-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WTBjNVDKkQxEzo1d9lQreYpzrqs0uhGGGDAfGS49CTS2Qdbs6Rih99TYVnQbnCi0 Ys5zTtmVawf+/Q5vN1ULrg== 0000710507-98-000009.txt : 19981113 0000710507-98-000009.hdr.sgml : 19981113 ACCESSION NUMBER: 0000710507-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANKS INC CENTRAL INDEX KEY: 0000710507 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 431175538 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-33786 FILM NUMBER: 98745471 BUSINESS ADDRESS: STREET 1: 135 N MERAMEC AVE CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3148544600 MAIL ADDRESS: STREET 1: 135 N MERAMEC AVE CITY: ST LOUIS STATE: MO ZIP: 63105 10-Q 1 FORM 10-Q 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 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- PART I - FINANCIAL INFORMATION Item 1. Financial Statements FIRST BANKS, INC. Consolidated Balance Sheets (dollars expressed in thousands, except per share data)
September 30, December 31, 1998 1997 ---- ---- (unaudited) ASSETS ------ Cash and cash equivalents: 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 =========== ==========
FIRST BANKS, INC. Consolidated Balance Sheets (dollars expressed in thousands, except per share data) (continued)
September 30, December 31, 1998 1997 ---- ---- (unaudited) LIABILITIES ----------- Deposits: Demand: 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 =========== ===========
See accompanying notes to consolidated financial statements. FIRST BANKS, INC. Consolidated Statements of Income (unaudited) (dollars expressed in thousands, except per share data)
Three months ended Nine months ended September 30, September 30, ----------------- ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Interest income: 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 ========= ======== ======== ========
See accompanying notes to consolidated financial statements. 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
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 ---------- ----- ------- ----- ------- ------ -------- ------ ------ 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 ======== ====== === ===== ====== ======= ====== ========
- --------------- (1) Components of other comprehensive income are shown net of tax. (2) Disclosure of reclassification adjustment:
Nine months ended Three months ended September 30, December 31, ----------------- ------------------ 1998 1997 1997 ---- ---- ---- 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 ====== ===== ====
See accompanying notes to consolidated financial statements. FIRST BANKS, INC. Consolidated Statements of Cash Flows (unaudited) (dollars expressed in thousands, except per share data)
Nine months ended September 30, ------------------- 1998 1997 ---- ---- Cash flows from operating activities: 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 -- ========== =========
See accompanying notes to consolidated financial statements. 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. 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. At September 30, 1998 and December 31, 1997, First Banks' and the Subsidiary Banks' capital ratios were as follows:
Risk based capital ratios ------------------------- Total Tier 1 Leverage Ratio ----- ------ -------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- 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
- ---------- (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. 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:
Number Loans, net of of unearned Total Subsidiary Banks locations Total assets discount deposits ---------------- --------- ------------ -------- -------- (dollars expressed in thousands) 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
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 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. 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:
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: 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% ==== ==== ==== ====
- ------------ (1) Includes the effects of interest rate exchange agreements. 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. 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. The following is a summary of nonperforming assets by category:
September 30, December 31, 1998 1997 ---- ---- (dollars expressed in thousands) 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 ========== ===========
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:
Three months ended Nine months ended September 30, September 30, ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- (dollars expressed in thousands) Allowance for possible loan losses, 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 ======== ======== ======= ========
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 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:
September 30, 1998 December 31, 1997 ---------------------- --- ------------------ Notional Credit Notional Credit amount exposure amount exposure ------ -------- ------ -------- (dollars expressed in thousands) 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 --
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. 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 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 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 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. 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) Exhibit 11 The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods indicated:
Income Shares Per-share (numerator) (denominator) Amount ----------- ------------- ------ (dollars expressed in thousands, except per share data) Three months ended September 30, 1998: 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 ======= ======= =========
EX-27 2 FDS --
9 0000710507 First Banks, Inc. 1,000 9-mos Dec-31-1998 Jan-01-1998 Sep-30-1998 130,186 2,657 10,200 3,882 635,693 20,519 0 3,432,484 60,553 4,461,294 3,866,764 105,519 107,252 127,402 0 13,063 5,915 235,379 4,461,294 209,430 31,676 2,541 243,647 114,535 122,045 121,602 6,225 1,430 103,202 36,298 36,298 0 0 22,829 942.70 910.91 8.31 32,400 3,238 113 27,364 53,709 (6,037) 6,656 60,553 60,553 0 6,163
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