
preferred debentures expense has been reclassified to interest expense from
noninterest expense in the consolidated statements of income.
Implementation of New Accounting Standard. In July 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 142 -- Goodwill and Other Intangible Assets. 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. 144 -- Accounting for the Impairment or
Disposal of Long-Lived Assets, as discussed below. The amortization of goodwill
ceased upon adoption of SFAS No. 142, which for calendar year-end companies was
January 1, 2002.
On January 1, 2002, First Banks adopted SFAS No. 142. At the date of
adoption, First Banks had unamortized goodwill of $115.9 million and core
deposit intangibles of $9.6 million, which were subject to the transition
provisions of SFAS No. 142. Under SFAS No. 142, First Banks continues to
amortize, on a straight-line basis, its core deposit intangibles and goodwill
associated with purchases of branch offices. Goodwill associated with the
purchase of subsidiaries will no longer be amortized, but instead, will be
tested annually for impairment following First Banks' existing methods of
measuring and recording impairment losses.
First Banks completed the transitional goodwill impairment test
required under SFAS No. 142, to determine the potential impact, if any, on the
consolidated financial statements. The results of the transitional goodwill
impairment testing did not identify any goodwill impairment losses.
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at September 30, 2002 and December
31, 2001:
September 30, 2002 December 31, 2001
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles........... $ 13,871 (1,372) 9,580 --
Goodwill associated with
purchases of branch offices...... 2,210 (684) 2,210 (576)
---------- ------- -------- -------
Total......................... $ 16,081 (2,056) 11,790 (576)
========== ======= ======== =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries......... $ 126,234 114,226
========== ========
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $1.5 million for the nine months ended
September 30, 2002, and $5.6 million for the comparable period in 2001.
Amortization of intangibles associated with the purchase of subsidiaries,
including amortization of core deposit intangibles and branch purchases, has
been estimated through 2007 in the following table, and does not take into
consideration any potential future acquisitions or branch purchases.
(dollars expressed
in thousands)
Year ending December 31:
2002 (1)........................................... $ 2,012
2003............................................... 2,129
2004............................................... 2,129
2005............................................... 2,129
2006............................................... 2,129
2007............................................... 2,129
-------
Total........................................... $12,657
=======
---------------------
(1) Includes $1.5 million of amortization for the nine months ended
September 30, 2002.
Changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 were as follows:
Nine Months Ended September 30, 2002
------------------------------------
First Bank FB&T Total
---------- ---- -----
(dollars expressed in thousands)
Balance, beginning of period.................... $ 19,165 96,695 115,860
Goodwill acquired during period................. 12,577 -- 12,577
Acquisition-related adjustments................. (569) -- (569)
Amortization - purchases of branch offices...... -- (108) (108)
-------- ------ --------
Balance, end of period.......................... $ 31,173 96,587 127,760
======== ====== ========
The following is a reconciliation of reported net income to net income
adjusted to reflect the adoption of SFAS No. 142, as if it had been implemented
on January 1, 2001:
Nine Months Ended
September 30,
---------------------
2002 2001
---- ----
(dollars expressed in thousands)
Net income:
Reported net income...................................... $ 30,362 34,632
Add back - goodwill amortization......................... -- 5,438
--------- --------
Adjusted net income.................................... $ 30,362 40,070
========= ========
Basic earnings per share:
Reported net income...................................... $1,261.05 1,441.51
Add back - goodwill amortization......................... -- 229.86
--------- --------
Adjusted net income.................................... $1,261.05 1,671.37
========= ========
Diluted earnings per share:
Reported net income...................................... $1,246.05 1,409.98
Add back - goodwill amortization......................... -- 221.50
--------- --------
Adjusted net income.................................... $1,246.05 1,631.48
========= ========
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 ten years. The weighted average
amortization period of the mortgage servicing rights is approximately seven
years.
Changes in mortgage servicing rights, net of amortization, for the
periods indicated were as follows:
Nine Months Ended
September 30,
-------------------
2002 2001
---- ----
(dollars expressed in thousands)
Balance, beginning of period........................... $10,125 7,048
Originated mortgage servicing rights................... 5,958 4,693
Amortization........................................... (2,715) (2,675)
------- ------
Balance, end of period................................. $13,368 9,066
======= ======
Amortization of mortgage servicing rights, as it relates to the balance
at September 30, 2002 of $13.4 million, has been estimated through 2006 in the
following table:
(dollars expressed
in thousands)
Year ending December 31:
2002 (1)........................................ $ 3,699
2003............................................ 3,946
2004............................................ 3,758
2005............................................ 3,662
2006............................................ 1,095
-------
Total........................................ $16,160
=======
--------------------
(1) Includes $2.7 million of amortization for the nine months ended
September 30, 2002.
In August 2001, the FASB issued SFAS No. 144 -- Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No.
121 -- Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and requires that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS No. 144 broadens the
presentation of discontinued operations to include more disposal transactions.
Therefore, the accounting for similar events and circumstances will be the same.
The provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years, with early application encouraged. The provisions of SFAS No. 144
generally are to be applied prospectively. On January 1, 2002, First Banks
implemented SFAS No. 144, which did not have a material effect on the
consolidated financial statements.
On October 1, 2002, the FASB issued SFAS No. 147 -- Acquisitions of
Certain Financial Institutions, an amendment of SFAS No. 72 -- Accounting for
Certain Acquisitions of Banking or Thrift Institutions and SFAS No. 144 --
Accounting for the Impairment or Disposal of Long-Lived Assets and FASB
Interpretation No. 9 -- Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method. SFAS No. 147 addresses the financial
accounting and reporting for the acquisition of all or part of a financial
institution, except for transactions between two or more mutual enterprises.
SFAS No. 147 removes acquisitions of financial institutions, other than
transactions between two or more mutual enterprises, from the scope of SFAS No.
72. SFAS No. 147 also provides guidance on the accounting for impairment or
disposal of acquired long-term customer-relationship intangible assets,
including those acquired in transactions between two or more mutual enterprises.
The provisions of SFAS No. 147 are effective for acquisitions on or after
October 1, 2002. On October 1, 2002, First Banks implemented SFAS No. 147, which
did not have a material effect on the consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 --
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002. First Banks has evaluated the requirements of FASB
Interpretation No. 45 and believes that it will not have a material effect on
the consolidated financial statements other than the additional disclosure
requirements.
Business Segment Results. The business segment results as of and for the nine months ended September 30, 2002 and 2001,
are summarized as follows:
First Bank FB&T
September 30, September 30,
2002 2002
---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities.............................................................. $ 498,927 393,543
Loans, net of unearned discount.................................................... 3,164,965 2,310,588
Goodwill........................................................................... 31,173 96,587
Total assets....................................................................... 4,063,159 3,135,105
Deposits........................................................................... 3,468,026 2,582,612
Note payable....................................................................... -- --
Stockholders' equity............................................................... 370,842 396,298
========== =========
First Bank FB&T
Three Months Ended Three Months Ended
September 30, September 30,
-------------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Income statement information:
Interest income................................................. $ 58,046 59,779 47,653 50,773
Interest expense................................................ 19,802 27,266 12,276 18,818
-------- -------- --------- -------
Net interest income........................................ 38,244 32,513 35,377 31,955
Provision for loan losses....................................... 6,500 4,800 7,200 2,000
-------- -------- --------- -------
Net interest income after provision for loan losses........ 31,744 27,713 28,177 29,955
-------- -------- --------- -------
Noninterest income.............................................. 19,309 13,187 6,617 9,023
Noninterest expense............................................. 35,756 26,943 22,223 22,383
-------- -------- --------- -------
Income before provision for income taxes
and minority interest in income of subsidiary............ 15,297 13,957 12,571 16,595
Provision for income taxes...................................... 4,967 4,922 4,695 6,751
-------- -------- --------- -------
Income before minority interest in income of subsidiary.... 10,330 9,035 7,876 9,844
Minority interest in income of subsidiary....................... -- -- -- --
-------- -------- --------- -------
Net income................................................. $ 10,330 9,035 7,876 9,844
======== ======== ========= =======
First Bank FB&T
Nine Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
Income statement information:
Interest income................................................. $177,682 182,765 141,787 157,851
Interest expense................................................ 63,817 88,563 38,704 61,870
-------- -------- ------- -------
Net interest income........................................ 113,865 94,202 103,083 95,981
Provision for loan losses....................................... 16,000 11,000 22,700 2,910
-------- -------- ------- -------
Net interest income after provision for loan losses........ 97,865 83,202 80,383 93,071
-------- -------- ------- -------
Noninterest income.............................................. 48,996 38,992 17,416 19,876
Noninterest expense............................................. 107,189 75,810 65,056 65,346
-------- -------- ------- -------
Income before provision for income taxes,
minority interest in income of subsidiary
and cumulative effect of change
in accounting principle.................................. 39,672 46,384 32,743 47,601
Provision for income taxes...................................... 12,900 16,249 12,317 18,807
-------- -------- ------- -------
Income before minority interest in income of
subsidiary and cumulative effect of change in
accounting principle..................................... 26,772 30,135 20,426 28,794
Minority interest in income of subsidiary....................... -- -- -- --
-------- -------- ------- -------
Income before cumulative effect of change in
accounting principle..................................... 26,772 30,135 20,426 28,794
Cumulative effect of change in accounting principle, net of tax. -- (917) -- (459)
-------- -------- ------- -------
Net income................................................. $ 26,772 29,218 20,426 28,335
======== ======== ======= =======
- ---------------------------
(1) Corporate and other includes $5.3 million and $4.5 million of guaranteed preferred debenture expense for the three months
ended September 30, 2002 and 2001, respectively. The applicable income tax benefit associated with the guaranteed preferred
debentures expense was $1.9 million and $1.6 million for the three months ended September 30, 2002 and 2001, respectively. For
the nine months ended September 30, 2002 and 2001, respectively, corporate and other includes $18.6 million and $13.5 million
of guaranteed preferred debenture expense. The applicable income tax benefit associated with the guaranteed preferred
debentures expense was $6.5 million and $4.7 million for the nine months ended September 30, 2002 and 2001, respectively. In
addition, corporate and other includes holding company expenses.
Corporate, Other and
Total Segments Intercompany Reclassifications (1) Consolidated Totals
- -------------------------------------- ---------------------------------------- ----------------------------------------
September 30, 2002 December 31, 2001 September 30, 2002 December 31, 2001 September 30, 2002 December 31, 2001
- ------------------ ----------------- ------------------ ------------------ ------------------ -----------------
(dollars expressed in thousands)
892,470 613,572 22,405 17,496 914,875 631,068
5,475,553 5,409,286 (11,533) (417) 5,464,020 5,408,869
127,760 115,860 -- -- 127,760 115,860
7,198,264 6,765,001 (26,730) 13,450 7,171,534 6,778,451
6,050,638 5,698,072 (24,935) (14,168) 6,025,703 5,683,904
-- -- -- 27,500 -- 27,500
767,140 720,049 (260,946) (271,392) 506,194 448,657
========== ========== ========= ========= =========== ==========
Corporate, Other and
Total Segments Intercompany Reclassifications (1) Consolidated Totals
- -------------------------------------- ------------------------------------ -----------------------------------------
Three Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
- -------------------------------------- ------------------------------------ -----------------------------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
105,699 110,552 112 172 105,811 110,724
32,078 46,084 5,552 4,866 37,630 50,950
-------- -------- -------- -------- --------- ---------
73,621 64,468 (5,440) (4,694) 68,181 59,774
13,700 6,800 -- -- 13,700 6,800
-------- -------- -------- -------- --------- ---------
59,921 57,668 (5,440) (4,694) 54,481 52,974
-------- -------- -------- -------- --------- ---------
25,926 22,210 (450) (364) 25,476 21,846
57,979 49,326 1,175 997 59,154 50,323
-------- -------- -------- -------- --------- ---------
27,868 30,552 (7,065) (6,055) 20,803 24,497
9,662 11,673 (2,290) (2,134) 7,372 9,539
-------- -------- -------- -------- --------- ---------
18,206 18,879 (4,775) (3,921) 13,431 14,958
-- -- 437 577 437 577
-------- -------- -------- -------- --------- ---------
18,206 18,879 (5,212) (4,498) 12,994 14,381
======== ======== ======== ======== ========= =========
Corporate, Other and
Total Segments Intercompany Reclassifications (1) Consolidated Totals
- -------------------------------------- -------------------------------------- -----------------------------------------
Nine Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30,
- -------------------------------------- -------------------------------------- -----------------------------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
319,469 340,616 257 (499) 319,726 340,117
102,521 150,433 19,214 14,407 121,735 164,840
-------- -------- -------- -------- --------- ---------
216,948 190,183 (18,957) (14,906) 197,991 175,277
38,700 13,910 -- -- 38,700 13,910
-------- -------- -------- -------- --------- ---------
178,248 176,273 (18,957) (14,906) 159,291 161,367
-------- -------- -------- -------- --------- ---------
66,412 58,868 (1,572) (1,124) 64,840 57,744
172,245 141,156 2,987 16,205 175,232 157,361
-------- -------- -------- -------- --------- ---------
72,415 93,985 (23,516) (32,235) 48,899 61,750
25,217 35,056 (7,746) (10,936) 17,471 24,120
-------- -------- -------- -------- --------- ---------
47,198 58,929 (15,770) (21,299) 31,428 37,630
-- -- 1,066 1,622 1,066 1,622
-------- -------- -------- -------- --------- ---------
47,198 58,929 (16,836) (22,921) 30,362 36,008
-- (1,376) -- -- -- (1,376)
-------- -------- -------- -------- --------- ---------
47,198 57,553 (16,836) (22,921) 30,362 34,632
======== ======== ======== ======== ========= =========
Change in Accounting Estimate. First Banks has followed the practice of
amortizing its deferred issuance costs associated with its guaranteed preferred
beneficial interests in its subordinated debentures over the 30-year period
through the respective maturity date of each issue. In 2002, First Banks
reviewed this practice relative to the significant decline in prevailing
interest rates experienced in 2001 and continuing in 2002 and determined that it
was probable that some or all of the existing issues would be called by First
Banks prior to their stated maturity date. Therefore, First Banks decided to
change the period over which its deferred issuance costs are amortized to the
five-year period ending on the respective dates the issues become callable.
A summary of the effect of this change in accounting estimate on the
results of operations for the nine months ended September 30, 2002 with what
they would have been without the change is as follows:
Nine Months Ended September 30, 2002
(dollars expressed in thousands)
Net income, as reported................................................................... $ 30,362
Change in accounting estimate - amortization period....................................... 2,772
Change in accounting estimate - tax effect................................................ (970)
--------------
Net income, as adjusted................................................................... $ 32,164
==============
Earnings per common share:
Basic ............................................................................... $ 1,261.05
Change in accounting estimate........................................................ 76.15
--------------
Basic................................................................................ $ 1,337.20
==============
Diluted.............................................................................. $ 1,246.05
Change in accounting estimate........................................................ 73.98
--------------
Diluted.............................................................................. $ 1,320.03
==============
QUARTERLY CONDENSED FINANCIAL DATA - UNAUDITED
2002 Quarter Ended
-------------------------------------
March 31 June 30 September 30
-------- ------- ------------
(dollars expressed in thousands)
Interest income.............................................. $ 106,612 107,303 105,811
Interest expense............................................. 42,490 41,615 37,630
--------- -------- -------
Net interest income...................................... 64,122 65,688 68,181
Provision for loan losses.................................... 13,000 12,000 13,700
--------- -------- -------
Net interest income after provision for loan losses...... 51,122 53,688 54,581
Noninterest income........................................... 18,835 20,529 25,476
Noninterest expense.......................................... 56,858 59,220 59,154
--------- -------- -------
Income before provision for income taxes and
minority interest in income of subsidiary.............. 13,099 14,997 20,803
Provision for income taxes................................... 4,771 5,328 7,372
--------- -------- -------
Income before minority interest in income of subsidiary.. 8,328 9,669 13,431
Minority interest in income of subsidiary.................... 328 301 437
--------- -------- -------
Net income............................................... $ 8,000 9,368 12,994
========= ======== =======
Earnings per common share:
Basic.................................................... $ 329.84 390.35 540.87
Diluted.................................................. 328.30 384.48 534.32
========= ======== =======
2001 Quarter Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands)
Interest income.............................................. $ 116,037 113,356 110,724 104,626
Interest expense............................................. 58,629 55,261 50,950 44,764
--------- -------- ------- --------
Net interest income...................................... 57,408 58,095 59,774 59,862
Provision for loan losses.................................... 3,390 3,720 6,800 9,600
--------- -------- ------- --------
Net interest income after provision for loan losses...... 54,018 54,375 52,974 50,262
Noninterest income........................................... 16,474 19,424 21,846 40,865
Noninterest expense.......................................... 47,129 59,909 50,323 54,310
--------- -------- ------- --------
Income before provision for income taxes, minority
interest in income of subsidiary and cumulative
effect of change in accounting principle............... 23,363 13,890 24,497 36,817
Provision for income taxes................................... 9,124 5,457 9,539 5,928
--------- -------- ------- --------
Income before minority interest in income
of subsidiary and cumulative effect of
change in accounting principle......................... 14,239 8,433 14,958 30,889
Minority interest in income of subsidiary.................... 511 534 577 1,007
--------- -------- ------- --------
Income before cumulative effect of change in
accounting principle................................... 13,728 7,899 14,381 29,882
Cumulative effect of change in accounting principle,
net of tax............................................... (1,376) -- -- --
--------- -------- ------- --------
Net income............................................... $ 12,352 7,899 14,381 29,882
========= ======== ======= ========
Earnings per common share:
Basic:
Income before cumulative effect of change in
accounting principle................................. $ 571.94 328.27 599.47 1,251.86
Cumulative effect of change in accounting principle.... (58.16) -- -- --
--------- -------- ------- --------
Basic.................................................. $ 513.78 328.27 599.47 1,251.86
========= ======== ======= ========
Diluted:
Income before cumulative effect of change in
accounting principle................................. $ 561.09 322.78 587.93 1,225.79
Cumulative effect of change in accounting principle.... (58.16) -- -- --
--------- -------- ------- --------
Diluted................................................ $ 502.93 322.78 587.93 1,225.79
========= ======== ======= ========
2000 Quarter Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands)
Interest income.............................................. $ 97,717 104,161 107,582 113,366
Interest expense............................................. 45,301 48,769 51,136 55,646
--------- -------- ------- --------
Net interest income...................................... 52,416 55,392 56,446 57,720
Provision for loan losses.................................... 3,582 3,620 3,865 3,060
--------- -------- ------- --------
Net interest income after provision for loan losses...... 48,834 51,772 52,581 54,660
Noninterest income........................................... 9,564 11,471 10,750 10,993
Noninterest expense.......................................... 34,779 38,919 39,780 44,512
--------- -------- ------- --------
Income before provision for income taxes and
minority interest in income of subsidiary.............. 23,619 24,324 23,551 21,141
Provision for income taxes................................... 8,544 9,197 8,947 7,794
--------- -------- ------- --------
Income before minority interest in income of subsidiary.. 15,075 15,127 14,604 13,347
Minority interest in income of subsidiary.................... 488 455 546 557
--------- -------- ------- --------
Net income............................................... $ 14,587 14,672 14,058 12,790
========= ======== ======= ========
Earnings per common share:
Basic.................................................... $ 608.21 614.51 585.87 529.46
Diluted.................................................. 589.52 594.12 570.33 519.78
========= ======== ======= ========
INVESTOR INFORMATION
First Banks' Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission, is available without charge to any stockholder upon
request. Requests should be directed, in writing, to Lisa K. Vansickle, First
Banks, Inc., 600 James S. McDonnell Boulevard, Mail Code - #014, Hazelwood,
Missouri 63042.
FIRST BANKS, INC. PREFERRED SECURITIES
The preferred securities of First Banks are traded on the Nasdaq
National Market System with the ticker symbols "FBNKO" "FBNKN" and "FBNKM." As
of March 22, 2002, there were approximately 420 record holders of First
Preferred Capital Trust. This number does not include any persons or entities
that hold their preferred securities in nominee or "street" name through various
brokerage firms. The preferred securities of First Preferred Capital Trust II
and First Preferred Capital Trust III are represented by a global security that
has been deposited with and registered in the name of The Depository Trust
Company, New York, New York (DTC). The beneficial ownership interests of these
preferred securities are recorded through the DTC book-entry system. The high
and low preferred securities prices and the dividends declared for 2001 and 2000
are summarized as follows:
FIRST PREFERRED CAPITAL TRUST (ISSUE DATE - FEBRUARY 1997) - FBNKO
2002 2001 2000
------------------ ----------------- ----------------- Dividend
High Low High Low High Low Declared
---- --- ---- --- ---- --- --------
First quarter...................... $26.25 25.20 26.25 24.38 25.25 23.13 $0.578125
Second quarter..................... 27.24 25.15 27.35 25.00 26.00 23.50 0.578125
Third quarter...................... 26.49 25.00 27.25 25.00 25.13 23.50 0.578125
Fourth quarter..................... 26.50 25.20 26.90 25.02 25.00 23.38 0.578125
FIRST PREFERRED CAPITAL TRUST II (ISSUE DATE - OCTOBER 2000) - FBNKN
2002 2001 2000
--------------------------- -------------------------------- ------------------------------
Dividend Dividend Dividend
High Low Declared High Low Declared High Low Declared
---- --- -------- ---- --- -------- ---- --- --------
First quarter.... $28.50 27.55 $0.640000 $27.75 26.38 $0.640000 $ -- -- $ --
Second quarter... 28.40 26.85 0.640000 27.40 26.25 0.640000 -- -- --
Third quarter.... 28.65 27.85 0.640000 28.50 26.95 0.640000 -- -- --
Fourth quarter... 28.25 27.30 0.640000 28.30 27.00 0.640000 27.00 25.13 0.504888
FIRST PREFERRED CAPITAL TRUST III (ISSUE DATE - NOVEMBER 2001) - FBNKM
2002 2001
-------------------------------- ------------------------------
Dividend Dividend
High Low Declared High Low Declared
---- --- -------- ---- --- --------
First quarter.................................. $26.75 25.90 $0.562500 $ -- -- $ --
Second quarter................................. 27.22 26.25 0.562500 -- -- --
Third quarter.................................. 27.00 26.50 0.562500 -- -- --
Fourth quarter................................. 27.05 26.50 0.562500 26.10 25.25 0.281250
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 22, 2002, there were approximately
200 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 2001 and 2000 are summarized as follows:
FIRST AMERICA CAPITAL TRUST (ISSUE DATE - JULY 1998) - FBAPrT
2002 2001 2000
----------------- --------------- ---------------- Dividend
High Low High Low High Low Declared
---- --- ---- --- ---- --- --------
First quarter....................... $25.90 24.70 25.00 21.63 23.00 19.50 $ 0.53125
Second quarter...................... 25.38 24.75 25.05 23.95 23.88 20.69 0.53125
Third quarter....................... 25.65 24.85 25.80 24.80 23.75 21.13 0.53125
Fourth quarter...................... 25.75 24.80 25.67 24.75 22.63 20.75 0.53125
----------
$ 2.12500
==========
For information concerning First Banks, please contact:
Allen H. Blake Lisa K. Vansickle
President, Chief Operating Officer Senior Vice President and Controller
and Chief Financial Officer 600 James S. McDonnell Boulevard
600 James S. McDonnell Boulevard Mail Code - #014
Mail Code - #014 Hazelwood, Missouri 63042
Hazelwood, Missouri 63042 Telephone - (314) 592-5000
Telephone - (314) 592-5000
Transfer Agent:
U.S. Bank Corporate Trust Services
One Federal Street, Third Floor
Boston, Massachusetts 02110
Telephone - (800) 934-6802
www.usbank.com
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TABLE OF CONTENTS ==========================================
1,600,000 Preferred Securities
Page
FIRST PREFERRED
CAPITAL TRUST IV
SUMMARY.....................................................1
RISK FACTORS................................................12 8.15% Cumulative Trust Preferred
SPECIAL NOTES REGARDING FORWARD LOOKING Securities
STATEMENTS..................................18
USE OF PROCEEDS.............................................19
ACCOUNTING TREATMENT........................................20 (Liquidation Amount $25 per
MARKET FOR PREFERRED SECURITIES.............................20 Preferred Security)
CAPITALIZATION..............................................21
SELECTED CONSOLIDATED AND OTHER
FINANCIAL DATA.....................................23 Fully, irrevocably and unconditionally
MANAGEMENT'S DISCUSSION AND ANALYSIS OF guaranteed on a subordinated basis, as
FINANCIAL CONDITION AND RESULTS OF described in this prospectus, by
OPERATIONS.........................................24
BUSINESS....................................................79
MANAGEMENT..................................................87
DESCRIPTION OF THE TRUST....................................89 FIRST BANKS, INC.
DESCRIPTION OF THE PREFERRED SECURITIES.....................90
DESCRIPTION OF THE SUBORDINATED DEBENTURES..................102 ---------------
BOOK-ENTRY ISSUANCE.........................................111
DESCRIPTION OF THE GUARANTEE................................113
RELATIONSHIP AMONG THE PREFERRED SECURITIES
THE SUBORDINATED DEBENTURES AND THE
GUARANTEE..........................................115 $40,000,000
MATERIAL UNITED STATES FEDERAL 8.15% Subordinated Debentures
INCOME TAX CONSEQUENCES........................116 of
ERISA CONSIDERATIONS........................................121
UNDERWRITING................................................121 FIRST BANKS, INC.
LEGAL MATTERS...............................................123
WHERE YOU CAN FIND INFORMATION..............................123 -------------
EXPERTS.....................................................124
DOCUMENTS INCORPORATED BY REFERENCE.........................124
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................125 Prospectus
March 26, 2003
o 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 Stifel, Nicolaus & Company
not rely on it. Incorporated
o We are not, and our underwriters are not, making an Fahnestock & Co. Inc.
offer to sell these securities in any jurisdiction where
the offer or sale is not permitted. ==========================================
o You should assume that the information appearing in this
prospectus is accurate as of the date on the front cover
of this prospectus only.
o 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.