SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20632
FIRST BANKS, INC.
-----------------
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 NORTH MERAMEC, CLAYTON, MISSOURI 63105
------------------------------------------
(Address of principal executive offices) (Zip code)
(314) 854-4600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class October 31, 1998
----- ----------------
Common Stock, $250.00 par value 23,661
<PAGE>
First Banks, Inc.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997......................................... -1-
Consolidated Statements of Income for the three and nine
months ended September 30, 1998 and 1997...................... -3-
Consolidated Statements of Changes in Stockholders' Equity for
the nine months ended September 30, 1998 and 1997
and the three months ended December 31, 1997.................. -4-
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997...................... -5-
Notes to Consolidated Financial Statements...................... -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... -9-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ -19-
Signatures................................................................. -20-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST BANKS, INC.
Consolidated Balance Sheets
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks............................................... $ 130,186 142,125
Interest-bearing deposits with other financial
institutions - with maturities of three months or less.............. 2,657 2,840
Federal funds sold.................................................... 10,200 23,515
----------- ----------
Total cash and cash equivalents............................ 143,043 168,480
----------- ----------
Investment securities:
Trading, at fair value................................................ 3,882 3,110
Available for sale, at fair value..................................... 635,693 773,271
Held to maturity, at amortized cost (fair value
of $21,383 and $19,835 at September 30, 1998 and
December 31,1997, respectively)..................................... 20,519 19,149
----------- ----------
Total investment securities................................ 660,094 795,530
----------- ----------
Loans:
Commercial, financial and agricultural................................ 831,816 621,618
Real estate construction and development.............................. 626,113 413,107
Real estate mortgage.................................................. 1,557,102 1,629,115
Consumer and installment.............................................. 318,860 287,752
Loans held for sale................................................... 106,369 59,081
----------- ----------
Total loans................................................ 3,440,260 3,010,673
Unearned discount..................................................... (7,776) (8,473)
Allowance for possible loan losses.................................... (60,553) (50,509)
----------- ----------
Net loans.................................................. 3,371,931 2,951,691
----------- ----------
Bank premises and equipment, net of
accumulated depreciation and amortization............................. 60,438 51,505
Intangibles associated with the purchase
of subsidiaries....................................................... 37,476 25,835
Mortgage servicing rights, net of amortization........................... 9,737 9,046
Accrued interest receivable.............................................. 29,617 28,358
Other real estate........................................................ 5,861 7,324
Deferred income taxes.................................................... 49,393 43,355
Other assets............................................................. 93,704 83,890
----------- ----------
Total assets.............................................. $ 4,461,294 4,165,014
=========== ==========
</TABLE>
<PAGE>
FIRST BANKS, INC.
Consolidated Balance Sheets
(dollars expressed in thousands, except per share data)
(continued)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
LIABILITIES
-----------
Deposits:
Demand:
<S> <C> <C>
Non-interest-bearing............................................ $ 510,063 485,222
Interest-bearing................................................ 348,662 348,080
Savings........................................................... 1,167,749 947,029
Time:
Time deposits of $100 or more................................... 220,069 219,417
Other time deposits............................................. 1,620,221 1,684,847
----------- -----------
Total deposits.......................................... 3,866,764 3,684,595
Other borrowings...................................................... 105,519 54,153
Notes payable......................................................... 53,048 55,144
Accrued interest payable.............................................. 9,020 9,976
Deferred income taxes................................................. 12,948 9,029
Accrued and other liabilities......................................... 17,287 20,990
Minority interest in subsidiaries..................................... 14,949 16,407
----------- -----------
Total liabilities....................................... 4,079,535 3,850,294
----------- -----------
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debenture.......................... 83,262 83,183
First Banks America, Inc. subordinated debenture.................. 44,140 --
----------- -----------
127,402 83,183
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
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....................................................... 1,432 3,978
Retained earnings..................................................... 221,448 199,143
Accumulated other comprehensive income................................ 12,499 9,438
----------- -----------
Total stockholders' equity.............................. 254,357 231,537
----------- -----------
Total liabilities and stockholders' equity.............. $ 4,461,294 4,165,014
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST BANKS, INC.
Consolidated Statements of Income (unaudited)
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans........................................ $ 73,260 64,334 209,430 187,431
Investment securities............................................. 9,966 8,508 31,676 24,988
Federal funds sold and other...................................... 551 1,898 2,541 4,400
--------- -------- -------- --------
Total interest income....................................... 83,777 74,740 243,647 216,819
--------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand......................................... 1,141 1,409 3,944 4,214
Savings......................................................... 11,226 7,221 31,011 18,260
Time deposits of $100 or more................................... 2,883 2,668 9,258 7,536
Other time deposits............................................. 22,590 23,881 70,322 70,910
Securities sold under agreements to repurchase.................... 647 490 1,722 1,232
Interest rate exchange agreements, net ........................... 1,011 3,227 2,991 5,610
Notes payable and other borrowings................................ 825 114 2,797 1,242
--------- -------- -------- --------
Total interest expense...................................... 40,323 39,010 122,045 109,004
--------- -------- -------- --------
Net interest income......................................... 43,454 35,730 121,602 107,815
--------- -------- -------- --------
Provision for possible loan losses..................................... 2,275 3,100 6,225 9,125
--------- -------- -------- --------
Net interest income after provision
for possible loan losses................................. 41,179 32,630 115,377 98,690
--------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and
customer service fees........................................... 3,781 3,208 10,670 9,176
Credit card fees.................................................. 695 788 2,307 2,248
Loan servicing fees, net.......................................... 177 398 880 1,262
Gain on mortgage loans sold and held for sale..................... 1,758 162 3,659 370
Gain on sales of securities, net.................................. 559 2,241 815 2,241
(Loss) gain on trading securities, net............................ (29) 91 615 113
Other income...................................................... 2,059 1,941 6,205 4,335
--------- -------- -------- --------
Total noninterest income.................................... 9,000 8,829 25,151 19,745
--------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits.................................... 14,627 10,756 41,897 31,684
Occupancy, net of rental income................................... 2,830 2,711 7,970 7,924
Furniture and equipment........................................... 1,755 1,654 5,381 5,704
Postage, printing and supplies.................................... 1,144 803 4,093 3,044
Data processing fees.............................................. 3,737 2,323 9,691 5,844
Legal, examination and professional fees.......................... 1,716 967 4,046 3,136
Credit card expenses.............................................. 987 863 2,549 2,503
Communications.................................................... 741 594 2,233 1,849
Advertising and business development expense...................... 1,111 1,098 3,767 2,711
Losses and expenses on other real estate, net of gains............ (146) (273) 515 (180)
Guaranteed preferred debentures expense........................... 2,786 2,083 6,828 5,462
Other expenses.................................................... 4,818 4,344 14,232 11,177
--------- -------- -------- --------
Total noninterest expense................................... 36,106 27,923 103,202 80,858
--------- -------- -------- --------
Income before provision for income taxes and minority
interest in income of subsidiaries....................... 14,073 13,536 37,326 37,577
Provision for income taxes............................................. 5,079 4,632 13,469 12,397
--------- -------- -------- --------
Income before minority interest in income of subsidiaries... 8,994 8,904 23,857 25,180
Minority interest in income of subsidiaries............................ 407 363 1,028 940
--------- -------- -------- --------
Net income.................................................. 8,587 8,541 22,829 24,240
Preferred stock dividends.............................................. 196 1,256 524 3,744
--------- -------- -------- --------
Net income available to common stockholders................. $ 8,391 7,285 22,305 20,496
========= ======== ======== ========
Earnings per share:
Basic............................................................. $ 354.65 307.87 942.70 866.21
Diluted........................................................... 343.73 295.45 910.91 830.16
========= ======== ======== ========
Weighted average shares of common stock outstanding.................... 23,661 23,661 23,661 23,661
========= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST BANKS, INC.
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
(dollars expressed in thousands, except per share data)
Nine months ended September 30, 1998 and 1997
and three months ended December 31, 1997
<TABLE>
<CAPTION>
Class C Accu-
preferred Adjustable rate mulated
stock, preferred stock other Total
increasing Class A Compre- compre- stock-
rate, conver- Common Capital hensive Retained hensive holders'
redeemable tible Class B stock surplus income earnings income equity
---------- ----- ------- ----- ------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated balances, January 1, 1997........... $ 53,887 12,822 241 5,915 3,289 171,182 4,053 251,389
Nine months ended September 30, 1997:
Comprehensive income:
Net income................................ -- -- -- -- -- $24,240 24,240 -- 24,240
Other comprehensive income, net of tax (1) -
Unrealized gains on securities, net of
reclassification adjustment (2) ...... -- -- -- -- -- 4,910 -- 4,910 4,910
-------
Comprehensive income...................... -- -- -- -- -- $29,150
=======
Class C preferred stock dividends,
$.56 per share.......................... -- -- -- -- -- (3,220) -- (3,220)
Class A preferred stock dividends,
$.30 per share.......................... -- -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$.03 per share.......................... -- -- -- -- -- (11) -- (11)
Purchase and retirement of Class C shares.... (6,774) -- -- -- (161) -- -- (6,935)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- -- (399) -- -- (399)
-------- ----- --- ---- ------ ------ ------ -------
Consolidated balances, September 30, 1997........ 47,113 12,822 241 5,915 2,729 191,678 8,963 269,461
Three months ended December 31, 1997: Comprehensive income:
Net income................................ -- -- -- -- -- $ 8,787 8,787 -- 8,787
Other comprehensive income, net of tax (1) -
Unrealized gains on securities, net of
reclassification adjustment (2)....... -- -- -- -- -- 475 -- 475 475
-------
Comprehensive income...................... -- -- -- -- -- $ 9,262
=======
Class C preferred stock dividends,
$1.69 per share.......................... -- -- -- -- -- (1,060) -- (1,060)
Class A preferred stock dividends,
$.90 per share........................... -- -- -- -- -- (256) -- (256)
Class B preferred stock dividends,
$.08 per share........................... -- -- -- -- -- (6) -- (6)
Redemption of Class C preferred shares....... (47,113) -- -- -- -- -- -- (47,113)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- -- 1,249 -- -- 1,249
-------- ----- --- ---- ----- ------- ------ --------
Consolidated balances, December 31,1997.......... -- 12,822 241 5,915 3,978 199,143 9,438 231,537
Nine months ended September 30, 1998: Comprehensive income:
Net income................................ -- -- -- -- -- $22,829 22,829 -- 22,829
Other comprehensive income, net of tax (1) -
Unrealized gains on securities, net of
reclassification adjustment (2)....... -- -- -- -- -- 3,061 -- 3,061 3,061
-------
Comprehensive income...................... -- -- -- -- -- $25,890
=======
Class A preferred stock dividends,
$.30 per share........................... -- -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$.03 per share........................... -- -- -- -- -- (11) -- (11)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- -- (2,546) -- -- (2,546)
-------- ----- --- ---- ------ ------ ------ --------
Consolidated balances, September 30, 1998........ $ -- 12,822 241 5,915 1,432 221,448 12,499 254,357
======== ====== === ===== ====== ======= ====== ========
</TABLE>
- ---------------
(1) Components of other comprehensive income are shown net of tax.
(2) Disclosure of reclassification adjustment:
<PAGE>
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, December 31,
----------------- ------------------
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized gains arising during the period.............................................. $2,531 3,453 414
Less: reclassification adjustment for gains included in net income...................... 530 1,457 61
------ ----- ----
Unrealized gain on securities........................................................... $3,061 4,910 475
====== ===== ====
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST BANKS, INC.
Consolidated Statements of Cash Flows (unaudited)
(dollars expressed in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income................................................................... $ 22,829 24,240
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization of bank premises and equipment............. 3,835 4,396
Amortization, net of accretion........................................... 7,851 3,505
Originations and purchases of loans held for sale........................ (391,414) (121,137)
Proceeds from sales of loans held for sale .............................. 344,766 94,716
Provision for possible loan losses....................................... 6,225 9,125
Provision for income taxes............................................... 13,469 12,397
Payments of income taxes................................................. (13,161) (11,169)
Increase in accrued interest receivable ................................. (825) (5,015)
Net increase in trading securities....................................... (772) (3,681)
Interest accrued on liabilities.......................................... 122,045 114,230
Payments of interest on liabilities...................................... (123,563) (115,480)
Other operating activities, net.......................................... (14,228) (7,303)
Minority interest in income of subsidiaries.............................. 1,028 940
---------- ---------
Net cash (used in) provided by operating activities................. (21,915) (236)
---------- ---------
Cash flows from investing activities:
Cash and cash equivalents received from acquisitions, net of cash paid....... 29,339 82,234
Sale of investment securities available for sale............................. 104,273 --
Maturities of investment securities available for sale....................... 271,571 260,568
Maturities of investment securities held to maturity......................... 1,699 1,366
Purchases of investment securities available for sale........................ (160,102) (393,704)
Purchases of investment securities held to maturity.......................... (3,124) (744)
Net increase in loans........................................................ (327,896) (111,317)
Recoveries of loans previously charged-off................................... 6,656 7,544
Purchases of bank premises and equipment..................................... (9,984) (4,062)
Other investing activities................................................... (3,612) 4,652
---------- ---------
Net cash used in investing activities............................... (91,180) (153,463)
---------- ---------
Cash flows from financing activities:
Other increases (decreases) in deposits:
Demand and savings deposits................................................ 147,845 166,754
Time deposits.............................................................. (133,516) 14,929
Decrease in Federal Home Loan Bank advances.................................. (1,514) (36,931)
Increase in other borrowings................................................. 13,979 16,843
Decrease in notes payable.................................................... 17,264 (71,175)
Purchase and retirement of Class C preferred stock........................... -- (6,774)
Proceeds from issuance of guaranteed preferred
subordinated debenture..................................................... 44,124 83,086
Payment of preferred stock dividends......................................... (524) (3,742)
---------- ---------
Net cash provided by financing activities .......................... 87,658 162,990
---------- ---------
Net increase (decrease) in cash and cash equivalents ............... (25,437) 9,291
Cash and cash equivalents, beginning of period ................................... 168,480 227,954
---------- ---------
Cash and cash equivalents, end of period.......................................... $ 143,043 237,245
========== =========
Noncash investing and financing activities:
Loans transferred to other real estate....................................... $ 2,391 3,062
Loans transferred to investment securities available for sale................ 65,361 --
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying consolidated financial statements of First Banks, Inc.
and subsidiaries (First Banks) are unaudited and should be read in conjunction
with the consolidated financial statements contained in the 1997 annual report
on Form 10-K. In the opinion of management, all adjustments, consisting of
normal recurring accruals considered necessary for a fair presentation of the
results of operations for the interim periods presented herein, have been
included. Operating results for the three and nine month periods ended September
30, 1998 are not necessarily indicative of the results that may be expected for
any other interim period or for the year ending December 31, 1998.
First Banks' primary subsidiaries (Subsidiary Banks) are:
First Bank, headquartered in St. Louis County, Missouri (First Bank).
First Banks America, Inc., headquartered in St. Louis County, Missouri (FBA),
and its wholly owned subsidiaries:
BankTEXAS N.A., headquartered in Houston, Texas (BankTEXAS).
First Bank of California, headquartered in Roseville, California (FB
California).
CCB Bancorp, Inc., headquartered in Newport Beach, California (CCB), and its
wholly owned subsidiary:
First Bank & Trust, headquartered in Newport Beach, California (FB&T).
First Banks' ownership interest in FBA was 73.7% and 65.1% at September
30, 1998 and December 31, 1997, respectively.
The consolidated financial statements include the accounts of First
Banks, Inc. and its subsidiaries, net of minority interests. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications of 1997 amounts have been made to conform with the
1998 presentation.
(2) Mergers and Acquisitions
On September 15, 1998, First Banks completed its acquisition of
Republic Bank for cash consideration of $19.3 million. Republic Bank had $124.1
million in total assets, $97.9 million in loans, net of unearned discount, and
$117.2 million in deposits at the date of acquisition. Republic Bank, previously
headquartered in Torrance, California, was merged into and will operate as
branch offices of FB&T. The transaction was funded from available cash of $3.3
million and borrowings of $16.0 million under First Banks' $90 million credit
agreement with a group of unaffiliated financial institutions (Credit
Agreement). The acquisition was accounted for under the purchase method of
accounting and, accordingly, the consolidated financial statements include the
financial position and results of operations for the period subsequent to the
acquisition date, and the assets acquired and liabilities assumed were recorded
at fair value at the acquisition date. The excess of the cost over the fair
value of the net assets acquired was $10.2 million and is being amortized over
15 years.
As previously announced, FBA and Redwood Bancorp executed an agreement
on September 3, 1998 providing for the acquisition of Redwood Bancorp, and its
wholly-owned subsidiary, Redwood Bank, for cash consideration of $26.0 million.
Redwood Bank is headquartered in San Francisco, California and operates four
banking locations in the San Francisco Bay area. Redwood Bank had $168.5 million
in total assets, $126.4 million in loans, net of unearned discount, and $148.6
million in deposits at September 30, 1998. FBA anticipates that the transaction,
which is subject to regulatory approval, will be completed on or about December
31, 1998.
<PAGE>
On March 19, 1998, First Banks completed its assumption of the deposits
and purchase of selected assets of the Solvang, California banking location of
Bank of America. The transaction resulted in the acquisition of approximately
$15.5 million in deposits and one office that operates as a branch of FB&T. The
excess of the cost over the fair value of the net assets acquired was $1.8
million and is being amortized over 15 years.
On February 2, 1998, FBA completed its merger with First Commercial
Bancorp, Inc. (FCB). FCB's wholly owned subsidiary, First Commercial Bank (First
Commercial), was merged into FB California. In the transaction, FCB shareholders
received .8888 shares of FBA common stock for each share of FCB common stock
that they held. In total, FCB shareholders received approximately 752,000 shares
of FBA common stock in the transaction. The transaction provided for First Banks
to receive 804,000 shares of FBA common stock in exchange for $10.0 million of
FBA's note payable to First Banks, and for the exchange of FCB convertible
debentures of $6.5 million, which are owned by First Banks, for comparable
debentures of FBA. The merger of FBA and FCB did not have a significant impact
on the operations of First Banks.
The transaction was accounted for as a business combination of entities
under common control. Accordingly, FBA assumed First Banks' 61.48% interest in
FCB at its historical cost basis. The remaining 38.52%, or minority interest,
owned by unaffiliated parties was recorded at fair value. The excess of the cost
over the fair value of the minority interest's share in the fair value of the
net assets acquired was $1.6 million and is being amortized over 15 years.
On February 2, 1998, FBA completed its acquisition of Pacific Bay Bank,
San Pablo, California (Pacific Bay). Under the terms of the Pacific Bay
Agreement, Pacific Bay shareholders received $14.00 per share in cash for their
stock, an aggregate of $4.2 million. The 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 $1.5 million and is being amortized over 15 years. This
transaction was funded from an advance under the Credit Agreement.
Pacific Bay operated a banking office in San Pablo, California and a
loan production office in Lafayette, California. At February 2, 1998, Pacific
Bay had total assets of $38.3 million, investment securities of $232,000, loans,
net of unearned discount, of $29.7 million and deposits of $35.2 million.
Pacific Bay was merged into FB California.
(3) 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' and the Subsidiary Banks'
financial statements. Under capital adequacy guidelines and the regulatory
framework for Prompt Corrective Action, the Subsidiary Banks must meet specific
capital guidelines that involve quantitative measures of the Subsidiary Banks'
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Subsidiary Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital
adequacy require the Subsidiary Banks to maintain certain minimum ratios. The
Subsidiary Banks are required to maintain a minimum risk-based capital to
risk-weighted assets ratio of 8.0%, with at least 4.0% being "Tier 1" capital
(as defined in the regulations). In addition, a minimum leverage ratio (Tier 1
capital to average assets) of 3.0% plus an additional cushion of 100 to 200
basis points is expected. In order to be considered well capitalized under
Prompt Corrective Action provisions, a bank is required to maintain a risk
weighted asset ratio of at least 10%, a Tier 1 to risk weighted assets ratio of
at least 6%, and a leverage ratio of at least 5%. As of December 31, 1997, the
date of the most recent notification from First Banks' primary regulator, each
of the Subsidiary Banks was categorized as well capitalized under the regulatory
framework for Prompt Corrective Action.
<PAGE>
At September 30, 1998 and December 31, 1997, First Banks' and the
Subsidiary Banks' capital ratios were as follows:
<TABLE>
<CAPTION>
Risk based capital ratios
-------------------------
Total Tier 1 Leverage Ratio
----- ------ --------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Banks...................... 10.41% 10.26% 9.15% 8.78% 7.83% 6.80%
First Bank....................... 10.10 10.78 8.84 9.52 7.35 7.19
FB&T............................. 10.40 12.71 9.14 11.45 8.29 7.70
BankTEXAS........................ 12.33 12.26 11.07 11.00 9.15 8.90
FB California.................... 10.93 13.03 9.67 11.77 8.47 13.80
First Commercial (1)............. -- 11.89 -- 10.61 -- 8.43
</TABLE>
- ----------
(1) Merged into FB California effective February 2, 1998.
(4) Cumulative Trust Preferred Securities of First America Capital Trust
During July 1998, First America Capital Trust (First Capital), a
newly-formed Delaware business trust subsidiary of FBA, issued 1.84 million
shares of 8.50% Cumulative Trust Preferred Securities (Preferred Securities) at
$25.00 per share in an underwritten public offering. FBA made certain guarantees
and commitments relating to the Preferred Securities. FBA's proceeds from the
issuance of the Preferred Securities, net of underwriting fees and offering
expenses, were approximately $44.0 million. Distributions payable on the
Preferred Securities are payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year commencing on September 30, 1998.
Distributions payable on the Preferred Securities were $765,000 for the three
months ended September 30, 1998 and are recorded as noninterest expense in the
accompanying consolidated financial statements.
Proceeds from the offering were used to repay outstanding indebtedness
under the Credit Agreement, support possible repurchases of FBA's common stock
from time to time and for general corporate purposes of FBA. The remaining
proceeds have been temporarily invested and will be used to fund the pending
acquisition of Redwood Bancorp.
<PAGE>
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
The discussion herein contains certain forward looking statements
regarding the financial condition, results of operations and business of First
Banks. These forward looking statements are subject to risks and uncertainties,
not all of which can be predicted or anticipated. Factors that may cause actual
results to differ materially from those contemplated by such forward looking
statements include general market conditions, conditions affecting the banking
industry generally and factors having a specific impact on First Banks,
including but not limited to, fluctuations in interest rates and in the economy;
the impact of laws and regulations applicable to First Banks and changes
therein; competitive conditions in the markets in which First Banks and the
Subsidiary Banks conduct their operations; and the ability of the Company to
respond to changes in technology, including the Year 2000 problem. Additional
factors potentially affecting First Banks' results were identified in the Annual
Report on Form 10-K filed with the Securities and Exchange Commission. Readers
should not place undue reliance on any forward looking statements contained
herein.
General
First Banks is a registered bank holding company, incorporated in
Missouri in 1978 and headquartered in St. Louis County, Missouri. At September
30, 1998, First Banks had $4.46 billion in total assets; $3.43 billion in total
loans, net of unearned discount; $3.87 billion in total deposits; and $254
million in total stockholders' equity.
Through the Subsidiary Banks, First Banks offers a broad range of
commercial and personal banking services including certificate of deposit
accounts, individual retirement and other time deposit accounts, checking and
other demand deposit accounts, interest checking accounts, savings accounts and
money market accounts. Loans include commercial, financial, agricultural, real
estate construction and development, commercial and residential real estate and
consumer and installment loans. Other financial services include mortgage
banking, discount brokerage, credit-related insurance, automatic teller
machines, safe deposit boxes, cash management, lockbox and trust services
offered by certain Subsidiary Banks.
The following table lists the Subsidiary Banks at September 30, 1998:
<TABLE>
<CAPTION>
Number Loans, net
of of unearned Total
Subsidiary Banks locations Total assets discount deposits
---------------- --------- ------------ -------- --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
First Bank.............................. 98 $ 2,962,042 2,377,806 2,610,405
CCB:
FB&T................................. 21 795,119 563,701 704,364
FBA:
FB California........................ 11 402,353 297,889 354,272
BankTEXAS............................ 6 286,378 193,507 244,232
</TABLE>
Financial Condition
First Banks' total assets increased by $296 million to $4.46 billion
from $4.17 billion at September 30, 1998 and December 31, 1997, respectively.
This increase is primarily attributable to the acquisitions of Republic Bank and
Pacific Bay, and internal loan growth. As previously discussed in Note 2 to the
consolidated financial statements, the acquisitions of Republic Bank and Pacific
Bay provided assets of $162.4 million. Internal loan growth, consisting
primarily of commercial, financial and agricultural and real estate construction
and development, increased by $302.6 million. Offsetting the increase and
<PAGE>
providing an additional source of funds for the loan growth was a reduction in
investment securities of $135.4 million and Federal funds sold of $13.3 million.
Total deposits, excluding deposits provided by acquisitions, and other
borrowings increased by $29.8 million and $51.4 million, respectively. The
increase in other borrowings was comprised primarily of Federal funds purchased.
Results of Operations
Net Income
First Banks' net income was $8.6 million, or $343.73 per share on a
diluted basis, for the three months ended September 30, 1998 compared to $8.5
million, or $295.45 per share on a diluted basis, for the same period in 1997.
Net income for the nine months ended September 30, 1998 and 1997 was $22.8
million and $24.2 million, or $910.91 and $830.16 per share on a diluted basis,
respectively. The increase in earnings per share reflects the effect of the
redemption of the Company's Class C preferred stock in 1997, and the resulting
reduction of the Company's quarterly dividend requirement by approximately $1.0
million and $3.2 million for the three and nine month periods ended September
30, 1998, respectively. However, the funds required for the redemption were
borrowed, resulting in an increase in interest expense of $700,000 and $2.6
million for the three and nine month periods ended September 30, 1998,
respectively. Since the Class C dividend requirement is not deducted in the
determination of net income, whereas interest expense is, the effect of this was
to reduce 1998 net income by $455,000 and $1.7 million for the three and nine
month periods, respectively, when compared to the same periods in 1997.
The results for the three and nine month periods ended September 30,
1998 include the additional costs associated with Surety Bank's and Pacific
Bay's data processing and back-office conversions to First Banks' systems and
procedures. Surety Bank, Vallejo, California, and Pacific Bay, San Pablo,
California, were acquired in December 1997 and February 1998, respectively.
Net Interest Income
Net interest income (expressed on a tax-equivalent basis) improved to
$43.7 million, or 4.35% of average interest earning assets, for the three months
ended September 30, 1998, from $35.9 million, or 3.97% of average interest
earning assets, for the same period in 1997. For the nine months ended September
30, 1998 and 1997, net interest income (expressed on a tax-equivalent basis) was
$122.3 million, or 4.16%, and $108.5 million, or 4.15%, of average interest
earning assets, respectively.
The increased net interest income for 1998 is attributable to the
increase in average interest-earning assets of $389.7 million and $431.9 million
for the three and nine month periods ended September 30, 1998, respectively,
compared to the same periods in 1997. The increase is attributable to loans,
which increased on average by $427.3 million and $345.4 million for the three
and nine month periods ended September 30, 1998, respectively, over the same
periods in 1997. Contributing further to the improved net interest income was
the decrease in the cost of interest-bearing liabilities to 4.68% and 4.80% for
the three and nine month periods ended September 30, 1998, compared to 5.15% and
4.92% for the same periods in 1997, respectively. This reflects the continual
process of realigning the deposit portfolios of acquired entities and the
overall increase in the percentage of demand deposits and savings deposits to
total deposits.
Offsetting the increase in net interest income is the amortization and
periodic costs of hedging the interest rate risk (IRR) position of First Banks.
The cost of hedging totaled $1.0 million and $3.2 million for the three and nine
month periods ended September 30, 1998, compared to $3.2 million and $5.6
million for the same periods in 1997. The decrease in the cost of hedging for
1998 is attributable to the reduced level of IRR risk that occurred over the
past several years. This reduction in IRR resulted from the realignment of the
loan portfolio, combined with the gradual changes in the composition of the
investment securities portfolios from mortgage-backed securities to U.S.
<PAGE>
Treasury and U.S. government agencies securities, and changes in the
composition of interest-bearing liabilities. As more fully discussed in the
Interest Rate Risk Management section, First Banks increased the use of interest
rate swap agreements during the third quarter of 1998 to offset the increasing
exposure to continued reductions in interest rates on its financial condition
and results of operations.
The following table sets forth, on a tax-equivalent basis, certain
information relating to First Banks' 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 three
and nine month periods ended September 30:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
---------------------------------------------- ---------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Interest Interest Interest Interest
Average income/ Yield/ Average income/Yield/ Average income/Yield/ Average income/ Yield/
balance expense rate balance expense rate balance expense rate balance expense rate
------- ------- ---- ------- ------------ ------- ------- ---- ---------------------
(dollars expressed in thousands)
Assets
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans....................... $3,297,377 73,332 8.82% $2,870,094 64,418 8.90% $3,168,141 209,654 8.85% $2,822,754 187,695 8.89%
Investment securities....... 641,853 10,107 6.25 583,551 8,619 5.86 698,614 32,112 6.15 567,645 25,371 5.98
Federal funds sold and other 41,603 551 5.25 137,474 1,898 5.48 62,223 2,541 5.46 106,678 4,400 5.51
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-earning
assets................ 3,980,833 83,990 8.37 3,591,119 74,935 8.28 3,928,978 244,307 8.31 3,497,077 217,466 8.31
------- ------ ------- -------
Nonearning assets.............. 309,265 201,766 302,093 218,238
---------- ---------- ---------- ----------
Total assets............ $4,290,098 $3,792,885 $4,231,071 $3,715,315
========== ========== ========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand
deposits.................. $ 355,503 1,141 1.27% $ 327,616 1,409 1.71% $ 353,144 3,944 1.49% $ 330,529 4,214 1.70%
Savings deposits............ 1,116,879 11,226 3.99 779,690 7,221 3.68 1,038,717 31,011 3.99 715,656 18,260 3.41
Time deposits of $100
or more (1)............... 208,753 2,994 5.69 186,424 2,978 6.34 216,439 9,589 5.92 178,194 8,063 6.05
Other time deposits (1)..... 1,627,137 23,455 5.72 1,660,059 26,720 6.40 1,688,111 72,897 5.77 1,677,714 75,858 6.05
---------- ------- ---------- ------ ---------- ------ ---------- -------
Total interest-bearing
deposits.............. 3,308,272 38,816 4.65 2,953,789 38,328 5.16 3,296,411 117,441 4.76 2,902,093 106,395 4.90
Notes payable and other (1). 112,953 1,507 5.29 51,677 682 5.24 106,555 4,604 5.78 63,063 2,609 5.53
---------- ------- ---------- ------ ---------- ------ ---------- -------
Total interest-bearing
liabilities........... 3,421,225 40,323 4.68 3,005,466 39,010 5.15 3,402,966 122,045 4.80 2,965,156 109,004 4.92
------- ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits............. 461,287 399,745 448,517 381,784
Other liabilities........... 159,714 123,860 138,781 112,808
---------- ---------- ---------- ----------
Total liabilities....... 4,042,226 3,529,071 3,990,264 3,459,748
Stockholders' equity........... 247,872 263,814 240,807 255,567
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity.. $4,290,098 $3,792,885 $4,231,071 $3,715,315
========== ========== ========== ==========
Net interest income............ 43,667 35,925 122,262 108,462
======= ====== ======= =======
Net interest margin............ 4.35% 3.97% 4.16% 4.15%
==== ==== ==== ====
</TABLE>
- ------------
(1) Includes the effects of interest rate exchange agreements.
<PAGE>
Provision for Possible Loan Losses
The provision for possible loan losses was $2.3 million and $6.2
million for the three and nine month periods ended September 30, 1998, compared
to $3.1 million and $9.1 million for the same periods in 1997, respectively. The
decrease in the provision for possible loan losses is primarily attributable to
loan loss experience. For the three and nine month periods ended September 30,
1998, First Banks experienced net loan recoveries of $372,000 and $619,000,
respectively, in comparison to net loan charge-offs of $68,000 and $5.2 million
for the same periods in 1997.
Tables summarizing nonperforming assets, past due loans and charge-off
experience are presented under "--Lending and Credit Management" of this Form
10-Q.
Noninterest Income
Noninterest income was $9.0 million and $25.2 million for the three and
nine month periods ended September 30, 1998, respectively, compared to $8.8
million and $19.7 million for the same period in 1997. The largest components of
noninterest income are service charges on deposit accounts and other non-yield
customer service fees and mortgage banking revenues.
Service charges on deposit accounts and customer service fees were $3.8
million and $10.7 million for the three and nine month periods ended September
30, 1998, respectively, compared to $3.2 million and $9.2 million for the same
periods in 1997. The increase in service charges corresponds to the increase in
deposit balances provided by internal growth, the acquisitions of Surety Bank
and Pacific Bay and the additional services available and utilized by First
Banks' commercial customers.
Mortgage banking revenues consist primarily of loan servicing fees, net
and gain on mortgage loans sold and held for sale. Loan servicing fees, net,
decreased to $177,000 and $880,000 for the three and nine month periods ended
September 30, 1998, respectively, from $398,000 and $1.3 million for the same
periods in 1997. This decrease is attributable to the reduction in loans
serviced for others resulting from the repayment and prepayment of the portfolio
and the current strategy of selling the new production of adjustable-rate and
non-conforming residential mortgage loans on a servicing released basis. The
gain on mortgage loans sold and held for sale increased to $1.8 million and $3.7
million for the three and nine month periods ended September 30, 1998, from
$162,000 and $370,000 for the same periods in 1997, respectively. This increase
is attributable to an increased volume of loans sold and held for sale including
fixed rate residential mortgage loans, which are sold on a servicing retained
basis, and adjustable-rate and non-conforming residential mortgage loans, which
are sold on a servicing released basis.
The gain on sales of securities, net, of $559,000 and $815,000 for the
three and nine month periods ended September 30, 1998, respectively, resulted
from sales of available-for-sale securities to facilitate the funding of loan
growth. The gain on sale of securities, net, of $2.24 million for the three and
nine month periods ended September 30, 1997 is attributable to the sales of
certain residual securities which had been acquired by First Banks through an
acquisition completed in 1995. These residuals, which had been written-down to
diminimous values at the date of acquisition, entitled First Banks to the
remaining cash flows of certain collateralized mortgage-backed residual
securities (CMOs) available upon redemption of the CMOs. However, the
combination of the unique structure of these CMOs and changes in interest rate
and mortgage markets combined to significantly enhance their value in 1997. The
residual securities sold were classified as available for sale within the
investment security portfolio.
Other income was $2.1 million and $6.2 million for the three and nine
month periods ended September 30, 1998, respectively, compared to $1.9 million
and $4.3 million for the same periods in 1997. The primary component of the
increase consists of $827,000 and $2.2 million recognized as income on
bank-owned life insurance (BOLI) policies for the three and nine month periods
ended September 30, 1998, respectively. The BOLI balance was $76.2 million and
is included in other assets.
<PAGE>
Noninterest Expense
Noninterest expense was $36.1 million and $103.2 million for the three
and nine month periods ended September 30, 1998, respectively, compared to $27.9
million and $80.9 million for the same periods in 1997. The increase in
noninterest expense is attributable to the acquisitions of Surety Bank and
Pacific Bay and the continued expansion of First Banks' commercial and retail
functions within existing markets.
Salaries and employee benefits have increased to $14.6 million and
$41.9 million for the three and nine month periods ended September 30, 1998,
from $10.8 million and $31.7 million for the same periods in 1997. The increase
is attributable to the newly acquired banks and First Banks' continued
commitment to expanding its commercial and retail business development
capabilities.
Data processing fees for the three and nine month periods ended
September 30, 1998 were $3.7 million and $9.7 million, compared to $2.3 million
and $5.8 million for the same periods in 1997, respectively. First Services,
L.P., a limited partnership indirectly owned by First Banks' Chairman and his
immediate family, provides data processing and related services for First Banks.
The increase for the third quarter of 1998 is primarily attributable to the
additional services provided by First Services, L.P. to meet the increasing
technology requirements of the banking industry and the additional costs
associated with the data processing conversions of newly acquired entities and
system upgrades. Expenses billed by First Services, L.P. associated with the
year 2000 efforts were $200,000 for the three and nine month periods ended
September 30, 1998.
Contributing further to the increase in noninterest expense is the
guaranteed preferred debenture expense. For the three and nine month periods
ended September 30, 1998, the cost was $2.8 million and $6.8 million,
respectively, compared to $2.1 million and $5.5 million for the same periods in
1997. The increases for 1998 are attributable to FBA's issuance of Preferred
Securities in July 1998 (as described in Note 4 to the consolidated financial
statements) and First Banks' issuance of similar securities in February 1997.
Other noninterest expense for the nine months ended September 30, 1998
includes a $1.1 million charitable contribution to the Affordable Housing
Assistance Program. In addition, the Subsidiary Banks settled two lawsuits
resulting in approximately $500,000 being charged to other noninterest expense
during the nine month period ended September 30, 1998.
Lending and Credit Management
Interest earned on the loan portfolio is the primary source of income
of First Banks. Total loans, net of unearned discount, represented 76.9% and
72.1% of total assets as of September 30, 1998 and December 31, 1997,
respectively. Total loans, excluding loans held for sale and net of unearned
discount, increased by $383.0 million to $3.3 billion at September 30, 1998,
from $2.9 billion at December 31, 1997. The increase reflects continued growth
within corporate lending of $503.3 million, offset by the decrease of the
residential mortgage and increase of the consumer and installment loan
portfolios of $157.8 million and $31.8 million, respectively, at September 30,
1998 in comparison to December 31, 1997. These fluctuations are attributable to
the reductions of new loan origination volumes that are held for investment, the
securitization and transfer of $64.5 million in residential real estate loans to
investment securities available for sale, and the continued repayment of
principal on the existing portfolios.
<PAGE>
The following is a summary of nonperforming assets by category:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Commercial, financial and agricultural....................................... $ 6,709 6,025
Real estate construction and development..................................... 6,386 4,097
Real estate mortgage......................................................... 20,610 19,305
Consumer and installment..................................................... 192 94
---------- ----------
Total nonperforming loans........................................... 33,897 29,521
Other real estate............................................................ 5,861 7,324
---------- ----------
Total nonperforming assets.......................................... $ 39,758 36,845
========== ==========
Loans, net of unearned discount.............................................. $3,432,484 3,002,200
========== =========
Loans past due 90 days or more
and still accruing........................................................ $ 3,238 2,725
========== =========
Asset Quality Ratios:
Allowance for possible loan losses to loans .............................. 1.76% 1.68%
Nonperforming loans to loans.............................................. 0.99 0.98
Allowance for possible loan losses
to nonperforming loans................................................. 178.64 171.10
Nonperforming assets to loans and other real estate....................... 1.16 1.22
========== ===========
</TABLE>
Nonperforming loans, consisting of loans on nonaccrual status and
restructured loans, were $33.9 million at September 30, 1998 in comparison to
$29.5 million at December 31, 1997. Impaired loans, consisting of nonaccrual
loans, were $32.4 million and $24.1 million at September 30, 1998 and December
31, 1997, respectively. These increases are primarily attributable to corporate
banking loans, including commercial, financial and agricultural, construction
and commercial real estate loans, and the loans obtained through the
acquisitions of Pacific Bay and Republic Bank.
The following is a summary of loan loss experience for the three and nine
month periods ended September 30:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(dollars expressed in thousands)
Allowance for possible loan losses,
<S> <C> <C> <C> <C>
beginning of period.................................................. $ 55,591 47,708 50,509 46,781
Acquired allowances for possible loan losses............................. 2,315 -- 3,200 --
-------- -------- ------- --------
57,906 47,708 53,709 46,781
-------- -------- ------- --------
Loans charged-off........................................................ (1,899) (2,062) (6,037) (12,710)
Recoveries of loans previously charged-off............................... 2,271 1,994 6,656 7,544
-------- -------- ------- --------
Net loan (charge-offs) recoveries................................... 372 (68) 619 (5,166)
-------- -------- ------- --------
Provision for possible loan losses....................................... 2,275 3,100 6,225 9,125
-------- -------- ------- --------
Allowance for possible loan losses, end of period........................ $ 60,553 50,740 60,553 50,740
======== ======== ======= ========
</TABLE>
The allowance for possible loan losses is monitored on a monthly basis.
Each month, credit administration provides First Banks' management with detailed
lists of loans on the watch list and summaries of the entire loan portfolio of
each Subsidiary Bank by risk rating. These are coupled with analyses of changes
in the risk profiles of the portfolios, changes in past due and nonperforming
loans and changes in watch list and classified loans over time. In this manner,
the overall increases or decreases in the levels of risk in the portfolios are
monitored continually. Factors are applied to the loan portfolios for each
category of loan risk to determine acceptable levels of allowance for possible
loan losses. These factors are derived primarily from the actual loss experience
<PAGE>
of the Subsidiary Banks and from published national surveys of norms in the
industry. The calculated allowances required for the portfolios are then
compared to the actual allowance balances to determine the provisions necessary
to maintain the allowances at appropriate levels. In addition, management
exercises judgment in its analysis of determining the overall level of the
allowance for possible loan losses. In its analysis, management considers the
change in the portfolio, including growth and composition, and the economic
conditions of the regions in which First Banks operates. Based on this
quantitative and qualitative analysis, the allowance for possible loan losses is
adjusted. Such adjustments are reflected in the consolidated statements of
income.
Interest Rate Risk Management
Derivative financial instruments held by First Banks for purposes of
managing interest rate risk are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
---------------------- --- ------------------
Notional Credit Notional Credit
amount exposure amount exposure
------ -------- ------ --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Interest rate swap agreements.......................... $ 280,000 -- -- --
Interest rate floor agreements......................... 70,000 120 70,000 26
Interest rate cap agreement............................ 10,000 28 10,000 222
Forward commitments to sell
mortgage-backed securities........................... 65,000 -- 60,000 --
</TABLE>
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 derivative financial
instruments. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the derivatives.
Previously, First Banks utilized interest rate swap agreements to
lengthen the repricing characteristics of certain interest-bearing liabilities
to correspond more closely with its assets, with the objective of stabilizing
net interest income over time. The utilization of these swaps decreased
consistent with the change in the composition of the balance sheet, resulting in
no open swap agreements as of December 31, 1997. Deferred losses on terminated
swap agreements are being amortized over the remaining lives of the swap
agreements. If all or any portion of the underlying liabilities are repaid, the
related deferred losses are charged to operations. The net interest expense for
these agreements, consisting solely of amortization of deferred losses, was $2.9
million and $4.4 million for the nine month periods ended September 30, 1998 and
1997, respectively. At September 30, 1998 and December 31, 1997, the unamortized
balance of these deferred losses was $6.5 million and $9.4 million,
respectively.
During 1998, First Banks entered into $280.0 million interest rate swap
agreements (Swap Agreements) to effectively shorten the repricing
characteristics of certain interest-bearing liabilities to correspond more
closely with its assets, with the objective of stabilizing net interest income
over time. In contrast to previous swap agreements, these Swap Agreements
provide for First Banks to receive a fixed rate of interest and pay an
adjustable rate equivalent to the 90-day London Interbank Offering Rate (LIBOR).
The terms of the Swap Agreements provide for First Banks to pay quarterly and
receive payment semi-annually. The net amount due to First Banks under the Swap
Agreements was $214,000 at September 30, 1998. The unrealized gain on the Swap
Agreements was $5.3 million at September 30, 1998.
First Banks has interest rate cap and floor agreements outstanding to
limit the interest expense associated with certain interest-bearing liabilities.
At September 30, 1998 and December 31, 1997, the unamortized costs for these
agreements were $192,000 and $290,000, respectively, and were included in other
assets.
<PAGE>
Derivative financial instruments issued by First Banks consist of
commitments to originate fixed-rate loans. Commitments to originate fixed-rate
loans consist primarily of residential real estate loans. These loan
commitments, net of estimated underwriting fallout, and loans held for sale are
hedged with forward contracts to sell mortgage-backed securities.
Liquidity
The liquidity of First Banks and its Subsidiary Banks is the ability to
maintain a cash flow which is adequate to fund operations, service debt
obligations and meet other commitments on a timely basis. The primary sources of
funds for liquidity are derived from customer deposits, loan payments,
maturities, sales of investments and earnings.
In addition, First Banks and its Subsidiary Banks may avail themselves
of more volatile sources of funds through issuance of certificates of deposit in
denominations of $100,000 or more, federal funds borrowed, securities sold under
agreements to repurchase and other borrowings, including the Credit Agreement.
The aggregate funds acquired from those sources were $378.6 million at September
30, 1998 and $328.7 million at December 31, 1997.
At September 30, 1998, First Banks' more volatile sources of funds
mature as follows:
(dollars expressed
in thousands)
Three months or less................................. $ 219,739
Over three months through six months................. 49,830
Over six months through twelve months................ 72,899
Over twelve months................................... 36,168
-----------
Total.............................................. $ 378,636
===========
Management believes the future earnings of its Subsidiary Banks will be
sufficient to provide funds for growth and to permit the distribution of
dividends to First Banks sufficient to meet First Banks' operating and debt
service requirements both on a short-term and long-term basis and to pay the
dividends on the Preferred Securities.
Year 2000
First Banks and the Subsidiary Banks are subject to risks associated
with the "Year 2000" problem, a term which refers to uncertainties about the
ability of various data processing hardware and software systems to interpret
dates correctly after the beginning of the Year 2000.
As described in Note 2, data processing services are provided to First
Banks by First Services L.P. under the terms of data processing agreements. To
address the Year 2000 problem, First Banks, working jointly with First Services
L.P., has established a dedicated team to coordinate the overall Year 2000
Preparedness Program (Program) under the guidelines of the Comprehensive Year
2000 Plan (Plan) as approved by the Board of Directors. The Plan summarizes each
major phase of the Program and the estimated costs to remediate and test systems
in preparation for the Year 2000. The major phases of the Program are awareness,
assessment, remediation, validation and implementation.
The awareness phase included a company-wide campaign to communicate the
Year 2000 problem and the potential ramifications to the organization.
Concurrent with this phase, the Year 2000 Program Team (Team) began the
assessment phase of the Program. The assessment phase included the inventorying
of systems that may be impacted by the Year 2000 problem. The business use of
each inventoried item was then analyzed and prioritized in varying degrees from
critical to non-critical, based upon the perceived adverse effect on the
<PAGE>
financial condition of First Banks in the event of a loss or interruption in the
use of each system. The awareness and assessment phases of the Program were
completed as scheduled.
First Banks' critical systems are purchased from industry-known
vendors. Such systems are generally used in their standard configuration, that
is, with minor modification. Focusing on these critical systems, First Banks is
closely reviewing and monitoring the Year 2000 progress as reported by each
vendor and testing, when possible, on a system separate from the on-line
production system. The review of non-critical in-house systems and external
providers of data processing services, including critical and non-critical
systems, has commenced and should be completed by June 30, 1999.
For the critical systems that have been modified, the vendors provided
remediation for such systems that were not otherwise reported as "Year
2000-ready." As the remediation phase was completed within the stated deadline,
First Banks did not invoke any remediation contingency efforts.
With the remediation phase of the program complete, the objective for
the fourth quarter of 1998 is to complete the validation phase for critical
in-house systems, including remediated systems provided by third party vendors.
A system is deemed validated upon completion of an approved test plan,
contingency plan and system testing of the Year 2000 compliant version without
significant problems.
First Banks has accelerated one major project, its teller system
replacement, since the existing system is not Year 2000 compliant. While
planning for the replacement of the teller system has been underway for several
years, the implementation was accelerated based on the potential Year 2000
impact. The reviewing and testing of the selected teller system is in process
and should be completed by December 31, 1998. In addition, First Banks has
identified a back-up teller system, which is being subjected to a similar
review, in the event the selected teller system does not meet First Banks'
requirements. The new teller system should be installed in selected bank test
locations during the fourth quarter of 1998 with implementation in the remaining
locations to be substantially completed by June 30, 1999. The estimated cost of
the teller replacement is $8.0 million and is expected to be charged to expense
over a 60 month period commencing in the third quarter of 1999. First Banks is
also upgrading its local area network-based systems, networks and core
processor, and is accelerating the purchase of certain item processing
equipment, as the current equipment, which is fully depreciated, is not Year
2000 compliant. The estimated cost of these upgrades and item processing
equipment is $3.9 million and $1.4 million, respectively, and is expected to be
charged to expense over 60 months commencing in the first quarter of 1999.
The final phase of the Program is the implementation of remediated and
other systems into the operating environment of First Banks. The final phase of
the Program is scheduled to be completed by June 30, 1999.
Concurrent with the development and execution of the Plan is the
evolution of First Banks' Year 2000 Contingency Plan (Contingency Plan). The
Contingency Plan is intended to be a living document changing and developing to
reflect the results of the Program. The Contingency Plan includes the
contingency procedures for common systems, coordinated by the Team, and
departmental specific systems, coordinated by the appropriate departmental
manager and the assigned Team member. The Contingency Plan addresses a variety
of issues including critical systems, credit risk, liquidity, loan and deposit
customers, facilities, supplies and computer hot-site location.
First Banks is also completing an assessment of Year 2000 risks
relating to its lines of business separate from its dependence on data
processing. The assessment includes a review of larger commercial loan and
deposit customers to ascertain their overall preparedness regarding Year 2000
risks. The process requires lending and other banking officers to meet with
their customers to review and assess their overall preparedness for Year 2000
risks. While the process of evaluating the potential adverse effects of Year
2000 risks on these customers is substantially complete, it is not possible to
quantify the overall potential adverse effects to First Banks resulting from
these customers' failure to adequately prepare for the Year 2000. The failure of
a commercial bank customer to prepare adequately for Year 2000 could have a
<PAGE>
significant adverse effect on such customer's operations and profitability, in
turn inhibiting its ability to repay loans in accordance with their terms or
requiring the use of its deposited funds. First Banks is also reviewing and
structuring certain funding sources to facilitate the Subsidiary Banks'
liquidity requirements under varying cash flow assumptions.
The Plan also provides for the identification and communication with
significant non-data processing third party vendors regarding their preparedness
for Year 2000 risks. The results of this process have revealed no significant
business risks to First Banks; however, additional investigation is scheduled
for the fourth quarter of 1998 and the first quarter of 1999.
The total cost of the Program is currently estimated at $16.2 million,
comprised of capital improvements of $13.3 million and direct expenses of $2.9
million. The capital improvements, as previously discussed, will be charged to
expense in the form of depreciation expense or lease expense, generally over a
period of 60 months. First Banks incurred direct expenses related to the Program
of approximately $200,000 during the third quarter of 1998. Similarly, First
Banks expects the Program to incur expenses of approximately $500,000 for the
last quarter of 1998. In addition, First Banks is estimating direct expenses of
$2.2 million for the duration of the Program. The total cost of the Program does
not include certain incremental expenses of temporary employees and contractors
positioned outside the Program Team in other operating units. These individuals
are providing assistance to other departments, allowing the more seasoned staff
to test and facilitate the Program. The total cost could vary significantly from
those currently estimated for unforeseen circumstances which could develop in
carrying out the Program.
While First Banks is making a substantial effort to become Year 2000
compliant, there is no assurance the failure to adequately address all issues
relating to the Year 2000 problem would not have a material adverse effect on
its financial condition or results of operations.
Effects of New Accounting Standards
First Banks adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 130 - Reporting Comprehensive Income (SFAS 130)
retroactively on January 1, 1998. SFAS 130 established standards for reporting
and displaying income and its components (revenues, gains, and losses) in a full
set of general purpose financial statements. SFAS 130 requires all items that
are required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comparative financial
statements provided for earlier periods have been restated to reflect the
application of SFAS 130. The implementation of SFAS 130 did not have material
impact on First Banks' consolidated financial statements.
During 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131 - Disclosures about Segments of an Enterprise and Related
Information (SFAS 131). SFAS 131 establishes standards for the way public
business enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. Additionally, SFAS 131 establishes standards for related
disclosures about products and services, geographic areas, and major customers
superseding SFAS No. 14 - Financial Reporting for Segments of a Business
Enterprise. First Banks is currently evaluating the requirements of SFAS 131 and
believes expanded disclosure information will be required to be included in
First Banks' consolidated financial statements for fiscal years beginning after
December 15, 1997.
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires an entity to recognize
<PAGE>
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. Earlier application of SFAS 133 is
encouraged but should not be applied retroactively to financial statements of
prior periods. First Banks is currently evaluating the requirements and impact
of SFAS 133.
Part II- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
Exhibit
Number Description
------ -----------
11 Calculations of Earnings Per Share.
27 Article 9 - Financial Data Schedule (EDGAR only)
(b) First Banks filed no reports on Form 8-K during the three month period
ended September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST BANKS, INC.
Registrant
Date: November 10, 1998 By: /s/ James F. Dierberg
---------------------
James F. Dierberg
Chairman, President and
Chief Executive Officer
Date: November 10, 1998 By: /s/ Allen H. Blake
------------------
Allen H. Blake
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
<PAGE>
Exhibit 11
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for the periods indicated:
<TABLE>
<CAPTION>
Income Shares Per-share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars expressed in thousands, except per share data)
Three months ended September 30, 1998:
<S> <C> <C> <C>
Basic EPS-income available to common stockholders......... $ 8,391 23,661 $ 354.65
=========
Effect of dilutive securities:
Class A convertible preferred stock..................... 193 1,311
------- -------
Diluted EPS-income available to common stockholders....... $ 8,584 24,972 $ 343.73
======= ======= =========
Three months ended September 30, 1997:
Basic EPS-income available to common stockholders......... $ 7,285 23,661 $ 307.87
=========
Effect of dilutive securities:
Class A convertible preferred stock..................... 192 1,650
------- -------
Diluted EPS-income available to common stockholders....... $ 7,477 25,311 $ 295.45
======= ======= =========
Nine months ended September 30, 1998:
Basic EPS-income available to common stockholders......... $22,305 23,661 $ 942.70
=========
Effect of dilutive securities:
Class A convertible preferred stock..................... 513 1,389
------- -------
Diluted EPS-income available to common stockholders....... $22,818 25,050 $ 910.91
======= ======= =========
Nine months ended September 30, 1997:
Basic EPS-income available to common stockholders......... $20,496 23,661 $ 866.21
=========
Effect of dilutive securities:
Class A convertible preferred stock..................... 513 1,650
------- -------
Diluted EPS-income available to common stockholders....... $21,009 25,311 $ 830.16
======= ======= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000710507
<NAME> First Banks, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 130,186
<INT-BEARING-DEPOSITS> 2,657
<FED-FUNDS-SOLD> 10,200
<TRADING-ASSETS> 3,882
<INVESTMENTS-HELD-FOR-SALE> 635,693
<INVESTMENTS-CARRYING> 20,519
<INVESTMENTS-MARKET> 0
<LOANS> 3,432,484
<ALLOWANCE> 60,553
<TOTAL-ASSETS> 4,461,294
<DEPOSITS> 3,866,764
<SHORT-TERM> 105,519
<LIABILITIES-OTHER> 107,252
<LONG-TERM> 127,402
0
13,063
<COMMON> 5,915
<OTHER-SE> 235,379
<TOTAL-LIABILITIES-AND-EQUITY> 4,461,294
<INTEREST-LOAN> 209,430
<INTEREST-INVEST> 31,676
<INTEREST-OTHER> 2,541
<INTEREST-TOTAL> 243,647
<INTEREST-DEPOSIT> 114,535
<INTEREST-EXPENSE> 122,045
<INTEREST-INCOME-NET> 121,602
<LOAN-LOSSES> 6,225
<SECURITIES-GAINS> 1,430
<EXPENSE-OTHER> 103,202
<INCOME-PRETAX> 36,298
<INCOME-PRE-EXTRAORDINARY> 36,298
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,829
<EPS-PRIMARY> 942.70
<EPS-DILUTED> 910.91
<YIELD-ACTUAL> 8.31
<LOANS-NON> 32,400
<LOANS-PAST> 3,238
<LOANS-TROUBLED> 113
<LOANS-PROBLEM> 27,364
<ALLOWANCE-OPEN> 53,709
<CHARGE-OFFS> (6,037)
<RECOVERIES> 6,656
<ALLOWANCE-CLOSE> 60,553
<ALLOWANCE-DOMESTIC> 60,553
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,163
</TABLE>
