UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares outstanding
Class at October 31, 2000
----- ----------------------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - (UNAUDITED):
CONSOLIDATED BALANCE SHEETS......................................................... 1
CONSOLIDATED STATEMENTS OF INCOME................................................... 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME........................................................ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS............................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 25
SIGNATURES ....................................................................................... 26
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS - (UNAUDITED)
(dollars expressed in thousands, except per share data)
September 30, December 31,
2000 1999
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks....................................................... $ 157,883 126,720
Interest-bearing deposits with other financial institutions
with maturities of three months or less..................................... 3,897 1,674
Federal funds sold............................................................ 17,900 42,500
------------ -----------
Total cash and cash equivalents..................................... 179,680 170,894
------------ -----------
Investment securities:
Available for sale, at fair value............................................. 396,892 430,093
Held to maturity, at amortized cost (fair value of $21,744 and $21,476
at September 30, 2000 and December 31, 1999, respectively).................. 21,579 21,554
------------ -----------
Total investment securities......................................... 418,471 451,647
------------ -----------
Loans:
Commercial, financial and agricultural........................................ 1,361,127 1,086,919
Real estate construction and development...................................... 768,252 795,081
Real estate mortgage.......................................................... 2,006,966 1,851,569
Consumer and installment...................................................... 183,699 233,374
Loans held for sale........................................................... 46,561 37,412
------------ -----------
Total loans......................................................... 4,366,605 4,004,355
Unearned discount............................................................. (7,019) (8,031)
Allowance for loan losses..................................................... (80,311) (68,611)
------------ -----------
Net loans........................................................... 4,279,275 3,927,713
------------ -----------
Bank premises and equipment, net of accumulated
depreciation and amortization................................................. 90,600 75,647
Intangibles associated with the purchase of subsidiaries........................... 55,071 46,085
Accrued interest receivable........................................................ 37,695 33,491
Deferred income taxes.............................................................. 62,472 51,972
Other assets....................................................................... 111,365 110,298
------------ -----------
Total assets........................................................ $ 5,234,629 4,867,747
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED) - (UNAUDITED)
(dollars expressed in thousands, except per share data)
September 30, December 31,
2000 1999
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing........................................................ $ 680,663 606,064
Interest-bearing............................................................ 409,905 415,113
Savings....................................................................... 1,292,588 1,198,314
Time:
Time deposits of $100 or more............................................... 415,633 339,214
Other time deposits......................................................... 1,732,259 1,693,109
------------ -----------
Total deposits........................................................... 4,531,048 4,251,814
Short-term borrowings.............................................................. 103,508 73,554
Note payable....................................................................... 54,500 64,000
Accrued interest payable........................................................... 18,419 11,607
Deferred income taxes.............................................................. 10,086 6,582
Accrued expenses and other liabilities............................................. 38,563 25,616
Minority interest in subsidiary.................................................... 12,864 12,058
------------ -----------
Total liabilities........................................................ 4,768,988 4,445,231
------------ -----------
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debentures..................................... 83,450 83,394
First Banks America, Inc. subordinated debentures............................. 44,264 44,217
------------ -----------
Total guaranteed preferred beneficial interests in
subordinated debentures.............................................. 127,714 127,611
------------ -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding at September 30, 2000 and December 31, 1999................. -- --
Class A convertible, adjustable rate, $20.00 par value, 750,000
shares authorized, 641,082 shares issued and outstanding.................... 12,822 12,822
Class B adjustable rate, $1.50 par value, 200,000 shares authorized,
160,505 shares issued and outstanding....................................... 241 241
Common stock, $250.00 par value, 25,000 shares authorized,
23,661 shares issued and outstanding.......................................... 5,915 5,915
Capital surplus.................................................................... 2,997 3,318
Retained earnings.................................................................. 313,052 270,259
Accumulated other comprehensive income............................................. 2,900 2,350
------------ -----------
Total stockholders' equity............................................... 337,927 294,905
------------ -----------
Total liabilities and stockholders' equity............................... $ 5,234,629 4,867,747
============ ===========
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Interest income:
Interest and fees on loans....................................... $ 99,758 81,919 285,584 235,558
Investment securities............................................ 7,085 6,347 21,104 20,454
Federal funds sold and other..................................... 739 779 2,772 1,234
-------- ------ -------- --------
Total interest income........................................ 107,582 89,045 309,460 257,246
-------- ------ -------- --------
Interest expense:
Deposits:
Interest-bearing demand........................................ 1,480 1,269 4,365 3,565
Savings........................................................ 13,176 10,962 37,246 32,976
Time deposits of $100 or more.................................. 7,932 2,986 13,787 8,452
Other time deposits............................................ 22,691 21,197 72,913 62,158
Interest rate exchange agreements, net........................... -- 1,409 -- 3,997
Short-term borrowings............................................ 1,641 847 4,156 3,106
Note payable..................................................... 1,220 874 3,731 2,406
-------- ------ -------- --------
Total interest expense....................................... 48,140 39,544 136,198 116,660
-------- ------ -------- --------
Net interest income.......................................... 59,442 49,501 173,262 140,586
Provision for loan losses............................................. 3,865 2,880 11,067 8,743
-------- ------ -------- --------
Net interest income after provision for loan losses.......... 55,577 46,621 162,195 131,843
-------- ------ -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees.... 5,184 4,434 14,648 12,791
Gain on mortgage loans sold and held for sale.................... 1,898 1,605 5,166 5,439
Net (loss) gain on sales of available-for-sale securities........ (180) 1 199 793
Net loss on trading securities................................... -- -- -- (303)
Other............................................................ 3,848 2,981 11,772 13,419
-------- ------ -------- --------
Total noninterest income..................................... 10,750 9,021 31,785 32,139
-------- ------ -------- --------
Noninterest expense:
Salaries and employee benefits................................... 18,200 15,560 53,437 45,631
Occupancy, net of rental income.................................. 3,754 3,505 10,409 9,347
Furniture and equipment.......................................... 2,851 2,179 8,524 6,178
Postage, printing and supplies................................... 1,027 1,003 3,210 3,156
Data processing fees............................................. 5,714 4,658 16,377 13,881
Legal, examination and professional fees......................... 1,108 1,700 3,111 4,942
Gain on sales of other real estate, net of expenses.............. (259) (391) (483) (405)
Guaranteed preferred debentures.................................. 2,996 3,014 9,008 9,042
Other............................................................ 7,385 6,287 18,893 18,478
-------- ------ -------- --------
Total noninterest expense.................................... 42,776 37,515 122,486 110,250
-------- ------ -------- --------
Income before provision for income taxes and minority
interest in income of subsidiary........................... 23,551 18,127 71,494 53,732
Provision for income taxes............................................ 8,947 6,689 26,688 19,792
-------- ------ -------- --------
Income before minority interest in income of subsidiary...... 14,604 11,438 44,806 33,940
Minority interest in income of subsidiary............................. 546 416 1,489 1,088
-------- ------ -------- --------
Net income................................................... 14,058 11,022 43,317 32,852
Preferred stock dividends............................................. 196 196 524 524
-------- ------ -------- --------
Net income available to common stockholders.................. $ 13,862 10,826 42,793 32,328
======== ====== ======== ========
Earnings per common share:
Basic............................................................ $ 585.87 457.54 1,808.59 1,366.29
Diluted.......................................................... 570.33 444.11 1,750.62 1,320.33
======== ====== ======== ========
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)
Nine months ended September 30, 2000 and 1999 and three months ended December 31, 1999
(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, December 31, 1998......... $12,822 241 5,915 780 231,867 11,738 263,363
Nine months ended September 30, 1999:
Comprehensive income:
Net income................................. -- -- -- -- 32,852 32,852 -- 32,852
Other comprehensive income, net of tax
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (7,526) -- (7,526) (7,526)
------
Comprehensive income....................... 25,326
======
Class A preferred stock dividends,
$0.80 per share............................ -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share............................ -- -- -- -- (11) -- (11)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- (3,341) -- -- (3,341)
Reclassification of retained earnings........ -- -- -- 5,000 (5,000) -- --
Reduction of deferred tax asset
valuation reserve.......................... -- -- -- 540 -- -- 540
------- ---- ----- ------ ------- ------ -------
Consolidated balances, September 30, 1999........ 12,822 241 5,915 2,979 259,195 4,212 285,364
Three months ended December 31, 1999:
Comprehensive income:
Net income................................. -- -- -- -- 11,326 11,326 -- 11,326
Other comprehensive income, net of tax
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (1,862) -- (1,862) (1,862)
------
Comprehensive income....................... 9,464
======
Class A preferred stock dividends,
$0.40 per share............................ -- -- -- -- (256) -- (256)
Class B preferred stock dividends,
$0.04 per share............................ -- -- -- -- (6) -- (6)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- 68 -- -- 68
Reduction of deferred tax asset
valuation allowance........................ -- -- -- 271 -- -- 271
------- ---- ----- ------ ------- ------ -------
Consolidated balances, December 31, 1999......... 12,822 241 5,915 3,318 270,259 2,350 294,905
Nine months ended September 30, 2000:
Comprehensive income:
Net income................................. -- -- -- -- 43,317 43,317 -- 43,317
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 550 -- 550 550
------
Comprehensive income....................... 43,867
======
Class A preferred stock dividends,
$0.80 per share............................ -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share............................ -- -- -- -- (11) -- (11)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- (321) -- -- (321)
------- ---- ----- ----- ------- ------ -------
Consolidated balances, September 30, 2000........ $12,822 241 5,915 2,997 313,052 2,900 337,927
======= ==== ===== ===== ======= ====== =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three months ended Nine months ended Three months ended
September 30, September 30, December 31,
----------------- ----------------- ------------------
2000 1999 2000 1999 1999
---- ---- ---- ---- ----
Unrealized gains (losses) arising during the period............... $ 1,900 (2,610) 679 (7,011) (1,863)
Less reclassification adjustment for (losses) gains included
in net income.................................................. (117) -- 129 515 (1)
------- ------- --- ------ ------
Unrealized gains (losses) on securities........................... $ 2,017 (2,610) 550 (7,526) (1,862)
======= ======= === ====== ======
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)
Nine months ended
September 30,
---------------------
2000 1999
Cash flows from operating activities:
Net income........................................................................... $ 43,317 32,852
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of bank premises and equipment....................... 6,967 5,375
Amortization, net of accretion..................................................... 5,878 9,529
Originations and purchases of loans held for sale.................................. (378,628) (378,045)
Proceeds from the sale of loans held for sale...................................... 290,102 437,397
Provision for loan losses.......................................................... 11,067 8,743
Provision for income taxes......................................................... 26,688 19,792
Payments of income taxes........................................................... (7,684) (18,816)
Increase in accrued interest receivable............................................ (3,262) (326)
Net decrease in trading securities................................................. -- 3,425
Interest accrued on liabilities.................................................... 136,198 116,660
Payments of interest on liabilities................................................ (129,984) (113,634)
Gain on sale of branch facility.................................................... (1,355) (4,474)
Net gain on sales of available-for-sale investment securities...................... (199) (793)
Other operating activities, net.................................................... (18,648) (6,933)
Minority interest in income of subsidiary.......................................... 1,489 1,088
-------- -------
Net cash (used in) provided by operating activities.............................. (18,054) 111,840
-------- -------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received........... (9,115) (15,961)
Proceeds from sales of investment securities available for sale...................... 28,488 64,640
Maturities of investment securities available for sale............................... 256,998 230,315
Maturities of investment securities held to maturity................................. 712 2,330
Purchases of investment securities available for sale................................ (150,180) (148,230)
Purchases of investment securities held to maturity.................................. (769) (1,982)
Net increase in loans................................................................ (265,191) (259,737)
Recoveries of loans previously charged-off........................................... 7,954 6,931
Purchases of bank premises and equipment............................................. (21,022) (13,561)
Other investing activities........................................................... 3,960 (695)
-------- --------
Net cash used in investing activities............................................ (148,165) (135,950)
-------- --------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits................................... 83,733 (58,424)
Increase in time deposits............................................................ 70,473 96,248
Increase in federal funds purchased.................................................. 1,900 --
Decrease in Federal Home Loan Bank advances.......................................... -- (25,000)
Increase (decrease)in securities sold under agreements to repurchase................. 28,054 (71)
(Decrease) increase in note payable.................................................. (9,500) 22,952
Payment of preferred stock dividends................................................. (524) (524)
Sale of branch deposits.............................................................. 892 (48,979)
Other financing activities........................................................... (23) --
-------- -------
Net cash provided by (used in) financing activities.............................. 175,005 (13,798)
-------- -------
Net increase (decrease) in cash and cash equivalents............................. 8,786 (37,908)
Cash and cash equivalents, beginning of period............................................ 170,894 214,762
-------- -------
Cash and cash equivalents, end of period.................................................. $179,680 176,854
======== =======
Noncash investing and financing activities:
Loans transferred to other real estate............................................... $ 1,226 2,549
Loans held for sale transferred to available-for-sale investment securities.......... 18,584 4,065
Loans exchanged for and transferred to available-for-sale investment securities...... 37,634 --
Loans held for sale transferred to loans............................................. 63,783 21,831
======== =======
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 1999
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and conform
to practices prevalent among financial institutions. Management of First Banks
has made a number of estimates and assumptions relating to the reporting of
assets and liabilities and the disclosure of contingent assets and liabilities
to prepare the consolidated financial statements in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments,
consisting of normal recurring accruals considered necessary for a fair
presentation of the results of operations for the interim periods presented
herein, have been included. Operating results for the three and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000.
The consolidated financial statements include the accounts of First
Banks, Inc. and its subsidiaries, net of minority interest, as more fully
described below. All significant intercompany accounts and transactions have
been eliminated. Certain reclassifications of 1999 amounts have been made to
conform with the 2000 presentation.
First Banks operates through its subsidiary bank holding company and
financial institutions (collectively referred to as the Subsidiary Banks) and
through its non-banking subsidiary, First Capital Group, Inc., as follows:
First Bank, headquartered in St. Louis County, Missouri (First Bank);
First Bank & Trust, headquartered in Newport Beach, California (FB&T);
First Capital Group, Inc., headquartered in Albuquerque, New Mexico (FCG);
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 Sacramento, California
(FB California); and
Redwood Bank, headquartered in San Francisco, California.
The Subsidiary Banks and FCG are wholly owned by their respective
parent companies except FBA, which was 84.30% and 83.37% owned by First Banks at
September 30, 2000 and December 31, 1999, respectively.
(2) ACQUISITIONS
Completed Transactions
----------------------
On February 29, 2000, FBA completed its acquisition of Lippo Bank, San
Francisco, California, in exchange for $17.2 million in cash. Lippo Bank
operated three banking locations in San Francisco, San Jose and Los Angeles,
California. The acquisition was funded from available cash. At the time of the
transaction, Lippo Bank had $85.3 million in total assets, $40.9 million in
loans, net of unearned discount, $37.4 million in investment securities and
$76.4 million in total deposits. This transaction was accounted for using the
purchase method of accounting. The excess of the cost over the fair value of the
net assets acquired was approximately $5.6 million and is being amortized over
15 years. Lippo Bank was merged into FB California on May 31, 2000.
On February 29, 2000, First Banks completed its acquisition of certain
assets and liabilities of FCG, Albuquerque, New Mexico, in exchange for $65.1
million in cash. FCG is a leasing company that specializes in commercial leasing
and operates a multi-state leasing business. The acquisition was funded from
available cash. At the time of the transaction, FCG had $64.6 million in total
assets, consisting almost solely of commercial leases, net of unearned income.
The premium paid on the lease portfolio acquired was $1.5 million and is being
amortized as a yield adjustment over approximately four years. FCG operates as a
direct subsidiary of First Banks, Inc.
On August 31, 2000, First Banks completed its acquisition of Bank of
Ventura, which operates one office in Ventura, California. The shareholders of
Bank of Ventura received $26.47 per share in cash, or a total of approximately
$14.2 million. At the time of the transaction, Bank of Ventura had $63.8 million
in total assets, $39.4 million in loans, net of unearned discount, $15.5 million
in investment securities and $57.3 million in deposits. This transaction was
accounted for using the purchase method of accounting. The excess of the cost
over the fair value of the net assets acquired was approximately $8.4 million
and is being amortized over 15 years. Bank of Ventura was merged with and into
FB&T on August 31, 2000.
Pending Transactions
--------------------
On June 27, 2000, FBA and Commercial Bank of San Francisco (Commercial
Bank) executed a definitive agreement providing for the acquisition of
Commercial Bank, San Francisco, California, by FBA. Under the terms of the
agreement, the shareholders of Commercial Bank will receive $17.75 per share in
cash, or a total of approximately $25.8 million. Commercial Bank operates one
branch office in the San Francisco financial district. At September 30, 2000,
Commercial Bank had $155.5 million in total assets, $98.6 million in loans, net
of unearned discount, $46.0 million in investment securities and $111.7 million
in deposits. FBA completed this transaction on October 31, 2000.
On June 29, 2000, First Banks and FBA executed a definitive agreement
providing for the acquisition of First Banks' wholly owned subsidiary, FB&T, by
FBA. Under the terms of the agreement, First Banks will exchange all of the
outstanding stock of FB&T for approximately 6.5 million shares of common stock
of FBA, which will increase First Banks' ownership percentage of FBA to
approximately 93.0%. This transaction and related internal reorganizations will
allow First Banks and FBA to merge their Texas and California interests. FB&T
operates 27 banking locations in the counties of Los Angeles, Orange, Ventura
and Santa Barbara, California as well as branches in San Jose and Walnut Creek,
in Northern California. First Banks completed this transaction on October 31,
2000.
On August 23, 2000, FBA and Millennium Bank executed a definitive
agreement providing for the acquisition of Millennium Bank, San Francisco,
California, by FBA. Under the terms of the agreement, the shareholders of
Millennium Bank will receive $8.10 per share in cash, or a total of
approximately $20.7 million. Millennium Bank has one office in the San Francisco
financial district and one office in Oakland, California. At September 30, 2000,
Millennium Bank had $110.4 million in total assets, $76.6 million in loans, net
of unearned discount, $28.4 million in investment securities and $97.6 million
in deposits. FBA expects this transaction, which is subject to regulatory
approvals, will be completed during or before the first quarter of 2001.
On September 22, 2000, FBA executed a definitive agreement to acquire The
San Francisco Company and its wholly-owned banking subsidiary, Bank of San
Francisco. Under the terms of this agreement, the shareholders of The San
Francisco Company will receive $1.95 per share in cash, or a total of
approximately $63.0 million. Bank of San Francisco operates one branch office in
the San Francisco financial district. At September 30, 2000, Bank of San
Francisco had $191.8 million in total assets, $105.1 million in loans, net of
unearned discount, $38.9 million in investment securities and $142.3 million in
deposits. FBA expects this transaction, which is subject to regulatory approvals
and other conditions, will be completed during or before the first quarter of
2001.
(3) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share (EPS) computations for the periods
indicated:
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- --------
(dollars in thousands, except per share data)
Three months ended September 30, 2000:
Basic EPS - income available to common stockholders............. $ 13,862 23,661 $ 585.87
==========
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 982
--------- -------
Diluted EPS - income available to common stockholders........... $ 14,054 24,643 $ 570.33
========= ======= ==========
Three months ended September 30, 1999:
Basic EPS - income available to common stockholders............. $ 10,826 23,661 $ 457.54
==========
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 1,149
--------- -------
Diluted EPS - income available to common stockholders........... $ 11,018 24,810 $ 444.11
========= ======= ==========
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- --------
(dollars in thousands, except per share data)
Nine months ended September 30, 2000:
Basic EPS - income available to common stockholders............. $ 42,793 23,661 $ 1,808.59
==========
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 1,076
--------- -------
Diluted EPS - income available to common stockholders........... $ 43,306 24,737 $ 1,750.62
========= ======= ==========
Nine months ended September 30, 1999:
Basic EPS - income available to common stockholders............. $ 32,329 23,661 $ 1,366.29
==========
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 1,212
--------- -------
Diluted EPS - income available to common stockholders........... $ 32,842 24,873 $ 1,320.33
========= ======= ==========
(4) TRANSACTIONS WITH RELATED PARTIES
First Brokerage America, L.L.C., a limited liability corporation which
is indirectly owned by First Banks' Chairman and members of his immediate
family, received approximately $500,000 and $1.6 million for the three and nine
months ended September 30, 2000, and $676,000 and $1.6 million for the
comparable periods in 1999, respectively, in commissions paid by unaffiliated
third-party companies. The commissions received were primarily associated with
sales of annuities and securities and other insurance products to individuals,
including customers of the Subsidiary Banks.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and his adult children, provides data processing services and
technological, telecommunication and operational support for First Banks, Inc.
and its Subsidiary Banks. Fees paid under agreements with First Services, L.P.
were $5.0 million and $14.2 million for the three and nine months ended
September 30, 2000, and $4.1 million and $12.3 million for the comparable
periods in 1999, respectively. During the three months ended September 30, 2000
and 1999, First Services, L.P. paid First Banks $411,000 and $328,000,
respectively, and during the nine months ended September 30, 2000 and 1999,
First Services, L.P. paid First Banks $1.3 million and $812,000, respectively,
in rental fees for the use of data processing and other equipment owned by First
Banks. The fees paid by First Banks for data processing services and the rental
fees charged by First Banks are at least as favorable as could have been
obtained from unaffiliated third parties.
(5) REGULATORY CAPITAL
First Banks and the Subsidiary Banks are subject to various regulatory
capital requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on First Banks' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, First Banks and the Subsidiary Banks must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and the Subsidiary Banks to maintain minimum
amounts and ratios of total and Tier I capital (as defined in the regulations)
to risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of September 30, 2000, First Banks and the Subsidiary Banks were
each well capitalized under the applicable regulations.
As of September 30, 2000, the most recent notification from First
Banks' primary regulator categorized First Banks and the Subsidiary Banks as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, First Banks and the Subsidiary Banks must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table below.
At September 30, 2000 and December 31, 1999, First Banks' and the
Subsidiary Banks' required and actual capital ratios were as follows:
To be well
Actual capitalized under
---------------------------
September 30,December 31, For capital prompt corrective
2000 1999 adequacy purposes action provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.32% 10.05% 8.0% 10.0%
First Bank.............................. 10.80 10.60 8.0 10.0
FB&T.................................... 10.34 10.96 8.0 10.0
FB California........................... 11.42 10.81 8.0 10.0
FB Texas................................ 12.12 12.42 8.0 10.0
Redwood Bank............................ 11.44 11.17 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 8.66% 8.00% 4.0% 6.0%
First Bank.............................. 9.54 9.35 4.0 6.0
FB&T.................................... 9.08 9.70 4.0 6.0
FB California........................... 10.16 9.56 4.0 6.0
FB Texas................................ 10.86 11.17 4.0 6.0
Redwood Bank............................ 10.19 10.15 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 8.07% 7.14% 3.0% 5.0%
First Bank.............................. 8.65 8.10 3.0 5.0
FB&T.................................... 8.68 8.57 3.0 5.0
FB California........................... 9.31 9.95 3.0 5.0
FB Texas................................ 10.20 10.39 3.0 5.0
Redwood Bank............................ 8.31 8.48 3.0 5.0
(6) BUSINESS SEGMENT RESULTS
First Banks' business segments are its Subsidiary Banks. The reportable
business segments are consistent with the management structure of First Banks
and the Subsidiary Banks, the internal reporting system that monitors
performance and, in all material respects, generally accepted accounting
principles and practices predominant in the banking industry.
Through the respective branch networks, the Subsidiary Banks provide
similar products and services in their defined geographic areas. The products
and services offered include a broad range of commercial and personal 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, commercial leasing, trade
finance, consumer and installment, student and Small Business Administration
loans. Other financial services include mortgage banking, credit and debit
cards, brokerage services, credit-related insurance, automatic teller machines,
telephone banking, safe deposit boxes and trust, private banking and
institutional money management services. The revenues generated by each business
segment consist primarily of interest income, generated from the loan and
investment security portfolios, and service charges and fees, generated from the
deposit products and services. The products and services are offered to
customers primarily within their respective geographic areas, with the exception
of loan participations executed between the Subsidiary Banks.
The business segment results are summarized as follows:
First Bank FB California (1) Redwood Bank (2)
------------------------ ------------------------- -------------------------
September 30,December 31, September 30,December 31, September 30,December 31,
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities............................ $ 206,724 241,624 46,443 20,743 17,707 37,539
Loans, net of unearned discount.................. 2,685,321 2,527,649 448,197 379,632 140,858 138,902
Total assets..................................... 3,127,512 3,028,046 575,488 431,838 193,393 199,988
Deposits......................................... 2,657,834 2,689,671 499,179 367,563 166,992 173,703
Stockholders' equity............................. 278,295 263,466 64,578 47,990 24,115 24,275
========= ======== ======== ======= ======= =======
First Bank FB California (1) Redwood Bank (2)
--------------------- --------------------- -------------------
Three months ended Three months ended Three months ended
September 30, September 30, September 30,
--------------------- --------------------- -------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Income statement information:
Interest income.................................. $ 63,621 55,300 12,704 8,582 4,252 3,866
Interest expense................................. 29,939 26,136 4,936 3,050 1,724 1,447
--------- -------- ------- ------- ------- -------
Net interest income......................... 33,682 29,164 7,768 5,532 2,528 2,419
Provision for loan losses........................ 3,500 1,950 15 15 150 60
--------- -------- ------- ------- ------- -------
Net interest income after
provision for loan losses................. 30,182 27,214 7,753 5,517 2,378 2,359
--------- -------- ------- ------- ------- -------
Noninterest income............................... 7,965 7,106 1,499 934 (71) 122
Noninterest expense.............................. 22,914 20,124 4,381 3,785 1,379 1,496
--------- -------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes and
minority interest in income of
subsidiary................................ 15,233 14,196 4,871 2,666 928 985
Provision (benefit) for income taxes............. 5,324 4,874 1,897 1,089 491 443
--------- -------- ------- ------- ------- -------
Income (loss) before minority
interest in income of subsidiary.......... 9,909 9,322 2,974 1,577 437 542
Minority interest in income of subsidiary........ -- -- -- -- -- --
--------- -------- ------- ------- ------- -------
Net income.................................. $ 9,909 9,322 2,974 1,577 437 542
========= ======== ======= ======= ======= =======
First Bank FB California (1) Redwood Bank (2)
--------------------- -------------------- -------------------
Nine months ended Nine months ended Nine months ended
September 30, September 30, September 30,
--------------------- -------------------- -------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Income statement information:
Interest income.................................. $ 184,248 162,891 35,325 24,714 12,136 8,796
Interest expense................................. 84,459 78,312 13,285 9,125 4,832 3,282
--------- ------- ------- ------- ------- -------
Net interest income......................... 99,789 84,579 22,040 15,589 7,304 5,514
Provision for loan losses........................ 9,250 6,650 150 95 432 133
--------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses................. 90,539 77,929 21,890 15,494 6,872 5,381
--------- ------- ------- ------- ------- ------
Noninterest income............................... 23,930 25,901 3,222 2,358 (120) 325
Noninterest expense.............................. 64,840 58,246 13,663 11,410 4,312 3,403
--------- ------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes and
minority interest in income of
subsidiary................................ 49,629 45,584 11,449 6,442 2,440 2,303
Provision (benefit) for income taxes............. 17,254 15,391 4,474 2,742 1,292 1,087
--------- ------- ------- ------- ------- ------
Income (loss) before minority
interest in income of subsidiary.......... 32,375 30,193 6,975 3,700 1,148 1,216
Minority interest in income of subsidiary........ -- -- -- -- -- --
--------- ------- ------- ------- ------- ------
Net income.................................. $ 32,375 30,193 6,975 3,700 1,148 1,216
========= ======= ======= ======= ======= ======
- ----------------
(1) Lippo Bank was acquired by FBA on February 29, 2000 and merged into FB California on May 31, 2000.
(2) Redwood Bank was acquired by FBA on March 4, 1999.
(3) Corporate and other includes $1.0 million and $5.9 million of guaranteed preferred debenture expense, after applicable
income tax benefit of $2.0 million and $3.1 million for the three and nine months ended September 30, 2000 and 1999.
In addition, corporate and other includes FCG and holding company expenses.
Corporate, other
and intercompany
FB Texas FB&T reclassifications (3) Consolidated totals
--------------------------- ---------------------------- ------------------------- --------------------------
September 30, December 31, September 30, December 31, September 30, December 31, September 30, December 31,
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
25,703 30,439 104,446 103,636 17,448 17,666 418,471 451,647
229,150 213,731 856,460 736,828 (400) (418) 4,359,586 3,996,324
292,890 278,988 1,113,018 944,013 (67,672) (15,126) 5,234,629 4,867,747
254,271 244,248 972,323 804,976 (19,551) (28,347) 4,531,048 4,251,814
30,097 30,338 110,600 102,014 (169,758) (173,178) 337,927 294,905
======= ======= ========= ======= ======== ======== ======== =======
Corporate, other
and intercompany
FB Texas First Bank & Trust reclassifications (3) Consolidated totals
---------------------- ------------------------ ------------------------ ----------------------
Three months ended Three months ended Three months ended Three months ended
September 30, September 30, September 30, September 30,
---------------------- ------------------------ ------------------------ ----------------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
6,044 5,500 21,945 15,766 (984) 31 107,582 89,045
2,575 2,185 9,146 6,231 (180) 495 48,140 39,544
------- ------- --------- ------ -------- -------- -------- -------
3,469 3,315 12,799 9,535 (804) (464) 59,442 49,501
155 15 45 840 -- -- 3,865 2,880
------- ------- --------- ------ -------- -------- -------- -------
3,314 3,300 12,754 8,695 (804) (464) 55,577 46,621
------- ------- --------- ------ -------- -------- -------- -------
459 504 1,467 1,103 (569) (748) 10,750 9,021
2,155 2,367 8,035 7,111 3,912 2,632 42,776 37,515
------- ------- --------- ------ -------- -------- -------- -------
1,618 1,437 6,186 2,687 (5,285) (3,844) 23,551 18,127
546 492 2,458 1,080 (1,769) (1,289) 8,947 6,689
------- ------- --------- ------ -------- -------- -------- -------
1,072 945 3,728 1,607 (3,516) (2,555) 14,604 11,438
-- -- -- -- 546 416 546 416
------- ------- --------- ------ -------- -------- -------- -------
1,072 945 3,728 1,607 (4,062) (2,971) 14,058 11,022
======= ======= ========= ====== ======== ======== ======== =======
Corporate, other
and intercompany
FB Texas First Bank & Trust reclassifications (3) Consolidated totals
---------------------- ------------------------ ------------------------- ---------------------
Nine months ended Nine months ended Nine months ended Nine months ended
September 30, September 30, September 30, September 30,
---------------------- ------------------------ ------------------------ ----------------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
17,702 16,523 61,250 44,121 (1,201) 201 309,460 257,246
7,295 6,510 25,010 18,220 1,317 1,211 136,198 116,660
------- ------- --------- ------ -------- -------- -------- -------
10,407 10,013 36,240 25,901 (2,518) (1,010) 173,262 140,586
450 75 785 1,790 -- -- 11,067 8,743
------- ------- --------- ------ -------- -------- -------- -------
9,957 9,938 35,455 24,111 (2,518) (1,010) 162,195 131,843
------- ------- --------- ------ --------- -------- -------- -------
1,445 1,560 4,650 3,467 (1,342) (1,472) 31,785 32,139
6,460 6,877 22,633 20,336 10,578 9,978 122,486 110,250
------- ------- --------- ------ -------- -------- -------- -------
4,942 4,621 17,472 7,242 (14,438) (12,460) 71,494 53,732
1,703 1,588 6,950 3,140 (4,985) (4,156) 26,688 19,792
------- ------- --------- ------ -------- --------- -------- -------
3,239 3,033 10,522 4,102 (9,453) (8,304) 44,806 33,940
-- -- -- -- 1,489 1,088 1,489 1,088
------- ------- --------- ------ -------- -------- -------- -------
3,239 3,033 10,522 4,102 (10,942) (9,392) 43,317 32,852
======= ======= ========= ====== ======== ======== ======== =======
(7) SUBSEQUENT EVENT
On October 19, 2000, First Preferred Capital Trust II, or FPCT II, a
newly formed Delaware business trust subsidiary of First Banks, issued 2.3
million shares of 10.24% cumulative trust preferred securities at $25 per share
in an underwritten public offering, and issued 71,135 shares of common
securities to First Banks at $25 per share. First Banks owns all of the common
securities of FPCT II. The gross proceeds of the offering were used by FPCT II
to purchase $59.3 million of 10.24% subordinated debentures from First Banks,
maturing on September 30, 2000. The maturity date of the subordinated debentures
may be shortened to a date not earlier than September 30, 2005, if certain
conditions are met. The subordinated debentures are the sole asset of FPCT II.
In connection with the issuance of the FPCT II preferred securities, First Banks
made certain guarantees and commitments that, in the aggregate, constitute a
full and unconditional guarantee by First Banks of the obligations of FPCT II
under the FPCT II preferred securities. First Banks' proceeds from the issuance
of the subordinated debentures to FPCT II, net of underwriting fees and offering
expenses, were approximately $55.0 million. Distributions on the FPCT II
securities are payable quarterly on March 31, June 30, September 30 and December
31.
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 our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. 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 affecting the banking industry generally and factors having a
specific impact on us, including but not limited to fluctuations in interest
rates and in the economy; the impact of laws and regulations applicable to us
and changes therein; competitive conditions in the markets in which we conduct
our operations, including competition from banking and non-banking companies
with substantially greater resources than us, some of which may offer and
develop products and services not offered by us; our ability to control the
composition of our loan portfolio without adversely affecting interest income;
and our ability to respond to changes in technology. With regard to our efforts
to grow through acquisitions, factors that could affect the accuracy or
completeness of forward-looking statements contained herein include the
potential for higher than acceptable operating costs arising from the geographic
dispersion of our offices, as compared with competitors operating solely in
contiguous markets; the competition of larger acquirers with greater resources
than us, fluctuations in the prices at which acquisition targets may be
available for sale and in the market for our securities; and the potential for
difficulty or unanticipated costs in realizing the benefits of particular
acquisition transactions. Readers of the Form 10-Q should therefore not place
undue reliance on forward-looking statements.
General
We are a bank holding company incorporated in Missouri and
headquartered in St. Louis County, Missouri. Through the operation of our
subsidiaries, we offer a broad array of financial services to consumer and
commercial customers. We currently operate banking subsidiaries in California,
Illinois, Missouri and Texas. At September 30, 2000, we had $5.23 billion in
total assets, $4.36 billion in total loans, net of unearned discount, $4.53
billion in total deposits and $337.9 million in total stockholders' equity. We
operate through five subsidiary banks, a subsidiary bank holding company, and
through our subsidiary leasing company, as follows:
Loans, net of
Number of Total unearned Total
Name Headquarters locations assets discount deposits
---- ------------ --------- ------ -------- --------
(dollars expressed in thousands)
First Bank St. Louis County, Missouri 86 $ 3,127,512 2,685,321 2,657,834
First Bank & Trust Newport Beach, California 27 1,113,018 856,460 972,323
First Capital Group, Inc. Albuquerque, New Mexico 1 344 (1) -- --
First Banks America, Inc.,
and its wholly-owned
subsidiaries:
First Bank of California Sacramento, California 13 575,488 448,197 499,179
First Bank Texas N.A. Houston, Texas 6 292,890 229,150 254,271
Redwood Bank San Francisco, California 4 193,393 140,858 166,992
=== =========== ======== =========
- -------------------------
(1) First Capital Group, Inc. was purchased on February 29, 2000. As of
September 30, 2000, there were approximately $90.1 million of commercial
leases. The commercial leases are recorded as assets of our subsidiary
banks.
Our subsidiary banks and First Capital Group, Inc., or FCG, are wholly
owned by their respective parent companies. We owned 84.30% and 83.37% of First
Banks America, Inc., or FBA, at September 30, 2000 and December 31, 1999,
respectively.
Through our subsidiary banks, we offer a broad range of commercial and
personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, we market combined basic services for various
customer groups, including packaged accounts for more affluent customers, and
sweep accounts, lock-box deposits and cash management products for commercial
customers. We also offer both consumer and commercial loans. Consumer lending
includes residential real estate, home equity and installment lending.
Commercial lending includes commercial, financial and agricultural loans, real
estate construction and development loans, commercial real estate loans,
asset-based loans, commercial leasing and trade financing. Other financial
services offered include mortgage banking, credit and debit cards, brokerage
services, credit-related insurance, automated teller machines, telephone
banking, safe deposit boxes and trust, private banking and institutional money
management services.
We centralize overall corporate policies, procedural and administrative
functions, and operational support functions for our subsidiary banks. Primary
responsibility for managing our subsidiary banks remains with the officers and
directors.
Financial Condition
Our total assets increased by $360.0 million to $5.23 billion from
$4.87 billion at September 30, 2000 and December 31, 1999, respectively. As
discussed in Note 2 to our accompanying consolidated financial statements, the
acquisitions of Bank of Ventura, Lippo Bank and FCG provided assets of $63.8
million, $85.3 million and $64.6 million, respectively. Loans, net of unearned
discount, excluding the loans from these acquired entities, increased by $218.4
million, which is further discussed under "--Loans and Allowance for Loan
Losses." Offsetting the overall increase in total assets and providing an
additional source of funds for continued internal loan growth was a reduction in
investment securities of $86.1 million, which was partially offset by $37.4
million and $15.5 million of investment securities acquired from Lippo Bank and
Bank of Ventura, respectively, to $418.5 million at September 30, 2000. Total
deposits, excluding the $76.4 million and $57.3 million of deposits provided by
the acquisitions of Lippo Bank and Bank of Ventura, respectively, increased by
$145.5 million to $4.53 billion at September 30, 2000. The funds generated from
the deposit growth were primarily utilized to fund internal loan growth and the
acquisition of the FCG leases. In addition, short-term borrowings increased by
$30.0 million to $103.5 million at September 30, 2000, reflecting increases of
$1.9 million and $28.1 million in federal funds purchased and securities sold
under agreements to repurchase, respectively.
Results of Operations
Net Income
Net income was $14.1 million and $43.3 million for the three and nine
months ended September 30, 2000, in comparison to $11.0 million and $32.9
million for the comparable periods in 1999. The earnings progress was primarily
driven by increased net interest income generated from the acquisitions of Bank
of Ventura, Lippo Bank and FCG, which were acquired during the nine months ended
September 30, 2000, and Century Bank and Redwood Bank, which were acquired in
1999; the continued change in the composition of our loan portfolio; increased
yields on earning assets and internal loan growth. Our overall loan growth was
primarily funded through internal deposit growth.
The increase in net interest income was partially offset by an increase
in the provision for loan losses, as further discussed under "--Loans and
Allowance for Loan Losses," and increased operating expenses of $5.3 million and
$12.2 million for the three and nine months ended September 30, 2000, in
comparison to the comparable periods in 1999, respectively. The increased
operating expenses reflect the operating expenses of Bank of Ventura, Lippo
Bank, FCG, Century Bank and Redwood Bank subsequent to their respective
acquisition dates; increased salaries and employee benefit expenses; increased
data processing fees and increased amortization of intangibles associated with
the purchase of subsidiaries. This increase was partially offset by a reduction
in legal, examination and professional fees.
Net Interest Income
Net interest income (expressed on a tax equivalent basis) improved to
$59.7 million, or 4.99% of interest-earning assets, for the three months ended
September 30, 2000, from $49.7 million, or 4.53% of interest-earning assets, for
the comparable period in 1999. For the nine months ended September 30, 2000 and
1999, net interest income (expressed on a tax-equivalent basis) was $173.9
million, or 4.93%, and $141.1 million, or 4.44% of interest-earning assets,
respectively. We credit the improved net interest income to the net
interest-earning assets provided by our aforementioned acquisitions, internal
loan growth and increases in the prime-lending rate which have resulted in
increased yields on interest-earning assets. For the three and nine months ended
September 30, 2000, average loans increased by $471.3 million and $471.7
million, respectively. During the period from October 1, 1999 through September
30, 2000, the Board of Governors of the Federal Reserve System increased the
discount rate several times, resulting in four increases in the prime rate of
interest from 8.25% to 9.50%. This is reflected not only in the rate of interest
earned on loans that are indexed to the prime rate, but also in other assets and
liabilities which either have variable or adjustable rates, or which matured or
repriced during this period. Although the cost of interest-bearing liabilities
has also increased, it has been less dramatic than the earnings on
interest-earning assets, contributing to an improvement in net interest margins.
This is further discussed under "--Interest Rate Risk Management."
The improved yield earned on our interest-earning assets was partially
offset by an increased rate paid on our interest-bearing liabilities. For the
three and nine months ended September 30, 2000, the aggregate weighted average
rate paid on the deposit portfolio increased to 4.72% and 4.52%, respectively,
from 4.25% and 4.29% for the comparable periods in 1999, reflecting increased
rates paid by us to provide a funding source for continued loan growth. In
addition, the aggregate weighted average rate on the note payable increased to
8.56% and 7.85% for the three and nine months ended September 30, 2000,
respectively, from 6.19% and 6.22% for the comparable periods in 1999,
reflecting an increase in market rates on these financial instruments. Our
$120.0 million revolving line of credit with a group of unaffiliated banks bears
interest at the lead bank's corporate base rate or, at our option, at the
Eurodollar Rate plus a margin determined by the outstanding balance and our
profitability.
The following table sets forth, on a tax-equivalent basis, certain
information relating to our average balance sheets, and reflects the average
yield earned on our interest-earning assets, the average cost of our
interest-bearing liabilities and our resulting net interest income for the
periods indicated.
Three months ended September 30, Nine months ended September 30,
---------------------------------------------- ----------------------------------------------
2000 1999 2000 1999
---------------------- --------------------- ---------------------- ---------------------
Interest Interest Interest Interest
Average income/Yield/ Average income/Yield/ Average income/Yield/ Averageincome/Yield/
balance expenserate balance expense rate balance expense rate balanceexpenserate
------- ----------- ---------------------- ------- ------- ---- --------------------
(dollars expressed in thousands)
Assets
------
Interest-earning assets:
Loans (1)(2)(3)(4)......... $4,317,762 99,858 9.20% $3,846,498 81,972 8.45% $4,226,438 285,845 9.03% $3,754,770 235,724 8.39%
Investment securities (4).. 412,501 7,214 6.96 435,931 6,446 5.87 431,104 21,493 6.66 460,355 20,831 6.05
Federal funds sold......... 24,304 685 11.21 59,807 744 4.94 49,926 2,628 7.03 29,266 1,154 5.27
Other...................... 3,020 54 7.11 2,424 35 5.73 2,662 144 7.23 1,747 80 6.12
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-earning
assets............... 4,757,587 107,811 9.02 4,344,660 89,197 8.15 4,710,130 310,110 8.79 4,246,138 257,789 8.12
------- ------ ------- -------
Nonearning assets............. 365,919 347,829 354,327 342,858
---------- ---------- ---------- ----------
Total assets.......... $5,123,506 $4,692,489 $5,064,457 $4,588,996
========== ========== ========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits............... $ 416,302 1,480 1.41% $ 388,880 1,269 1.29% $ 420,442 4,365 1.39% $ 382,790 3,565 1.25%
Savings deposits......... 1,277,167 13,176 4.10 1,217,845 10,962 3.57 1,253,312 37,246 3.97 1,221,226 32,976 3.61
Time deposits (3)........ 2,120,397 30,623 5.75 1,922,841 25,537 5.27 2,118,313 86,700 5.47 1,854,886 74,419 5.36
---------- ------- ---------- ------ ---------- ------ ---------- -------
Total interest-bearing
deposits............. 3,813,866 45,279 4.72 3,529,566 37,768 4.25 3,792,067 128,311 4.52 3,458,902 110,960 4.29
Short-term borrowings...... 97,407 1,641 6.70 77,188 903 4.64 93,208 4,156 5.96 91,188 3,294 4.83
Note payable............... 56,708 1,220 8.56 55,995 873 6.19 63,482 3,731 7.85 51,683 2,406 6.22
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
liabilities.......... 3,967,981 48,140 4.83 3,662,749 39,544 4.28 3,948,757 136,198 4.61 3,601,773 116,660 4.33
------- ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits............ 644,158 569,074 616,359 537,332
Other liabilities.......... 180,376 177,165 185,084 174,410
---------- ---------- ---------- ----------
Total liabilities..... 4,792,515 4,408,988 4,750,200 4,313,515
Stockholders' equity.......... 330,991 283,501 314,257 275,481
---------- ---------- ----------- ----------
Total liabilities and
stockholders' equity. $5,123,506 $4,692,489 $5,064,457 $4,588,996
========== ========== =========== ==========
Net interest income........... 59,671 49,653 173,912 141,129
======= ====== ======= =======
Interest rate spread.......... 4.19 3.87 4.18 3.79
Net interest margin........... 4.99% 4.53% 4.93% 4.44%
==== ==== ==== ====
------------------------
(1) For purposes of these computations, 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 $229,000 and $650,000 for the three and nine months ended September 30, 2000, and $152,000 and $543,000
for the comparable periods in 1999, respectively.
Provision for Loan Losses
The provision for loan losses was $3.9 million and $11.1 million for
the three and nine months ended September 30, 2000, in comparison to $2.9
million and $8.7 million for the comparable periods in 1999, respectively. We
attribute the increase in the provision for loan losses to continued growth in
the loan portfolio, both internal and through acquisitions; increased risk
associated with the continued changing composition of our loan portfolio; and an
increase in nonperforming assets. Loan charge-offs were $3.7 million and $8.7
million for the three and nine months ended September 30, 2000, respectively, in
comparison to $3.6 million and $11.2 million for the comparable periods in 1999.
The decrease in loan charge-offs is indicative of the generally strong economic
conditions prevalent in our markets, as well as management's continued efforts
to effectively monitor and manage our loan portfolio. For the nine months ended
September 30, 2000, loan charge-offs include a charge-off of $1.6 million on a
single loan. Loan recoveries increased to $1.8 million and $8.0 million for the
three and nine months ended September 30, 2000, respectively, from $2.7 million
and $6.9 million for the comparable periods in 1999, reflecting continued
aggressive collection efforts. The acquisitions of Bank of Ventura, Lippo Bank,
Century Bank and Redwood Bank provided $547,000, $799,000, $1.5 million and $1.5
million, respectively, in additional allowance for loan losses.
Tables summarizing nonperforming assets, past-due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $10.8 million and $31.8 million for the three
and nine months ended September 30, 2000, in comparison to $9.0 million and
$32.1 million for the comparable periods in 1999. Noninterest income consists
primarily of service charges on deposit accounts and customer service fees,
mortgage banking revenues and other income.
Service charges on deposit accounts and customer service fees were $5.2
million and $14.6 million for the three and nine months ended September 30,
2000, in comparison to $4.4 million and $12.8 million for the comparable periods
in 1999, respectively. The increase in service charges and customer service fees
is attributable to (a) increased deposit balances provided by internal growth;
(b) the acquisitions of Bank of Ventura, Lippo Bank, Century Bank and Redwood
Bank; (c) additional products and services available and utilized by our
expanding base of retail and commercial customers; (d) increased fee income
resulting from revisions of customer service charge rates, effective April 1,
1999 and June 1, 2000, and enhanced control of fee waivers; and (e) increased
income associated with automatic teller machine services and debit and credit
cards.
The gain on mortgage loans sold and held for sale was $1.9 million and
$5.2 million for the three and nine months ended September 30, 2000, in
comparison to $1.6 million and $5.4 million for the comparable periods in 1999,
respectively. The overall decrease for the nine months ended September 30, 2000
is primarily attributable to a reduced volume of loans originated and sold
commensurate with the increases in mortgage loan rates experienced in recent
months.
The net loss on sales of available-for-sale securities was $180,000 for
the three months ended September 30, 2000, in comparison to a net gain of $1,000
for the comparable period in 1999. For the nine months ended September 30, 2000
and 1999, the net gain on sales of available-for-sale securities was $199,000
and $793,000, respectively. These gains primarily resulted from sales of
securities necessary to fund our loan growth. The decrease in the net gains
reflects the sales, at a loss, of certain investment securities that did not
meet our overall investment objectives.
The net loss on trading securities of $303,000 for the nine months
ended September 30, 1999 resulted from the termination of our trading division,
effective December 31, 1998, and the liquidation of all trading securities
during the first quarter of 1999.
Other income was $3.8 million and $11.8 million for the three and nine
months ended September 30, 2000, in comparison to $3.0 million and $13.4 million
for the comparable periods in 1999. We attribute the reduction in other income
primarily to non-recurring gains on branch divestitures. During the nine months
ended September 30, 2000, we divested one of our branch locations in central
Illinois, resulting in a pre-tax gain of $1.4 million, net of related expenses.
In the same period in 1999, we divested six branch offices in central and
northern Illinois, resulting in a pre-tax gain of $4.4 million, net of related
expenses. The reduction in these gains were partially offset by increased income
earned on our investment in bank-owned life insurance; rental income associated
with FCG's leasing activities; and, increased rental fees received from First
Services, L.P. for the use of data processing and other equipment owned by us.
The increase in rental fees is commensurate with the replacement of our teller
system and certain other technological upgrades, including local and wide area
network-based systems, networks, core processors and item processing equipment
that were replaced in 1999 in conjunction with Year 2000 compliance preparations
and to improve system capabilities and performance.
Noninterest Expense
Noninterest expense was $42.8 million and $122.5 million for the three
and nine months ended September 30, 2000, in comparison to $37.5 million and
$110.3 million for the comparable periods in 1999. The increase reflects: (a)
the noninterest expense of Bank of Ventura, Lippo Bank, FCG, Century Bank and
Redwood Bank subsequent to their respective acquisition dates, including certain
nonrecurring expenses associated with those acquisitions; (b) increased salaries
and employee benefit expenses; (c) increased data processing fees; (d) increased
amortization of intangibles associated with the purchase of subsidiaries; and
(e) increased expenses associated with our internal restructuring process. The
overall increase in noninterest expense was partially offset by a decrease in
legal, examination and professional fees.
During 1999, we began an internal restructuring process designed to
better position us for future growth and opportunities expected to become
available as consolidation and changes continue in the delivery of financial
services. The magnitude of this project was extensive and covered almost every
area within First Banks. The primary objectives of the restructuring process
were: (a) to redesign our corporate organization to provide lines of authority
which are more conducive to the effective delivery of services to customers; (b)
to enhance our technological strength to enable us to more effectively and
efficiently provide the products, services and delivery channels necessary to
remain competitive in the financial services industry of the future; (c) to
establish the infrastructure necessary to better support our service delivery
and business development efforts, and to provide more efficient, better quality
services to customers; (d) to increase the depth and abilities of all levels of
management and supervision to lead the efforts to accomplish our corporate
objectives; and (e) to improve internal monitoring systems in order to better
assess the progress of all areas in achieving our corporate objectives. Although
these efforts have primarily led to increased capital expenditures and
noninterest expenses in the short-term as further discussed below, we anticipate
they will lead to more effective internal growth, more efficient operations and
improved profitability over the long term.
Salaries and employee benefits were $18.2 million and $53.4 million for
the three and nine months ended September 30, 2000, in comparison to $15.6
million and $45.6 million for the comparable periods in 1999, respectively. We
attribute the increase to the aforementioned acquisitions and the competitive
environment in the employment market that has resulted in a higher demand for
limited resources, thus escalating industry salary and employee benefit costs
necessary to employ and retain qualified personnel. In addition, the increase
includes various additions to staff to enhance executive and senior management
expertise, improve technological support and strengthen centralized operational
functions.
Occupancy, net of rental income, and furniture and equipment expense
totaled $6.6 million and $18.9 million for the three and nine months ended
September 30, 2000, in comparison to $5.7 million and $15.5 million for the
comparable periods in 1999, respectively. We attribute the increase to the
aforementioned acquisitions, the relocation of certain California and Texas
branches and increased depreciation expense associated with numerous capital
expenditures made throughout 1999, including the implementation of our new
teller system. This increase has been partially offset by selective elimination
of 15 branch offices by sales, mergers or closures during 1999 and 2000.
Data processing fees were $5.7 million and $16.4 million for the three
and nine months ended September 30, 2000, in comparison to $4.7 million and
$13.9 million for the comparable periods in 1999, respectively. We attribute the
increased data processing fees to growth and technological advancements
consistent with our product and service offerings and upgrades to technological
equipment, networks and communication channels.
Legal, examination and professional fees were $1.1 million and $3.1
million for the three and nine months ended September 30, 2000, in comparison to
$1.7 million and $4.9 million for the comparable periods in 1999, respectively.
We attribute the decrease in these fees to a decline in our utilization of
external consultants who provided assistance throughout 1999 associated with the
development and expansion of selected business initiatives. In addition, the
decrease is also reflective of the settlement of certain litigation completed in
1999.
Interest Rate Risk Management
We utilize off-balance-sheet derivative financial instruments to assist
in our management of interest rate sensitivity and to modify the repricing,
maturity and option characteristics of on-balance-sheet assets and liabilities.
We limit the use of such derivative financial instruments to reduce our interest
rate exposure. The derivative financial instruments we hold, for purposes of
managing interest rate risk, are summarized as follows:
September 30, 2000 December 31, 1999
---------------------- ----------------------
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................ 1,105,000 92 455,000 3,349
Interest rate floor agreements......................... 35,000 8 35,000 13
Interest rate cap agreements........................... 450,000 4,009 10,000 26
Forward commitments to sell
mortgage-backed securities......................... 35,000 20 33,000 --
========== ====== ======= ======
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
our credit exposure through our use of these instruments. The credit exposure
represents the accounting loss we would incur in the event the counterparties
failed completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value.
During 1998, we entered into $280.0 million notional amount interest
rate swap agreements. The swap agreements effectively lengthen the repricing
characteristics of certain interest-earning assets to correspond more closely
with their funding source with the objective of stabilizing cash flow, and
accordingly, net interest income, over time. The swap agreements initially
provided for us to receive a fixed rate of interest and pay an adjustable rate
equivalent to the 90-day London Interbank Offering Rate. In March 2000, the
terms of the swap agreements were modified such that we currently pay an
adjustable rate of interest equivalent to the daily weighted average prime
lending rate minus 2.705%. The terms of the swap agreements provide for us to
pay quarterly and receive payment semiannually. The amount receivable by us
under the swap agreements was $790,000 and $4.1 million at September 30, 2000
and December 31, 1999, respectively, and the amount payable by us under the swap
agreements was $691,000 and $770,000 at September 30, 2000 and December 31,
1999, respectively.
During May 1999, we entered into $500.0 million notional amount
interest rate swap agreements with the objective of stabilizing the net interest
margin during the nine-month period surrounding the Year 2000 century date
change. The swap agreements provided for us to receive an adjustable rate of
interest equivalent to the daily weighted average 30-day London Interbank
Offering Rate 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 had an effective date of October 1, 1999 and a maturity date
of March 31, 2000, provided for us to pay and receive interest on a monthly
basis. In January 2000, we determined these swap agreements were no longer
necessary based upon the results of the Year 2000 transition and terminated
these agreements at a cost of $150,000.
During September 1999, we entered into $175.0 million notional amount
interest rate swap agreements to effectively lengthen the repricing
characteristics of certain interest-earning assets to correspond more closely
with their funding source with the objective of stabilizing cash flow, and
accordingly, net interest income, over time. The swap agreements provide for us
to receive a fixed rate of interest and pay an adjustable rate equivalent to the
weighted average prime lending rate minus 2.70%. The terms of the swap
agreements provide for us to pay and receive interest on a quarterly basis. The
amount receivable by us under the swap agreements was $119,000 at September 30,
2000 and December 31, 1999, and the amount payable by us under the swap
agreements was $132,000 and $141,000 at September 30, 2000 and December 31,
1999, respectively.
During September 2000, we entered into $600.0 million notional amount
of four-year interest rate swap agreements to effectively lengthen the repricing
characteristics of certain interest-earning assets to correspond more closely
with their funding source with the objective of stabilizing cash flow, and
accordingly, net interest income, over time. The swap agreements provide for us
to receive a fixed rate of interest of 6.7750% and pay an adjustable rate
equivalent to the weighted average prime lending rate minus 2.70%. The terms of
the swap agreements provide for us to pay and receive interest on a quarterly
basis. The amount receivable and payable by us under the swap agreements was
$1.2 million at September 30, 2000. In conjunction with these interest rate swap
agreements, we also entered into $450.0 million notional amount of interest rate
cap agreements to limit the net interest expense associated with the interest
rate swap agreements. The interest rate cap agreements provide for us to receive
a quarterly adjustable rate of interest equivalent to the three-month London
Interbank Offering Rate should such rate exceed the predetermined interest rate
of 7.50%, and have a maturity date of September 20, 2004. At September 30, 2000,
the unamortized costs of these interest rate cap agreements were $4.0 million,
and were included in other assets
During September 2000, we entered into $12.5 million notional amount of
one-year interest rate swap agreements to effectively shorten the repricing
characteristics of certain interest-bearing liabilities with the objective of
stabilizing cash flow, and accordingly, net interest income, over time. The swap
agreements provide for us to receive a fixed rate of interest and pay an
adjustable rate equivalent to the three-month London Interbank Offering Rate
minus 0.02%. The terms of the swap agreements provide for us to pay interest on
a quarterly basis and receive interest on an annual basis. The amount receivable
and payable by us under the swap agreements was $42,000 at September 30, 2000.
During September 2000, we entered into $12.5 million notional amount of
one-year interest rate swap agreements to effectively shorten the repricing
characteristics of certain interest-bearing liabilities with the objective of
stabilizing cash flow, and accordingly, net interest income, over time. The swap
agreements provide for us to receive a fixed rate of interest and pay an
adjustable rate equivalent to the three-month London Interbank Offering Rate
minus 0.05%. The terms of the swap agreements provide for us to pay interest on
a quarterly basis and receive interest on an annual basis. The amount receivable
and payable by us under the swap agreements was $23,000 at September 30, 2000.
During September 2000, we entered into $25.0 million notional amount of
five and one-half year interest rate swap agreements to effectively shorten the
repricing characteristics of certain interest-bearing liabilities with the
objective of stabilizing cash flow, and accordingly, net interest income, over
time. The swap agreements provide for us to receive a fixed rate of interest and
pay an adjustable rate equivalent to the three-month London Interbank Offering
Rate minus 0.11%. The terms of the swap agreements provide for us to pay
interest on a quarterly basis and receive interest on a semi-annual basis. The
amount receivable by us under the swap agreements was $67,000 at September 30,
2000 and the amount payable by us under the swap agreements was $61,000 at
September 30, 2000.
The maturity dates, notional amounts, interest rates paid and received,
and fair values of interest rate swap agreements outstanding as of September 30,
2000 and December 31, 1999 were as follows:
Notional Interest rate Interest rate Fair value
Maturity date as of September 30, 2000 amount paid received gain (loss)
-------------------------------------- ------ ---- -------- -----------
(dollars expressed in thousands)
September 13, 2001.............................. $ 12,500 6.61% 6.60% $ (8)
September 21, 2001.............................. 12,500 6.64 6.80 (13)
September 27, 2001.............................. 75,000 6.80 6.14 (393)
September 27, 2001.............................. 45,000 6.80 6.14 (236)
September 27, 2001.............................. 40,000 6.80 6.14 (210)
September 27, 2001.............................. 15,000 6.80 6.14 (79)
June 11, 2002................................... 15,000 6.80 6.00 (173)
September 16, 2002.............................. 175,000 6.80 5.36 (4,204)
September 16, 2002.............................. 20,000 6.80 5.36 (486)
September 18, 2002.............................. 40,000 6.80 5.33 (1,001)
September 18, 2002.............................. 30,000 6.80 5.33 (750)
September 20, 2004.............................. 300,000 6.78 6.80 777
September 20, 2004.............................. 300,000 6.78 6.80 777
March 13, 2006.................................. 12,500 6.55 7.20 (220)
March 22, 2006.................................. 12,500 6.55 7.25 (219)
---------- ---------
$1,105,000 6.77 6.34 $ (6,438)
========== ===== ===== =========
Notional Interest rate Interest rate Fair value
Maturity date as of December 31, 1999 amount paid received gain (loss)
------------------------------------- ------ ---- -------- -----------
(dollars expressed in thousands)
March 31, 2000.................................. $ 350,000 5.84% 6.45% $ 87
March 31, 2000.................................. 75,000 5.84 6.45 19
March 31, 2000.................................. 50,000 5.84 6.45 12
March 31, 2000.................................. 25,000 5.84 6.45 6
September 27, 2001.............................. 75,000 5.80 6.14 (685)
September 27, 2001.............................. 45,000 5.80 6.14 (411)
September 27, 2001.............................. 40,000 5.80 6.14 (365)
September 27, 2001.............................. 15,000 5.80 6.14 (137)
June 11, 2002................................... 15,000 6.12 6.00 (291)
September 16, 2002.............................. 175,000 6.12 5.36 (6,574)
September 16, 2002.............................. 20,000 6.12 5.36 (751)
September 18, 2002.............................. 40,000 6.14 5.33 (1,543)
September 18, 2002.............................. 30,000 6.14 5.33 (1,157)
---------- ---------
$ 955,000 5.91 6.08 $ (11,790)
========== ===== ===== =========
In the event of early termination of the interest rate swap agreements,
the net proceeds received or paid are deferred and amortized over the shorter of
the remaining contract life or the maturity of the related asset. If, however,
the amount of the underlying asset is repaid, then the fair value gains or
losses on the interest rate swap agreements are recognized immediately in the
consolidated statements of income.
We also utilize interest rate floor agreements to limit the interest
expense associated with the net interest expense of certain interest rate swap
agreements. At September 30, 2000 and December 31, 1999, the unamortized costs
of these agreements were $8,000 and $32,000, respectively, and were included in
other assets.
Derivative financial instruments issued by us 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 $35.0 million and
$31.5 million at September 30, 2000 and December 31, 1999, respectively. These
net loan commitments and loans held for sale were hedged with forward contracts
to sell mortgage-backed securities of $35.0 million and $33.0 million at
September 30, 2000 and December 31, 1999, respectively. We defer gains and
losses from forward contracts and include them in the cost basis of loans held
for sale. At September 30, 2000 and December 31, 1999, the net unamortized gains
were $90,000 and $838,000, respectively. Such net gains were applied to the
carrying value of the loans held for sale as part of our lower of cost or market
valuation.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source
of income for First Banks and our subsidiary banks. Interest and fees on loans
were 92.7% and 92.3% of total interest income for the three and nine months
ended September 30, 2000, in comparison to 92.0% and 91.6% for the comparable
periods in 1999, respectively. Total loans, net of unearned discount, increased
$363.3 million to $4.36 billion, or 83.3% of total assets, at September 30,
2000, compared to $4.00 billion, or 82.1% of total assets, at December 31, 1999.
The increase in loans, as summarized on our consolidated balance sheets, is
primarily attributable to the acquisitions of Bank of Ventura, Lippo Bank and
FCG, which provided loans, net of unearned discount, of $39.4 million, $40.9
million and $64.6 million, respectively, and the continued growth and
diversification of our commercial, financial and agricultural and commercial
real estate mortgage loan portfolios. This increase was partially offset by a
decline in our consumer and installment portfolio to $176.7 million at September
30, 2000 from $225.3 million at December 31, 1999. Such decrease reflects
reductions in new loan volumes and the repayment of principal on the existing
portfolio, and is also consistent with our objectives of de-emphasizing indirect
automobile lending and expanding commercial lending.
Nonperforming assets include nonaccrual loans, restructured loans and
other real estate. The following table presents the categories of nonperforming
assets and certain ratios as of the dates indicated:
September 30, December 31,
2000 1999
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual..................................................... $ 20,167 18,397
Restructured terms............................................. 22 29
Real estate construction and development:
Nonaccrual..................................................... 16,928 1,886
Real estate mortgage:
Nonaccrual..................................................... 16,564 16,414
Restructured terms............................................. 2,962 2,979
Consumer and installment:
Nonaccrual..................................................... 184 32
Restructured terms............................................. 9 --
----------- ----------
Total nonperforming loans.................................. 56,836 39,737
Other real estate................................................... 1,566 2,129
----------- ----------
Total nonperforming assets................................ $ 58,402 41,866
=========== ==========
Loans, net of unearned discount..................................... $ 4,359,586 3,996,324
=========== ==========
Loans past due 90 days or more and still accruing................... $ 5,275 5,844
=========== =========
Allowance for loan losses to loans.................................. 1.84% 1.72%
Nonperforming loans to loans........................................ 1.30 0.99
Allowance for loan losses to nonperforming loans.................... 141.30 172.66
Nonperforming assets to loans and other real estate................. 1.34 1.05
=========== ========
Nonperforming loans (also considered impaired loans), consisting of
loans on nonaccrual status and certain restructured loans, were $56.8 million at
September 30, 2000 in comparison to $39.7 million at December 31, 1999. We
primarily attribute the increase in nonperforming loans to a small number of
credit relationships that were placed on nonaccrual status in 2000. These
nonperforming loans are symptomatic of circumstances that are specific to these
relationships, and are not indicative of distress across the broad spectrum of
our loan portfolio. In addition, the decline in the ratio of the allowance for
loan losses to nonperforming loans is attributable to the increase in
nonperforming loans, partially offset by an increase in the allowance for loan
losses.
The following table presents a summary of loan loss experience for the
periods indicated:
Three months ended Nine months ended
September 30, September 30,
---------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of period.............. $ 77,822 64,977 68,611 60,970
Acquired allowances for loan losses.................... 547 1,542 1,346 3,008
--------- -------- -------- --------
78,369 66,519 69,957 63,978
--------- -------- -------- --------
Loans charged-off...................................... (3,697) (3,626) (8,667) (11,154)
Recoveries of loans previously charged-off............. 1,774 2,725 7,954 6,931
--------- -------- -------- --------
Net loan charge-offs .................................. (1,923) (901) (713) (4,223)
--------- -------- -------- --------
Provision for loan losses.............................. 3,865 2,880 11,067 8,743
--------- -------- -------- --------
Allowance for loan losses, end of period.................... $ 80,311 68,498 80,311 68,498
========= ======== ======== ========
The allowance for loan losses is monitored on a monthly basis. Each
month, the credit administration department provides our management with
detailed lists of loans on the watch list and summaries of the entire loan
portfolio of each subsidiary bank by risk rating. These are coupled with
analyses of changes in the risk profiles of the portfolios, changes in past due
and nonperforming loans and changes in watch list and classified loans over
time. In this manner, we continually monitor the overall increases or decreases
in the levels of risk in the portfolios. Factors are applied to the loan
portfolios for each category of loan risk to determine acceptable levels of
allowance for loan losses. We derive these factors primarily from the actual
loss experience of our subsidiary banks and from published national surveys of
norms in the industry. The calculated allowances required for the portfolios are
then compared to the actual allowance balances to determine the provisions
necessary to maintain the allowances at appropriate levels. In addition,
management exercises judgment in its analysis of determining the overall level
of the allowance for loan losses. In its analysis, management considers the
change in the portfolio, including growth, composition and the ratio of net
loans to total assets, and the economic conditions of the regions in which we
operate. Based on this quantitative and qualitative analysis, provisions are
made to our allowance for loan losses. Such provisions are reflected in our
consolidated statements of income.
Liquidity
The liquidity of First Banks and our subsidiary banks is the ability to
maintain a cash flow which is adequate to fund operations, service debt
obligations and meet obligations and other commitments on a timely basis. The
subsidiary banks receive funds for liquidity from customer deposits, loan
payments, maturities of loans and investments, sales of investments and
earnings. In addition, First Banks and the subsidiary banks may avail themselves
of more volatile sources of funds through the 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 Banks
and other borrowings, including our revolving note payable. The aggregate funds
acquired from these more volatile sources were $573.6 million and $476.8 million
at September 30, 2000 and December 31, 1999, respectively.
The following table presents the maturity structure of volatile funds,
which consists of certificates of deposit of $100,000 or more, short-term
borrowings and our revolving note payable, at September 30, 2000:
(dollars expressed in thousands)
Three months or less.......................................................... $ 262,532
Over three months through six months.......................................... 67,546
Over six months through twelve months......................................... 144,678
Over twelve months............................................................ 98,885
---------
Total.................................................................. $ 573,641
=========
In addition to these more volatile sources of funds, in 1999, First
Bank, First Bank & Trust, First Bank of California and First Bank Texas N.A.
established borrowing relationships with the Federal Reserve Banks in their
respective districts. These borrowing relationships, which are secured by
commercial loans, provide an additional liquidity facility that may be utilized
for contingency purposes. At September 30, 2000 and December 31, 1999, the
borrowing capacity of our subsidiary banks under these agreements was
approximately $1.34 billion and $1.67 billion, respectively. In addition, our
subsidiary banks' borrowing capacity through their relationships with the
Federal Home Loan Banks was approximately $257.6 million at September 30, 2000
and $395.9 million at December 31, 1999.
Management believes the available liquidity and operating results of
the subsidiary banks will be sufficient to provide funds for growth and to
permit the distribution of dividends to us sufficient to meet our operating and
debt service requirements, both on a short-term and long-term basis, and to pay
the dividends on the trust preferred securities issued by First Banks' and FBA's
financing subsidiaries.
Year 2000 Compatibility
First Banks and our subsidiary banks were subject to risks associated
with the "Year 2000" issue, a term which referred 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 were particularly vulnerable to Year 2000 issues because of heavy
reliance in the industry on electronic data processing and funds transfer
systems.
We successfully completed all phases of our Year 2000 program within
the appropriate timeframes established by the regulatory agencies. In addition,
we did not encounter any significant business disruptions or processing problems
as a result of the Year 2000 century date change. Furthermore, we are unaware of
any Year 2000 issues encountered by our more significant borrowers and vendors
that would inhibit their ability to repay obligations or provide goods or
services. The total cost of our program was $14.9 million, comprised of capital
improvements of $12.3 million and direct expenses reimbursable to First
Services, L.P. of $2.6 million. We are charging the capital improvements to
expense in the form of depreciation expense or lease expense, generally over a
period of 60 months. We incurred direct expenses related to our program of
approximately $195,000 for the nine months ended September 30, 2000, $450,000
and $1.4 million for the three and nine months ended September 30, 1999,
respectively, and $1.8 million for the year ended December 31, 1999.
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.
In June 2000, the FASB issued SFAS No. 138 - Accounting for Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,
which addresses a limited number of issues causing implementation difficulties
for numerous entities that apply SFAS 133, as amended. SFAS 138 amends the
accounting and reporting standards of SFAS 133, as amended, for certain
derivative instruments, certain hedging activities and for decisions made by the
FASB relating to the Derivatives Implementation Group (DIG) process. The DIG
presently has additional issues and questions pending and continues to release
guidance and interpretations as such issues are resolved. We continue to
consider the actions and conclusions of the DIG as they are released in order to
determine their potential impact on our consolidated financial statements.
We currently believe the implementation of SFAS 133 will not have a
material impact on our consolidated financial statements as it relates to our
existing derivative financial instruments. However, the effect of future
derivative transactions as well as further guidance from the DIG may result in
modifications of our current assessment of SFAS 133 and its overall impact on
our consolidated financial statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999, our risk management program's simulation model
indicated a loss of projected net interest income in the event of a decline in
interest rates. While a decline in interest rates of less than 100 basis points
was projected to have a minimal impact on our earnings, a decline in interest
rates of 100 basis points indicated a pre-tax projected loss of approximately
7.1% of net interest income based on assets and liabilities at December 31,
1999.
Our interest sensitivity position has been modified as a result of the
derivative instruments entered into during September 2000. After consideration
of these derivative instruments, we are still "asset-sensitive," however, our
simulation model indicated a lost of projected net interest income should
interest rates decline or should interest rates increase up to a maximum of 100
basis points. While a decline or increase in interest rates of less than 100
basis points has a minimal impact on our net interest income, a decline in
interest rates of 100 basis points indicates a pre-tax projected loss of
approximately 4.9% of net interest income based on assets and liabilities at
June 30, 2000, whereas an increase in interest rates of 100 basis points
indicates a pre-tax projected loss of approximately 0.3% of net interest income,
based on assets and liabilities at June 30, 2000.
At September 30, 2000, we remain in an "asset-sensitive" position and
thus, remain subject to a higher level of risk in a declining interest-rate
environment. Our asset-sensitive position, coupled with increases in the prime
lending rate experienced throughout the last nine months, is reflected in our
increased net interest income for the three and nine months ended September 30,
2000 as further discussed under "--Results of Operations." During the three and
nine months ended September 30, 2000, our asset-sensitive position and overall
susceptibility to market risks have not changed materially, except for the
modifications that have resulted from our additional derivative financial
instruments entered into during September 2000 as described above.
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
-------------- -----------
10.6 $120,000,000 Second Amended and Restated Secured Credit Agreement, dated as of
August 24, 2000, among First Banks, Inc. and Firstar Bank, N.A., American
National Bank and Trust Company of Chicago, Harris Trust and Savings Bank,
Wells Fargo Bank Minnesota, N.A., The Frost National Bank, Union Bank of
California, N.A. LaSalle Bank National Association and Firstar Bank, N.A., as
Agent (incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-2 (File Nos. 333-46270 and 333-46270-01) dated
September 20, 2000).
27 Article 9 - Financial Data Schedule (EDGAR only)
(b) We filed no reports on Form 8-K during the three months ended September 30,
2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ James F. Dierberg
-------------------------------------------------
James F. Dierberg
Chairman of the Board of Directors
and Chief Executive Officer
November 13, 2000 (Principal Executive Officer)
By: /s/ Frank H. Sanfilippo
------------------------------------------------
Frank H. Sanfilippo
Executive Vice President and
Chief Financial Officer
November 13, 2000 (Principal Financial and Accounting Officer)