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 March 31, 1999
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)
-----------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
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 April 30, 1999
----- --------------
Common Stock, $250.00 par value 23,661
<PAGE>
First Banks, Inc.
INDEX
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1999
<S> <C> <C>
and December 31, 1998...................................................... -1-
Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998....................................... -3-
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the three months ended March 31,
1999 and 1998 and the nine months ended
December 31, 1998.......................................................... -4-
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998.............................................. -5-
Notes to Consolidated Financial Statements..................................... -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... -11-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................... -22-
SIGNATURES....................................................................................... -23-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST BANKS, INC.
Consolidated Balance Sheets (unaudited)
(dollars expressed in thousands, except per share data)
March 31, December 31,
1999 1998
---- ----
ASSETS
------
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks............................................... $ 148,432 174,329
Interest-bearing deposits with other financial
institutions with maturities of three months or less................. 2,085 3,733
Federal funds sold.................................................... 27,700 36,700
----------- ----------
Total cash and cash equivalents................................. 178,217 214,762
----------- ----------
Investment securities:
Trading, at fair value................................................ -- 3,425
Available for sale, at fair value..................................... 442,272 509,695
Held to maturity, at amortized cost (fair value of
$23,376 and $22,568 at March 31, 1999 and
December 31,1998, respectively).................................... 22,650 21,676
----------- ----------
Total investment securities..................................... 464,922 534,796
----------- ----------
Loans:
Commercial, financial and agricultural................................ 937,633 920,007
Real estate construction and development.............................. 791,534 720,910
Real estate mortgage.................................................. 1,615,842 1,529,177
Consumer and installment ............................................. 300,679 282,549
Loans held for sale................................................... 125,324 135,619
----------- ----------
Total loans ...................................................... 3,771,012 3,588,262
Unearned discount..................................................... (6,604) (8,157)
Allowance for possible loan losses.................................... (65,239) (60,970)
----------- ----------
Net loans....................................................... 3,699,169 3,519,135
----------- ----------
Bank premises and equipment, net of accumulated
depreciation and amortization......................................... 70,478 63,848
Intangibles associated with the purchase of subsidiaries................. 44,045 36,534
Mortgage servicing rights, net of amortization........................... 9,838 9,825
Accrued interest receivable.............................................. 27,778 28,465
Other real estate........................................................ 3,376 3,709
Deferred income taxes.................................................... 50,489 46,848
Other assets............................................................. 86,322 96,888
----------- ----------
Total assets.................................................... $ 4,634,634 4,554,810
=========== ==========
</TABLE>
<PAGE>
FIRST BANKS, INC.
Consolidated Balance Sheets (unaudited)
(dollars expressed in thousands, except per share data)
(continued)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
LIABILITIES
-----------
Deposits:
Demand:
<S> <C> <C>
Non-interest-bearing............................................ $ 540,589 561,383
Interest-bearing................................................ 366,960 377,435
Savings........................................................... 1,288,518 1,198,567
Time:
Time deposits of $100 or more................................... 240,466 219,996
Other time deposits............................................. 1,627,892 1,582,604
----------- -----------
Total deposits............................................... 4,064,425 3,939,985
Other borrowings...................................................... 67,376 121,331
Notes payable......................................................... 50,000 50,048
Accrued interest payable.............................................. 9,855 5,817
Deferred income taxes................................................. 11,887 10,920
Accrued and other liabilities......................................... 24,737 20,652
Minority interest in subsidiary....................................... 11,768 15,251
----------- -----------
Total liabilities............................................ 4,240,048 4,164,004
----------- -----------
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debenture........................... 83,315 83,288
First Banks America, Inc. subordinated debenture................... 44,171 44,155
----------- -----------
Total guaranteed preferred beneficial interests in
subordinated debentures.................................... 127,486 127,443
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized; no shares issued
and outstanding at March 31, 1999 and December 31, 1998........ -- --
Class A convertible, adjustable rate, $20.00 par value; 750,000
shares authorized; 641,082 shares issued and outstanding....... 12,822 12,822
Class B adjustable rate, $1.50 par value; 200,000 shares
authorized; 160,505 shares issued and outstanding.............. 241 241
Common stock, $250.00 par value; 25,000 shares
authorized; 23,661 shares issued and outstanding................... 5,915 5,915
Capital surplus....................................................... 2,815 780
Retained earnings..................................................... 235,942 231,867
Accumulated other comprehensive income................................ 9,365 11,738
----------- -----------
Total stockholders' equity............................. 267,100 263,363
----------- -----------
Total liabilities and stockholders' equity............. $ 4,634,634 4,554,810
=========== ===========
</TABLE>
The accompanying notes are an integral part of the 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
March 31,
---------
1999 1998
---- ----
Interest income:
<S> <C> <C>
Interest and fees on loans.............................................................. $ 74,675 66,738
Investment securities................................................................... 7,662 11,056
Federal funds sold and other............................................................ 223 1,136
-------- --------
Total interest income............................................................. 82,560 78,930
-------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................................... 1,114 1,474
Savings............................................................................... 10,929 9,553
Time deposits of $100 or more......................................................... 2,775 3,044
Other time deposits................................................................... 21,130 24,017
Interest rate exchange agreements, net.................................................. 1,283 989
Notes payable and other borrowings...................................................... 1,735 1,524
-------- --------
Total interest expense............................................................ 38,966 40,601
-------- --------
Net interest income............................................................... 43,594 38,329
-------- --------
Provision for possible loan losses........................................................... 2,490 2,100
-------- --------
Net interest income after provision for possible loan losses...................... 41,104 36,229
-------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees........................... 3,882 3,375
Credit card fees........................................................................ 26 862
Loan servicing fees, net................................................................ 221 299
Gain on mortgage loans sold and held for sale........................................... 2,332 1,038
Net gain on sales of available-for-sale securities...................................... 677 92
Net gain (loss) on sales of trading securities.......................................... (303) 58
Other................................................................................... 2,768 2,070
-------- --------
Total noninterest income.......................................................... 9,603 7,794
-------- --------
Noninterest expense:
Salaries and employee benefits.......................................................... 14,502 12,879
Occupancy, net of rental income......................................................... 2,883 2,423
Furniture and equipment................................................................. 1,901 1,587
Federal Deposit Insurance Corporation premiums.......................................... 332 375
Postage, printing and supplies.......................................................... 1,142 1,406
Data processing fees.................................................................... 4,536 2,966
Legal, examination and professional fees................................................ 1,320 1,056
Credit card............................................................................. 168 792
Communications.......................................................................... 681 726
Advertising and business development.................................................... 659 865
Gain (loss) on sales of other real estate, net of expenses.............................. (53) 380
Guaranteed preferred debentures......................................................... 3,014 2,021
Other................................................................................... 4,402 4,583
-------- --------
Total noninterest expense......................................................... 35,487 32,059
-------- --------
Income before provision for income taxes and minority interest in income
of subsidiary.................................................................. 15,220 11,964
Provision for income taxes................................................................... 5,638 4,256
-------- --------
Income before minority interest in income of subsidiary........................... 9,582 7,708
Minority interest in income of subsidiary.................................................... 311 342
-------- --------
Net income........................................................................ 9,271 7,366
Preferred stock dividends.................................................................... 196 197
-------- --------
Net income available to common stockholders....................................... $ 9,075 7,169
======== ========
Earnings per share:
Basic................................................................................... $ 383.52 302.99
Diluted................................................................................. 372.57 293.85
======== ========
Weighted average shares of common stock outstanding.......................................... 23,661 23,661
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FIRST BANKS, INC.
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income (unaudited)
(dollars expressed in thousands, except per share data)
Three months ended March 31, 1999 and 1998 and nine months ended
December 31, 1998
<TABLE>
<CAPTION>
Accu-
Adjustable rate mulated
preferred stock other Total
---------------
Class A Compre- compre- stock-
conver- Common Capital hensive Retained hensiveholders'
tible Class B stock surplus income earnings income equity
----- ------- ----- -------------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated balances, January 1,1998..................... $12,822 241 5,915 3,978 199,143 9,438 231,537
Three months ended March 31, 1998:
Comprehensive income:
Net income......................................... -- -- -- -- 7,366 7,366 -- 7,366
Other comprehensive income net of tax (1) -
Unrealized gains on securities, net of
reclassification adjustment (2)................ -- -- -- -- 992 -- 992 992
-------
Comprehensive income............................... 8,358
=======
Class A preferred stock dividends, $.30 per share.... -- -- -- -- (193) -- (193)
Class B preferred stock dividends, $.03 per share.... -- -- -- -- (4) -- (4)
Effect of capital stock transactions of
majority-owned subsidiary.......................... -- -- -- (1,460) -- -- (1,460)
------- --- ---- ------ ------- ------ --------
Consolidated balances, March 31, 1998..................... 12,822 241 5,915 2,518 206,312 10,430 238,238
Nine months ended December 31, 1998: Comprehensive income:
Net income......................................... -- -- -- -- 26,144 26,144 -- 26,144
Other comprehensive income, net of tax (1) -
Unrealized gains on securities, net of
reclassification adjustment (2)................ -- -- -- -- 1,308 -- 1,308 1,308
-------
Comprehensive income............................... 27,452
=======
Class A preferred stock dividends, $.90 per share..... -- -- -- -- (576) -- (576)
Class B preferred stock dividends, $.08 per share..... -- -- -- -- (13) -- (13)
Effect of capital stock transactions of
majority-owned subsidiary.......................... -- -- -- (1,738) -- -- (1,738)
------- --- ---- ------ ------- ------ --------
Consolidated balances, December 31, 1998.................. 12,822 241 5,915 780 231,867 11,738 263,363
Three months ended March 31, 1999: Comprehensive income:
Net income......................................... -- -- -- -- 9,271 9,271 -- 9,271
Other comprehensive income, net of tax (1) -
Unrealized losses on securities, net of
reclassification adjustment (2) ............... -- -- -- -- (2,373) -- (2,373) (2,373)
-------
Comprehensive income............................... 6,898
=======
Class A preferred stock dividends, $.30 per share..... -- -- -- -- (192) -- (192)
Class B preferred stock dividends, $.03 per share..... -- -- -- -- (4) -- (4)
Effect of capital stock transactions of
majority-owned subsidiary.......................... -- -- -- (2,965) -- -- (2,965)
Reclassification of retained earnings................. -- -- -- 5,000 (5,000) -- --
------- --- ----- ------ ------- ----- --------
Consolidated balances, March 31, 1999..................... $12,822 241 5,915 2,815 235,942 9,365 267,100
======== ==== ===== ====== ======= ===== ========
- ----------------------------
(1) Components of other comprehensive income are shown net of tax.
(2) Disclosure of reclassification adjustment:
Three months ended Nine months ended
March 31, December 31,
--------------- ---------------
1999 1998 1998
---- ---- ----
Unrealized gains (losses) arising during the period............................ $ (1,934) 1,052 2,201
Less: reclassification adjustment for gains included in net income............. 439 60 893
------- ----- -----
Unrealized gain (loss) on securities........................................... $ (2,373) 992 1,308
======= ===== =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FIRST BANKS, INC.
Consolidated Statements of Cash Flows (unaudited)
(dollars expressed in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income............................................................. $ 9,271 7,366
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization of bank premises
and equipment................................................... 1,596 1,245
Amortization, net of accretion..................................... 3,066 2,580
Originations and purchases of loans held for sale.................. (161,378) (102,010)
Proceeds from the sale of loans held for sale...................... 168,532 46,525
Provision for possible loan losses................................. 2,490 2,100
Provision for income taxes......................................... 5,638 4,256
Payments of income taxes........................................... (1,491) (2,149)
Decrease in accrued interest receivable ........................... 1,557 848
Net decrease (increase) in trading securities...................... 3,425 (2,456)
Interest accrued on liabilities.................................... 38,966 40,601
Payments of interest on liabilities................................ (35,861) (40,455)
Gain on sale of branch facility.................................... (247) --
Net gain on sales of available for sale securities................. (677) (92)
Other operating activities, net.................................... 456 1,346
Minority interest in income of subsidiary.......................... 311 342
-------- --------
Net cash provided by (used in) operating activities........... 35,654 (39,953)
-------- --------
Cash flows from investing activities:
Cash (paid) received for acquired entities, net of cash and cash
equivalents received (paid).......................................... (17,245) 16,895
Proceeds from sales of investment securities available for sale........ 49,467 4,000
Maturities of investment securities available for sale................. 54,682 141,989
Maturities of investment securities held to maturity................... 998 641
Purchases of investment securities available for sale.................. (7,297) (78,547)
Purchases of investment securities held to maturity.................... (1,982) (800)
Net increase in loans.................................................. (48,315) (9,814)
Recoveries of loans previously charged-off ............................ 2,224 2,605
Purchases of bank premises and equipment............................... (6,717) (4,180)
Other investing activities............................................. (5,543) (1,982)
-------- --------
Net cash provided by investing activities..................... 20,272 70,807
-------- --------
Cash flows from financing activities:
(Decrease) increase in demand and savings deposits..................... (37,729) 55,634
Increase in time deposits.............................................. 2,311 33,912
Decrease in Federal Home Loan Bank advances............................ (50,000) (1,220)
(Decrease) increase in securities sold under agreements
to repurchase........................................................ (3,955) 9,246
Decrease in notes payable.............................................. (48) (1,548)
Payment of preferred stock dividends................................... (196) (197)
Sale of branch facility................................................ (2,854) --
-------- --------
Net cash (used in) provided by financing activities .......... (92,471) 95,827
-------- --------
Net (decrease) increase in cash and cash equivalents ......... (36,545) 126,681
Cash and cash equivalents, beginning of period ............................. 214,762 168,480
-------- -------
Cash and cash equivalents, end of period.................................... $178,217 295,161
======== =======
Noncash investing and financing activities:
Loans transferred to other real estate................................. $ 317 1,613
======== =========
</TABLE>
The accompanying notes are an integral part of the 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 or the Company) are unaudited and should be read
in conjunction with the consolidated financial statements contained in the 1998
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 month period ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for any other interim period or for the year ending December 31, 1999.
The consolidated financial statements include the accounts of First
Banks, Inc. and its subsidiaries, net of minority interest. All significant
intercompany accounts and transactions have been eliminated. Certain
reclassifications of 1998 amounts have been made to conform with the 1999
presentation.
First Banks operates through its subsidiary bank holding companies and
financial institututions (collectively referred to as the Subsidiary Banks) as
follows:
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:
First Bank Texas N.A., headquartered in Houston, Texas (FB Texas)
First Bank of California, headquartered in Roseville, California (FB
California)
Redwood Bancorp, headquartered in San Francisco, California (Redwood),
and its wholly owned subsidiary:
Redwood Bank, headquartered in San Francisco, California
(Redwood Bank)
CCB Bancorp, Inc., headquartered in Newport Beach, California (CCB), and its
wholly owned subsidiary:
First Bank & Trust, headquartered in Newport Beach, California (FB&T).
The Subsidiary Banks are wholly owned by their respective parent
companies except FBA, which was 76.84% owned by First Banks at December 31,
1998. On February 17, 1999, First Banks completed its purchase of 314,848 shares
of FBA common stock, pursuant to a tender offer to purchase up to 400,000 shares
of FBA common stock. This tender offer increased First Banks' ownership interest
in FBA to 82.34% of the outstanding voting stock of FBA. At March 31, 1999,
First Banks' ownership interest in FBA remained at 82.34%.
(2) Acquisitions
On March 4, 1999, FBA completed its acquisition of Redwood and its
wholly owned subsidiary, Redwood Bank, for cash consideration of $26.0 million.
The acquisition was accounted for using the purchase method of accounting. The
excess of the cost over the fair value of the net assets acquired was $9.4
million and is being amortized over 15 years. The acquisition was funded from
available proceeds from the sale of the 8.50% Guaranteed Preferred Beneficial
Interest in First Banks America, Inc. Subordinated Debenture completed in July
1998. Redwood is headquartered in San Francisco, California and operates four
banking locations in the San Francisco Bay area. Redwood had $183.9 million in
total assets, $134.4 million in loans, net of unearned discount, $32.4 million
in investment securities and $162.9 million in deposits at the acquisition date.
<PAGE>
First Banks, Century Holding Corporation (CHC) and Century Bank
executed a stock purchase agreement (Agreement) on May 7, 1999, providing for
the acquisition of Century Bank, Beverly Hills, California (Century Bank). Under
the Agreement, First Banks will purchase from CHC all of the issued and
outstanding capital stock of Century Bank for an estimated purchase price of
$31.5 million. Century Bank operates six commercial banking locations in Beverly
Hills, Los Angeles, Santa Monica, Marina del Rey, Encino and San Francisco,
California. At March 31, 1999, Century Bank had $160.3 million in total assets,
$80.9 million in loans, net of unearned discount, $42.1 million in investment
securities and $133.7 million in deposits. First Banks expects the transaction,
which is subject to regulatory approvals, to be completed during the third
quarter of 1999.
(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. 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 First Banks and the Subsidiary Banks to maintain certain
minimum ratios. First Banks and the Subsidiary Banks are required to maintain a
minimum risk-based capital to risk-weighted assets ratio of 8.00%, with at least
4.00% being "Tier 1" capital (as defined in the regulations). In addition, a
minimum leverage ratio (Tier 1 capital to average assets) of 3.00% 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 10.00%, a Tier 1
risk-weighted asset ratio of at least 6.00%, and a leverage ratio of at least
5.00%. As of December 31, 1997, the date of the most recent notification from
First Banks' primary regulator, the Subsidiary Banks were categorized as well
capitalized under the regulatory framework for Prompt Corrective Action.
Management believes, as of March 31, 1999, First Banks and the Subsidiary Banks
were well capitalized.
At March 31, 1999 and December 31, 1998, First Banks' and the
Subsidiary Banks' capital ratios were as follows:
<TABLE>
<CAPTION>
Risk based capital ratios
-------------------------
Total Tier 1 Leverage Ratio
----- ------ --------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Banks...................... 10.04% 10.28% 8.64% 9.03% 7.68% 7.77%
First Bank....................... 10.21 10.01 8.95 8.75 7.66 7.46
FB&T............................. 10.40 10.39 9.15 9.13 7.76 7.60
FB Texas......................... 11.02 11.37 9.76 10.11 9.20 9.15
FB California.................... 10.92 10.63 9.66 9.37 8.94 8.34
Redwood Bank (1)................. 10.92 -- 9.98 -- 8.30 --
-----------------------
(1) Redwood Bank was acquired by FBA on March 4, 1999.
</TABLE>
<PAGE>
(4) Business Segment Results
First Banks' business segments are First Bank, FB California, Redwood
Bank, FB Texas, FB&T and First Bank Mortgage (FBM). The reportable business
segments are consistent with the management structure of First Banks and the
internal reporting system that monitors performance.
Through the respective branch networks, First Bank, FB California,
Redwood Bank, FB Texas and FB&T provide similar products and services in four
defined geographic areas. The products and services offered include a broad
range of commercial and personal banking services, including certificates of
deposit, individual retirement and other time deposit accounts, checking and
other demand deposit accounts, interest checking accounts, savings accounts and
money market accounts. Loans include commercial, financial and agricultural,
real estate construction and development, commercial and residential real
estate, consumer and installment, student and Small Business Administration
loans. Other financial services include mortgage banking, credit and debit
cards, discount brokerage, credit-related insurance, automatic teller machines,
telephone account access, safe deposit boxes, trust and private banking services
and cash 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 and Illinois (First
Bank), southern California (FB&T), the San Francisco - Sacramento corridor of
northern California (FB California and Redwood Bank) and Houston, Dallas, Irving
and McKinney, Texas (FB Texas). The products and services are offered to
customers primarily within their respective geographic areas, with the exception
of loan participations executed between these operating segments of First Banks.
There are no foreign operations.
FBM conducts the mortgage banking activities of First Banks. The
mortgage banking activities consist primarily of the origination and purchase of
conforming and nonconforming residential real estate loans, which are generally
sold into the secondary market. The related mortgage servicing rights are
generally maintained for conforming loans while the nonconforming loans are sold
on a servicing released basis. FBM's revenues include the interest earned while
loans are held pending sale, net gains on the sale of loans, and mortgage loan
servicing fees earned from its loan servicing portfolio. The products and
services are offered to customers primarily within First Banks' four geographic
areas. FBM also services certain residential real estate loans for the
Subsidiary Banks for which it receives loan servicing fees.
<PAGE>
The business segment results are summarized below and are consistent
with First Banks' internal reporting system which is consistent, in all material
respects, with generally accepted accounting principles and practices
predominant in the banking and mortgage banking industries. The balance sheet
information is presented as of March 31, 1999 and December 31, 1998, and the
statement of income information is presented for the three months ended March
31, 1999 and 1998, respectively. The business segment results include Redwood
Bank, which was acquired by FBA on March 4, 1999, for the period subsequent to
the acquisition date.
<TABLE>
<CAPTION>
First Bank FB California Redwood Bank (1) FB Texas
----------------------- --------------------- ---------------------- ---------------------
March 31, December 31, March 31, December 31, March 31, December 31, March 31, December 31,
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities................. $ 213,349 252,165 45,837 53,449 32,891 -- 35,917 59,914
Loans, net of unearned discount 2,379,568 2,354,937 327,589 314,977 138,601 -- 221,150 201,426
Total assets.......................... 2,829,735 2,869,648 404,343 410,110 194,084 -- 284,592 300,984
Deposits.............................. 2,621,417 2,623,157 348,218 363,422 167,160 -- 245,377 264,425
Stockholders' equity.................. $ 245,936 236,010 42,960 42,825 25,593 -- 30,397 30,249
========== ========= ======== ======== ========= ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
First Bank FB California Redwood Bank (1) FB Texas
-------------------- ------------------ ------------------ -----------------
Three months ended Three months ended Three months ended Three months ended
March 31, March 31, March 31, March 31,
-------------------- ------------------ -------------------- ------------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income....................... $ 51,471 52,307 8,000 7,757 1,180 -- 5,542 5,237
Interest expense...................... 25,327 26,853 3,079 3,316 442 -- 2,162 2,100
---------- -------- ------- ------ ---- ----- ------ ------
Net interest income................ 26,144 25,454 4,921 4,441 738 -- 3,380 3,137
Provision for possible loan losses.... 2,100 1,600 60 150 -- -- 30 150
---------- -------- ------- ------ ---- ----- ------ ------
Net interest income after provision
for possible loan losses......... 24,044 23,854 4,861 4,291 738 -- 3,350 2,987
---------- -------- ------- ------ ---- ----- ------ ------
Noninterest income (2)................ 4,694 4,049 609 713 26 543 379
Noninterest expense (3)............... 16,705 17,397 3,699 3,730 438 -- 2,279 2,203
---------- --------- ------- ------ ---- ----- ------ ------
Income before provision for income
taxes and minority interest in
income of subsidiary............. 12,033 10,506 1,771 1,274 326 -- 1,614 1,163
Provision for income taxes............ 4,121 3,560 787 535 164 -- 555 410
---------- --------- ------- ------ ---- ----- ------ ------
Income before minority interest
in income of subsidiary.......... 7,912 6,946 984 739 162 -- 1,059 753
Minority interest in income of subsidiary -- -- -- -- -- -- --
---------- --------- ------- ------ ---- ----- ------ ------
Net income......................... $ 7,912 6,946 984 739 162 -- 1,059 753
========== ========= ======= ====== ==== ===== ====== ======
</TABLE>
- -----------------
(1 Redwood Bank was acquired by FBA on March 4, 1999.
(2) FBM includes intercompany loan servicing fees of $169,000 and $324,000
for the three months ended March 31,
1999 and 1998, respectively.
(3) Corporate and other includes $2.0 million and $1.3 million of guaranteed
preferred debenture expense, after applicable income tax benefit of $1.0
million and $700,000 for the three months ended March 31, 1999 and 1998,
respectively.
<PAGE>
<TABLE>
<CAPTION>
Corporate, other and
FB&T FBM intercompany reclassifications Consolidated Totals
-------------------------- ---------------------- ------------------------------ -------------------
March 31, December 31, March 31, December 31, March 31, December 31, March 31, December 31,
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
102,701 134,203 12,135 12,199 22,092 22,866 464,922 534,796
566,374 573,562 129,027 135,619 2,099 (416) 3,764,408 3,580,105
761,684 793,217 145,093 154,952 15,103 25,899 4,634,634 4,554,810
670,818 701,406 28,483 35,873 (17,048) (48,298) 4,064,425 3,939,985
74,533 75,165 2,417 7,663 (154,736) (128,549) 267,100 263,363
======== ======== ======== ======== ======== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Corporate, other and
FB&T FBM intercompany reclassifications Consolidated Totals
------------------------ --------------------- ------------------------------ -------------------
Three months ended Three months ended Three months ended Three months ended
March 31, March 31, March 31, March 31,
------------------------ --------------------- --------------------------- -------------------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
14,341 12,398 2,007 1,315 19 (84) 82,560 78,930
6,199 6,494 1,340 941 417 897 38,966 40,601
------- -------- -------- --------- -------- ------- ---------- --------
8,142 5,904 667 374 (398) (981) 43,594 38,329
300 200 -- -- -- -- 2,490 2,100
------- -------- -------- --------- -------- ------- ---------- --------
7,842 5,704 667 374 (398) (981) 41,104 36,229
------- -------- -------- --------- -------- ------- ---------- --------
1,243 757 2,725 1,718 (237) 178 9,603 7,794
6,552 4,768 2,315 1,225 3,499 2,736 35,487 32,059
------- -------- -------- --------- -------- ------- ---------- --------
2,533 1,693 1,077 867 (4,134) (3,539) 15,220 11,964
1,123 510 377 303 (1,489) (1,062) 5,638 4,256
------- -------- -------- --------- -------- ------- ---------- --------
1,410 1,183 700 564 (2,645) (2,477) 9,582 7,708
-- -- -- -- 311 342 311 342
------- -------- -------- --------- -------- ------- ---------- --------
1,410 1,183 700 564 (2,956) (2,819) 9,271 7,366
======= ======== ======== ========= ======== ======= ========== ========
</TABLE>
<PAGE>
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward looking
statements with respect to the financial condition, results of operations and
business of First Banks. These forward looking statements are subject to certain
risks and uncertainties, not all of which can be predicted or anticipated.
Factors that may cause actual results to differ materially from those
contemplated by the forward looking statements herein include market conditions
as well as conditions specifically 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 conducts its operations,
including competition from banking and non-banking companies with substantially
greater resources than First Banks, some of which may offer and develop products
and services not offered by First Banks; and the ability of First Banks to
respond to changes in technology, including effects of the Year 2000 problem.
With regard to First Banks' efforts to grow through acquisitions, factors that
could affect the accuracy or completeness of forward looking statements
contained herein include the potential for higher than acceptable operating
costs arising from the geographic dispersion of the offices of First Banks, as
compared with competitors operating solely in contiguous markets; the
competition of larger acquirers with greater resources than First Banks,
fluctuations in the prices at which acquisition targets may be available for
sale and in the market for First Banks' securities; and the potential for
difficulty or unanticipated costs in realizing the benefits of particular
acquisition transactions. Additional factors potentially affecting First Banks'
results were identified in the 1998 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
General
First Banks is a registered bank holding company, incorporated in
Missouri in 1978 and headquartered in St. Louis County, Missouri. At March 31,
1999, First Banks had $4.6 billion in total assets; $3.8 billion in total loans,
net of unearned discount; $4.1 billion in total deposits; and $267.1 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 and agricultural,
real estate construction and development, commercial and residential real
estate, consumer and installment, student and Small Business Administration
loans. Other financial services include mortgage banking, credit and debit
cards, discount brokerage, credit-related insurance, automatic teller machines,
telephone account access, safe deposit boxes, trust and private banking services
and cash management services.
The following table lists the Subsidiary Banks at March 31, 1999:
<TABLE>
<CAPTION>
Number of Loans, net of Total
Subsidiary Banks locations Total assets unearned discount deposits
---------------- --------- ------------ ----------------- --------
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
First Bank.............................. 97 $ 2,974,828 2,508,595 2,649,900
CCB:
FB&T............................... 21 761,684 566,374 670,818
FBA:
FB California...................... 10 404,343 327,589 348,218
FB Texas........................... 6 284,592 221,150 245,377
Redwood:
Redwood Bank................... 4 194,084 138,601 167,160
</TABLE>
<PAGE>
Financial Condition
First Banks' total assets increased by $79.8 million to $4.63 billion
from $4.55 billion at March 31, 1999 and December 31, 1998, respectively. As
discussed in Note 2 to the accompanying consolidated financial statements, the
acquisition of Redwood provided assets of $183.9 million. In addition, net
loans, excluding the $134.4 million of loans acquired from Redwood, increased
$49.9 million, which is discussed under "--Lending and Credit Management" of
this Form 10-Q. Offsetting this increase was a reduction in cash and due from
banks precipitated by the purchase of Redwood, and a reduction in investment
securities and federal funds sold of $69.9 million and $9.0 million,
respectively, which provided additional sources of funds for the loan growth.
Total deposits, excluding the deposits provided by the acquisition of Redwood,
and other borrowings decreased by $38.5 million and $54.0 million, respectively.
The decrease in other borrowings was comprised primarily of Federal Home Loan
Bank advances.
Results of Operations
Net Income
Net income was $9.27 million, or $372.57 per share on a diluted basis,
for the three months ended March 31, 1999, compared to $7.37 million, or $293.85
per share on a diluted basis, for the same period in 1998. The improvement in
First Banks' earnings was primarily a result of increased net interest income
and noninterest income, which was partially offset by increased operating
expenses. The increased net interest income reflects an increase in average
interest-earning assets and the continued realignment of the composition of
interest-bearing liabilities. The improvement in interest-earning assets results
primarily from the continued growth and diversification of the loan portfolio,
while the improvement in interest-bearing liabilities results primarily from
competitive pricing and enhanced products and services. The improved net
interest income was partially offset by a reduction in the yield on the loan
portfolio from 8.93% to 8.36% at March 31, 1999 and 1998, respectively. This
reduction reflects the overall decline in prime rate experienced during the
fourth quarter of 1998.
Net Interest Income
Net interest income (expressed on a tax-equivalent basis) improved to
$43.8 million, or 4.28% of average interest-earning assets, for the three months
ended March 31, 1999, from $38.5 million, or 4.05% of average interest-earning
assets, for the same period in 1998.
The increased net interest income for 1999 is attributable to the
increase in average interest-earning assets of $292.4 million for the three
months ended March 31, 1999, in comparison to the same period in 1998. The
increase is primarily attributable to loans, which increased on average by
$591.8 million for the three months ended March 31, 1999, over the same period
in 1998. Contributing further to the improved net interest income was the
decrease in the cost of interest-bearing liabilities to 4.45% from 4.90% for the
three months ended March 31, 1999 and 1998, respectively. This reflects the
continual process of realigning the deposit portfolios of acquired entities, the
overall increase in the percentage of savings deposits to total deposits,
competitive pricing and enhanced products and services.
Offsetting the increase in net interest income is the amortization and
periodic costs of hedging the interest rate risk position of First Banks. The
cost of hedging totaled $1.3 million and $975,000 for the three months ended
March 31, 1999 and 1998, respectively. The increase in the cost of hedging for
the three months ended March 31, 1999 in comparison to the same period in 1998
is primarily reflective of the liquidation of a portion of the underlying
interest-bearing liabilities. This liquidation resulted in the additional
recognition of a portion of the related deferred losses on previously terminated
interest rate exchange agreements. As more fully discussed in the "--Interest
Rate Risk Management" section of this Form 10-Q, First Banks increased the use
of interest rate exchange agreements in 1998 to offset the increasing exposure
to continued reductions in interest rates on its financial condition and results
of operations.
<PAGE>
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
months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------------------------------------
1999 1998
------------------------------ ----------------------------
Interest Interest
Average income/ Yield/ Average income/ Yield/
balance expense rate balance expense rate
------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
Assets
------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (1)(2)(3)(4).............................. $ 3,625,581 74,761 8.36% $3,033,759 66,815 8.93%
Investment securities (4)....................... 510,844 7,807 6.20 742,338 11,196 6.12
Federal funds sold.............................. 14,854 193 5.27 79,285 1,071 5.48
Other........................................... 1,074 30 11.33 4,611 65 5.72
---------- ------ --------- -------
Total interest-earning assets............. 4,152,353 82,791 8.09 3,859,993 79,147 8.32
------ ------
Nonearning assets.................................. 343,402 293,435
----------- ----------
Total assets.............................. $ 4,495,755 $4,153,428
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand deposits.............. $ 371,174 1,114 1.22% $ 350,580 1,474 1.71%
Savings deposits.............................. 1,212,273 10,929 3.66 966,069 9,553 4.01
Time deposits of $100 or more (3)............. 213,461 2,918 5.54 210,119 3,148 6.08
Other time deposits (3)....................... 1,618,772 22,214 5.57 1,730,597 24,877 5.83
--------- ------ --------- ------
Total interest-bearing deposits........... 3,415,680 37,175 4.41 3,257,365 39,052 4.86
Federal funds purchased, repurchase
agreements and Federal Home Loan
Bank advances (3)............................. 83,256 998 4.86 48,873 579 4.80
Notes payable and other......................... 50,001 793 6.43 54,623 970 7.20
---------- ------ --------- ------
Total interest-bearing liabilities........ 3,548,937 38,966 4.45 3,360,861 40,601 4.90
Noninterest-bearing liabilities:
Demand deposits................................. 508,451 429,015
Other liabilities............................... 171,607 129,149
----------- ----------
Total liabilities......................... 4,228,995 3,919,025
Stockholders' equity............................... 266,760 234,403
----------- ----------
Total liabilities and
stockholders' equity..................... $ 4,495,755 $4,153,428
=========== ==========
Net interest income................................ 43,825 38,546
====== ======
Net interest margin................................ 4.28% 4.05%
==== ====
</TABLE>
- --------------------------
(1) Nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Includes the effects of interest rate exchange agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of
35%. The tax-equivalent adjustments were approximately $202,000 and
$217,000 for the three months ended March 31, 1999 and 1998, respectively.
<PAGE>
Provision for Possible Loan Losses
The provision for possible loan losses was $2.5 million compared to
$2.1 million for the three months ended March 31, 1999 and 1998, respectively.
The increase in the provision for possible loan losses reflects continued growth
and diversification of the loan portfolio coupled with an increase in
nonperforming loans during the first quarter of 1999. In addition, for the three
months ended March 31, 1999, First Banks experienced net loan recoveries of
$313,000, in comparison to net loan recoveries of $549,000 for the same period
in 1998. The acquisition of Redwood, completed on March 4, 1999, provided $1.5
million in additional allowance for possible loan losses, while the acquisition
of Pacific Bay Bank, completed on February 2, 1998, provided $885,000 in
additional allowance for possible loan losses.
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 $9.6 million for the three months ended March
31, 1999, in comparison to $7.8 million for the same period in 1998. Noninterest
income consists primarily of service charges on deposit accounts, gains on
mortgage loans sold and held for sale, and other non-yield related customer
service fees.
Service charges on deposit accounts and customer service fees were $3.9
million for the three months ended March 31, 1999, compared to $3.4 million for
the same period in 1998. The increase in service charges and customer service
fees is principally attributable to: (a). increased deposit balances provided by
internal growth; (b). the acquisitions of Pacific Bay Bank, Republic Bank and
Redwood; (c). additional products and services available and utilized by First
Banks' retail and commercial customer base; (d). increased fees charged; and
(e). enhanced control of fee waivers.
The gain on mortgage loans sold and held for sale increased $1.3
million to $2.3 million from $1.0 for the three months ended March 31, 1999 and
1998, respectively. This increase is primarily 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. Additionally, the increase also reflects the
continued expansion of First Banks' mortgage banking activities in the Texas and
California market areas.
The gain on sales of securities was $677,000 and $92,000 for the three
months ended March 31, 1999 and 1998, respectively. The gain resulted from sales
of available-for-sale securities, the proceeds of which were used to provide
funds for First Banks' continued loan growth. In addition, the gain for the
three months ended March 31, 1999 includes a $250,000 gain on the sale of a
mortgage-backed residual security that was acquired by First Banks through an
acquisition completed in 1995. Because of the unique structure of this residual
security, at the date of acquisition, it appeared unlikely that First Banks
would receive full payment of all of the remaining principal and interest.
Consequently, the aggregate principal amount of this security was written off,
reflecting the approximate market value at that time.
Net loss on sales of trading securities was $303,000 for the three
months ended March 31, 1999, in comparison to a net gain of $58,000 for the
three months ended March 31, 1998. This loss resulted from the termination of
First Banks' trading division, effective December 31, 1998, and the liquidation
of all trading portfolio securities.
Other income was $2.8 million for the three months ended March 31, 1999
in comparison to $2.1 for the same period in 1998. The primary components of the
increase are attributable to income earned on First Banks' investment in
bank-owned life insurance (BOLI), expanded trust and private banking services
and the settlement of certain litigation. BOLI income was $824,000 and $638,000
for the three months ended March 31, 1999 and 1998, respectively, reflecting
increased income attributable to FBA's initial investment in BOLI completed in
<PAGE>
April 1998. Trust and private banking income increased $143,000 to $459,000 from
$316,000 for the three months ended March 31, 1999 and 1998, respectively,
resulting from continued growth experienced through enhanced product and service
offerings and First Banks' expansion of these services into all markets served.
In addition, other income for the three months ended March 31, 1999 reflects a
$250,000 settlement received in connection with certain litigation at First
Bank.
Noninterest Expense
Noninterest expense was $35.5 million and $32.1 million for the three
months ended March 31, 1999 and 1998, respectively. The increase in noninterest
expense is attributable to the acquisitions of Pacific Bay Bank, Republic Bank
and Redwood and the continued expansion of First Banks' commercial functions
within existing markets. In addition, the increase also reflects an increase of
$993,000 associated with the formation of First America Capital Trust (FACT) and
FACT's issuance of Cumulative Trust Preferred Securities in July 1998.
Salaries and employee benefits have increased to $14.5 million for the
three months ended March 31, 1999 from $12.9 million for the same period in
1998. The increase is attributable to the newly acquired banks including Pacific
Bay Bank, Republic Bank and Redwood, and First Banks' continued commitment to
expanding its commercial and retail business development capabilities. The
overall increase also reflects the present competitive employment market
environment that has resulted in a higher demand for more limited resources,
thus escalating industry salary and employee benefits costs.
Data processing fees for the three months ended March 31, 1999 were
$4.5 million in comparison to $3.0 million for the same period in 1998. First
Services, L.P., a limited partnership indirectly owned by First Banks' Chairman
and his children through its general partners and limited partners, provides
data processing and various related services to First Banks and the Subsidiary
Banks under the terms of data processing agreements. The increase in data
processing fees is attributable to growth and technological advancements
consistent with First Banks' product and service offerings, and expenses
associated with First Banks' Year 2000 program.
Guaranteed preferred debentures expense increased $993,000 to $3.0
million from $2.0 million at March 31, 1999 and 1998, respectively. Similar to
First Banks' formation of First Preferred Capital Trust (First Capital) and
First Capital's issuance of 9.25% Cumulative Trust Preferred Securities (First
Capital Preferred Securities) in February 1997, FBA formed FACT, a Delaware
business trust subsidiary, on July 21, 1998, and FACT issued 1.84 million shares
of 8.50% Cumulative Trust Preferred Securities (FACT Preferred Securities) at
$25.00 per share in an underwritten public offering, and issued 56,908 shares of
common securities to FBA at $25.00 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 (Subordinated Debentures) from
FBA, maturing on June 30, 2028. 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, net of underwriting fees and offering expenses, were approximately
$44.1 million. Guaranteed preferred debentures expense on the First Capital
Preferred Securities and the FACT Preferred Securities is recorded as
noninterest expense in the accompanying consolidated financial statements.
Other noninterest expense was $4.4 million and $4.6 million for the
three months ended March 31, 1999 and 1998, respectively. Other noninterest
expense for the three months ended March 31, 1998 includes $1.1 million
representing a one-time charitable contribution to the Affordable Housing
Assistance Program. In addition, during the first quarter of 1998, the
Subsidiary Banks settled two lawsuits that had been outstanding for several
years. In conjunction with these settlements, approximately $500,000 was charged
to other noninterest expense.
<PAGE>
Excluding these items, other noninterest expense increased approximately $1.4
million during the first quarter of 1999. This increase was primarily driven by:
(a). increased amortization of intangibles associated with the purchase of
subsidiaries, reflective of the acquisitions completed throughout 1998 and early
1999; (b). increased recruiting expenses associated with obtaining and retaining
qualified employees; and (c). increased expenses associated with the BOLI
investments.
Lending and Credit Management
Interest earned on the loan portfolio represents the principal source
of income for First Banks and its Subsidiary Banks. Interest and fees on loans
were 90.4% and 84.6% of total interest income for the three months ended March
31, 1999 and 1998, respectively. Total loans, net of unearned discount,
represented 81.2% and 78.6% of total assets as of March 31, 1999 and December
31, 1998, respectively. Total loans, excluding loans held for sale and net of
unearned discount, increased by $194.6 million to $3.64 billion at March 31,
1999 from $3.44 billion at December 31, 1998. The increase reflects the
acquisition of Redwood, which provided loans, net of unearned discount, of
$134.4 million, and the continued growth and diversification within the
corporate lending function of $78.0 million. This increase was partially offset
by a $17.7 million decline in the existing residential real estate mortgage loan
portfolio to $729.9 million at March 31, 1999 from $739.4 million at December
31, 1998. This decrease is reflective of First Banks' continued sale of
conforming residential mortgage loan production into the secondary mortgage
market.
First Banks' nonperforming loans consist of loans on nonaccrual status
and loans on which the original terms have been restructured. The following is a
summary of nonperforming assets and past due loans by category at the dates
indicated:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
<S> <C> <C>
Nonaccrual............................................... $ 18,852 15,385
Real estate construction and development:
Nonaccrual............................................... 5,826 3,858
Real estate mortgage:
Nonaccrual............................................... 20,393 18,858
Restructured terms....................................... 4,573 5,221
Consumer and installment:
Nonaccrual............................................... 160 216
----------- -----------
Total nonperforming loans................................ 49,804 43,538
Other real estate............................................. 3,376 3,709
----------- -----------
Total nonperforming assets............................... $ 53,180 47,247
=========== ===========
Loans, net of unearned discount............................... $ 3,764,408 3,580,105
=========== ===========
Loans past due 90 days or more and still accruing............. $ 3,674 4,674
=========== ===========
Allowance for possible loan losses to loans .................. 1.73% 1.70%
Nonperforming loans to loans.................................. 1.32 1.22
Allowance for possible loan losses to nonperforming loans..... 130.99 140.04
Nonperforming assets to loans and other real estate........... 1.41 1.32
=========== ===========
</TABLE>
Nonperforming loans, consisting of loans on nonaccrual status and
restructured loans, were $49.8 million at March 31, 1999, in comparison to $43.5
million at December 31, 1998. The majority of the increase is attributable to
First Bank, which experienced an increase in nonperforming loans of $4.5 million
to $26.5 million from $22.0 million at March 31, 1999 and December 31, 1998,
respectively. Furthermore, the loans obtained through the acquisition of
Redwood, completed on March 4, 1999, have also contributed to the overall
increase in nonperforming loans. The acquired allowance for possible loan losses
totaled $1.5 million at the acquisition date.
Impaired loans, consisting of nonaccrual loans and restructured loans,
were $49.8 million and $43.5 million at March 31, 1999 and December 31, 1998,
respectively.
<PAGE>
The following is a summary of loan loss experience for the three months
ended March 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
(dollars expressed in thousands)
<S> <C> <C>
Allowance for possible loan losses, beginning of period.................... $ 60,970 50,509
Acquired allowances for possible loan losses............................... 1,466 885
--------- ---------
62,436 51,394
Loans charged-off.......................................................... (1,911) (2,056)
Recoveries of loans previously charged-off................................. 2,224 2,605
--------- ---------
Net loan recoveries...................................................... 313 549
--------- ---------
Provision for possible loan losses......................................... 2,490 2,100
--------- ---------
Allowance for possible loan losses, end of period.......................... $ 65,239 54,043
========= =========
</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
of the Subsidiary Banks and from published national surveys of norms in the
industry. The calculated allowances required for the portfolios are then
compared to the actual allowance balances to determine the provisions necessary
to maintain the allowances at appropriate levels. In addition, management
exercises judgment in its analysis of determining the overall level of the
allowance for possible losses. In its analysis, management considers the change
in the portfolio, including growth and composition, and the economic conditions
of the regions in which 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
First Banks periodically utilizes off-balance-sheet derivative
financial instruments to assist in the management of interest rate sensitivity
and to modify the repricing, maturity and option characteristics of
on-balance-sheet assets and liabilities.
Derivative financial instruments held by First Banks for purposes of
managing interest rate risk are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------- --------------------
Notional Credit Notional Credit
amount exposure amount exposure
(dollars expressed in thousands)
<S> <C> <C> <C> <C>
Interest rate swap agreements......................... $ 280,000 232 280,000 3,526
Interest rate floor agreements........................ 70,000 -- 70,000 --
Interest rate cap agreements.......................... 10,000 127 10,000 164
Forward commitments to sell
mortgage-backed securities.......................... 60,000 -- 95,000 237
</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. The credit exposure represents
the accounting loss First Banks would incur in the event the couterparties
failed completely to perform according to the terms of the derivative financial
instruments and the collateral was of no value.
<PAGE>
Previously, First Banks utilized interest rate swap agreements to
extend the repricing characteristics of certain interest-bearing liabilities to
correspond more closely with its assets, with the objective of stabilizing cash
flow, and accordingly, net interest income, over time. These swap agreements
were terminated in July 1995, November 1996 and July 1997 due to a change in the
composition of First Banks' balance sheet. The change in the composition of the
balance sheet was primarily driven by the significant decline in interest rates
experienced during 1995, which caused an increase in the principal prepayments
of residential mortgage loans. The net interest expense associated with these
agreements, consisting primarily of amortization of deferred losses, was $1.3
million and $975,000 for the three months ended March 31, 1999 and 1998,
respectively. The deferred losses on terminated swap agreements are being
amortized over the remaining lives of the agreements, unless the underlying
liabilities are repaid, in which case the deferred losses are charged to
operations. The unamortized balance of these losses was $4.4 million and $5.7
million at March 31, 1999 and December 31, 1998, respectively, and is included
in other assets.
During 1998, First Banks entered into $280.0 million notional amount of
interest rate swap agreements (Swap Agreements). The Swap Agreements effectively
extended the repricing term of a selected group of loans to more closely
correspond with its funding source with the objective of stabilizing cash flow,
and accordingly, net interest income, over time. The Swap Agreements provide for
First Banks to receive a fixed rate of interest and pay an adjustable rate
equivalent to the 90-day London Interbank Offering Rate. The terms of the Swap
Agreements provide for First Banks to pay quarterly and receive payment
semi-annually. The amount receivable by First Banks under the Swap Agreements
was $845,000 and $4.2 million at March 31, 1999 and December 31, 1998,
respectively, and the amount payable by First Banks under the Swap Agreements
was $613,000 and $640,000 at March 31, 1999 and December 31, 1998, respectively.
The maturity dates, notional amounts, interest rates paid and received, and fair
values of the Swap Agreements outstanding as of March 31, 1999 were as follows:
<TABLE>
<CAPTION>
Notional Interest rate Interest rate
Maturity date amount paid received Fair value
------------- ------ ---- -------- ----------
<S> <C> <C> <C> <C>
June 11, 2002.............................. $ 15,000 5.00% 6.00% $ 157
September 16, 2002......................... 20,000 5.00 5.36 (183)
September 16, 2002......................... 175,000 5.00 5.36 (1,598)
September 18, 2002......................... 30,000 5.00 5.33 (310)
September 18, 2002......................... 40,000 5.00 5.33 (413)
---------- -------
$ 280,000 5.00 5.39 $(2,347)
========== ==== ==== =======
</TABLE>
First Banks has interest rate cap and floor agreements outstanding to
limit the interest expense associated with certain interest-bearing liabilities
and the net interest expense of certain interest rate swap agreements,
respectively. At March 31, 1999 and December 31, 1998, the unamortized costs of
these agreements were $127,000 and $159,000, respectively, and were included in
other assets.
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 were
$112.3 million and $103.1 million at March 31, 1999 and December 31, 1998,
respectively. These net loan commitments and loans held for sale are hedged with
forward contracts to sell mortgage-backed securities of $60.0 million and $95.0
million at March 31, 1999 and December 31, 1998, respectively. Gains and losses
from forward contracts are deferred and included in the cost basis of loans held
for sale. At March 31, 1999 and December 31, 1998, the net unamortized gains and
losses were $826,000 and $649,000, respectively, which were applied to the
carrying value of the loans held for sale as part of the lower of cost or market
valuation.
<PAGE>
Year 2000 Compatibility
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 surrounding the beginning of the Year 2000. Financial
institutions are particularly vulnerable to Year 2000 issues because of heavy
reliance in the industry on electronic data processing and funds transfer
systems.
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 Plan addresses both Information Technology (IT) projects,
such as data processing and data network applications, and non-IT projects, such
as building facilities and security systems. 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 analyzed and prioritized from critical to
non-critical, based upon the perceived adverse effect on the 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, with
minor modification. Focusing on these critical systems, First Banks continues to
closely review and monitor the Year 2000 progress as reported by each vendor,
and has tested, in most cases, on a system separate from the on-line production
system. The review and testing of critical data processing service providers was
substantially complete as of March 31, 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.
Concurrent with the completion of the remediation phase of the Program,
First Banks commenced the final analysis of the validation phase for critical
systems, including remediated systems provided by third party vendors. This
portion of the Program was substantially complete as of December 31, 1998.
First Banks has accelerated the replacement of its existing teller
system (ISC), since certain functions of ISC were not Year 2000 compliant.
Planning for the replacement of ISC has been underway for several years with the
primary objectives of adding functionality to meet expanding product and service
offerings and improving efficiency in serving customers. As the newly selected
teller system (CFI) also provided a solution for the Year 2000 problem, the
overall implementation schedule was accelerated. Recognizing the heightened
risks of deploying CFI within the narrowed timeline created by the Year 2000
issue, emphasis was first given to the Year 2000 solution for ISC, with
simultaneous deployment of CFI throughout 1999 and early 2000. The testing of
the Year 2000 solution for ISC has been completed and will be installed
throughout First Banks' branch network by June 30, 1999.
The testing of CFI was completed by December 31, 1998. The CFI was
installed in selected bank test locations during the fourth quarter of 1998. The
estimated cost of the teller replacement is $8.0 million and will be charged to
expense over a 60-month period upon installation at each branch location. First
Banks is also upgrading its local area network-based systems, networks and core
processor, and has purchased certain item processing equipment, as the previous
equipment, which is fully depreciated, was not Year 2000 compliant. The
estimated cost of these upgrades and the item processing equipment is $3.9
million and $1.4 million, respectively, and is expected to be depreciated 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.
First Banks has also assessed the Year 2000 risks relating to its lines
of business separate from its dependence on data processing. The assessment
includes a review of large commercial loan and deposit customers to ascertain
<PAGE>
their overall preparedness regarding Year 2000 risks. The process requires
lending and other banking officers to meet with certain of 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 revealed no probable adverse effect to First Banks, it is not possible
to quantify the overall potential adverse effects to First Banks resulting from
the failure of these customers, or other customers not meeting the review
criteria, to adequately prepare for the Year 2000. The failure of a commercial
bank customer to adequately prepare for Year 2000 could have a 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 continues to review and
structure certain funding sources to facilitate the Subsidiary Banks' liquidity
requirements under varying cash flow assumptions. In addition, Year 2000 risks
associated with adversely rated credits are monitored more frequently in
conjunction with the internal watch list review committee meetings, while new
credit relationships include parameters to assess and evaluate Year 2000 risks
at the time of the initial credit decision.
The Plan also provides for the identification and communication with
significant non-data processing third party vendors regarding their preparedness
for Year 2000 risks. While the results of this process have not revealed any
quantifiable loss to First Banks, the absence of certain basic services such as
telecommunications, electric power and service provided by other financial
institutions and governmental agencies would have a serious impact on the
operations of First Banks. First Banks has developed processes to monitor
significant non-data processing third party vendors regarding their preparedness
for Year 2000 risks.
The total cost of the Program is currently estimated at $16.2 million,
comprised of capital improvements of $13.3 million and direct expenses
reimbursable to First Services L.P. 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 $450,000 for
the three months ended March 31, 1999 and $600,000 for the year ended December
31, 1998. In addition, First Banks is estimating direct expenses of $1.9 million
for the duration of the Program. The total cost could vary significantly from
those currently estimated for unforeseen circumstances that could develop in
carrying out the Program.
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 an evolving document changing and developing
to reflect the results, progress and current status of the Program. The
Contingency Plan includes the remediation and business resumption 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 back-up locations. Additionally, First Banks has developed
business resumption plans for each functional area deemed critical to the
operations of First Banks. These business resumption plans also serve as
evolving documents and will continue to be modified to appropriately address
Year 2000 risks associated with the individual needs and responsibilities of
each of these critical functional areas.
While First Banks is making a substantial effort to become Year 2000
compliant, there is no assurance the Year 2000 problem will not have a material
adverse effect on its financial condition or results of operations.
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 Subsidiary Banks'
primary sources for liquidity are customer deposits, loan payments, maturities
and sales of investment securities 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, borrowings from the Federal Home Loan Bank and other
borrowings, including First Banks' $90 million credit agreement with a group of
unaffiliated financial institutions. The aggregate funds acquired from those
sources were $357.8 million and $391.4 million at March 31, 1999 and December
31, 1998, respectively.
<PAGE>
<TABLE>
<CAPTION>
At March 31, 1999, First Banks' more volatile sources of funds mature
as follows:
(dollars expressed in thousands)
<S> <C>
Three months or less................................................... $ 199,416
Over three months through six months................................... 53,044
Over six months through twelve months.................................. 65,402
Over twelve months..................................................... 39,980
-----------
Total................................................................ $ 357,842
===========
</TABLE>
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 First Capital Preferred Securities and the FACT Preferred
Securities.
Effects of New Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 133 -- Accounting for Derivative Instruments and Hedging
Activities (SFAS 133). SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS 131 requires that an entity
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, 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. SFAS 133 applies to all entities and is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Initial application
should be as of the beginning of an entity's fiscal quarter; on that date,
hedging relationships must be designated and documented pursuant to the
provisions of SFAS 133. Earlier application of all of the provisions is
encouraged but is permitted only as of the beginning of any fiscal quarter that
begins after the issuance date of SFAS 133. Additionally, SFAS 133 should not be
applied retroactively to financial statements of prior periods. First Banks is
currently evaluating SFAS 133 to determine its potential impact on the
consolidated financial statements of First Banks.
On January 1, 1999, First Banks adopted the provisions of SFAS No. 134
- - Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an amendment of
FASB SFAS No. 65 (SFAS 134). SFAS 134 amended SFAS 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. However, a mortgage banking enterprise must classify as trading any
retained mortgage-backed securities that it commits to sell before or during the
securitization process. The implementation of SFAS 134 did not have a material
impact on First Banks' consolidated financial statements.
<PAGE>
Part II- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
Exhibit
Number Description
------ -----------
11 Calculation 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 months ended
March 31, 1999.
<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: May 12, 1999 By: /s/ James F. Dierberg
---------------------
James F. Dierberg
Chairman, President and
Chief Executive Officer
Date: May 12, 1999 By: /s/ Allen H. Blake
-----------------------
Allen H. Blake
Executive Vice President,
Chief Financial Officer
Chief Operating Officer
and Secretary
(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)
Quarter ended March 31, 1999:
<S> <C> <C> <C>
Basic EPS - income available to common stockholders....... $ 9,075 23,661 $ 383.52
==========
Effect of dilutive securities:
Class A convertible preferred stock..................... 192 1,212
-------- --------
Diluted EPS - income available to common stockholders..... $ 9,267 24,873 $ 372.57
======== ======== ==========
Quarter ended March 31, 1998:
Basic EPS - income available to common stockholders....... $ 7,169 23,661 $ 302.99
==========
Effect of dilutive securities:
Class A convertible preferred stock..................... 192 1,389
-------- --------
Diluted EPS - income available to common stockholders..... $ 7,361 25,050 $ 293.85
======== ======== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000710507
<NAME> First Banks, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 148,432
<INT-BEARING-DEPOSITS> 2,085
<FED-FUNDS-SOLD> 27,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 442,272
<INVESTMENTS-CARRYING> 22,650
<INVESTMENTS-MARKET> 23,376
<LOANS> 3,764,408
<ALLOWANCE> 65,239
<TOTAL-ASSETS> 4,634,634
<DEPOSITS> 4,064,425
<SHORT-TERM> 67,376
<LIABILITIES-OTHER> 108,247
<LONG-TERM> 127,486
0
13,063
<COMMON> 5,915
<OTHER-SE> 248,122
<TOTAL-LIABILITIES-AND-EQUITY> 4,634,634
<INTEREST-LOAN> 74,675
<INTEREST-INVEST> 7,662
<INTEREST-OTHER> 223
<INTEREST-TOTAL> 82,560
<INTEREST-DEPOSIT> 35,948
<INTEREST-EXPENSE> 38,966
<INTEREST-INCOME-NET> 43,594
<LOAN-LOSSES> 2,490
<SECURITIES-GAINS> 374
<EXPENSE-OTHER> 35,487
<INCOME-PRETAX> 15,220
<INCOME-PRE-EXTRAORDINARY> 15,220
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,271
<EPS-PRIMARY> 383.52
<EPS-DILUTED> 372.57
<YIELD-ACTUAL> 8.09
<LOANS-NON> 45,231
<LOANS-PAST> 3,674
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 71,632
<ALLOWANCE-OPEN> 60,970
<CHARGE-OFFS> 1,911
<RECOVERIES> 2,224
<ALLOWANCE-CLOSE> 65,239
<ALLOWANCE-DOMESTIC> 50,988
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 14,251
</TABLE>
