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 June 30, 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 July 31, 1999
----- -------------
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 June 30, 1999
and December 31, 1998...................................................... -1-
Consolidated Statements of Income for the three and six
months ended June 30, 1999 and 1998........................................ -3-
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the six months ended June 30,
1999 and 1998 and the six months ended
December 31, 1998.......................................................... -4-
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998............................................... -5-
Notes to Consolidated Financial Statements..................................... -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... -12-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................... -24-
SIGNATURES....................................................................................... -25-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST BANKS, INC.
Consolidated Balance Sheets (unaudited)
(dollars expressed in thousands, except per share data)
June 30, December 31,
1999 1998
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks............................................... $ 138,686 174,329
Interest-bearing deposits with other financial
institutions with maturities of three months or less................ 2,232 3,733
Federal funds sold.................................................... 28,100 36,700
----------- ----------
Total cash and cash equivalents................................. 169,018 214,762
----------- ----------
Investment securities:
Trading, at fair value................................................ -- 3,425
Available for sale, at fair value..................................... 374,978 509,695
Held to maturity, at amortized cost (fair value of
$22,373 and $22,568 at June 30, 1999 and
December 31,1998, respectively)..................................... 22,136 21,676
----------- ----------
Total investment securities..................................... 397,114 534,796
----------- ----------
Loans:
Commercial, financial and agricultural................................ 1,018,343 920,007
Real estate construction and development.............................. 789,582 720,910
Real estate mortgage.................................................. 1,637,026 1,529,177
Consumer and installment ............................................. 266,904 282,549
Loans held for sale................................................... 62,900 135,619
----------- ----------
Total loans .................................................... 3,774,755 3,588,262
Unearned discount..................................................... (6,661) (8,157)
Allowance for possible loan losses.................................... (64,977) (60,970)
----------- ----------
Net loans....................................................... 3,703,117 3,519,135
----------- ----------
Bank premises and equipment, net of accumulated
depreciation and amortization......................................... 70,271 63,848
Intangibles associated with the purchase of subsidiaries................. 43,844 36,534
Mortgage servicing rights, net of amortization........................... 9,567 9,825
Accrued interest receivable.............................................. 31,722 28,465
Other real estate........................................................ 2,545 3,709
Deferred income taxes.................................................... 50,437 46,848
Other assets............................................................. 95,234 96,888
----------- ----------
Total assets.................................................... $ 4,572,869 4,554,810
=========== ==========
FIRST BANKS, INC.
Consolidated Balance Sheets (unaudited)
(dollars expressed in thousands, except per share data)
(continued)
June 30, December 31,
1999 1998
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing............................................ $ 549,408 561,383
Interest-bearing................................................ 354,440 377,435
Savings........................................................... 1,232,519 1,198,567
Time:
Time deposits of $100 or more................................... 255,292 219,996
Other time deposits............................................. 1,598,831 1,582,604
----------- -----------
Total deposits............................................... 3,990,490 3,939,985
Other borrowings...................................................... 77,855 121,331
Notes payable......................................................... 48,000 50,048
Accrued interest payable.............................................. 9,872 5,817
Deferred income taxes................................................. 10,866 10,920
Accrued and other liabilities......................................... 19,235 20,652
Minority interest in subsidiary....................................... 11,845 15,251
----------- -----------
Total liabilities............................................ 4,168,163 4,164,004
----------- -----------
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debenture........................... 83,341 83,288
First Banks America, Inc. subordinated debenture................... 44,186 44,155
----------- -----------
Total guaranteed preferred beneficial interests in
subordinated debentures.................................... 127,527 127,443
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized; no shares issued
and outstanding at June 30, 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....................................................... 3,010 780
Retained earnings..................................................... 248,369 231,867
Accumulated other comprehensive income................................ 6,822 11,738
----------- -----------
Total stockholders' equity................................... 277,179 263,363
----------- -----------
Total liabilities and stockholders' equity................... $ 4,572,869 4,554,810
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
FIRST BANKS, INC.
Consolidated Statements of Income (unaudited)
(dollars expressed in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Interest and fees on loans.................................................... $ 78,964 69,432 153,639 136,170
Investment securities......................................................... 6,445 10,654 14,107 21,710
Federal funds sold and other.................................................. 232 854 455 1,990
-------- ------- -------- --------
Total interest income................................................... 85,641 80,940 168,201 159,870
-------- ------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand..................................................... 1,182 1,329 2,296 2,803
Savings..................................................................... 11,085 10,232 22,014 19,785
Time deposits of $100 or more............................................... 2,691 3,331 5,466 6,375
Other time deposits......................................................... 19,831 23,715 40,961 47,732
Interest rate exchange agreements, net........................................ 1,305 991 2,588 1,980
Notes payable and other borrowings............................................ 2,056 1,523 3,791 3,047
-------- ------- -------- --------
Total interest expense.................................................. 38,150 41,121 77,116 81,722
-------- ------- -------- --------
Net interest income..................................................... 47,491 39,819 91,085 78,148
-------- ------- -------- --------
Provision for possible loan losses................................................. 3,373 1,850 5,863 3,950
-------- ------- -------- --------
Net interest income after provision for possible loan losses............ 44,118 37,969 85,222 74,198
-------- ------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees................. 4,475 3,514 8,357 6,889
Credit card fees.............................................................. 301 750 327 1,612
Loan servicing fees, net...................................................... 62 404 283 703
Gain on mortgage loans sold and held for sale................................. 1,502 863 3,834 1,901
Net gain on sales of available-for-sale securities............................ 115 164 792 256
Net gain (loss) on sales of trading securities................................ -- 586 (303) 644
Other......................................................................... 7,060 2,076 9,828 4,146
-------- ------- -------- --------
Total noninterest income................................................ 13,515 8,357 23,118 16,151
-------- ------- -------- --------
Noninterest expense:
Salaries and employee benefits................................................ 15,569 14,391 30,071 27,270
Occupancy, net of rental income............................................... 2,959 2,717 5,842 5,140
Furniture and equipment....................................................... 2,098 2,039 3,999 3,626
Federal Deposit Insurance Corporation premiums................................ 325 242 657 617
Postage, printing and supplies................................................ 1,011 1,543 2,153 2,949
Data processing fees.......................................................... 4,687 2,988 9,223 5,954
Legal, examination and professional fees...................................... 1,922 1,274 3,242 2,330
Credit card................................................................... 199 770 367 1,562
Communications................................................................ 582 766 1,263 1,492
Advertising and business development.......................................... 888 1,791 1,547 2,656
Losses and expenses on other real estate, net of gains........................ 39 281 (14) 661
Guaranteed preferred debentures............................................... 3,014 2,021 6,028 4,042
Other......................................................................... 3,955 4,214 8,357 8,797
-------- ------- -------- --------
Total noninterest expense............................................... 37,248 35,037 72,735 67,096
-------- ------- -------- --------
Income before provision for income taxes and minority interest
in income of subsidiary.............................................. 20,385 11,289 35,605 23,253
Provision for income taxes......................................................... 7,465 4,134 13,103 8,390
-------- ------- -------- --------
Income before minority interest in income of subsidiary................. 12,920 7,155 22,502 14,863
Minority interest in income of subsidiary.......................................... 361 279 672 621
-------- ------- -------- --------
Net income.............................................................. 12,559 6,876 21,830 14,242
Preferred stock dividends.......................................................... 132 131 328 328
-------- ------- -------- --------
Net income available to common stockholders............................. $ 12,427 6,745 21,502 13,914
======== ======= ======== ========
Earnings per share:
Basic......................................................................... $ 525.23 285.02 908.75 588.03
Diluted....................................................................... 505.15 274.34 877.36 568.22
======== ======= ======== ========
Weighted average shares of common stock outstanding................................ 23,661 23,661 23,661 23,661
======== ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
FIRST BANKS, INC.
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income (unaudited)
Six months ended June 30, 1999 and 1998
and six months ended December 31, 1998
(dollars expressed in thousands, except per share data)
Accu-
Adjustable rate mulated
preferred stock other Total
Class A Compre- compre- stock-
conver- Common Capital hensive Retained hensive holders'
tible Class B stock surplus income earnings income equity
----- ------- ------ ------- ------ -------- ------ ------
Consolidated balances, January 1, 1998.................... $ 12,822 241 5,915 3,978 199,143 9,438 231,537
Six months ended June 30, 1998:
Comprehensive income:
Net income......................................... -- -- -- -- 14,242 14,242 -- 14,242
Other comprehensive income, net of tax -
Unrealized gains on securities, net of
reclassification adjustment (1)................ -- -- -- -- 1,023 -- 1,023 1,023
-------
Comprehensive income............................... 15,265
=======
Class A preferred stock dividends, $0.50 per share.... -- -- -- -- (321) -- (321)
Class B preferred stock dividends, $0.04 per share.... -- -- -- -- (7) -- (7)
Effect of capital stock transactions of
majority-owned subsidiary.......................... -- -- -- (1,999) -- -- (1,999)
-------- --- ----- ------ ------- ------ -------
Consolidated balances, June 30, 1998...................... 12,822 241 5,915 1,979 213,057 10,461 244,475
Six months ended December 31, 1998:
Comprehensive income:
Net income......................................... -- -- -- -- 19,268 19,268 -- 19,268
Other comprehensive income, net of tax -
Unrealized gains on securities, net of
reclassification adjustment (1)................ -- -- -- -- 1,277 -- 1,277 1,277
-------
Comprehensive income............................... 20,545
=======
Class A preferred stock dividends, $0.70 per share.... -- -- -- -- (448) -- (448)
Class B preferred stock dividends, $0.07 per share.... -- -- -- -- (10) -- (10)
Effect of capital stock transactions of
majority-owned subsidiary.......................... -- -- -- (1,199) -- -- (1,199)
-------- --- ----- ------ ------- ------ -------
Consolidated balances, December 31, 1998.................. 12,822 241 5,915 780 231,867 11,738 263,363
Six months ended June 30, 1999:
Comprehensive income:
Net income......................................... -- -- -- -- 21,830 21,830 -- 21,830
Other comprehensive income, net of tax -
Unrealized losses on securities, net of
reclassification adjustment (1) ............... -- -- -- -- (4,916) -- (4,916) (4,916)
-------
Comprehensive income............................... 16,914
=======
Class A preferred stock dividends, $0.50 per share.... -- -- -- -- (321) -- (321)
Class B preferred stock dividends, $0.04 per share.... -- -- -- -- (7) -- (7)
Effect of capital stock transactions of
majority-owned subsidiary.......................... -- -- -- (3,040) -- -- (3,040)
Reclassification of retained earnings................. -- -- -- 5,000 (5,000) -- --
Reduction of valuation reserve........................ -- -- -- 270 -- -- 270
------- --- ----- ------ ------- ----- -------
Consolidated balances, June 30, 1999...................... $12,822 241 5,915 3,010 248,369 6,822 277,179
======= === ===== ====== ======= ===== =======
(1) Disclosure of reclassification adjustment:
Six months ended Six months ended
June 30, December 31,
----------------- ----------------
1999 1998 1998
---- ---- ----
Unrealized gains (losses) arising during the period............................ $ (4,401) 1,189 2,064
Less: reclassification adjustment for gains included in net income............. 515 166 787
------ ------ -----
Unrealized gains (losses) on securities........................................ $ (4,916) 1,023 1,277
====== ====== =====
The accompanying notes are an integral part of the consolidated financial
statements.
FIRST BANKS, INC.
Consolidated Statements of Cash Flows (unaudited)
(dollars expressed in thousands)
Six months ended
June 30,
----------------------
1999 1998
---- ----
Cash flows from operating activities:
Net income............................................................. $ 21,830 14,242
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization of bank premises
and equipment.................................................... 3,293 2,519
Amortization, net of accretion..................................... 6,379 5,210
Originations and purchases of loans held for sale.................. (297,565) (239,632)
Proceeds from the sale of loans held for sale...................... 352,434 195,617
Provision for possible loan losses................................. 5,863 3,950
Provision for income taxes......................................... 13,103 8,390
Payments of income taxes........................................... (11,547) (9,862)
(Increase) decrease in accrued interest receivable ................ (2,462) 801
Net decrease (increase) in trading securities...................... 3,425 (1,392)
Interest accrued on liabilities.................................... 77,116 81,722
Payments of interest on liabilities................................ (73,901) (82,068)
Gain on sales of branch deposits................................... (4,473) --
Net gain on sales of available-for-sale securities................. (792) (256)
Other operating activities, net.................................... 874 (10,420)
Minority interest in income of subsidiary.......................... 672 621
--------- --------
Net cash provided by (used in) operating activities........... 94,249 (30,558)
--------- --------
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........ 88,714 46,558
Maturities of investment securities available for sale................. 85,650 226,922
Maturities of investment securities held to maturity................... 1,503 1,074
Purchases of investment securities available for sale.................. (15,029) (139,067)
Purchases of investment securities held to maturity.................... (1,982) (1,091)
Net increase in loans.................................................. (120,721) (161,963)
Recoveries of loans previously charged-off ............................ 4,206 4,385
Purchases of bank premises and equipment............................... (8,904) (9,811)
Other investing activities............................................. (3,668) (2,931)
--------- --------
Net cash provided by (used in) investing activities........... 12,524 (19,029)
--------- --------
Cash flows from financing activities:
(Decrease) increase in demand and savings deposits..................... (83,907) 73,905
Increase (decrease) in time deposits................................... 26,221 (25,389)
Decrease in Federal Home Loan Bank advances............................ (50,000) (1,514)
Increase in securities sold under agreements to repurchase............. 6,524 10,447
Decrease in notes payable.............................................. (2,048) (7,637)
Payment of preferred stock dividends................................... (328) (328)
Proceeds from sales of branch deposits................................. (48,979) --
--------- --------
Net cash (used in) provided by financing activities .......... (152,517) 49,484
--------- --------
Net decrease in cash and cash equivalents .................... (45,744) (103)
Cash and cash equivalents, beginning of period ............................. 214,762 168,480
--------- ---------
Cash and cash equivalents, end of period.................................... $ 169,018 168,377
========= =========
Noncash investing and financing activities:
Loans held for sale transferred to loans............................... $ 9,206 --
Loans transferred to other real estate................................. 1,189 1,808
========= =========
The accompanying notes are an integral part of the 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 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 six month period ended
June 30, 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 institutions (collectively referred to as the Subsidiary Banks) as
follows:
First Bank, headquartered in St. Louis County, Missouri (First Bank)
First Bank & Trust, headquartered in Newport Beach, California (FB&T)
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)
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 June 30, 1999, First
Banks' ownership interest in FBA was 82.56%.
(2) Acquisitions and Divestitures
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 $9.5
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.
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. 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 June 30,
1999, Century Bank had $161.3 million in total assets, $93.8 million in loans,
net of unearned discount, $27.6 million in investment securities and $127.2
million in deposits. First Banks expects the transaction, which is subject to
regulatory approvals, to be completed by the end of the third quarter of 1999.
In May 1999, FB&T and Brentwood Bank of California (Brentwood) entered
into a branch purchase and assumption agreement providing for the purchase of
certain assets and the assumption of deposits of approximately $16.3 million and
certain liabilities of Brentwood's Malibu, California branch office. First Banks
expects the transaction, which is subject to regulatory approvals, to be
completed by the end of the third quarter of 1999. In March and April 1999,
First Bank completed its divestiture of seven branch facilities in the northern
and central Illinois market areas, resulting in a reduction of the deposit base
of approximately $54.8 million.
(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 March 31, 1999, 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 June 30, 1999, First Banks and the Subsidiary Banks
were well capitalized.
At June 30, 1999 and December 31, 1998, First Banks' and the Subsidiary
Banks' capital ratios were as follows:
Risk based capital ratios
----------------------------------------
Total Tier 1 Leverage Ratio
----- ------ --------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
First Banks...................... 10.29% 10.28% 7.93% 9.03% 6.99% 7.77%
First Bank....................... 10.54 10.01 9.28 8.75 7.95 7.46
FB&T............................. 10.26 10.39 9.00 9.13 7.96 7.60
FB Texas......................... 11.81 11.37 10.56 10.11 9.72 9.15
FB California.................... 11.11 10.63 9.84 9.37 9.28 8.34
Redwood Bank (1)................. 11.66 -- 10.72 -- 9.50 --
----------------
(1) Redwood Bank was acquired by FBA on March 4, 1999.
(4) Earnings Per Common Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computations for the periods indicated:
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ------
(dollars expressed in thousands, except per share data)
Three months ended June 30, 1999:
Basic EPS - income available to common stockholders.... $ 12,427 23,661 $ 525.23
=========
Effect of dilutive securities:
Class A convertible preferred stock................. 128 1,194
--------- --------
Diluted EPS - income available to common stockholders.. $ 12,555 24,855 $ 505.15
========= ======== =========
Three months ended June 30, 1998:
Basic EPS - income available to common stockholders.... $ 6,745 23,661 $ 285.02
=========
Effect of dilutive securities:
Class A convertible preferred stock................. 128 1,389
--------- --------
Diluted EPS - income available to common stockholders.. $ 6,873 25,050 $ 274.34
========= ======== =========
Six months ended June 30, 1999:
Basic EPS - income available to common stockholders.... $ 21,502 23,661 $ 908.75
=========
Effect of dilutive securities:
Class A convertible preferred stock................. 321 1,212
--------- --------
Diluted EPS - income available to common stockholders.. $ 21,823 24,873 $ 877.36
========= ======== =========
Six months ended June 30, 1998:
Basic EPS - income available to common stockholders.... $ 13,914 23,661 $ 588.03
=========
Effect of dilutive securities:
Class A convertible preferred stock................. 321 1,389
--------- --------
Diluted EPS - income available to common stockholders.. $ 14,235 25,050 $ 568.22
========= ======== =========
(5) 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), 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.
The business segment results are summarized as follows 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 June 30, 1999 and December 31,
1998, and the statement of income information is presented for the three and six
months ended June 30, 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.
First Bank FB California Redwood Bank (1) FB Texas
---------------------- ---------------------- -------------------- ---------------------
June 30, December 31, June 30, December 31, June 30, December 31, June 30, December 31,
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................. $ 188,651 252,165 29,566 53,449 19,865 -- 33,777 59,914
Loans, net of unearned discount....... 2,422,082 2,354,937 331,707 314,977 142,409 -- 217,908 201,426
Total assets.......................... 2,858,607 2,869,648 396,656 410,110 190,879 -- 277,114 300,984
Deposits.............................. 2,584,279 2,623,157 349,254 363,422 163,688 -- 238,118 264,425
Stockholders' equity.................. $ 252,321 236,010 43,709 42,825 25,870 -- 30,091 30,249
========== ========= ======== ======== ========= ====== ======== ========
First Bank FB California Redwood Bank (1) FB Texas
--------------------- ------------------ ------------------ ------------------
Three months ended Three months ended Three months ended Three months ended
June 30, June 30, June 30, June 30,
---------------------- ------------------ -------------------- ------------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income....................... $ 52,683 52,678 8,132 8,117 3,750 -- 5,481 5,286
Interest expense...................... 24,351 27,025 2,996 3,436 1,393 -- 2,163 2,132
---------- --------- ------- ------ ----- ----- ------ ------
Net interest income................ 28,332 25,653 5,136 4,681 2,357 -- 3,318 3,154
Provision for possible loan losses.... 2,600 1,500 20 150 73 -- 30 50
---------- --------- ------- ------ ----- ----- ------ ------
Net interest income after provision
for possible loan losses......... 25,732 24,153 5,116 4,531 2,284 -- 3,288 3,104
---------- --------- ------- ------ ----- ----- ------ ------
Noninterest income (2)................ 9,722 5,975 815 616 177 -- 513 373
Noninterest expense (3)............... 17,130 18,330 3,926 4,077 1,469 -- 2,231 2,185
---------- --------- ------- ------ ----- ----- ------ ------
Income before provision for income
taxes and minority interest in
income of subsidiary............. 18,324 11,798 2,005 1,070 992 -- 1,570 1,292
Provision for income taxes............ 6,035 3,977 866 432 480 -- 541 444
---------- --------- ------- ------ ----- ----- ------ ------
Income before minority interest
in income of subsidiary.......... 12,289 7,821 1,139 638 512 -- 1,029 848
Minority interest in income of
subsidiary...................... -- -- -- -- -- -- -- --
---------- --------- ------- ------ ----- ------ ------ ------
Net income......................... $ 12,289 7,821 1,139 638 512 -- 1,029 848
========== ========= ======= ====== ===== ====== ====== ======
First Bank FB California Redwood Bank (1) FB Texas
---------------------- ----------------- ---------------- ----------------
Six months ended Six months ended Six months ended Six months ended
June 30, June 30, June 30, June 30,
---------------------- ------------------ -------------------- ------------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income....................... $ 104,154 104,985 16,132 15,874 4,930 -- 11,023 10,523
Interest expense...................... 49,678 53,878 6,075 6,752 1,835 -- 4,325 4,232
---------- -------- ------- ------ ----- ----- ------ ------
Net interest income................ 54,476 51,107 10,057 9,122 3,095 -- 6,698 6,291
Provision for possible loan losses.... 4,700 3,100 80 300 73 -- 60 200
---------- -------- ------- ------ ----- ----- ------ ------
Net interest income after provision
for possible loan losses......... 49,776 48,007 9,977 8,822 3,022 -- 6,638 6,091
---------- -------- ------- ------ ----- ----- ------ ------
Noninterest income (2)................ 14,416 10,024 1,424 1,329 203 -- 1,056 752
Noninterest expense (3)............... 33,835 35,727 7,625 7,807 1,907 -- 4,510 4,388
---------- --------- ------- ------ ----- ----- ------ ------
Income before provision for income
taxes and minority interest in
income of subsidiary............. 30,357 22,304 3,776 2,344 1,318 -- 3,184 2,455
Provision for income taxes............ 10,156 7,537 1,653 967 644 -- 1,096 854
---------- --------- ------- ------ ----- ----- ------ ------
Income before minority interest
in income of subsidiary.......... 20,201 14,767 2,123 1,377 674 -- 2,088 1,601
Minority interest in income of
subsidiary....................... -- -- -- -- -- -- -- --
--------- ------- ------ ---- ----- ------ ------ ------
Net income......................... $ 20,201 14,767 2,123 1,377 674 -- 2,088 1,601
========== ========= ======= ====== ===== ===== ====== ======
---------------
(1) Redwood Bank was acquired by FBA on March 4, 1999.
(2) FBM includes intercompany loan servicing fees of $158,000 and $327,000
and $272,000 and $596,000 for the three and six months ended June 30, 1999
and 1998, respectively.
(3) Corporate and other includes $2.0 million and $3.9 million and $1.3 million
and $2.6 million of guaranteed preferred debenture expense, after
applicable income tax benefit of $1.0 million and $2.1 million and $700,000
and $1.4 million for the three and six months ended June 30, 1999 and 1998,
respectively.
Corporate, other and
FB&T FBM (2) intercompany reclassifications (3) Consolidated totals
------------------------ ---------------------- ---------------------------------- ---------------------------
June 30, December 31, June 30, December 31, June 30, December 31, June 30, December 31,
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
91,870 134,203 11,865 12,199 21,520 22,866 397,114 534,796
587,181 573,562 67,209 135,619 (402) (416) 3,768,094 3,580,105
751,028 793,217 89,933 154,952 8,652 25,899 4,572,869 4,554,810
646,464 701,406 25,358 35,873 (16,671) (48,298) 3,990,490 3,939,985
73,860 75,165 3,529 7,663 (152,201) (128,549) 277,179 263,363
======== ======== ======== ======== ======== ======== ========== ========
Corporate, other and
FB&T FBM intercompany reclassifications Consolidated totals
------------------------ -------------------- ------------------------------ -------------------------
Three months ended Three months ended Three months ended Three months ended
June 30, June 30, June 30, June 30,
------------------------ --------------------- ------------------------------ -------------------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
14,014 12,979 1,757 2,045 (176) (165) 85,641 80,940
5,790 6,473 1,158 1,352 299 703 38,150 41,121
------- -------- -------- --------- -------- ------- -------- -------
8,224 6,506 599 693 (475) (868) 47,491 39,819
650 150 -- -- -- -- 3,373 1,850
------- -------- -------- --------- -------- ------- -------- -------
7,574 6,356 599 693 (475) (868) 44,118 37,969
------- -------- -------- --------- -------- ------- -------- -------
1,121 1,077 1,327 1,548 (160) (1,232) 13,515 8,357
6,673 5,674 1,972 2,037 3,847 2,734 37,248 35,037
------- -------- -------- --------- -------- ------- -------- -------
2,022 1,759 (46) 204 (4,482) (4,834) 20,385 11,289
937 721 (16) 72 (1,378) (1,512) 7,465 4,134
------- -------- ------- --------- -------- ------- -------- -------
1,085 1,038 (30) 132 (3,104) (3,322) 12,920 7,155
-- -- -- -- 361 279 361 279
------- -------- -------- --------- -------- ------- -------- -------
1,085 1,038 (30) 132 (3,465) (3,601) 12,559 6,876
======= ======== ======== ========= ======== ======= ======== =======
Corporate, other and
FB&T FBM intercompany reclassifications Consolidated totals
------------------------ --------------------- ------------------------------ ------------------------
Six months ended Six months ended Six months ended Six months ended
June 30, June 30, June 30, June 30,
------------------------ --------------------- ------------------------------ ----------------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
28,355 25,377 3,764 3,360 (157) (249) 168,201 159,870
11,989 12,967 2,498 2,293 716 1,600 77,116 81,722
------- -------- -------- --------- -------- ------- -------- -------
16,366 12,410 1,266 1,067 (873) (1,849) 91,085 78,148
950 350 -- -- -- -- 5,863 3,950
------- -------- -------- --------- -------- ------- -------- -------
15,416 12,060 1,266 1,067 (873) (1,849) 85,222 74,198
------- -------- -------- --------- -------- ------- -------- -------
2,364 1,834 4,052 3,266 (397) (1,054) 23,118 16,151
13,225 10,442 4,287 3,262 7,346 5,470 72,735 67,096
------- -------- -------- --------- -------- ------- -------- -------
4,555 3,452 1,031 1,071 (8,616) (8,373) 35,605 23,253
2,060 1,231 361 375 (2,867) (2,574) 13,103 8,390
------- -------- -------- --------- -------- ------- -------- -------
2,495 2,221 670 696 (5,749) (5,799) 22,502 14,863
-- -- -- -- 672 621 672 621
------- -------- -------- --------- -------- ------- -------- -------
2,495 2,221 670 696 (6,421) (6,420) 21,830 14,242
======= ======== ======== ========= ======== ======= ======== =======
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 June 30,
1999, First Banks had $4.6 billion in total assets; $3.8 billion in total loans,
net of unearned discount; $4.0 billion in total deposits; and $277.2 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 June 30, 1999:
Number of Loans, net of Total
Subsidiary Banks locations Total assets unearned discount deposits
---------------- --------- ------------ ----------------- --------
(dollars expressed in thousands)
First Bank.............................. 90 $ 2,948,540 2,489,291 2,609,637
FB&T ................................... 21 751,028 587,181 646,464
FBA:
FB California...................... 10 396,656 331,707 349,254
FB Texas........................... 6 277,114 217,908 238,118
Redwood:
Redwood Bank................... 4 190,879 142,409 163,688
Financial Condition
First Banks' total assets increased by $18.1 million to $4.57 billion
from $4.55 billion at June 30, 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
$53.6 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 First Banks' efforts to
effectively monitor non-earning assets, and a reduction in investment securities
and federal funds sold of $137.7 million and $8.6 million, respectively, which
provided additional sources of funds for the loan growth. Although average total
deposits for the three and six months ended June 30, 1999 increased by $188.1
million and $212.5 million, respectively, in comparison to the same periods in
1998, total deposits, excluding the deposits provided by the acquisition of
Redwood, decreased by $112.4 million to $3.99 billion at June 30, 1999 from
$3.94 billion at December 31, 1998. This decrease is primarily attributable to
the divestiture of certain branch facilities with a total deposit base of $54.8
million, and to First Banks' strategy of reducing its overall interest cost by
allowing a controlled attrition of a portion of deposits.
Results of Operations
Net Income
Net income was $12.6 million, or $505.15 per share on a diluted basis,
for the three months ended June 30, 1999, in comparison to $6.9 million, or
$274.34 per share on a diluted basis, for the same period in 1998. Net income
for the six months ended June 30, 1999 and 1998 was $21.8 million and $14.2
million, or $877.36 and $568.22 per share on a diluted basis, respectively. The
earnings improvement is primarily attributable to First Banks' efforts to
realign the composition of the loan portfolio through further diversification
and growth; the results of FBA's acquisition of Redwood; and the divestiture of
certain branch facilities. As previously mentioned, the loan growth was
primarily funded through reductions in investment securities and federal funds
sold.
The increased net income was partially offset by an increased provision
for possible loan losses, as discussed under "--Provision for Possible Loan
Losses," and an increase in operating expenses of $2.2 million and $5.6 million
for the three and six months ended June 30, 1999 in comparison to the same
periods in 1998, respectively. The increased operating expenses are reflective
of: the additional cost of the preferred securities issued by FBA in July 1998;
the continuing expansion of commercial and retail banking activities; the
acquisitions of Redwood, completed on March 4, 1999, Pacific Bay Bank, completed
on February 2, 1998, and Republic Bank, completed on September 15, 1998;
increased legal, examination and professional fees; and increased data
processing fees primarily associated with Year 2000 activities.
Net Interest Income
Net interest income (expressed on a tax-equivalent basis) improved to
$47.7 million, or 4.51% of average interest-earning assets, for the three months
ended June 30, 1999, from $40.0 million, or 4.07% of average interest-earning
assets, for the same period in 1998. For the six months ended June 30, 1999 and
1998, net interest income (expressed on a tax-equivalent basis) was $91.5
million, or 4.40%, and $78.6 million, or 4.06%, or average interest-earning
assets, respectively. The improved net interest income is primarily attributable
to the net interest-earning assets provided by the acquisitions of Redwood,
Pacific Bay Bank and Republic Bank, internal loan growth and a reduction in the
overall cost of deposits. For the three and six months ended June 30, 1999 and
1998, loans, on average, increased by $621.5 million and $606.1 million,
respectively. Contributing further to the improved net interest income is the
effect of (a) the earnings impact of the interest rate swap agreements entered
into in 1998; (b) the reduction of First Bank's deposit base associated with the
divested branch facilities, which was primarily concentrated in certificates of
deposit; and (c) a decrease in the cost of interest-bearing liabilities to 4.26%
and 4.35% from 4.81% and 4.86% for the three and six months ended June 30, 1999
and 1998, respectively.
Although net interest margin improved, the yield on the loan portfolio
declined to 8.35% and 8.36% from 8.79% and 8.86% for the three and six months
ended June 30, 1999 and 1998, respectively. This reduction primarily results
from the overall decline in the prime lending rate experienced during the latter
part of 1998.
The improved net interest margin is further offset by the amortization
of deferred hedging losses. These costs were $1.2 million and $2.5 million for
the three and six months ended June 30, 1999, in comparison to $1.0 million and
$2.0 million for the same periods in 1998, respectively. The increase is
reflective of the liquidation of a portion of the underlying interest-bearing
liabilities, primarily associated with the branch divestitures, which resulted
in the additional recognition of a portion of the related deferred losses on the
previously terminated interest rate exchange agreements.
The following table sets forth, on a tax-equivalent basis, certain
information relating to First Banks' average balance sheets, and reflects the
average yield earned on interest-earning assets, the average cost of
interest-bearing liabilities and the resulting net interest income for the three
and six months ended June 30, 1999 and 1998:
Three months ended June 30, Six months ended June 30,
---------------------------------------------- ---------------------------------------------
1999 1998 1999 1998
-------------------- ---------------------- ---------------------- ----------------------
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(1)(2)(3)(4)........... $3,792,234 78,991 8.35% $3,170,735 69,507 8.79% 3,708,908 153,752 8.36% $3,102,837 136,322 8.86%
Investment securities(4).... 434,288 6,578 6.08 712,523 10,809 6.08 472,566 14,385 6.14 727,515 22,005 6.10
Federal funds sold.......... 13,137 217 6.63 58,752 806 5.50 13,995 410 5.91 68,733 1,877 5.51
Other....................... 1,743 15 3.45 3,145 48 6.12 1,408 45 6.45 3,878 113 5.88
---------- ------- ---------- ------ ---------- ------ ---------- -------
Total interest-earning
assets............... 4,241,402 85,801 8.11 3,945,155 81,170 8.25 4,196,877 168,592 8.10 3,902,963 160,317 8.28
------- ------ ------- -------
Nonearning assets.............. 337,342 303,401 340,373 298,518
---------- ---------- ---------- ----------
Total assets........... $4,578,744 $4,248,556 $4,537,250 $4,201,481
========== ========== ========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits................ $ 388,317 1,182 1.22% $ 353,276 1,329 1.51% $ 379,746 2,296 1.22% $ 351,974 2,803 1.61%
Savings deposits.......... 1,233,559 11,085 3.60 1,031,642 10,232 3.98 1,222,916 22,014 3.63 999,149 19,785 3.99
Time deposits of $100
or more (3)............. 211,042 2,834 5.39 230,423 3,446 6.00 212,252 5,752 5.46 220,327 6,594 6.04
Other time deposits(3).... 1,598,543 20,916 5.25 1,707,704 24,567 5.77 1,608,657 43,130 5.41 1,719,013 49,444 5.80
---------- ------- ---------- ------ ---------- ------ --------- ------
Total interest-bearing
deposits............. 3,431,461 36,017 4.21 3,323,045 39,574 4.78 3,423,571 73,192 4.31 3,290,463 78,626 4.82
Federal funds purchased,
repurchase agreements
and Federal Home Loan
Bank advances(3).......... 113,120 1,393 4.94 50,208 596 4.76 98,188 2,391 4.91 49,558 1,175 4.78
Notes payable and other..... 49,054 740 6.05 53,185 951 7.17 49,527 1,533 6.24 53,900 1,921 7.19
---------- ------- ---------- ------ ---------- ------ ---------- -------
Total interest-bearing
liabilities.......... 3,593,635 38,150 4.26 3,426,438 41,121 4.81 3,571,286 77,116 4.35 3,393,921 81,722 4.86
------- ------ ------ -------
Noninterest-bearing liabilities:
Demand deposits............. 534,472 454,792 521,461 442,112
Other liabilities........... 174,456 127,397 173,033 128,217
---------- ---------- ---------- ----------
Total liabilities...... 4,302,563 4,008,627 4,265,780 3,964,250
Stockholders' equity........... 276,181 239,929 271,470 237,231
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity. $4,578,744 $4,248,556 $4,537,250 $4,201,481
========== ========== ========== ==========
Net interest income............ 47,651 40,049 91,476 78,595
======= ====== ====== =======
Net interest margin............ 4.51% 4.07% 4.40% 4.06%
==== ==== ====== ====
- ------------
(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 $160,000 and
$391,000 and $230,000 and $447,000 for the three and six months ended June
30, 1999 and 1998, respectively.
Provision for Possible Loan Losses
The provision for possible loan losses was $3.4 million and $5.9
million for the three and six months ended June 30, 1999, compared to $1.9
million and $4.0 million for the same periods in 1998, respectively. The
increase in the provision for possible loan losses reflects the continued growth
and changing composition of the loan portfolio and an increase in loans
charged-off and loans past due 90 days or more.
First Banks' loan loss experience for the three and six months ended
June 30, 1999 further contributed to the increased provision for possible loan
losses. Net loan charge-offs were $3.6 million and $3.3 million for the three
and six months ended June 30, 1999, in comparison to net loan charge-offs of
$302,000 and net loan recoveries of $247,000 for the same periods in 1998. The
increase in net loan charge-offs is reflective of overall growth in the loan
portfolio, increased risk associated with the change in the composition of the
loan portfolio and the charge-off of certain credit relationships. The
acquisitions of Redwood, Pacific Bay Bank and Republic Bank provided $1.5
million, $885,000 and $2.3 million in additional allowance for possible loan
losses, respectively.
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 $13.5 million and $23.1 million for the three
and six months ended June 30, 1999, in comparison to $8.4 million and $16.2
million for the same periods in 1998. Noninterest income consists primarily of
service charges on deposit accounts and customer service fees, mortgage banking
revenues and other income.
Service charges on deposit accounts and customer service fees were $4.5
million and $8.4 million for the three and six months ended June 30, 1999, in
comparison to $3.5 million and $6.9 million for the same periods in 1998,
respectively. 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 Redwood, Pacific Bay Bank and Republic Bank; (c)
additional products and services available and utilized by First Banks' retail
and commercial customer base; (d) increased fee income resulting from revisions
of customer service charge rates effective April 1, 1999, and enhanced control
of fee waivers; and (e) increased interchange income associated with automatic
teller machine services and debit and credit cards. As described below, this
increase was partially offset by the foregone revenue associated with the
divestiture of certain branch facilities in 1999, which resulted in a reduction
in First Bank's deposit base of approximately $54.8 million.
Mortgage banking revenues consist primarily of loan servicing fees,
net, and gains on mortgage loans sold and held for sale. Loan servicing fees,
net, decreased to $62,000 and $283,000 for the three and six months ended June
30, 1999, from $404,000 and $703,000 for the same periods in 1998, respectively.
This decrease is attributable to a reduction in loans serviced for others
resulting from the repayment and prepayment of the portfolio and First Banks'
strategy of selling the new production of adjustable-rate and nonconforming
residential mortgage loans on a servicing released basis. The gain on mortgage
loans sold and held for sale increased to $1.5 million and $3.8 million for the
three and six months ended June 30, 1999, from $863,000 and $1.9 million for the
same periods in 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 nonconforming residential mortgage loans, which are sold on
a servicing released basis. In addition, the increase also reflects the
continued expansion of First Banks' mortgage banking activities in the Texas and
California market areas.
Net loss on sales of trading securities was $303,000 for the six months
ended June 30, 1999, in comparison to a net gain of $644,000 for the same period
in 1998. The loss for 1999 resulted from the termination of First Banks' trading
division, effective December 31, 1998, and the liquidation of all trading
portfolio securities.
Other income increased to $7.1 million and $9.8 million for the three
and six months ended June 30, 1999, in comparison to $2.1 million and $4.1
million for the same periods in 1998, respectively. The primary components of
the increase are attributable to increased income earned on First Banks'
investment in bank owned life insurance (BOLI), expanded discount brokerage and
private banking and trust services, and a gain recognized on the divestiture of
certain branch facilities in the central and northern Illinois market areas.
BOLI income was $966,000 and $1.8 million for the three and six months ended
June 30, 1999, in comparison to $761,000 and $1.4 million for the same periods
in 1998. This increase is primarily attributable to FBA's initial investment in
BOLI completed in April 1998 and increased income earned on the underlying
investments. In addition, First Banks recorded a pre-tax gain of $4.2 million
and $4.5 million for the three and six months ended June 30, 1999 associated
with the divestiture of seven branch facilities in late March and early April of
1999.
Noninterest Expense
Noninterest expense was $37.2 million and $72.7 million for the three
and six months ended June 30, 1999, in comparison to $35.0 million and $67.1
million for the same periods in 1998, respectively. The increase is reflective
of: (a) the acquisitions of Redwood, Pacific Bay Bank and Republic Bank; (b)
increased data processing fees primarily associated with First Banks' Year 2000
Program; (c) increased legal, examination and professional fees and (d) the
formation of First America Capital Trust (FACT) and FACT's issuance of
Cumulative Trust Preferred Securities in July 1998. The overall increase in
noninterest expense is partially offset by a reduction in advertising and
business development expenses and communications expenses, and is consistent
with management's efforts to more effectively and efficiently monitor and manage
these expenditures. In addition, credit card fees declined for the three and six
months ended June 30, 1999, in comparison to the same periods in 1998, and is
primarily attributable to First Banks' liquidation of its merchant credit card
processing operation, effective December 31, 1998.
Salaries and employee benefits increased to $15.6 million and $30.1
million for the three and six months ended June 30, 1999, in comparison to $14.4
million and $27.3 million for the same periods in 1998, respectively. The
increase is attributable to the newly acquired banks and First Banks' continued
commitment to expanding its commercial and retail business development
capabilities associated with expansion and delivery of its products and
services. The overall increase also reflects the competitive employment market
environment that has resulted in a higher demand for limited resources, thus
escalating industry salary and employee benefit costs.
Data processing fees increased to $4.7 million and $9.2 million for the
three and six months ended June 30, 1999, in comparison to $3.0 million and $6.0
million for the same periods in 1998, respectively. 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, increased expenses attributable to
communication data lines related to the expansion of the branch network
infrastructure and expenses associated with the Year 2000 Program.
Legal, examination and professional fees increased to $1.9 million and
$3.2 million for the three and six months ended June 30, 1999, in comparison to
$1.3 million and $2.3 million for the same periods in 1998, respectively. The
increased fees primarily relate to First Banks' enhanced utilization of external
consulting services and legal expenditures associated with litigation defense.
Guaranteed preferred debentures expense increased to $3.0 million and
$6.0 million for the three and six months ended June 30, 1999, in comparison to
$2.0 million and $4.0 million for the same periods in 1998. 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. 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, 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.
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 91.3% and 85.2% of total interest income for the six months ended June 30,
1999 and 1998, respectively. Total loans, net of unearned discount, represented
82.4% and 78.6% of total assets as of June 30, 1999 and December 31, 1998,
respectively. Total loans, excluding loans held for sale and net of unearned
discount, increased by $260.7 million to $3.71 billion at June 30, 1999 from
$3.44 billion at December 31, 1998. The increase in loans, as summarized on the
consolidated balance sheets, is attributable to the acquisition of Redwood,
which provided loans, net of unearned discount, of $134.4 million, and continued
internal growth of $185.4 million. This increase was partially offset by
declines in the residential real estate mortgage, consumer and installment and
loans held for sale portfolios of $32.7 million, $26.4 million and $72.7
million, respectively. These fluctuations are attributable to the continued sale
of conforming residential mortgage loan production into the secondary mortgage
market, reductions of new loan origination volumes and the repayment of
principal on the existing portfolios.
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:
June 30, December 31,
1999 1998
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual............................................... $ 17,548 15,385
Real estate construction and development:
Nonaccrual............................................... 4,904 3,858
Real estate mortgage:
Nonaccrual............................................... 18,318 18,858
Restructured terms....................................... 4,553 5,221
Consumer and installment:
Nonaccrual............................................... 91 216
Restructured items....................................... 29 --
----------- -----------
Total nonperforming loans................................ 45,443 43,538
Other real estate............................................. 2,545 3,709
----------- -----------
Total nonperforming assets............................... $ 47,988 47,247
=========== ===========
Loans, net of unearned discount............................... $ 3,768,094 3,580,105
=========== ===========
Loans past due 90 days or more and still accruing............. $ 6,957 4,674
=========== ===========
Allowance for possible loan losses to loans .................. 1.72% 1.70%
Nonperforming loans to loans.................................. 1.21 1.22
Allowance for possible loan losses to nonperforming loans..... 142.99 140.04
Nonperforming assets to loans and other real estate........... 1.27 1.32
=========== ===========
Nonperforming loans, consisting of loans on nonaccrual status and
restructured loans, were $45.4 million at June 30, 1999, in comparison to $43.5
million at December 31, 1998. This increase is primarily attributable to an
increase in nonaccrual loans at First Bank and FB&T and the overall growth of
the loan portfolio, principally within commercial, financial and agricultural,
real estate construction and development, and commercial real estate loans,
which generally possess a higher level of inherent risk. First Banks does not
believe the increase in nonperforming loans to be indicative of distress or
negative trends within the loan portfolio.
Impaired loans, consisting of nonaccrual loans and restructured loans,
were $45.4 million and $43.5 million at June 30, 1999 and December 31, 1998,
respectively.
The following is a summary of loan loss experience for the three and
six months ended June 30:
Three months ended Six months ended
June 30, June 30,
-------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
(dollars expressed in thousands)
Allowance for possible loan losses, beginning of period.................. $ 65,239 54,043 60,970 50,509
Acquired allowances for possible loan losses............................. -- -- 1,466 885
-------- -------- ------- --------
65,239 54,043 62,436 51,394
-------- -------- ------- --------
Loans charged-off........................................................ (5,617) (2,082) (7,528) (4,138)
Recoveries of loans previously charged-off............................... 1,982 1,780 4,206 4,385
-------- -------- ------- --------
Net loan (charge-offs) recoveries................................... (3,635) (302) (3,322) 247
-------- -------- ------- --------
Provision for possible loan losses....................................... 3,373 1,850 5,863 3,950
-------- -------- ------- --------
Allowance for possible loan losses, end of period........................ $ 64,977 55,591 64,977 55,591
======== ======== ======= ========
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:
June 30, 1999 December 31, 1998
---------------------- -----------------------
Notional Credit Notional Credit
amount exposure amount exposure
------ -------- ------ --------
(dollars expressed in thousands)
Interest rate swap agreements - pay
adjustable rate, receive adjustable rate............ $ 500,000 -- -- --
Interest rate swap agreements - pay
adjustable rate, receive fixed rate................. 280,000 3,574 280,000 3,526
Interest rate floor agreements........................ 70,000 -- 70,000 --
Interest rate cap agreements.......................... 10,000 94 10,000 164
Forward commitments to sell
mortgage-backed securities.......................... 45,000 -- 95,000 237
========== ======= ======= =====
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.
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 $1.2
million and $2.5 million and $1.0 million and $2.0 million for the three and six
months ended June 30, 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 $2.8 million and $5.7 million at June 30, 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. 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 (LIBOR). 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 $4.2 million at
June 30, 1999 and December 31, 1998 and the amount payable by First Banks under
the swap agreements was $592,000 and $640,000 at June 30, 1999 and December 31,
1998, respectively.
During May 1999, First Banks entered into $500.0 million notional
amount of interest rate swap agreements with the objective of stabilizing the
net interest margin during the six-month period surrounding the Year 2000
century date change. The swap agreements provide for First Banks to receive an
adjustable rate of interest equivalent to the daily weighted average 30-day
LIBOR and pay an adjustable rate of interest equivalent to the daily weighted
average prime lending rate minus 2.665%. The terms of the swap agreements, which
have an effective date of October 1, 1999 and a maturity date of March 31, 2000,
provide for First Banks to pay and receive interest on a monthly basis.
The maturity dates, notional amounts, interest rates paid and received,
and fair values of the swap agreements outstanding as of June 30, 1999 were as
follows:
Notional Interest rate Interest rate
Maturity date amount paid received Fair value
March 31, 2000 (1)......................... $ 350,000 --% --% $ 261
March 31, 2000 (1)......................... 75,000 -- -- 56
March 31, 2000 (1)......................... 50,000 -- -- 37
March 31, 2000 (1)......................... 25,000 -- -- 19
June 11, 2002.............................. 15,000 5.10 6.00 (72)
September 16, 2002......................... 20,000 5.16 5.36 (496)
September 16, 2002......................... 175,000 5.16 5.36 (4,299)
September 18, 2002......................... 30,000 5.18 5.33 (771)
September 18, 2002......................... 40,000 5.18 5.33 (1,037)
---------- -------
$ 780,000 5.16 5.39 $(6,302)
========== ===== ==== =======
--------------------
(1) These interest rate swap agreements will become effective on
October 1, 1999.
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 June 30, 1999 and December 31, 1998, the unamortized costs of
these agreements were $94,000 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
$55.6 million and $103.1 million at June 30, 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 $45.0 million and $95.0
million at June 30, 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 June 30, 1999 and December 31, 1998, the net unamortized gains and
losses were $764,000 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.
Year 2000 Compatibility
First Banks and the Subsidiary Banks are subject to risks associated
with the "Year 2000" issue, 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
issue, 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 issue, 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. The testing of the Year 2000
solution for ISC was completed and ISC was upgraded throughout First Banks'
branch network by June 30, 1999, thereby maintaining compliance with appropriate
regulatory guidelines associated with Year 2000.
The testing of CFI was completed by December 31, 1998. The CFI system
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 was the implementation of remediated and
other systems into the operating environment of First Banks. With the final
phase of the Program substantially completed by June 30, 1999, First Banks
continues to focus its efforts on overall contingency planning and specific Year
2000 event preparation.
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
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 and
$900,000 for the three and six months ended June 30, 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 addresses a variety of issues including critical and common
systems, credit risk, liquidity, loan and deposit customers, facilities,
supplies and computer back-up locations. Additionally, First Banks has developed
business resumption plans and process resumption test plans for each functional
area deemed critical to the operations of First Banks. These business resumption
plans, collectively with the Contingency Plan, 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 based upon the results of the process resumption
testing efforts.
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 $381.1 million and $391.4 million at June 30, 1999 and December 31,
1998, respectively.
At June 30, 1999, First Banks' more volatile sources of funds mature as
follows:
(dollars expressed in thousands)
Three months or less................................................... $ 205,410
Over three months through six months................................... 52,087
Over six months through twelve months.................................. 70,454
Over twelve months..................................................... 53,196
----------
Total................................................................ 381,147
==========
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 Financial Accounting Standards Board (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 133 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. In June
1999, the FASB issued SFAS No. 137 - Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,
an Amendment of FASB Statement No. 133, which defers the effective date of SFAS
133 from fiscal years beginning after June 15, 1999 to fiscal years beginning
after June 15, 2000. 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, as amended. 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, as amended. Additionally, SFAS 133, as amended, should not be applied
retroactively to financial statements of prior periods. First Banks is currently
evaluating the requirements of SFAS 133, as amended, to determine its potential
impact on the consolidated financial statements.
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.
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
------ -----------
27 Article 9 - Financial Data Schedule (EDGAR only)
(b) First Banks filed no reports on Form 8-K during the three months ended
June 30, 1999.
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: August 10, 1999 By: /s/ James F. Dierberg
---------------------
James F. Dierberg
Chairman, President and
Chief Executive Officer
Date: August 10, 1999 By: /s/ Allen H. Blake
-----------------------
Allen H. Blake
Executive Vice President,
Chief Financial Officer,
Chief Operating Officer
and Secretary
(Principal Financial Officer)