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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 June 30, 2002
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 July 31, 2002
----- ----------------
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....................................................... 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................... 28
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 29
SIGNATURES.......................................................................................... 30
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS - (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2002 2001
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks....................................................... $ 163,371 181,522
Interest-bearing deposits with other financial institutions
with maturities of three months or less..................................... 880 4,664
Federal funds sold............................................................ 112,900 55,688
------------ -----------
Total cash and cash equivalents.......................................... 277,151 241,874
------------ -----------
Investment securities:
Available for sale, at fair value............................................. 819,580 610,466
Held to maturity, at amortized cost (fair value of $21,003 and $20,812
at June 30, 2002 and December 31, 2001, respectively)....................... 20,444 20,602
------------ -----------
Total investment securities.............................................. 840,024 631,068
------------ -----------
Loans:
Commercial, financial and agricultural........................................ 1,556,017 1,681,846
Real estate construction and development...................................... 997,190 954,913
Real estate mortgage.......................................................... 2,552,257 2,445,847
Consumer and installment...................................................... 112,241 124,542
Loans held for sale........................................................... 150,871 204,206
------------ -----------
Total loans.............................................................. 5,368,576 5,411,354
Unearned discount............................................................. (5,944) (2,485)
Allowance for loan losses..................................................... (103,794) (97,164)
------------ -----------
Net loans................................................................ 5,258,838 5,311,705
------------ -----------
Derivative instruments............................................................. 70,128 54,889
Bank premises and equipment, net of accumulated depreciation and amortization...... 154,026 149,604
Intangibles associated with the purchase of subsidiaries, net of amortization...... 140,774 125,440
Bank-owned life insurance.......................................................... 89,796 87,200
Accrued interest receivable........................................................ 38,062 37,349
Deferred income taxes.............................................................. 94,496 94,546
Other assets....................................................................... 42,767 44,776
------------ -----------
Total assets............................................................. $ 7,006,062 6,778,451
============ ===========
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 share and per share data)
June 30, December 31,
2002 2001
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing........................................................ $ 915,618 921,455
Interest-bearing............................................................ 736,301 629,015
Savings....................................................................... 1,939,002 1,832,939
Time:
Time deposits of $100 or more............................................... 500,442 484,201
Other time deposits......................................................... 1,817,032 1,816,294
------------ -----------
Total deposits........................................................... 5,908,395 5,683,904
Short-term borrowings.............................................................. 198,922 243,134
Note payable....................................................................... 10,000 27,500
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debentures..................................... 218,944 191,539
First Banks America, Inc. subordinated debentures............................. 44,988 44,342
Accrued interest payable........................................................... 19,798 16,006
Deferred income taxes.............................................................. 53,916 43,856
Accrued expenses and other liabilities............................................. 52,654 61,515
Minority interest in subsidiary.................................................... 18,847 17,998
------------ -----------
Total liabilities........................................................ 6,526,464 6,329,794
------------ -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding at June 30, 2002 and December 31, 2001...................... -- --
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.................................................................... 5,958 6,074
Retained earnings.................................................................. 406,348 389,308
Accumulated other comprehensive income............................................. 48,314 34,297
------------ -----------
Total stockholders' equity............................................... 479,598 448,657
------------ -----------
Total liabilities and stockholders' equity............................... $ 7,006,062 6,778,451
============ ===========
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Interest and fees on loans............................................ $ 98,782 105,855 197,824 212,917
Investment securities................................................. 7,868 6,341 15,149 14,821
Federal funds sold and other.......................................... 653 1,160 942 1,655
-------- ------- ------- -------
Total interest income............................................ 107,303 113,356 213,915 229,393
-------- ------- ------- -------
Interest expense:
Deposits:
Interest-bearing demand............................................. 2,281 1,807 3,953 3,480
Savings............................................................. 9,265 13,342 18,434 27,525
Time deposits of $100 or more....................................... 4,889 7,453 10,179 15,329
Other time deposits................................................. 16,970 25,954 35,851 53,143
Short-term borrowings................................................. 912 1,673 1,829 3,662
Note payable.......................................................... 181 543 530 1,773
Guaranteed preferred debentures....................................... 7,117 4,489 13,329 8,978
-------- ------- ------- -------
Total interest expense........................................... 41,615 55,261 84,105 113,890
-------- ------- ------- -------
Net interest income.............................................. 65,688 58,095 129,810 115,503
Provision for loan losses.................................................. 12,000 3,720 25,000 7,110
-------- ------- ------- -------
Net interest income after provision for loan losses.............. 53,688 54,375 104,810 108,393
-------- ------- ------- -------
Noninterest income:
Service charges on deposit accounts and customer service fees......... 7,014 5,312 13,494 10,537
Gain on mortgage loans sold and held for sale......................... 7,292 3,864 12,459 7,332
Gain on sale of credit card portfolio, net of expenses................ -- -- -- 2,275
Net gain (loss) on sales of available-for-sale investment securities.. -- 61 92 (113)
Bank-owned life insurance investment income........................... 1,526 1,044 2,813 2,099
Net gain (loss) on derivative instruments............................. 90 4,989 (249) 5,486
Other................................................................. 4,607 4,154 10,755 8,282
-------- ------- ------- -------
Total noninterest income......................................... 20,529 19,424 39,364 35,898
-------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits........................................ 28,895 23,345 56,156 45,797
Occupancy, net of rental income....................................... 4,964 4,100 9,636 8,216
Furniture and equipment............................................... 4,396 2,406 8,539 5,617
Postage, printing and supplies........................................ 1,317 1,103 2,859 2,258
Information technology fees........................................... 8,497 6,452 16,597 12,951
Legal, examination and professional fees.............................. 2,106 1,734 3,597 3,424
Amortization of intangibles associated with the
purchase of subsidiaries........................................... 482 1,862 964 3,712
Communications........................................................ 908 732 1,704 1,513
Advertising and business development.................................. 1,507 1,595 2,951 3,182
Other................................................................. 6,148 16,580 13,075 20,368
-------- ------- ------- -------
Total noninterest expense........................................ 59,220 59,909 116,078 107,038
-------- ------- ------- -------
Income before provision for income taxes, minority interest
in income of subsidiary and cumulative effect of change
in accounting principle...................................... 14,997 13,890 28,096 37,253
Provision for income taxes................................................. 5,328 5,457 10,099 14,581
-------- ------- ------- -------
Income before minority interest in income of subsidiary and
cumulativeeffect of change in accounting principle........... 9,669 8,433 17,997 22,672
Minority interest in income of subsidiary.................................. 301 534 629 1,045
-------- ------- ------- -------
Income before cumulative effect of change in
accounting principle......................................... 9,368 7,899 17,368 21,627
Cumulative effect of change in accounting principle, net of tax............ -- -- -- (1,376)
-------- ------- ------- -------
Net income....................................................... 9,368 7,899 17,368 20,251
Preferred stock dividends.................................................. 132 132 328 328
-------- ------- ------- -------
Net income available to common stockholders...................... $ 9,236 7,767 17,040 19,923
======== ======= ======= =======
Basic earnings per common share:
Income before cumulative effect of change in accounting principle..... $ 390.35 328.27 720.18 900.21
Cumulative effect of change in accounting principle, net of tax....... -- -- -- (58.16)
--------- ------- ------- -------
Basic................................................................. $ 390.35 328.27 720.18 842.05
======== ======= ======= =======
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle..... $ 384.48 322.78 712.75 882.65
Cumulative effect of change in accounting principle, net of tax....... -- -- -- (58.16)
-------- ------- ------- -------
Diluted............................................................... $ 384.48 322.78 712.75 824.49
========= ======= ======= =======
Weighted average common stock outstanding.................................. 23,661 23,661 23,661 23,661
======== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Six Months Ended June 30, 2002 and 2001 and Six Months Ended December 31, 2001
(dollars expressed in thousands, except per share data)
Adjustable Rate Accu-
Preferred Stock mulated
------------------ 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, 2000......... $12,822 241 5,915 2,267 325,580 6,021 352,846
Six months ended June 30, 2001:
Comprehensive income:
Net income................................. -- -- -- -- 20,251 20,251 -- 20,251
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 9,529 -- 9,529 9,529
Derivative instruments:
Cumulative effect of change in
accounting principle, net........... -- -- -- -- 9,069 -- 9,069 9,069
Current period transactions............ -- -- -- -- 7,621 -- 7,621 7,621
Reclassification to earnings........... -- -- -- -- (2,927) -- (2,927) (2,927)
------
Comprehensive income....................... 43,543
======
Class A preferred stock dividends,
$0.50 per share.......................... -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share.......................... -- -- -- -- (7) -- (7)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- 343 -- -- 343
------- --- ----- ----- ------- ------- -------
Consolidated balances, June 30, 2001............. 12,822 241 5,915 2,610 345,503 29,313 396,404
Six months ended December 31, 2001:
Comprehensive income:
Net income................................. -- -- -- -- 44,263 44,263 -- 44,263
Other comprehensive income, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (11,400) -- (11,400) (11,400)
Derivative instruments:
Current period transactions............ -- -- -- -- 19,400 -- 19,400 19,400
Reclassification to earnings........... -- -- -- -- (3,016) -- (3,016) (3,016)
------
Comprehensive income....................... -- -- -- -- 49,247
======
Class A preferred stock dividends,
$0.70 per share.......................... -- -- -- -- (448) -- (448)
Class B preferred stock dividends,
$0.07 per share.......................... -- -- -- -- (10) -- (10)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- 3,464 -- -- 3,464
------- --- ----- ----- ------- ------ -------
Consolidated balances, December 31, 2001......... 12,822 241 5,915 6,074 389,308 34,297 448,657
Six months ended June 30, 2002:
Comprehensive income:
Net income................................. -- -- -- -- 17,368 17,368 -- 17,368
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 7,620 -- 7,620 7,620
Derivative instruments:
Current period transactions............ -- -- -- -- 6,397 -- 6,397 6,397
------
Comprehensive income....................... 31,385
======
Class A preferred stock dividends,
$0.50 per share.......................... -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share.......................... -- -- -- -- (7) -- (7)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- (116) -- -- (116)
------- --- ----- ----- ------- ------ -------
Consolidated balances, June 30, 2002............. $12,822 241 5,915 5,958 406,348 48,314 479,598
======= === ===== ===== ======= ====== =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, December 31,
------------------ ----------------
2002 2001 2002 2001 2001
---- ---- ---- ---- ----
Unrealized gains on investment securities arising
during the period.............................................. $7,086 4,098 7,680 9,456 842
Less reclassification adjustment for gains (losses)
included in net income......................................... -- 40 60 (73) 12,242
----- ----- ----- ----- -------
Unrealized gains (losses) on investment securities................ $7,086 4,058 7,620 9,529 (11,400)
====== ===== ===== ===== =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Six Months Ended
June 30,
---------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income........................................................................... $ 17,368 20,251
Adjustments to reconcile net income to net cash used in operating activities:
Cumulative effect of change in accounting principle, net of tax.................... -- 1,376
Depreciation and amortization of bank premises and equipment....................... 9,261 5,734
Amortization, net of accretion..................................................... 7,020 4,090
Originations and purchases of loans held for sale.................................. (806,713) (757,526)
Proceeds from the sale of loans held for sale...................................... 757,023 587,612
Provision for loan losses.......................................................... 25,000 7,110
Provision for income taxes......................................................... 10,099 14,581
Payments of income taxes........................................................... (15,792) (21,288)
(Increase) decrease in accrued interest receivable................................. (218) 2,949
Interest accrued on liabilities.................................................... 84,105 113,890
Payments of interest on liabilities................................................ (81,341) (109,947)
Gain on mortgage loans sold and held for sale...................................... (12,459) (7,332)
Gain on sale of credit card portfolio, net of expenses............................. -- (2,275)
Net (gain) loss on sales of available-for-sale investment securities............... (92) 113
Net loss (gain) on derivative instruments.......................................... 249 (5,486)
Other operating activities, net.................................................... 3,147 (8,574)
Minority interest in income of subsidiary.......................................... 629 1,045
-------- ---------
Net cash used in operating activities........................................... (2,714) (153,677)
-------- ---------
Cash flows from investing activities:
Cash received from acquired entities, net of cash and cash equivalents paid.......... 44,097 --
Proceeds from sales of investment securities available for sale...................... 192 71,023
Maturities of investment securities available for sale............................... 398,629 194,642
Maturities of investment securities held to maturity................................. 2,405 1,887
Purchases of investment securities available for sale................................ (416,673) (57,421)
Purchases of investment securities held to maturity.................................. (2,260) (240)
Proceeds from terminations of derivative instruments................................. -- 5,396
Net decrease in loans................................................................ 118,128 27,258
Recoveries of loans previously charged-off........................................... 8,297 3,775
Purchases of bank premises and equipment............................................. (7,621) (20,403)
Other investing activities, net...................................................... 4,721 1,098
-------- ---------
Net cash provided by investing activities....................................... 149,915 227,015
-------- ---------
Cash flows from financing activities:
Increase in demand and savings deposits.............................................. 58,743 11,883
Decrease in time deposits............................................................ (114,739) (27,926)
Decrease in federal funds purchased.................................................. (81,000) --
(Decrease) increase in Federal Home Loan Bank advances............................... (4,600) 50,000
Increase in securities sold under agreements to repurchase........................... 23,267 10,608
Advances drawn on note payable....................................................... 36,500 5,000
Repayments of note payable........................................................... (54,000) (53,500)
Proceeds from issuance of guaranteed preferred subordinated debentures............... 24,233 --
Payment of preferred stock dividends................................................. (328) (328)
Other financing activities, net...................................................... -- (94)
-------- ---------
Net cash used in financing activities........................................... (111,924) (4,357)
-------- ---------
Net increase in cash and cash equivalents....................................... 35,277 68,981
Cash and cash equivalents, beginning of period............................................ 241,874 198,279
-------- ---------
Cash and cash equivalents, end of period.................................................. $277,151 267,260
======== =========
Noncash investing and financing activities:
Reduction of deferred tax asset valuation reserve.................................... $ -- 565
Loans transferred to other real estate............................................... 1,622 1,312
Loans held for sale transferred to mortgage-backed securities........................ 100,317 15,139
Loans held for sale transferred to loans............................................. 2,741 28,351
======== =========
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 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 2001
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and conform to predominant practices within the banking
industry. 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 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 six months ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
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 2001 amounts have been made to
conform to the 2002 presentation. In particular, the guaranteed preferred
beneficial interests in First Banks, Inc. and First Banks America, Inc.
subordinated debentures has been reclassified into the liabilities section on
the consolidated balance sheets rather than presented as a separate line item
excluded from the calculation of total liabilities. Consequently, the guaranteed
preferred debentures expense has been reclassified to interest expense from
noninterest expense in the consolidated statements of income.
First Banks operates through its subsidiary bank holding companies and
subsidiary financial institutions (collectively referred to as the Subsidiary
Banks) as follows:
Union Financial Group, Ltd., headquartered in Swansea, Illinois (UFG),
and its wholly owned subsidiary:
First Bank, headquartered in St. Louis County, Missouri;
First Banks America, Inc., headquartered in San Francisco, California
(FBA), and its wholly owned subsidiary:
The San Francisco Company, headquartered in San Francisco,
California (SFC), and its wholly-owned subsidiary:
First Bank & Trust, headquartered in San Francisco, California
(FB&T).
The Subsidiary Banks are wholly owned by their respective parent
companies except FBA, which was 93.76% and 93.69% owned by First Banks at June
30, 2002 and December 31, 2001, respectively.
(2) ACQUISITIONS
On January 15, 2002, First Banks completed its acquisition of Plains
Financial Corporation (PFC), and its wholly owned banking subsidiary, PlainsBank
of Illinois, National Association (PlainsBank), Des Plaines, Illinois, in
exchange for $36.5 million in cash. PFC operated a total of three banking
facilities in Des Plaines, Illinois, and one banking office in Elk Grove
Village, Illinois. The acquisition was funded from borrowings under First Banks'
credit agreement with a group of unaffiliated financial institutions. At the
time of the transaction, PFC had $256.3 million in total assets, $150.4 million
in loans, net of unearned discount, $81.0 million in investment securities and
$213.4 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 $12.6 million and will not be amortized,
but instead will be periodically tested for impairment in accordance with the
requirements of SFAS No. 142 (as defined below). The core deposit intangibles
were approximately $2.9 million and are being amortized over seven years
utilizing the straight-line method. PFC was merged with and into UFG, and
PlainsBank was merged with and into First Bank.
On June 22, 2002, FB&T completed its assumption of the deposits and
certain liabilities and the purchase of certain assets of the Garland and
Denton, Texas branch offices of Union Planters Bank, National Association. The
transaction resulted in the acquisition of $15.3 million in deposits and one
branch office in Garland and $49.6 million in deposits and one branch office,
including a detached drive-thru facility, in Denton. The core deposit
intangibles associated with the branch purchases were $1.4 million and are being
amortized over seven years.
(3) IMPLEMENTATION OF ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142 -- Goodwill and Other
Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144 --
Accounting for the Impairment or Disposal of Long-Lived Assets, as discussed
below. The amortization of goodwill ceased upon adoption of SFAS No. 142, which
for calendar year-end companies was January 1, 2002.
On January 1, 2002, First Banks adopted SFAS No. 142. At the date of
adoption, First Banks had unamortized goodwill of $115.9 million and core
deposit intangibles of $9.6 million, which were subject to the transition
provisions of SFAS No. 142. Under SFAS No. 142, First Banks will continue to
amortize, on a straight-line basis, its core deposit intangibles and goodwill
associated with purchases of branch offices. Goodwill associated with the
purchase of subsidiaries will no longer be amortized, but instead, will be
tested annually for impairment following First Banks' existing methods of
measuring and recording impairment losses.
First Banks completed the transitional goodwill impairment test
required under SFAS No. 142, to determine the potential impact, if any, on the
consolidated financial statements. The results of the transitional goodwill
impairment testing did not identify any goodwill impairment losses.
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at June 30, 2002 and December 31,
2001:
June 30, 2002 December 31, 2001
---------------------------- --------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles........... $ 13,871 (893) 9,580 --
Goodwill associated with
purchases of branch offices...... 2,210 (648) 2,210 (576)
---------- ------- -------- -------
Total......................... $ 16,081 (1,541) 11,790 (576)
========== ======= ======== =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries......... $ 126,234 114,226
========== ========
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $482,000 and $964,000 for the three and six
months ended June 30, 2002, respectively, and $1.9 million and $3.7 million for
the comparable periods in 2001. Amortization of intangibles associated with the
purchase of subsidiaries, including amortization of core deposit intangibles and
branch purchases, has been estimated through 2007 in the following table, and
does not take into consideration any potential future acquisitions or branch
purchases.
(dollars expressed
in thousands)
Year ending December 31:
2002................................... $ 2,026
2003................................... 2,124
2004................................... 2,124
2005................................... 2,124
2006................................... 2,124
2007................................... 2,124
---------
Total............................... $ 12,646
=========
Changes in the carrying amount of goodwill for the three and six months
ended June 30, 2002 were as follows:
Three Months Ended June 30, 2002 Six Months Ended June 30, 2002
-------------------------------- ----------------------------------
First Bank FB&T Total First Bank FB&T Total
---------- ---- ----- ---------- ---- -----
(dollars expressed in thousands)
Balance, beginning of period............ $ 31,912 96,758 128,670 19,165 96,695 115,860
Goodwill acquired during period......... -- -- -- 12,577 -- 12,577
Acquisition-related adjustments......... (739) (99) (838) (569) -- (569)
Amortization - purchases of
branch offices........................ -- (36) (36) -- (72) (72)
-------- ------- -------- ------- ------ -------
Balance, end of period................ $ 31,173 96,623 127,796 31,173 96,623 127,796
======== ======= ======= ======= ====== =======
The following is a reconciliation of reported net income to net income
adjusted to reflect the adoption of SFAS No. 142, as if it had been implemented
on January 1, 2001:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
Net income:
Reported net income........................... $ 9,368 7,899 17,368 20,251
Add back - goodwill amortization.............. -- 1,817 -- 3,623
------- ------- ------- ------
Adjusted net income......................... $ 9,368 9,716 17,368 23,874
======= ======= ======= ======
Basic earnings per share:
Reported net income........................... $390.35 328.27 720.18 842.05
Add back - goodwill amortization.............. -- 76.82 -- 153.11
------- ------- ------- ------
Adjusted net income......................... $390.35 405.09 720.18 995.16
======= ======= ======= ======
Diluted earnings per share:
Reported net income........................... $384.48 322.78 712.75 824.49
Add back - goodwill amortization.............. -- 74.31 -- 147.54
------- ------- ------- ------
Adjusted net income......................... $384.48 397.09 712.75 972.03
======= ======= ======= ======
In August 2001, the FASB issued SFAS No. 144 -- Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No.
121 -- Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and requires that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS No. 144 broadens the
presentation of discontinued operations to include more disposal transactions.
Therefore, the accounting for similar events and circumstances will be the same.
The provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years, with early application encouraged. The provisions of SFAS No. 144
generally are to be applied prospectively. On January 1, 2002, First Banks
implemented SFAS No. 144, which did not have a material effect on the
consolidated financial statements.
(4) MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are amortized in proportion to the related
estimated net servicing income on a disaggregated, discounted basis over the
estimated lives of the related mortgages considering the level of current and
anticipated repayments, which range from five to 10 years. The weighted average
amortization period of the mortgage servicing rights is seven years.
Changes in mortgage servicing rights, net of amortization, for the
periods indicated were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................... $11,746 7,258 10,125 7,048
Originated mortgage servicing rights................... 1,522 2,257 3,960 3,291
Amortization........................................... (914) (886) (1,731) (1,710)
------- ----- ------ ------
Balance, end of period................................. $12,354 8,629 12,354 8,629
======= ===== ====== ======
Amortization of mortgage servicing rights, as it relates to the balance
at June 30, 2002 of $12.4 million, has been estimated through 2007 in the
following table:
(dollars expressed in thousands)
Year ending December 31:
2002 (1)........................................... $ 3,460
2003............................................... 3,341
2004............................................... 3,138
2005............................................... 3,051
2006............................................... 1,095
2007............................................... --
---------
Total........................................... $ 14,085
=========
- -----------------------
(1) Includes $1.7 million of amortization for the six months ended June 30,
2002.
(5) EARNINGS PER COMMON 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 June 30, 2002:
Basic EPS - income before cumulative effect..................... $ 9,236 23,661 $ 390.35
Cumulative effect of change in accounting principle,
net of tax.................................................... -- -- --
--------- ------- ---------
Basic EPS - income available to common stockholders............. 9,236 23,661 390.35
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 695 (5.87)
--------- ------- ---------
Diluted EPS - income available to common stockholders........... $ 9,364 24,356 $ 384.48
========= ======= =========
Three months ended June 30, 2001:
Basic EPS - income before cumulative effect..................... $ 7,767 23,661 $ 328.27
Cumulative effect of change in accounting principle,
net of tax.................................................... -- -- --
--------- ------- ---------
Basic EPS - income available to common stockholders............. 7,767 23,661 328.27
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 800 (5.49)
--------- ------- ---------
Diluted EPS - income available to common stockholders........... $ 7,895 24,461 $ 322.78
========= ======= =========
Six months ended June 30, 2002:
Basic EPS - income before cumulative effect..................... $ 17,040 23,661 $ 720.18
Cumulative effect of change in accounting principle, net of tax. -- -- --
--------- ------- ---------
Basic EPS - income available to common stockholders............. 17,040 23,661 720.18
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 696 (7.43)
--------- ------- ---------
Diluted EPS - income available to common stockholders........... $ 17,361 24,357 $ 712.75
========= ======= =========
Six months ended June 30, 2001:
Basic EPS - income before cumulative effect..................... $ 21,299 23,661 $ 900.21
Cumulative effect of change in accounting principle,
net of tax.................................................... (1,376) -- (58.16)
--------- ------- ---------
Basic EPS - income available to common stockholders............. 19,923 23,661 842.05
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 893 (17.56)
--------- ------- ---------
Diluted EPS - income available to common stockholders........... $ 20,244 24,554 $ 824.49
========= ======= =========
(6) 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 $978,000 and $1.7 million for the three and six
months ended June 30, 2002, and $676,000 and $1.4 million for the comparable
periods in 2001, respectively, in commissions paid by unaffiliated third-party
companies. The commissions received were primarily in connection with the sales
of annuities, securities and other insurance products to customers of the
Subsidiary Banks.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and his adult children, provides information technology and
various related services to First Banks, Inc. and its Subsidiary Banks. Fees
paid under agreements with First Services, L.P. were $7.0 million and $13.7
million for the three and six months ended June 30, 2002, and $5.6 million and
$10.9 million for the comparable periods in 2001, respectively. During the three
months ended June 30, 2002 and 2001, First Services, L.P. paid First Banks
$975,000 and $498,000, respectively, and during the six months ended June 30,
2002 and 2001, First Services, L.P. paid First Banks $1.9 million and $984,000,
respectively, in rental fees for the use of data processing and other equipment
owned by First Banks.
(7) 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 June 30, 2002, First Banks and the Subsidiary Banks were each
well capitalized under the applicable regulations.
As of June 30, 2002, the most recent notification from First Banks'
primary regulator categorized First Banks and the Subsidiary Banks as well
capitalized and FBA as adequately 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 June 30, 2002 and December 31, 2001, First Banks' and the Subsidiary
Banks' required and actual capital ratios were as follows:
Actual To Be Well
------------------------ Capitalized Under
June 30, December 31, For Capital Prompt Corrective
2002 2001 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.91% 10.53% 8.0% 10.0%
First Bank.............................. 10.59 10.14 8.0 10.0
FB&T.................................... 10.88 11.27 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 7.61 7.57 4.0 6.0
First Bank.............................. 9.33 8.89 4.0 6.0
FB&T.................................... 9.63 10.02 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 6.78 7.24 3.0 5.0
First Bank.............................. 7.95 8.67 3.0 5.0
FB&T.................................... 9.17 9.47 3.0 5.0
(8) BUSINESS SEGMENT RESULTS
First Banks' business segments are its Subsidiary Banks. The reportable
business segments are consistent with the management structure of First Banks,
the Subsidiary Banks and the internal reporting system that monitors
performance.
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 deposit
products, including demand, savings, money market and time deposit accounts. In
addition, the Subsidiary Banks 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. The Subsidiary Banks 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 include mortgage banking, debit cards,
brokerage services, credit-related insurance, internet banking, automated teller
machines, telephone banking, safe deposit boxes, escrow and bankruptcy deposit
services, stock option services 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 geographic areas include eastern Missouri, Illinois,
southern and northern California and Houston, Dallas, Irving, McKinney and
Denton, Texas. 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 consistent with First Banks' internal
reporting system and, in all material respects, with accounting principles
generally accepted in the United States of America and practices predominant in
the banking industry.
The business segment results are summarized as follows:
First Bank FB&T
-------------------------- -------------------------
June 30, December 31, June 30, December 31,
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities........................................... $ 456,955 245,365 360,218 368,207
Loans, net of unearned discount................................. 3,084,650 3,086,023 2,278,398 2,323,263
Intangibles associated with the purchase
of subsidiaries, net of amortization......................... 36,788 22,287 103,986 103,153
Total assets.................................................... 3,927,412 3,707,081 3,058,123 3,057,920
Deposits........................................................ 3,400,478 3,142,676 2,527,248 2,555,396
Note payable.................................................... -- -- -- --
Stockholders' equity............................................ 362,293 321,336 394,158 398,713
========== ========= ========= =========
First Bank FB&T
Three Months Ended Three Months Ended
June 30, June 30,
-------------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Income statement information:
Interest income................................................. $ 59,894 61,391 47,268 52,339
Interest expense................................................ 21,595 30,121 12,757 20,712
---------- --------- --------- ---------
Net interest income........................................ 38,299 31,270 34,511 31,627
Provision for loan losses....................................... 4,200 2,900 7,800 820
---------- --------- --------- ---------
Net interest income after provision for loan losses........ 34,099 28,370 26,711 30,807
---------- --------- --------- ---------
Noninterest income.............................................. 15,815 13,373 5,264 6,343
Noninterest expense............................................. 36,428 24,561 22,157 22,171
---------- --------- --------- ---------
Income before provision for income taxes
and minority interest in income of subsidiary............ 13,486 17,182 9,818 14,979
Provision for income taxes...................................... 4,367 6,000 3,720 5,772
---------- --------- --------- ---------
Income before minority interest in income of subsidiary.... 9,119 11,182 6,098 9,207
Minority interest in income of subsidiary....................... -- -- -- --
---------- --------- --------- ---------
Net income................................................. $ 9,119 11,182 6,098 9,207
========== ========= ========= =========
First Bank FB&T
Six Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Income statement information:
Interest income................................................. $ 119,636 122,986 94,134 107,078
Interest expense................................................ 44,015 61,297 26,428 43,052
---------- --------- --------- ---------
Net interest income........................................ 75,621 61,689 67,706 64,026
Provision for loan losses....................................... 9,500 6,200 15,500 910
---------- --------- --------- ---------
Net interest income after provision for loan losses........ 66,121 55,489 52,206 63,116
---------- --------- --------- ---------
Noninterest income.............................................. 29,687 25,805 10,799 10,853
Noninterest expense............................................. 71,433 48,867 42,833 42,963
---------- --------- --------- ---------
Income before provision for income taxes,
minority interest in income of
subsidiary and cumulative effect of change
in accounting principle.................................. 24,375 32,427 20,172 31,006
Provision for income taxes...................................... 7,933 11,327 7,622 12,056
---------- --------- --------- ---------
Income before minority interest in income of
subsidiary and cumulative effect of change in
accounting principle..................................... 16,442 21,100 12,550 18,950
Minority interest in income of subsidiary....................... -- -- -- --
---------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle..................................... 16,442 21,100 12,550 18,950
Cumulative effect of change in accounting principle,
net of tax............................................... -- (917) -- (459)
---------- --------- --------- ---------
Net income................................................. $ 16,422 20,183 12,550 18,491
========== ========= ========= =========
- ---------------------------
(1) Corporate and other includes $7.1 million and $4.5 million of guaranteed preferred debenture expense for the three months
ended June 30, 2002 and 2001, respectively. The applicable income tax benefit associated with the guaranteed preferred
debentures expense was $2.5 million and $1.6 million for the three months ended June 30, 2002 and 2001, respectively. For
the six months ended June 30, 2002 and 2001, respectively, corporate and other includes $13.3 million and $9.0 million of
guaranteed preferred debenture expense. The applicable income tax benefit associated with the guaranteed preferred
debentures expense was $4.7 million and $3.1 million for the six months ended June 30, 2002 and 2001, respectively. In
addition, corporate and other includes holding company expenses.
Corporate, Other and
Intercompany Reclassifications (1) Consolidated Totals
---------------------------------- ------------------------------------
June 30, December 31, June 30, December 31,
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
22,851 17,496 840,024 631,068
(416) (417) 5,362,632 5,408,869
-- -- 140,774 125,440
20,527 13,450 7,006,062 6,778,451
(19,331) (14,168) 5,908,395 5,683,904
10,000 27,500 10,000 27,500
(276,853) (271,392) 479,598 448,657
========= ======== ========= =========
Corporate, Other and
Intercompany Reclassifications (1) Consolidated Totals
---------------------------------- ------------------------------------
Three Months Ended Three Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
141 (374) 107,303 113,356
7,263 4,428 41,615 55,261
--------- -------- --------- ---------
(7,122) (4,802) 65,688 58,095
-- -- 12,000 3,720
--------- -------- --------- ---------
(7,122) (4,802) 53,688 54,375
--------- -------- --------- ---------
(550) (292) 20,529 19,424
635 13,177 59,220 59,909
--------- -------- --------- ---------
(8,307) (18,271) 14,997 13,890
(2,759) (6,315) 5,328 5,457
--------- -------- --------- ---------
(5,548) (11,956) 9,669 8,433
301 534 301 534
--------- -------- --------- ---------
(5,849) (12,490) 9,368 7,899
========= ======== ========= =========
Corporate, Other and
Intercompany Reclassifications (1) Consolidated Totals
---------------------------------- ------------------------------------
Six Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
145 (671) 213,915 229,393
13,662 9,541 84,105 113,890
--------- -------- --------- ---------
(13,517) (10,212) 129,810 115,503
-- -- 25,000 7,110
--------- -------- --------- ---------
(13,517) (10,212) 104,810 108,393
--------- -------- --------- ---------
(1,122) (760) 39,364 35,898
1,812 15,208 116,078 107,038
--------- -------- --------- ---------
(16,451) (26,180) 28,096 37,253
(5,456) (8,802) 10,099 14,581
--------- -------- --------- ---------
(10,995) (17,378) 17,997 22,672
629 1,045 629 1,045
--------- -------- --------- ---------
(11,624) (18,423) 17,368 21,627
-- -- -- (1,376)
--------- -------- --------- ---------
(11,624) (18,423) 17,368 20,251
========= ======== ========= =========
(9) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBENTURES
On April 10, 2002, First Bank Capital Trust (FBCT), a newly-formed
Delaware business trust subsidiary of First Banks, issued 25,000 shares of
variable rate cumulative trust preferred securities at $1,000 per share in a
private placement offering, and issued 774 shares of common securities to First
Banks at $1,000 per share. First Banks owns all of the common securities of
FBCT. The gross proceeds of the offering were used by FBCT to purchase $25.8
million of variable rate junior subordinated debentures from First Banks,
maturing on April 22, 2032. The maturity date of the subordinated debentures may
be shortened to a date not earlier than April 22, 2007, if certain conditions
are met. The subordinated debentures are the sole asset of FBCT. In connection
with the issuance of the FBCT 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 FBCT under the FBCT
preferred securities. First Banks' proceeds from the issuance of the
subordinated debentures to FBCT, net of offering expenses, were $24.2 million,
and were used to reduce indebtedness currently outstanding under First Banks'
revolving credit line with a group of unaffiliated banks. The distribution rate
on the FBCT securities is equivalent to the six-month London Interbank Offering
Rate plus 387.5 basis points, and is payable semi-annually in arrears on April
22 and October 22, beginning on October 22, 2002. Distributions on FBCT's
preferred securities were $391,000 for the three and six months ended June 30,
2002.
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, including the negative impact on the economy resulting
from the events of September 11, 2001 in New York City and Washington D.C. and
the national response to those events; the impact of laws and regulations
applicable to us and changes therein; the impact of accounting pronouncements
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 anticipated 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 our Form 10-Q should therefore not place
undue reliance on forward-looking statements.
General
We are a registered 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 with 154 branch
offices throughout California, Illinois, Missouri and Texas. At June 30, 2002,
we had total assets of $7.01 billion, loans, net of unearned discount, of $5.36
billion, total deposits of $5.91 billion and total stockholders' equity of
$479.6 million.
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 include mortgage banking, debit cards, brokerage services,
credit-related insurance, internet banking, automated teller machines, telephone
banking, safe deposit boxes, escrow and bankruptcy deposit services, stock
option services and trust, private banking and institutional money management
services.
We operate through two subsidiary banks and three subsidiary bank
holding companies as follows:
Union Financial Group, Ltd., or UFG, headquartered in Swansea,
Illinois, and its wholly owned subsidiary:
First Bank, headquartered in St. Louis County, Missouri;
First Banks America, Inc., or FBA, headquartered in San Francisco,
California and its wholly owned subsidiary:
The San Francisco Company, or SFC, headquartered in San Francisco,
California, and its wholly owned subsidiary:
First Bank & Trust, or FB&T, headquartered in San Francisco,
California.
Our subsidiary banks are wholly owned by their respective parent
companies. We owned 93.76% and 93.69% of FBA at June 30, 2002 and December 31,
2001, respectively.
Primary responsibility for managing our subsidiary banking units rests
with the officers and directors of each unit. However, in keeping with our
policy, we centralize overall corporate policies, procedures and administrative
functions and provide operational support functions for our subsidiaries. This
practice allows us to achieve various operating efficiencies while allowing our
subsidiary banking units to focus on customer service.
Financial Condition
Our total assets were $7.01 billion and $6.78 billion at June 30, 2002
and December 31, 2001, respectively. The increase in total assets is primarily
attributable to our acquisition of Plains Financial Corporation, or PFC, in
January 2002, which provided total assets of $256.3 million as well as our
acquisition of the Denton and Garland, Texas branch offices of Union Planters
Bank, National Association, or UPB, completed on June 22, 2002, which provided
assets of approximately $63.7 million. The increase in total assets was
partially offset by lower loan demand and an anticipated level of attrition
associated with our acquisitions of Charter Pacific Bank, BYL Bancorp and UFG,
completed during the fourth quarter of 2001, and of PFC. Federal funds sold
increased by $57.2 million due to the investment of excess funds resulting from
reduced loan demand primarily due to economic conditions. Investment securities
increased $208.9 million to $840.0 million at June 30, 2002 from $631.1 million
at December 31, 2001. We attribute the increase in investment securities
primarily to the purchase of available-for-sale investment securities of $517.0
million as well as the $81.0 million of investments acquired in conjunction with
our acquisition of PFC, offset by maturities of available-for-sale investment
securities of $398.6 million. Derivative instruments increased $15.2 million due
to the purchase of two interest rate swap agreements in June 2002 and
mark-to-market adjustments required under Statement of Financial Accounting
Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging
Activities, which was implemented in January 2001. See further discussion under
"--Interest Rate Risk Management." In addition, intangibles associated with the
purchase of subsidiaries increased $15.3 million, which reflects core deposit
intangibles and goodwill associated with our acquisition of PFC as well as core
deposit intangibles associated with our branch purchases of UPB as further
discussed in Note 2 to the consolidated financial statements. The overall
increase in assets was partially offset by a decrease in loans, net of unearned
discount, of $46.2 million, which is further discussed under "--Loans and
Allowance for Loan Losses." Total deposits increased by $224.5 million to $5.91
billion at June 30, 2002 from $5.68 billion at December 31, 2001. The increase
reflects deposits of $213.4 million acquired in our PFC acquisition and $64.9
million acquired in our branch purchases offset by an anticipated level of
attrition associated with our acquisitions and continued aggressive competition
within our market areas. In addition, certain large commercial accounts,
particularly related to real estate title and escrow business, sharply reduced
their deposit levels, reflecting reduced business activity as a result of
general economic conditions. Short-term borrowings decreased $44.2 million to
$198.9 million at June 30, 2002 from $243.1 million at December 31, 2001,
primarily due to a reduction in federal funds purchased. Our note payable
decreased by $17.5 million to $10.0 million at June 30, 2002 from $27.5 million
at December 31, 2001 due to $54.0 million in repayments offset by a $36.5
million advance utilized to fund our acquisition of PFC. Guaranteed preferred
beneficial interests in subordinated debentures increased $28.1 million due
primarily to the issuance of $25.0 million of additional trust preferred
securities as more fully described in Note 9 to the consolidated financial
statements. Furthermore, accrued expenses and other liabilities decreased $8.8
million to $52.7 million at June 30, 2002 from $61.5 million at December 31,
2001. We attribute this decrease primarily to the timing of certain payments.
Results of Operations
Net Income
Net income was $9.4 million and $17.4 million for the three and six
months ended June 30, 2002, respectively, compared to $7.9 million and $20.3
million for the comparable periods in 2001. Results for 2002 reflect increased
net interest income and noninterest income, offset by increased provisions for
loan losses, reflecting the effects of the current economic environment,
increased charge-off, delinquency and higher-than-normal nonperforming trends,
and higher operating expenses. The implementation of SFAS No. 142, Goodwill and
Other Intangible Assets, on January 1, 2002, resulted in the discontinuation of
the amortization of certain intangibles associated with the purchase of
subsidiaries. As more fully described in Note 3 to the consolidated financial
statements, if we had implemented SFAS No. 142 at the beginning of 2001, net
income for the three and six months ended June 30, 2001 would have increased
$1.8 million and $3.6 million, respectively. In addition, the implementation of
SFAS No. 133, on January 1, 2001, resulted in the recognition of a cumulative
effect of change in accounting principle of $1.4 million, net of tax, which
reduced net income in 2001. Excluding this item, net income would have been
$21.6 million for the six months ended June 30, 2001. The accounting for
derivatives under the requirements of SFAS No. 133 will continue to have an
impact on future financial results as further discussed above and under
"--Noninterest Income."
The decline in earnings primarily reflects higher operating expenses
and increased provisions for loan losses associated with the increased
charge-off, delinquency and nonperforming trends we are experiencing as a result
of current economic conditions. The overall increase in operating expenses for
2002, as further discussed under "--Noninterest Expense," was partially offset
by the discontinuation of the amortization of certain intangibles associated
with the purchase of subsidiaries in accordance with the implementation of SFAS
No. 142. Amortization of intangibles for the three and six months ended June 30,
2002 was $482,000 and $964,000, respectively, compared to $1.9 million and $3.7
million for the comparable periods in 2001. The higher operating expenses and
increased provisions for loan losses were partially offset by increased net
interest income and noninterest income as further discussed under "--Net
Interest Income" and "--Noninterest Income."
Net Interest Income
Net interest income (expressed on a tax equivalent basis) increased to
$66.1 million, or 4.24% of interest-earning assets, for the three months ended
June 30, 2002, from $58.3 million, or 4.37% of interest-earning assets, for the
comparable period in 2001. For the six months ended June 30, 2002 and 2001, net
interest income (expressed on a tax equivalent basis) was $130.5 million, or
4.22% of interest-earning assets, and $115.9 million, or 4.39% of
interest-earning assets, respectively. We credit the increased net interest
income primarily to the net interest-earning assets provided by our acquisitions
completed during the fourth quarter of 2001 and in January 2002, internal loan
growth and earnings on our interest rate swap agreements that we entered into in
conjunction with our interest rate risk management program. As further discussed
under "--Interest Rate Risk Management," for the three and six months ended June
30, 2002, these agreements provided net interest income of $12.6 million and
$23.8 million, respectively, in comparison to $4.7 million and $5.7 million for
the comparable periods in 2001. The increase in net interest income, however,
was partially offset by reductions in prevailing interest rates during 2001,
generally weaker loan demand and overall economic conditions, resulting in the
decline in our net interest margin. Guaranteed preferred debentures expense was
$7.1 million and $13.3 million for the three and six months ended June 30, 2002,
respectively, compared to $4.5 million and $9.0 million for the comparable
periods in 2001. The increase for 2002 is primarily attributable to the issuance
of trust preferred securities by our financing subsidiaries. In November 2001,
First Preferred Capital Trust III issued $55.2 million of trust preferred
securities and in April 2002, First Bank Capital Trust issued $25.8 million of
trust preferred securities. The increase also reflects a change in estimate
regarding the amortization period over which the deferred issuance costs are
being amortized.
Average loans, net of unearned discount, were $5.39 billion and $5.44
billion for the three and six months ended June 30, 2002, respectively, in
comparison to $4.88 billion and $4.84 billion for the comparable periods in
2001. The yield on our loan portfolio, however, decreased to 7.36% and 7.34% for
the three and six months ended June 30, 2002, respectively, in comparison to
8.70% and 8.88% for the comparable periods in 2001. This was a major contributor
to the decline in our net interest margin of 13 basis points and 17 basis points
for the three and six months ended June 30, 2002, respectively, from the
comparable periods in 2001. We attribute the decline in yields and our net
interest margin primarily to the decreases in prevailing interest rates
throughout 2001. During the period from January 1, 2001 through December 31,
2001, the Board of Governors of the Federal Reserve System decreased the
targeted Federal funds rate 11 times, resulting in 11 decreases in the prime
rate of interest from 9.50% to 4.75%. 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. As discussed above, the reduced level of
interest income earned on our loan portfolio as a result of declining interest
rates and increased competition within our market areas was partially mitigated
by the earnings associated with our interest rate swap agreements.
For the three and six months ended June 30, 2002, the aggregate
weighted average rate paid on our deposit portfolio decreased to 2.71% and
2.80%, respectively, compared to 4.56% and 4.73% for the comparable periods in
2001. We attribute the decline primarily to rates paid on savings and time
deposits, which have continued to decline in conjunction with the interest rate
reductions previously discussed. The decrease in rates paid for the three and
six months ended June 30, 2002 is a result of generally decreasing interest
rates during 2001. However, the competitive pressures on deposits within our
market areas precluded us from fully reflecting the general interest rate
decreases in our deposit pricing and still providing an adequate funding source
for loans.
The aggregate weighted average rate paid on our note payable decreased
to 3.65% and 3.24% for the three and six months ended June 30, 2002,
respectively, compared to 5.93% and 6.78% for the comparable periods in 2001,
which is reflective of the current rate environment. Amounts outstanding under
our $120.0 million line of credit with a group of unaffiliated financial
institutions bear 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. Thus, our revolving credit line represents a
relatively high-cost funding source as increased advances have the effect of
increasing the weighted average rate of non-deposit liabilities. The overall
cost of this funding source, however, has been significantly mitigated by the
reductions in the prime lending rate during 2001 and in the outstanding balance
of the note payable in 2002. During 2001, our note payable was fully repaid from
the proceeds of the trust preferred securities issued by First Preferred Capital
Trust III. However, on December 31, 2001, we obtained a $27.5 million advance to
fund our acquisition of UFG and in January 2002, we utilized the note payable to
fund our acquisition of PFC. The aggregate weighted average rate paid on our
short-term borrowings also declined for the three and six months ended June 30,
2002, as compared to the comparable periods in 2001, reflecting reductions in
the current interest rate environment.
The aggregate weighted average rate paid on our guaranteed preferred
debentures increased to 11.01% and 10.85% for the three and six months ended
June 30, 2002, respectively, from 9.85% and 9.90% for the comparable periods in
2001. The increase is due to the change in estimate regarding the amortization
period over which the deferred issuance costs associated with these obligations
are being amortized.
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 interest-earning assets, the average cost of interest-bearing
liabilities and the resulting net interest income for the periods indicated.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------- ----------------------------------------------
2002 2001 2002 2001
------------------------- ---------------------- ---------------------- -----------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ---- ------- ------- ------
(dollars expressed in thousands)
Assets
------
Interest-earning assets:
Loans (1)(2)(3)(4)......... $5,391,165 98,916 7.36% $4,883,268 105,923 8.70% $5,443,106 198,038 7.34% $4,840,188 213,061 8.88%
Investment securities (4).. 701,470 8,127 4.65 388,456 6,466 6.68 679,733 15,644 4.64 428,817 15,072 7.09
Federal funds sold
and other................ 156,675 653 1.67 82,631 1,160 5.63 115,364 942 1.65 57,511 1,655 5.80
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total interest-
earning assets...... 6,249,310 107,696 6.91 5,354,355 113,549 8.51 6,238,203 214,624 6.94 5,326,516 229,788 8.70
------- ------- ------- -------
Nonearning assets............. 663,241 534,143 667,649 517,548
---------- ---------- ---------- ----------
Total assets.......... $6,912,551 $5,888,498 $6,905,852 $5,844,064
========== ========== ========== ==========
Liabilities and
Stockholders' Equity
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits............... $ 731,513 2,281 1.25% $ 478,771 1,807 1.51% $ 695,901 3,953 1.15% $ 466,634 3,480 1.50%
Savings deposits......... 1,928,691 9,265 1.93 1,479,117 13,342 3.62 1,921,210 18,434 1.93 1,452,496 27,525 3.82
Time deposits of $100
or more (3)............ 497,267 4,889 3.94 534,970 7,453 5.59 501,252 10,179 4.10 527,164 15,329 5.86
Other time deposits (3).. 1,794,830 16,970 3.79 1,778,304 25,954 5.85 1,812,161 35,851 3.99 1,795,382 53,143 5.97
---------- ------- ---------- ------- ---------- ------- --------- -------
Total interest-
bearing deposits.... 4,952,301 33,405 2.71 4,271,162 48,556 4.56 4,930,524 68,417 2.80 4,241,676 99,477 4.73
Short-term borrowings...... 191,568 912 1.91 174,667 1,673 3.84 183,718 1,829 2.01 166,720 3,662 4.43
Notes payable.............. 19,911 181 3.65 36,700 543 5.93 32,987 530 3.24 52,753 1,773 6.78
Guaranteed preferred
debentures(3).......... 259,233 7,117 11.01 182,860 4,489 9.85 247,657 13,329 10.85 182,829 8,978 9.90
---------- ------- ---------- ------- ---------- ------- --------- -------
Total interest-
bearing
liabilities....... 5,423,013 41,615 3.08 4,665,389 55,261 4.75 5,394,886 84,105 3.14 4,643,978 113,890 4.95
------- ------- ------- -------
Noninterest-bearing
liabilities:
Demand deposits............ 898,862 718,259 918,829 714,891
Other liabilities.......... 130,394 107,660 136,610 106,335
---------- --------- --------- ---------
Total liabilities..... 6,452,269 5,491,308 6,450,325 5,465,204
Stockholders' equity.......... 460,282 397,190 455,527 378,860
----------- ---------- --------- ---------
Total liabilities
and stockholders'
equity............. $6,912,551 $5,888,498 $6,905,852 $5,844,064
========== ========== ========== ==========
Net interest income........... 66,081 58,288 130,519 115,898
======= ======= ======= =======
Interest rate spread.......... 3.83 3.76 3.80 3.75
Net interest margin (5)....... 4.24% 4.37% 4.22% 4.39%
===== ==== ===== ====
- --------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $393,000 and $709,000 for the three and six months ended June 30, 2002, and $193,000 and $395,000 for
the comparable periods in 2001, respectively.
(5) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-
earning assets.
Provision for Loan Losses
The provision for loan losses was $12.0 million and $25.0 for the three
and six months ended June 30, 2002, compared to $3.7 million and $7.1 million
for the comparable periods in 2001, respectively. The provision for loan losses
reflects the level of loan charge-offs and recoveries, the adequacy of the
allowance for loan losses and the effect of economic conditions within our
markets. We attribute the increase in the provision for loan losses primarily to
the overall growth in our loan portfolio, principally through acquisitions, a
general increase in risk associated with the continued changing composition of
our loan portfolio and a significant increase in net loan charge-offs and past
due loans, largely resulting from the slowdown in economic conditions prevalent
within our markets. Net loan charge-offs were $7.9 million and $19.7 million for
the three and six months ended June 30, 2002, respectively, in comparison to
$4.6 million and $11.6 million for the comparable periods in 2001. The increase
in net charge-offs reflects the general slowdown in economic conditions
prevalent within our markets as well as an aggregate of $12.9 million of loan
charge-offs on four large credit relationships during 2002. Loan recoveries were
$3.7 million and $8.3 for the three and six months ended June 30, 2002,
respectively, in comparison to $1.9 million and $3.8 million for the comparable
periods in 2001. Although nonperforming assets and past due loans have declined
to $85.2 million at June 30, 2002 from $86.8 million at December 31, 2001, our
overall nonperforming and past due trends remain at higher than historical
levels and are expected to remain at these levels in the near future. However,
we believe these trends represent normal cyclical trends experienced within the
banking industry during times of economic slowdown. Management considered these
trends in its overall assessment of the adequacy of the 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 $20.5 million and $39.4 million for the three
and six months ended June 30, 2002, respectively, in comparison to $19.4 million
and $35.9 million for the comparable periods in 2001. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, a gain on the sale of our credit card portfolio
in 2001, bank-owned life insurance investment income, net gains or losses on
derivative instruments and other income.
Service charges on deposit accounts and customer service fees were $7.0
million and $13.5 million for the three and six months ended June 30, 2002,
respectively, in comparison to $5.3 million and $10.5 million for the comparable
periods in 2001. We attribute the increase in service charges and customer
service fees to:
>> increased deposit balances provided by internal growth;
>> our acquisitions completed during 2001 and, to a lesser degree,
2002;
>> additional products and services available and utilized by our
expanding base of consumer and commercial customers;
>> increased fee income resulting from revisions of customer service
charge rates, effective July 1, 2001, and enhanced control
of fee waivers; and
>> increased income associated with automated teller machine
services and debit cards.
The gain on mortgage loans sold and held for sale was $7.3 million and
$12.5 million for the three and six months ended June 30, 2002, respectively, in
comparison to $3.9 million and $7.3 million for the comparable periods in 2001.
The overall increase is primarily attributable to a significant increase in the
volume of loans originated and sold commensurate with the reductions in mortgage
loan rates experienced in 2001 as well as the continued expansion of our
mortgage banking activities into new and existing markets.
During the six months ended June 30, 2001, we recorded a $2.3 million
pre-tax gain on the sale of our credit card portfolio. The sale of this
portfolio was consistent with our strategic decision to exit this product line
and enter into an agent relationship with a larger credit card service provider.
Bank-owned life insurance investment income was $1.5 million and $2.8
million for the three and six months ended June 30, 2002, respectively, in
comparison to $1.0 million and $2.1 million for the comparable periods in 2001.
The increase for 2