UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 Number - 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction (I.R.S. Employer Identification Number)
of 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)
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
9.25% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust and guaranteed
by its parent, First Banks, Inc.)
(Title of class)
8.50% Cumulative Trust Preferred Securities
(issued by First America Capital Trust and guaranteed by
its parent, First Banks, Inc.)
(Title of class)
10.24% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust II and guaranteed
by its parent, First Banks, Inc.)
(Title of class)
9.00% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust III and guaranteed
by its parent, First Banks, Inc.)
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ X ]
None of the voting stock of the Company is held by nonaffiliates. All
of the voting stock of the Company is owned by various trusts, which were
created by and for the benefit of Mr. James F. Dierberg, the Company's Chairman
of the Board of Directors and Chief Executive Officer, and members of his
immediate family.
At March 25, 2003, there were 23,661 shares of the registrant's common
stock outstanding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K 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 our 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 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 as well as the threat of future terrorist
activities, potential wars and/or military actions related thereto, and domestic
responses to terrorism or threats of terrorism; 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; the credit risk associated with consumers who may not
repay loans; the geographic dispersion of our offices; the impact our hedging
activities may have on our operating results; the highly regulated environment
in which we operate; 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 competition of larger acquirers with greater resources; fluctuations
in the prices at which acquisition targets may be available for sale; the impact
of making acquisitions without using our common stock; and possible asset
quality issues, unknown liabilities or integration issues with the businesses
that we have acquired. We do not have a duty to and will not update these
forward-looking statements. Readers of this report should therefore not place
undue reliance on forward-looking statements.
FIRST BANKS, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business...................................................................... 1
Item 2. Properties.................................................................... 16
Item 3. Legal Proceedings............................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........................... 16
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..... 17
Item 6. Selected Financial Data....................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................... 48
Item 8. Financial Statements and Supplementary Data................................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................. 48
Part III
Item 10. Directors and Executive Officers of the Registrant............................ 49
Item 11. Executive Compensation........................................................ 51
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 53
Item 13. Certain Relationships and Related Transactions................................ 54
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 55
Signatures............................................................................. 99
Certifications......................................................................... 103
PART I
Item 1. Business
General. We are a registered bank holding company incorporated in Missouri and
headquartered in St. Louis County, Missouri. Through our subsidiaries, we offer
a broad array of financial services to consumer and commercial customers. Since
1994, our organization has grown significantly, primarily as a result of our
acquisition strategy, as well as through internal growth. We currently have
banking operations in California, Illinois, Missouri and Texas. At December 31,
2002, we had total assets of $7.34 billion, total loans, net of unearned
discount, of $5.43 billion, total deposits of $6.17 billion and total
stockholders' equity of $519.0 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 a subsidiary bank holding
company, all of which are wholly owned, as follows:
The San Francisco Company, or SFC, headquartered in San Francisco,
California, and its wholly owned subsidiaries:
First Bank, headquartered in St. Louis County, Missouri; and
First Bank & Trust, or FB&T, headquartered in San Francisco,
California.
The following table summarizes selected data about our subsidiaries at
December 31, 2002:
Loans, Net of
Number of Total Unearned Total
Name Locations Assets Discount Deposits
---- --------- ------ -------- --------
(dollars expressed in thousands)
First Bank.................................. 94 $ 4,187,958 3,128,677 3,551,533
FB&T ....................................... 57 3,169,197 2,303,912 2,638,395
We anticipate merging our bank subsidiaries on March 31, 2003, to allow
certain administrative and operational economies not available while the two
banks maintain separate charters.
Primary responsibility for managing our subsidiary banking units rests
with the officers and directors of each unit, but we centralize overall
corporate policies, procedures and administrative functions and provide
centralized 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.
In February 1997, our initial financing subsidiary, First Preferred
Capital Trust, issued $86.25 million of 9.25% trust preferred securities, and,
in July 1998, our second financing subsidiary, First America Capital Trust,
issued $46.0 million of 8.50% trust preferred securities. In October 2000, our
third financing subsidiary, First Preferred Capital Trust II, issued $57.5
million of 10.24% trust preferred securities, and, in November 2001, our fourth
financing subsidiary, First Preferred Capital Trust III, issued $55.2 million of
9.00% trust preferred securities. On April 10, 2002, First Bank Capital Trust,
our fifth financing subsidiary, issued $25.0 million of variable rate cumulative
trust preferred securities. Each of these financing subsidiaries operates as a
Delaware business trust. The trust preferred securities issued by First
Preferred Capital Trust, First Preferred Capital Trust II and First Preferred
Capital Trust III are publicly held and traded on the Nasdaq Stock Market's
National Market system. The trust preferred securities issued by First Bank
Capital Trust were issued in a private placement and rank equal to the trust
preferred securities issued by our other three financing subsidiaries and junior
to the trust preferred securities issued by First Preferred Capital Trust III.
The trust preferred securities issued by First America Capital Trust are
publicly held and traded on the New York Stock Exchange. These trust preferred
securities have no voting rights except in certain limited circumstances. With
the exception of the First Bank Capital Trust preferred securities, we pay
distributions on these trust preferred securities quarterly in arrears on March
31st, June 30th, September 30th, and December 31st of each year. Distributions
on the First Bank Capital Trust preferred securities are payable semi-annually
in arrears on April 22nd and October 22nd of each year. The distributions
payable on all issues of trust preferred securities are included in interest
expense in the consolidated statements of income.
Various trusts, which were created by and are administered by and for
the benefit of Mr. James F. Dierberg, our Chairman of the Board and Chief
Executive Officer, and members of his immediate family, own all of our voting
stock. Mr. Dierberg and his family, therefore, control our management and
policies.
At December 31, 2002, we, Mr. Dierberg and an affiliate of Mr. Dierberg
owned 7.47%, 0.08% and 1.75%, respectively, of the outstanding shares of common
stock of Allegiant Bancorp, Inc., or Allegiant, located in St. Louis, Missouri.
Strategy. In the development of our banking franchise, we acquire other
financial institutions as one means of achieving our growth objectives.
Acquisitions may serve to enhance our presence in a given market, to expand the
extent of our market area or to enable us to enter new or noncontiguous markets.
Due to the nature of our ownership, we have elected to only engage in those
acquisitions that can be accomplished for cash. However, by using cash in our
acquisitions, the characteristics of the acquisition arena may, at times, place
us at a competitive disadvantage relative to other acquirers offering stock
transactions. This results from the market attractiveness of other financial
institutions' stock and the advantages of tax-free exchanges to the selling
shareholders. Our acquisition activities are generally somewhat sporadic because
we may consummate multiple transactions in a particular period, followed by a
substantially less active acquisition period. Furthermore, the intangible assets
recorded in conjunction with these acquisitions create an immediate reduction in
regulatory capital. This reduction, as required by regulatory policy, provides
further financial disincentives to paying large premiums in cash acquisitions.
Recognizing these facts, we follow certain patterns in our
acquisitions. First, we typically acquire several smaller institutions,
sometimes over an extended period of time, rather than a single larger one. We
attribute this approach to the constraints imposed by the amount of funds
required for a larger transaction, as well as the opportunity to minimize the
aggregate premium required through smaller individual transactions. Secondly, in
some acquisitions, we may acquire institutions having significant asset-quality,
ownership, regulatory or other problems. We seek to address the risks of these
issues by adjusting the acquisition pricing, accompanied by appropriate remedial
attention after consummation of the transaction. In these institutions, these
issues may diminish their attractiveness to other potential acquirers, and
therefore may reduce the amount of acquisition premium required. Finally, we may
pursue our acquisition strategy in other geographic areas, or pursue internal
growth more aggressively because cash transactions may not be economically
viable in extremely competitive acquisition markets.
During the five years ended December 31, 2002, we primarily
concentrated our acquisitions in California, completing 13 acquisitions of banks
and four purchases of branch offices, which provided us with an aggregate of
$2.21 billion in total assets and 48 banking locations as of the dates of the
acquisitions. More recent acquisitions have occurred in our other geographic
markets. In 2001, we completed our acquisition of a bank holding company in
Swansea, Illinois, and in 2002, we completed our acquisition of a bank holding
company in Des Plaines, Illinois, as well as the purchase of two branch offices
in Denton and Garland, Texas. We are also planning to further expand our Midwest
banking franchise with an acquisition in the Ste. Genevieve, Missouri market,
which is expected to be completed on March 31, 2003. These acquisitions have
allowed us to significantly expand our presence throughout our geographic areas,
improve operational efficiencies, convey a more consistent image and quality of
service and more cohesively market and deliver our products and services.
Management continues to meld the acquired entities into our operations, systems
and culture.
Following our acquisitions, various tasks are necessary to effectively
integrate the acquired entities into our business systems and culture. While the
activities required are specifically dependent upon the individual circumstances
surrounding each acquisition, the majority of our efforts have been concentrated
in various areas including, but not limited to:
>> improving asset quality;
>> reducing unnecessary, duplicative and/or excessive expenses
including personnel, information technology and certain other
operational and administrative expenses;
>> maintaining, repairing and, in some cases, refurbishing bank
premises necessitated by the deferral of such projects by some of
the acquired entities;
>> renegotiating long-term leases which provide space in excess of
that necessary for banking activities and/or rates in excess of
current market rates, or subleasing excess space to third
parties;
>> relocating branch offices which are not adequate, conducive or
convenient for banking operations; and
>> managing actual or potential litigation that existed with respect
to acquired entities to minimize the overall costs of
negotiation, settlement or litigation.
The post-acquisition process also includes the combining of separate
and distinct entities together to form a cohesive organization with common
objectives and focus. We invest significant resources to reorganize staff,
recruit personnel where needed, and establish the direction and focus necessary
for the combined entity to take advantage of the opportunities available to it.
This investment contributed to the increases in noninterest expense during the
five years ended December 31, 2002, and resulted in the creation of new banking
entities, which conveyed a more consistent image and quality of service. The new
banking entities provide a broad array of banking products to their customers
and compete effectively in their marketplaces, even in the presence of other
financial institutions with much greater resources. While some of these
modifications did not contribute to reductions of noninterest expense, they
contributed to the commercial and retail business development efforts of the
banks, and ultimately to their prospects for improving future profitability.
In conjunction with our acquisition strategy, we have also focused on
building and reorganizing the infrastructure necessary to accomplish our
objectives for internal growth. This process has required significant increases
in the resources dedicated to commercial and consumer business development,
financial service product line and delivery systems, branch development and
training, advertising and marketing programs, and administrative and operational
support. In addition, 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 of our organization. We continue to focus on modifying and
effectively repositioning our internal and external resources to better serve
the markets in which we operate. Although these efforts have primarily led to
increased capital expenditures and noninterest expenses, we anticipate they will
lead to additional internal growth, more efficient operations and improved
profitability over the long term.
Lending Activities. Our enhanced business development resources assisted in the
realignment of certain acquired loan portfolios, which were skewed toward loan
types that reflected the abilities and experiences of the management of the
acquired entities. In order to achieve a more diversified portfolio, to address
asset-quality issues in the portfolios and to achieve a higher interest yield on
our loan portfolio, we reduced a substantial portion of the loans which were
acquired during this time through payments, refinancing with other financial
institutions, charge-offs, and, in certain instances, sales of loans. As a
result, our portfolio of one-to-four family residential real estate loans, after
reaching a high of $1.20 billion at December 31, 1995, has decreased to $694.6
million at December 31, 2002. Similarly, our portfolio of consumer and
installment loans, net of unearned discount, decreased significantly from $279.3
million at December 31, 1997 to $79.1 million at December 31, 2002. The decrease
reflects the reduction in new consumer and installment loan volumes and the
repayment of principal on our existing consumer and installment loan portfolio,
all of which are consistent with our objectives of expanding commercial lending
and reducing the amount of less profitable loan types. The decline also reflects
the sale of our student loan and credit card portfolios in 2001, which totaled
approximately $16.9 million and $13.5 million, respectively, at the time of
sale. We recorded gains of $1.9 million and $229,000 on the sale of the credit
card portfolio and the student loan portfolio, respectively, and we do not have
any continuing involvement in the transferred assets.
As these components of our loan portfolio decreased, we replaced them
with higher yielding loans that were internally generated by our business
development function. With our acquisitions, we expanded our business
development function into the new market areas in which we were then operating.
Consequently, in spite of relatively large reductions in acquired portfolios,
our aggregate loan portfolio, net of unearned discount, increased from $3.00
billion at December 31, 1997 to $5.43 billion at December 31, 2002.
Our business development efforts are focused on the origination of
loans in three general types: (a) commercial, financial and agricultural loans,
which totaled $1.44 billion at December 31, 2002; (b) commercial real estate
mortgage loans, which totaled $1.64 billion at December 31, 2002; and (c)
construction and land development loans, which totaled $989.7 million at
December 31, 2002.
The primary component of commercial, financial and agricultural loans
is commercial loans which are made based on the borrowers' general credit
strength and ability to generate cash flows for repayment from income sources.
Most of these loans are made on a secured basis, most often involving the use of
company equipment, inventory and/or accounts receivable as collateral. For
reporting purposes, this category of loans includes only those commercial loans
that do not include real estate as collateral. Regardless of collateral,
substantial emphasis is placed on the borrowers' ability to generate cash flow
sufficient to operate the business and provide coverage of debt servicing
requirements. Commercial loans are frequently renewable annually, although some
terms may be as long as three years. These loans typically require the borrower
to maintain certain operating covenants appropriate for the specific business,
such as profitability, debt service coverage and current asset and leverage
ratios, which are generally reported and monitored on a quarterly basis and
subject to more detailed annual reviews. Commercial loans are made to customers
primarily located in the geographic trade areas of our subsidiary banks in
Missouri, Illinois, Texas and California, and who are engaged in manufacturing,
retailing, wholesaling and other service businesses. This portfolio is not
concentrated in large specific industry segments that are characterized by
sufficient homogeneity that would result in significant concentrations of credit
exposure. Rather, it is a highly diversified portfolio that encompasses many
industry segments. The largest general concentration in this portfolio, which is
not homogeneous in nature, is agricultural which totals approximately $37.3
million, representing approximately 3% of the commercial, financial and
agricultural portfolio. This portfolio, however, is diverse in geography and
collateral, secured by a mixture of agricultural equipment, livestock and crop
production. The largest homogeneous industry segment included within this
portfolio is the fast-food restaurant segment, in which we had total loans
outstanding of approximately $50.0 million, representing approximately 3% of
this portfolio at December 31, 2002. Diversity in this segment of the portfolio
is represented by both geography and a mixture of loans to both franchisees and
franchisors, with approximately 80% of the portfolio involving loans to
franchisees and 20% to franchisors. Within both real estate and commercial
lending portfolios, we strive for the highest degree of diversity that is
practicable. We also emphasize the development of other service relationships
with our commercial borrowers, particularly deposit accounts.
Commercial real estate loans include loans for which the intended
source of repayment is the rental and other income from the real estate,
including both commercial real estate developed for lease and owner occupied
commercial real estate. The underwriting of owner occupied commercial real
estate loans generally follows the procedures for commercial lending described
above, except that the collateral is real estate, and the loan term may be
longer. The primary emphasis in underwriting loans for which the primary source
of repayment is the performance of the collateral is the projected cash flow
from the real estate and its adequacy to cover the operating costs of the
project and the debt service requirements. Secondary emphasis is placed on the
appraised value of the real estate, although the appraised liquidation value of
the collateral must be adequate to repay the debt and related interest in the
event the cash flow becomes insufficient to service the debt. Generally,
underwriting terms require the loan principal not to exceed 75% of the appraised
value of the collateral and the loan maturity not to exceed seven years.
Commercial real estate loans are made for commercial office space, retail
properties, hospitality, industrial and warehouse facilities and recreational
properties. We rarely finance commercial real estate or rental properties that
do not have lease commitments from substantial tenants.
Construction and land development loans include commitments for
construction of both residential and commercial properties. Commercial real
estate projects require commitments for permanent financing from other lenders
upon completion of the project or, more typically, include a short-term
amortizing component of the financing from the bank. Commitments for
construction of multi-tenant commercial and retail projects require lease
commitments from a substantial primary tenant or tenants prior to commencement
of construction. We finance some projects for borrowers whose home office is
within our trade area for which the particular project may be outside our normal
trade area. We do not, however, engage in developing commercial and residential
construction lending business outside of our trade area. Residential real estate
construction and development loans are made based on the cost of land
acquisition and development, as well as the construction of the residential
units. Although we finance the cost of display units and units held for sale,
approximately 40% of the loans for individual residential units have purchase
commitments prior to funding.
In addition to underwriting based on estimates and projection of
financial strength, collateral values and future cash flows, most loans to
borrowing entities other than individuals require the personal guarantees of the
principals of the borrowing entity.
Our commercial leasing portfolio totaled $126.7 million and $149.0
million at December 31, 2002 and 2001, respectively. This portfolio consists of
leases originated by our former subsidiary, First Capital Group, Inc.,
Albuquerque, New Mexico, primarily through third parties, on commercial
equipment including aircraft parts and equipment. During 2002, we changed the
nature of this business, resulting in the discontinuation of the operations of
First Capital Group, Inc. and the transfer of all responsibilities for the
existing portfolio to a new leasing staff in St. Louis, Missouri.
At December 31, 2001, within the commercial leasing portfolio, there
were approximately $60.1 million of leases of parts and equipment to the
commercial airline industry and related aircraft service providers. This
equipment consisted primarily of engines, landing gear and replacement parts,
most of which is used in maintenance operations by commercial airlines or by
third party vendors performing maintenance for the airlines. In addition, there
were several leases for smaller aircraft used by charter services. Earlier in
2001, it became apparent that the airline industry in general was experiencing
problems with overcapacity, and as a result, had begun reducing its requirements
for new and replacement aircraft. This was evidenced by airlines taking portions
of their fleets, particularly older less efficient aircraft, out of service and
reducing orders for new equipment. This affected maintenance operations because
as the usage of aircraft decreased, the maintenance requirements were also
reduced. Consequently, by late 2001, we discontinued new leases of equipment
related to the airline industry.
While some of the leases in our portfolio had evidenced problems by
early 2001, overcapacity problems and resulting financial distress in the
commercial airline industry became more critical after the terrorist attacks of
September 11, 2001. Following these events, we re-evaluated our aviation related
lease portfolio to examine our overall exposure to the industry, the effects of
recent trends on valuations of equipment and the financial strength of our
lessees. As a result of our review, for the year ended December 31, 2001, we
incurred $4.5 million of charge-offs in connection with the aircraft leasing
portfolio and had $2.6 million of nonperforming aviation related leases at
December 31, 2001. The evaluation process has evolved into an ongoing monitoring
of this portfolio through continuous communication with lessees to establish
information concerning their use of equipment under lease, monitoring the use of
that equipment, and tracking of changes in equipment and related residual
valuations. When problems are detected, we obtain new valuations of the
equipment, and recognize any impairment in valuation by adjustments to reserves
or income as appropriate depending upon the type of lease. Sources of
information for valuing our leased assets include the Aircraft Bluebook, other
public information from a variety of sources, consultation with other lessors
and brokers of aviation equipment and specific engagement of an independent
asset management company for equipment valuation as well as management of
repossessed assets. Specifically with respect to residual values, and to
establish formality in our process, we have also arranged for appraisal of
leased assets that involve residual risk by an International Society of
Transport Aircraft Trading certified appraiser of aviation assets. The
information received from these various specialized sources assists us in
valuing our lease portfolio and recognizing any impairment on these assets. By
December 31, 2002, the portfolio of leases on commercial aircraft and parts and
equipment had been reduced to $46.5 million, with $8.6 million of nonperforming
aviation related leases, and $619,000 of charge-offs in connection with the
aircraft leasing portfolio for the year ended December 31, 2002.
Our expanded level of commercial lending carries with it greater credit
risk, which we manage through uniform loan policies, procedures, underwriting
and credit administration. As a consequence of such greater risk, the growth of
the loan portfolio must also be accompanied by adequate allowances for loan
losses. We associate the increased level of commercial lending activities and
our acquisitions with the increases of $7.9 million and $14.1 million in
nonperforming loans for the years ended December 31, 2002 and 2001,
respectively. In addition, the loan portfolios of Millennium Bank and Union
Financial Group, Ltd., or Union, which we acquired in 2000 and 2001,
respectively, exhibited significant distress, which further contributed to the
overall increase in nonperforming loans.
Millennium Bank, which we acquired on December 29, 2000, operated a
factoring business for doctors, hospitals and other health care professionals.
This business had been started by Millennium Bank the year before our
acquisition, and had approximately $11.0 million of receivables at the time of
our acquisition. Due to the relatively short life of this operation, the
portfolio did not exhibit signs of problems at that time. Consequently, we
allowed the business to continue after the acquisition to determine whether it
would be an appropriate line of business in the future. However, in late 2001,
the factoring receivables began to exhibit signs of problems, and in early 2002,
we determined one of the larger borrowers was incorrectly accounting for its
receivables, causing the factored balance to be substantially overfunded. After
this, other asset quality issues arose, causing us to discontinue this business
in June 2002. During 2002, we charged-off approximately $2.6 million, or 24.8%,
of the health care factoring portfolio. At December 31, 2002, we had
approximately $10.2 million of factoring business receivables, which are
expected to decline over time given the discontinuation of this line of
business. Since no value was assigned to goodwill or other intangible assets of
this line of business in the acquisition, and the problems appeared to arise
subsequent to the acquisition, we determined that this did not create an
impairment of the goodwill that we recorded in connection with the acquisition.
In evaluating the loan portfolios of Union's two subsidiary banks prior
to its acquisition, it was clear that substantial problems existed in those
portfolios. Generally, credit documentation was poor, underwriting standards
were lax and loan terms were aggressive. As we conducted our due diligence
review, we applied the same asset quality standards, risk rating system and
allowance methodology that we apply to our own loan portfolio. Based on this
review, and to address concerns we had regarding Union's loan portfolios and the
level of its allowance for loan and lease losses, an escrow account of
approximately $1.6 million was established by withholding that amount from the
purchase price. This escrow account was available to absorb losses during the
two-year period following the acquisition from the Union Bank loan portfolio
that were in excess of Union Bank's allowance for loan and lease losses at the
time of the due diligence review. Union's consolidated allowance for loan losses
was $8.6 million relative to an aggregate loan portfolio of $262.3 million at
December 31, 2001, the date of acquisition.
While we believed there were substantial problems with the Union
portfolios, few of these had been identified or addressed by Union as of
December 31, 2001. Consequently, when we assimilated these loans into our
systems and procedures, the problems in the portfolio surfaced, causing an
increase in the amount of problem assets, as well as contributing to the level
of loans charged-off during 2002. For the year ended December 31, 2002, loan
charge-offs from the Union portfolios were $5.2 million, including an amount
within the Union Bank portfolio that was in excess of the allowance at the date
of our due diligence review and the entire $1.6 million escrow account.
Furthermore, at December 31, 2002, nonperforming loans in the Union portfolios
were $6.9 million. Because these problems had been anticipated in negotiating
the acquisition price, they did not affect the amount of goodwill recorded in
connection with this acquisition.
For the years ended December 31, 2002 and 2001, our nonperforming loans
increased $7.9 million and $14.1 million, respectively. The increase in
nonperforming loans in 2001 and 2002 is primarily attributable to general
economic conditions, additional problems identified in the acquired loan
portfolios, continuing deterioration in the portfolio of leases to the airline
industry and the addition of a $16.1 million borrowing relationship to
nonaccrual real estate construction and development loans during the second
quarter of 2002. This relationship relates to a residential and recreational
development project that had significant financial difficulties and experienced
inadequate project financing, project delays and weak project management. This
relationship had previously been on nonaccrual status and was removed from
nonaccrual status during the third quarter of 2001 due to financing being recast
with a new borrower, who appeared able to meet ongoing developmental
expectations. Subsequent to that time, the new borrower encountered internal
management problems, which negatively impacted and further delayed development
of the project. We believe these increases, while partially attributable to the
overall risk in our loan portfolio, are reflective of cyclical trends
experienced within the banking industry as a result of the economic slow down.
During 2001 and 2002, the nation generally experienced a relatively
mild, but prolonged economic slow down that has affected much of the banking
industry, including us. This was exacerbated by the terrorist attacks in
September 2001 and the effects the attacks and related governmental responses
had on economic activity. The effects of the downturn have been inconsistent
between various geographic areas of the country, as well as different segments
of the economy. To us, the effects of the downturn can be observed in generally
lower interest rates, which have a negative impact on our net interest income,
and on the performance of our loan portfolio, which is reflected in higher
delinquencies, nonperforming assets, charge-offs and provisions for loan losses,
as well as reduced loan demand from customers. The impact of lower interest
rates has been significantly reduced through the use of various financial
derivative instruments to provide hedges of this interest rate risk. See
"--Interest Rate Risk Management." However, during 2001 and 2002, we incurred
increasing asset quality issues that were at least partially attributable to
economic conditions.
Within our market areas, the impact of the economy has become evident
at different times. In our midwestern markets, a perceptible increase in loan
delinquencies began in late 2000 and continued throughout 2001. The increase in
delinquencies was primarily focused in commercial, financial and agricultural
loans, lease financing loans and, to a lesser extent, commercial real estate
loans, and initially involved borrowers that had already encountered some
operating problems that continued to deteriorate as the economy became weaker.
Included in this were loans on hotels and leases to the commercial airline
industry. In both instances, the industry had been suffering from overcapacity
prior to 2001, which then became much worse with the economic downturn and the
events of September 11, 2001. As the recession continued, the effects expanded
to companies that had been stronger, but succumbed to the ongoing effects of
slowed economic activity. First Bank, our midwestern subsidiary bank, incurred
net loan charge-offs of $16.3 million for the year ended December 31, 2001, and
had nonperforming loans and leases of $47.7 million at December 31, 2001. In
comparison, for the year ended December 31, 2002, net loan charge-offs had
increased to $22.1 million, while nonperforming loans had increased to $50.5
million at December 31, 2002. The increase in nonperforming loans primarily
reflects the single real estate construction and development relationship of
$16.1 million that became nonperforming during the second quarter of 2002, as
previously discussed.
Generally, the effects on us of the economic downturn in California
have been limited to the San Francisco Bay area, including the area known as
"Silicon Valley." Although we have a substantial banking presence in the San
Francisco Bay area, we have relatively little direct exposure to the high
technology companies. Consequently, the decline in that industry beginning in
2000 had little direct effect on our California operations. However, as the
magnitude of the problems in the high technology sector increased, the effects
spread to companies that were suppliers and servicers of the high technology
sector, and to commercial real estate in the area. As a result, our asset
quality issues in California have been concentrated within the San Francisco Bay
area, and generally do not involve Southern California or the
Sacramento-Roseville area in Northern California. Furthermore, these issues have
primarily arisen during 2002. Consequently, while our California banking
operation incurred net loan charge-offs of $5.4 million in 2001, and had
nonperforming loans of $14.1 million at December 31, 2001, during the year ended
December 31, 2002, these increased to $27.6 million and $17.2 million,
respectively, most of which related to the San Francisco Bay area.
Our Texas banking operation represents a somewhat smaller portion of
our overall lending function. However, the Texas economy has generally continued
to be fairly strong, resulting in relatively few asset quality issues.
Consequently, we had loan charge-offs of $5.6 million and loan recoveries of
$751,000 for the year ended December 31, 2002, which included a charge-off of
$5.3 million on a single loan to a company engaged in leasing equipment,
primarily to manufacturers. This company encountered significant operating
problems from rapid expansion, principally through acquisition, accompanied by
the economic downturn, which particularly affected the manufacturing sector.
Total nonperforming loans were $5.5 million and $3.5 million at December 31,
2002 and 2001, respectively, including the remaining balance on the loan to the
leasing company referred to above of $1.5 million.
In addition to restructuring our loan portfolio, we also have changed
the composition of our deposit base. The majority of our deposit development
programs are now directed toward increased transaction accounts, such as demand
and savings accounts, rather than time deposits, and have emphasized attracting
more than one account relationship with customers. This growth is accomplished
by cross-selling various products and services, packaging account types and
offering incentives to deposit customers on other deposit or non-deposit
services. In addition, commercial borrowers are encouraged to maintain their
operating deposit accounts with us. At December 31, 1997, total time deposits
were $1.90 billion, or 51.7% of total deposits. Although time deposits have
increased to $2.19 billion at December 31, 2002, they represented only 35.5% of
total deposits, reflecting our continued focus on transactional accounts and
full service deposit relationships with our customers.
Despite the significant expenses we incurred in the amalgamation of the
acquired entities into our corporate culture and systems, and in the expansion
of our organizational capabilities, the earnings of the acquired entities and
the increased net interest income resulting from the transition in the
composition of our loan and deposit portfolios have contributed to improving net
income. For the years ended December 31, 2002 and 2001, net income was $45.2
million and $64.5 million, respectively, compared with $56.1 million, $44.2
million and $33.5 million in 2000, 1999 and 1998, respectively. The factors that
led to the decline in our earnings for 2002 include the current interest rate
environment, asset quality issues requiring additional provisions for loan
losses, and increased operating expenses. The increased provisions for loan
losses reflect the current economic environment and significantly increased loan
charge-off, delinquency and nonperforming trends as further discussed under
"--Comparison of Results of Operations for 2002 and 2001." Although we
anticipate certain short-term adverse effects on our operating results
associated with acquisitions, we believe the long-term benefits of our
acquisition program will exceed the short-term issues encountered with some
acquisitions. As such, in addition to concentrating on internal growth through
continued efforts to further develop our corporate infrastructure and product
and service offerings, we expect to continue to identify and pursue
opportunities for growth through acquisitions.
Acquisitions. In the development of our banking franchise, we emphasize
acquiring other financial institutions as one means of achieving our growth
objectives. Acquisitions may serve to enhance our presence in a given market, to
expand the extent of our market area or to enable us to enter new or
noncontiguous market areas. After we consummate an acquisition, we expect to
enhance the franchise of the acquired entity by supplementing the marketing and
business development efforts to broaden the customer bases, strengthening
particular segments of the business or filling voids in the overall market
coverage. We have primarily utilized cash, borrowings and the issuance of trust
preferred securities to meet our growth objectives under our acquisition
program.
During the three years ended December 31, 2002, we completed nine
acquisitions of banks, two branch office purchases and the acquisition of
certain assets and assumption of certain liabilities of a leasing company. As
demonstrated in the following table, our acquisitions during the three years
ended December 31, 2002 have primarily served to increase our presence in the
California markets that we originally entered during 1995 and to further augment
our existing markets and our Midwest banking franchise. Additionally, we
currently have one pending acquisition that will further expand our Midwest
banking franchise. These transactions are summarized as follows:
Number
Loans, Net of of
Total Unearned Investment Banking
Entity Closing Date Assets (1) Discount (1) Securities (1) Deposits (1) Locations (1)
------ ------------ ---------- ------------- -------------- ----------- -------------
(dollars expressed in thousands)
Pending Acquisition
-------------------
Bank of Ste. Genevieve
Ste. Genevieve, Missouri -- $ 108,800 57,500 40,600 88,300 2
========= ======== ======= ======== ====
2002
----
Union Planters Bank, N.A.
Denton and Garland, Texas
branch offices June 22, 2002 $ 63,700 600 -- 64,900 2
Plains Financial Corporation
Des Plaines, Illinois January 15, 2002 256,300 150,400 81,000 213,400 4
--------- -------- ------- -------- ----
$ 320,000 151,000 81,000 278,300 6
========= ======== ======= ======== ====
2001
----
Union Financial Group, Ltd.
Swansea, Illinois December 31, 2001 $ 360,000 263,500 1,150 283,300 9
BYL Bancorp
Orange, California October 31, 2001 281,500 175,000 12,600 251,800 7
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 70,200 7,500 89,000 2
--------- -------- ------- -------- ----
$ 743,000 508,700 21,250 624,100 18
========= ======== ======= ======== ====
2000
----
The San Francisco Company
San Francisco, California December 31, 2000 $ 183,800 115,700 38,300 137,700 1
Millennium Bank
San Francisco, California December 29, 2000 117,000 81,700 21,100 104,200 2
Commercial Bank of San Francisco
San Francisco, California October 31, 2000 155,600 97,700 45,500 109,400 1
Bank of Ventura
Ventura, California August 31, 2000 63,800 39,400 15,500 57,300 1
First Capital Group, Inc.
Albuquerque, New Mexico February 29, 2000 64,600 64,600 -- -- 1
Lippo Bank
San Francisco, California February 29, 2000 85,300 40,900 37,400 76,400 3
--------- -------- ------- -------- -----
$ 670,100 440,000 157,800 485,000 9
========= ======== ======= ======== =====
- --------------------------
(1) For our pending acquisition that is expected to close on March 31, 2003,
amounts are as of December 31, 2002. For closed acquisitions, amounts are
as of the respective closing dates.
We funded the completed acquisitions from available cash reserves,
proceeds from the sales and maturities of available-for-sale investment
securities, borrowings under our revolving credit line with a group of
unaffiliated banks and proceeds from the issuance of trust preferred securities.
Pending Acquisition
On September 17, 2002, First Banks and Allegiant Bancorp, Inc., or
Allegiant, signed an agreement and plan of exchange that provides for First
Banks to acquire Allegiant's wholly owned banking subsidiary, Bank of Ste.
Genevieve. Bank of Ste. Genevieve operates two locations in Ste. Genevieve,
Missouri, and reported total assets of $108.8 million and total deposits of
$88.3 million at December 31, 2002. Under the terms of the agreement, First
Banks will acquire Bank of Ste. Genevieve in exchange for approximately 974,150
shares of Allegiant common stock that are currently held by First Banks. The
value of $18.375 per share assigned to each share of Allegiant common stock to
be exchanged in the transaction was determined by the parties based upon the
existing market price of the shares and detailed negotiations. The transaction
is expected to be completed on March 31, 2003. First Banks will continue to own
approximately 232,000 shares of Allegiant common stock subsequent to completion
of the transaction.
Closed Acquisitions and Other Corporate Transactions
On January 15, 2002, we completed our acquisition of Plains Financial
Corporation, or Plains, and its wholly owned banking subsidiary, PlainsBank of
Illinois, National Association, Des Plaines, Illinois, in exchange for $36.5
million in cash. Plains operated a total of three banking facilities in Des
Plaines, Illinois, and one banking facility in Elk Grove Village, Illinois. At
the time of the transaction, Plains 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. Goodwill was approximately $12.6
million and will not be amortized, but instead will be periodically tested for
impairment in accordance with Statement of Financial Accounting Standards, or
SFAS, No. 142, Goodwill and Other Intangible Assets. The core deposit
intangibles were approximately $2.9 million and are being amortized over seven
years utilizing the straight-line method. Plains was merged with and into Union
and PlainsBank of Illinois 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, or UP
branches. 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 and 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 utilizing the straight-line method.
On December 31, 2002, we completed our acquisition of all of the
outstanding capital stock of First Banks America, Inc., or FBA, San Francisco,
California, that we did not already own for a price of $40.54 per share, or
approximately $32.4 million. At December 31, 2002, prior to consummation of this
transaction, there were 798,753 shares, or approximately 6.22% of our former
majority-owned subsidiary's outstanding stock, held publicly. We owned the other
93.78%. In conjunction with this transaction, FBA was merged with and into First
Banks. This transaction was accounted for using the purchase method of
accounting. Goodwill was approximately $12.4 million and will not be amortized,
but instead will be periodically tested for impairment in accordance with SFAS
No. 142.
Acquisition and Integration Costs
We accrue certain costs associated with our acquisitions as of the
respective consummation dates. Essentially all of these accrued costs relate
either to adjustments to the staffing levels of the acquired entities or to the
anticipated termination of information technology or item processing contracts
of the acquired entities prior to their stated contractual expiration dates. The
most significant costs that we incur relate to salary continuation agreements,
or other similar agreements, of executive management and certain other employees
of the acquired entities that were in place prior to the acquisition dates.
These agreements provide for payments over periods ranging from one to nine
years and are triggered as a result of the change in control of the acquired
entity. Other severance benefits for employees that are terminated in
conjunction with the integration of the acquired entities into our existing
operations are normally paid to the recipients within 90 days of the respective
consummation date. The balance of our accrued severance of $2.4 million
identified in the following table is comprised of contractual obligations under
salary continuation agreements to 13 individuals and have remaining terms
ranging from eight months to approximately 14 years. Payments made under these
agreements are paid from accrued liabilities and consequently, do not have any
impact on our statements of income.
A summary of acquisition and integration costs attributable to the
acquisitions included in the foregoing table, which were accrued as of the
consummation dates of the respective acquisition, is listed below. These
acquisition and integration costs are reflected in accrued and other liabilities
in our consolidated financial statements.
Information
Severance Technology Fees Total
--------- --------------- -----
Balance at December 31, 1998......................... $ 1,100,000 -- 1,100,000
Year Ended December 31, 1999:
Amounts accrued at acquisition date............... 1,633,768 -- 1,633,768
Payments.......................................... (124,742) -- (124,742)
----------- ------------ -----------
Balance at December 31, 1999......................... $ 2,609,026 -- 2,609,026
Year Ended December 31, 2000:
Amounts accrued at acquisition date............... 3,331,600 -- 3,331,600
Reversal to goodwill.............................. (278,974) -- (278,974)
Payments.......................................... (2,492,319) -- (2,492,319)
----------- ------------ -----------
Balance at December 31, 2000......................... $ 3,169,333 -- 3,169,333
Year Ended December 31, 2001:
Amounts accrued at acquisition date............... 3,884,800 515,638 4,400,438
Payments.......................................... (3,119,602) (363,138) (3,482,740)
----------- ------------ -----------
Balance at December 31, 2001......................... $ 3,934,531 152,500 4,087,031
Year Ended December 31, 2002:
Amounts accrued at acquisition date............... 238,712 250,000 488,712
Payments.......................................... (1,821,878) (375,032) (2,196,910)
----------- ------------ -----------
Balance at Decmber 31, 2002.......................... $ 2,351,365 27,468 2,378,833
=========== ============ ===========
As further discussed and quantified under "--Comparison of Results of
Operations for the Nine Months Ended September 30, 2002," "--Comparison of
Results of Operations for 2001 and 2000," and "--Comparison of Results of
Operations for 2000 and 1999," we also incur costs associated with our
acquisitions that are expensed in our statements of income. These costs relate
exclusively to additional costs incurred in conjunction with the data processing
conversions of the respective entities.
Market Area. As of December 31, 2002, our subsidiary banks' 151 banking
facilities were located in California, eastern Missouri, Illinois and Texas. Our
primary market area is the St. Louis, Missouri metropolitan area. Our second and
third largest market areas are southern and northern California and central and
southern Illinois, respectively. We also have locations in the Houston, Dallas,
Irving, McKinney and Denton, Texas metropolitan areas, rural eastern Missouri
and the greater Chicago, Illinois metropolitan area.
The following table lists the market areas in which our subsidiary
banks operate, total deposits, deposits as a percentage of total deposits and
the number of locations as of December 31, 2002:
Total Deposits Number
Deposits as a Percentage of
Geographic Area (in millions) of Total Deposits Locations
--------------- ------------- ----------------- ---------
St. Louis, Missouri metropolitan area (1)............................... $ 1,534.3 24.9% 29
Regional Missouri (1)................................................... 414.0 6.7 14
Central and southern Illinois (1)....................................... 1,055.3 17.1 33
Northern Illinois (1)................................................... 530.8 8.6 18
Texas (2)............................................................... 328.2 5.3 8
Southern California (2)................................................. 1,334.1 21.6 32
Northern California (2)................................................. 976.1 15.8 17
--------- ----- ----
Total deposits..................................................... $ 6,172.8 100.0% 151
========= ===== ====
- ------------------------
(1) First Bank operates in the St. Louis metropolitan area, in regional
Missouri, in central and southern Illinois and in northern Illinois,
including Chicago.
(2) FB&T operates in the greater Los Angeles metropolitan area, including
Ventura County, Riverside and Orange County, California; in Santa Barbara
County, California; in northern California, including the greater San
Francisco, San Jose and Sacramento metropolitan areas; and in the Houston,
Dallas, Irving, McKinney and Denton metropolitan areas.
Competition and Branch Banking. Our subsidiary banks engage in highly
competitive activities. Those activities and the geographic markets served
primarily involve competition with other banks, some of which are affiliated
with large regional or national holding companies. Financial institutions
compete based upon interest rates offered on deposit accounts, interest rates
charged on loans and other credit and service charges, the quality of services
rendered, the convenience of banking facilities and, in the case of loans to
large commercial borrowers, relative lending limits.
Our principal competitors include other commercial banks, savings
banks, savings and loan associations, mutual funds, finance companies, trust
companies, insurance companies, leasing companies, credit unions, mortgage
companies, private issuers of debt obligations and suppliers of other investment
alternatives, such as securities firms and financial holding companies. Many of
our non-bank competitors are not subject to the same degree of regulation as
that imposed on bank holding companies, federally insured banks and national or
state chartered banks. As a result, such non-bank competitors have advantages
over us in providing certain services. We also compete with major multi-bank
holding companies, which are significantly larger than us and have greater
access to capital and other resources.
We believe we will continue to face competition in the acquisition of
independent banks and savings banks from banks and financial holding companies.
We often compete with larger financial institutions that have substantially
greater resources available for making acquisitions.
Subject to regulatory approval, commercial banks operating in
California, Illinois, Missouri and Texas are permitted to establish branches
throughout their respective states, thereby creating the potential for
additional competition in our service areas.
Supervision and Regulation
General. Federal and state laws extensively regulate our subsidiary banks and us
primarily to protect depositors and customers of our subsidiary banks. To the
extent this discussion refers to statutory or regulatory provisions, it is not
intended to summarize all such provisions and is qualified in its entirety by
reference to the relevant statutory and regulatory provisions. Changes in
applicable laws, regulations or regulatory policies may have a material effect
on our business and prospects. We are unable to predict the nature or extent of
the effects on our business and earnings that new federal and state legislation
or regulation may have. The enactment of the legislation described below has
significantly affected the banking industry generally and is likely to have
ongoing effects on us and our subsidiary banks in the future.
We are a registered bank holding company under the Bank Holding Company
Act of 1956. Consequently, the Board of Governors of the Federal Reserve System,
or Federal Reserve, regulates, supervises and examines us. We file annual
reports with the Federal Reserve and provide to the Federal Reserve additional
information as it may require.
Since First Bank is an institution chartered by the State of Missouri
and a member of the Federal Reserve, both the State of Missouri Division of
Finance and the Federal Reserve supervise, regulate and examine First Bank. FB&T
is chartered by the State of California and is subject to supervision,
regulation and examination by the California Department of Financial
Institutions. Our subsidiary banks are also regulated by the Federal Deposit
Insurance Corporation, or FDIC, which provides deposit insurance of up to
$100,000 for each insured depositor.
Bank Holding Company Regulation. Our activities and those of our subsidiary
banks have in the past been limited to the business of banking and activities
"closely related" or "incidental" to banking. Under the Gramm-Leach-Bliley Act,
or GLB Act, which was enacted in November 1999 and is discussed below, bank
holding companies now have the opportunity to seek broadened authority, subject
to limitations on investment, to engage in activities that are "financial in
nature" if all of their subsidiary depository institutions are well capitalized,
well managed and have at least a satisfactory rating under the Community
Reinvestment Act (discussed briefly below).
We are also subject to capital requirements applied on a consolidated
basis, which are substantially similar to those required of our subsidiary banks
(briefly summarized below). The Bank Holding Company Act also requires a bank
holding company to obtain approval from the Federal Reserve before:
>> acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls a majority of such
shares);
>> acquiring all or substantially all of the assets of another bank
or bank holding company; or
>> merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anti-competitive result, unless
the anti-competitive effects of the proposed transaction are clearly outweighed
by a greater public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve also considers capital adequacy and
other financial and managerial factors in reviewing acquisitions and mergers.
Safety and Soundness and Similar Regulations. We are subject to various
regulations and regulatory policies directed at the financial soundness of our
subsidiary banks. These include, but are not limited to, the Federal Reserve's
source of strength policy, which obligates a bank holding company such as us to
provide financial and managerial strength to its subsidiary banks; restrictions
on the nature and size of certain affiliate transactions between a bank holding
company and its subsidiary depository institutions; and restrictions on
extensions of credit by our subsidiary banks to executive officers, directors,
principal stockholders and the related interests of such persons.
Regulatory Capital Standards. The federal bank regulatory agencies have adopted
substantially similar risk-based and leverage capital guidelines for banking
organizations. Risk-based capital ratios are determined by classifying assets
and specified off-balance-sheet obligations and financial instruments into
weighted categories, with higher levels of capital being required for categories
deemed to represent greater risk. Federal Reserve policy also provides that
banking organizations generally, and in particular those that are experiencing
internal growth or actively making acquisitions, are expected to maintain
capital positions that are substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Under the risk-based capital standard, the minimum consolidated ratio
of total capital to risk-adjusted assets required for bank holding companies is
8%. At least one-half of the total capital must be composed of common equity,
retained earnings, qualifying noncumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual preferred stock and minority interests
in the equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets, which amount is referred to as
"Tier I capital." The remainder may consist of qualifying hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier I
capital and a limited amount of loan and lease loss reserves, which amount,
together with Tier I capital, is referred to as "Total Risk-Based Capital."
In addition to the risk-based standard, we are subject to minimum
requirements with respect to the ratio of our Tier I capital to our average
assets less goodwill and certain other intangible assets, or the Leverage Ratio.
Applicable requirements provide for a minimum Leverage Ratio of 3% for bank
holding companies that have the highest supervisory rating, while all other
bankholding companies must maintain a minimum Leverage Ratio of at least 4% to
5%. The Office of the Comptroller of the Currency, or OCC, and the FDIC have
established capital requirements for banks under their respective jurisdictions
that are consistent with those imposed by the Federal Reserve on bank holding
companies. Information regarding our capital levels and our subsidiary banks'
capital levels under the federal capital requirements is contained in Note 21 to
our consolidated financial statements appearing elsewhere in this report.
Prompt Corrective Action. The FDIC Improvement Act requires the federal bank
regulatory agencies to take prompt corrective action in respect to depository
institutions that do not meet minimum capital requirements. A depository
institution's status under the prompt corrective action provisions depends upon
how its capital levels compare to various relevant capital measures and other
factors as established by regulation.
The federal regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. Under the regulations, a
bank will be:
>> "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier I capital ratio of 6% or greater and a
Leverage Ratio of 5% or greater and is not subject to any order
or written directive by any such regulatory authority to meet and
maintain a specific capital level for any capital measure;
>> "adequately capitalized" if it has a total risk-based capital
ratio of 8% or greater, a Tier I capital ratio of 4% or greater
and a Leverage Ratio of 4% or greater (3% in certain
circumstances);
>> "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I capital ratio of less than 4% or a
Leverage Ratio of less than 4% (3% in certain circumstances);
>> "significantly undercapitalized" if it has a total risk-based
capital ratio of less than 6%, a Tier I capital ratio of less
than 3% or a Leverage Ratio of less than 3%; and
>> "critically undercapitalized" if its tangible equity is equal to
or less than 2% of its average quarterly tangible assets.
Under certain circumstances, a depository institution's primary federal
regulatory agency may use its authority to lower the institution's capital
category. The banking agencies are permitted to establish individual minimum
capital requirements exceeding the general requirements described above.
Generally, failing to maintain the status of "well capitalized" or "adequately
capitalized" subjects a bank to restrictions and limitations on its business
that become progressively more severe as the capital levels decrease.
A bank is prohibited from making any capital distribution (including
payment of a dividend) or paying any management fee to its holding company if
the bank would thereafter be "undercapitalized." Limitations exist for
"undercapitalized" depository institutions regarding, among other things, asset
growth, acquisitions, branching, new lines of business, acceptance of brokered
deposits and borrowings from the Federal Reserve System. These institutions are
also required to submit a capital restoration plan that includes a guarantee
from the institution's holding company. "Significantly undercapitalized"
depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
"adequately capitalized," requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. The appointment of a receiver or
conservator may be required for "critically undercapitalized" institutions.
Dividends. Our primary source of funds in the future is the dividends, if any,
paid by our subsidiary banks. The ability of our subsidiary banks to pay
dividends is limited by federal laws, by regulations promulgated by the bank
regulatory agencies and by principles of prudent bank management.
Customer Protection. Our subsidiary banks are also subject to consumer laws and
regulations intended to protect consumers in transactions with depository
institutions, as well as other laws or regulations affecting customers of
financial institutions generally. These laws and regulations mandate various
disclosure requirements and substantively regulate the manner in which financial
institutions must deal with their customers. Our subsidiary banks must comply
with numerous regulations in this regard and are subject to periodic
examinations with respect to their compliance with the requirements.
Community Reinvestment Act. The Community Reinvestment Act of 1977 requires
that, in connection with examinations of financial institutions within their
jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered in evaluating
mergers, acquisitions and other applications to expand.
The Gramm-Leach-Bliley Act. The GLB Act, enacted in 1999, amended and repealed
portions of the Glass-Steagall Act and other federal laws restricting the
ability of bank holding companies, securities firms and insurance companies to
affiliate with each other and to enter new lines of business. The GLB Act
established a comprehensive framework to permit financial companies to expand
their activities, including through such affiliations, and to modify the federal
regulatory structure governing some financial services activities. This
authority of financial firms to broaden the types of financial services offered
to customers and to affiliates with other types of financial services companies
may lead to further consolidation in the financial services industry. However,
it may lead to additional competition in the markets in which we operate by
allowing new entrants into various segments of those markets that are not the
traditional competitors in those segments. Furthermore, the authority granted by
the GLB Act may encourage the growth of larger competitors.
The GLB Act also adopted consumer privacy safeguards requiring
financial services providers to disclose their policies regarding the privacy of
customer information to their customers and, subject to some exceptions,
allowing customers to "opt out" of policies permitting such companies to
disclose confidential financial information to non-affiliated third parties.
Final regulations implementing the new privacy standards became effective in
2001.
The Sarbanes-Oxley Act. On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act imposes a myriad of corporate
governance and accounting measures designed to ensure that the shareholders of
corporate America are treated fairly and have full and accurate information
about the public companies in which they invest. All public companies, including
companies that file periodic reports with the Securities and Exchange
Commission, or SEC, such as First Banks, are affected by the Sarbanes-Oxley Act.
Certain provisions of the Sarbanes-Oxley Act became effective
immediately, while other provisions will become effective as the SEC adopts
rules to implement those provisions. Some of the principal provisions of the
Sarbanes-Oxley Act which may affect us include:
>> the creation of an independent accounting oversight board to
oversee the audit of public companies and auditors who perform
such audits;
>> auditor independence provisions which restrict non-audit services
that independent accountants may provide to their audit clients;
>> additional corporate governance and responsibility measures which
(i) require the chief executive officer and chief financial
officer to certify financial statements and to forfeit salary and
bonuses in certain situations, and (ii) protect whistleblowers
and informants;
>> expansion of the audit committee's authority and responsibility
by requiring that the audit committee (i) have direct control of
the outside auditor, (ii) be able to hire and fire the auditor,
and (iii) approve all non-audit services;
>> mandatory disclosure by analysts of potential conflicts of
interest; and
>> enhanced penalties for fraud and other violations.
The Sarbanes-Oxley Act is expected to increase the administrative costs
and burden of doing business for public companies; however, we cannot predict
the significance of any increase at this time.
The USA Patriot Act. In October 2001, the Patriot Act was enacted in response to
the terrorist attacks in New York, Pennsylvania and Washington, D.C. that
occurred on September 11, 2001. The Patriot Act is intended to strengthen the
ability of U.S. law enforcement agencies and the intelligence communities to
work cohesively to combat terrorism on a variety of fronts. The potential impact
of the Patriot Act on financial institutions of all kinds is significant and
wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and imposes various regulations, including standards
for verifying client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering. The Patriot Act is expected to increase the administrative costs and
burden of doing business for financial institutions; however, we cannot predict
the significance of any increase at this time.
Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System.
The Federal Reserve requires all depository institutions to maintain reserves
against their transaction accounts and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements. Institutions are authorized to borrow
from the Federal Reserve Bank "discount window," but Federal Reserve regulations
require institutions to exhaust other reasonable alternative sources of funds,
including advances from Federal Home Loan Banks, before borrowing from the
Federal Reserve Bank.
First Bank is a member of the Federal Reserve System. Both First Bank
and FB&T are members of the Federal Home Loan Bank System. As members, they are
required to hold investments in regional banks within those systems. Our
subsidiary banks were in compliance with these requirements at December 31,
2002, with investments of $9.7 million in stock of the Federal Home Loan Bank of
Des Moines held by First Bank, $450,000 in stock of the Federal Home Loan Bank
of Chicago held by First Bank (associated with the acquisition of Union
completed on December 31, 2001), $2.4 million in stock of the Federal Home Loan
Bank of San Francisco held by FB&T, and $7.5 million in stock of the Federal
Reserve Bank of St. Louis held by First Bank.
Monetary Policy and Economic Control. The commercial banking business is
affected by legislation, regulatory policies and general economic conditions as
well as the monetary policies of the Federal Reserve. The instruments of
monetary policy available to the Federal Reserve include the following:
>> changes in the discount rate on member bank borrowings and the
targeted federal funds rate;
>> the availability of credit at the "discount window;"
>> open market operations;
>> the imposition of changes in reserve requirements against
deposits of domestic banks;
>> the imposition of changes in reserve requirements against
deposits and assets of foreign branches; and
>> the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates.
These monetary policies are used in varying combinations to influence
overall growth and distributions of bank loans, investments and deposits, and
this use may affect interest rates charged on loans or paid on liabilities. The
monetary policies of the Federal Reserve have had a significant effect on the
operating results of commercial banks and are expected to do so in the future.
Such policies are influenced by various factors, including inflation,
unemployment, and short-term and long-term changes in the international trade
balance and in the fiscal policies of the U.S. Government. We cannot predict the
effect that changes in monetary policy or in the discount rate on member bank
borrowings will have on our future business and earnings or those of our
subsidiary banks.
Employees
As of March 25, 2003, we employed approximately 2,200 employees. None
of the employees are subject to a collective bargaining agreement. We consider
our relationships with our employees to be good.
Executive Officers of the Registrant
Information regarding executive officers is contained in Item 10 of
Part III hereof (pursuant to General Instruction G) and is incorporated herein
by this reference.
Item 2. Properties
We own our office building, which houses our principal place of
business, located at 135 North Meramec, Clayton, Missouri 63105. The property is
in good condition and consists of approximately 41,763 square feet, of which
approximately 1,791 square feet is currently leased to others. Of our other 150
offices and two operations and administrative facilities, 91 are located in
buildings that we own and 62 are located in buildings that we lease.
We consider the properties at which we do business to be in good
condition generally and suitable for our business conducted at each location. To
the extent our properties or those acquired in connection with our acquisition
of other entities provide space in excess of that effectively utilized in the
operations of our subsidiary banks, we seek to lease or sub-lease any excess
space to third parties. Additional information regarding the premises and
equipment utilized by our subsidiary banks appears in Note 7 to our consolidated
financial statements appearing elsewhere in this report.
Item 3. Legal Proceedings
In the ordinary course of business, we and our subsidiaries become
involved in legal proceedings. Our management, in consultation with legal
counsel, believes that the ultimate resolution of existing proceedings will not
have a material adverse effect on our business, financial condition or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information. There is no established public trading market for our common
stock. Various trusts, which were created by and are administered by and for the
benefit of Mr. James F. Dierberg, our Chairman of the Board and Chief Executive
Officer, and members of his immediate family, own all of our voting stock.
Dividends. In recent years, we have paid minimal dividends on our Class A
Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible
Adjustable Rate Preferred Stock, and have paid no dividends on our Common Stock.
Our ability to pay dividends is limited by regulatory requirements and by the
receipt of dividend payments from our subsidiary banks, which are also subject
to regulatory requirements. The dividend limitations are included in Note 22 to
our consolidated financial statements appearing elsewhere in this report.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below are derived
from our consolidated financial statements, which have been audited by KPMG LLP.
This information is qualified by reference to our consolidated financial
statements appearing elsewhere in this report. This information should be read
in conjunction with such consolidated financial statements, the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
As of or For the Year Ended December 31, (1)
-----------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars expressed in thousands, except per share data)
Income Statement Data:
Interest income................................... $ 424,910 444,743 422,826 353,082 327,860
Interest expense.................................. 156,740 209,604 200,852 170,751 172,021
---------- ---------- ---------- ---------- ----------
Net interest income............................... 268,170 235,139 221,974 182,331 155,839
Provision for loan losses......................... 55,500 23,510 14,127 13,073 9,000
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses................................. 212,670 211,629 207,847 169,258 146,839
Noninterest income................................ 89,455 98,609 42,778 41,650 36,497
Noninterest expense............................... 232,756 211,671 157,990 138,757 128,862
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes,
minority interest in income of subsidiary
and cumulative effect of change in
accounting principle............................ 69,369 98,567 92,635 72,151 54,474
Provision for income taxes........................ 22,771 30,048 34,482 26,313 19,693
---------- ---------- ---------- ---------- ----------
Income before minority interest in income
of subsidiary and cumulative effect of
change in accounting principle.................. 46,598 68,519 58,153 45,838 34,781
Minority interest in income of subsidiary......... 1,431 2,629 2,046 1,660 1,271
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle............................ 45,167 65,890 56,107 44,178 33,510
Cumulative effect of change in
accounting principle, net of tax................ -- (1,376) -- -- --
---------- ---------- ---------- ---------- ----------
Net income........................................ $ 45,167 64,514 56,107 44,178 33,510
========== ========== ========== ========== ==========
Dividends:
Preferred stock................................... $ 786 786 786 786 786
Common stock...................................... -- -- -- -- --
Ratio of total dividends declared to net income... 1.74% 1.22% 1.40% 1.78% 2.35%
Per Share Data:
Earnings per common share:
Basic:
Income before cumulative effect of change
in accounting principle...................... $ 1,875.69 2,751.54 2,338.04 1,833.91 1,383.04
Cumulative effect of change in
accounting principle, net of tax............. -- (58.16) -- -- --
---------- ---------- ---------- ---------- ----------
Basic.......................................... $ 1,875.69 2,693.38 2,338.04 1,833.91 1,383.04
========== ========== ========== ========== ==========
Diluted:
Income before cumulative effect of change
in accounting principle...................... $ 1,853.64 2,684.93 2,267.41 1,775.47 1,337.09
Cumulative effect of change in accounting
principle, net of tax........................ -- (58.16) -- -- --
---------- ---------- ---------- ---------- ----------
Diluted........................................ $ 1,853.64 2,626.77 2,267.41 1,775.47 1,337.09
========== ========== ========== ========== ==========
Weighted average common stock outstanding....... 23,661 23,661 23,661 23,661 23,661
Balance Sheet Data:
Investment securities............................. $1,137,320 631,068 563,534 451,647 534,796
Loans, net of unearned discount................... 5,432,588 5,408,869 4,752,265 3,996,324 3,580,105
Total assets...................................... 7,342,800 6,778,451 5,876,691 4,867,747 4,554,810
Total deposits.................................... 6,172,820 5,683,904 5,012,415 4,251,814 3,939,985
Notes payable..................................... 7,000 27,500 83,000 64,000 50,048
Guaranteed preferred beneficial interests in
subordinated debentures........................ 270,039 235,881 182,849 127,611 127,443
Common stockholders' equity....................... 505,978 435,594 339,783 281,842 250,300
Total stockholders' equity........................ 519,041 448,657 352,846 294,905 263,363
Earnings Ratios:
Return on average total assets.................... 0.64% 1.08% 1.09% 0.95% 0.78%
Return on average total stockholders' equity...... 9.44 15.96 17.43 15.79 13.64
Efficiency ratio (2).............................. 65.08 63.42 59.67 61.95 67.00
Net interest margin (3)........................... 4.24 4.34 4.65 4.24 3.94
Asset Quality Ratios:
Allowance for loan losses to loans................ 1.83 1.80 1.72 1.72 1.70
Nonperforming loans to loans (4).................. 1.38 1.24 1.12 0.99 1.22
Allowance for loan losses to
nonperforming loans (4)........................ 132.29 144.36 153.47 172.66 140.04
Nonperforming assets to loans and
other real estate (5).......................... 1.52 1.32 1.17 1.05 1.32
Net loan charge-offs to average loans............. 1.01 0.45 0.17 0.22 0.05
Capital Ratios:
Average total stockholders' equity
to average total assets........................ 6.79 6.74 6.25 6.01 5.74
Total risk-based capital ratio.................... 10.68 10.53 10.21 10.05 10.28
Leverage ratio.................................... 6.45 7.24 7.46 7.15 7.78
- --------------------------------
(1) The comparability of the selected data presented is affected by the acquisitions of 13 banks and four branch offices
during the five-year period ended December 31, 2002. These acquisitions were accounted for as purchases and, accordingly,
the selected data includes the financial position and results of operations of each acquired entity only for the periods
subsequent to its respective date of acquisition.
(2) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income.
(3) Net interest rate margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average
interest-earning assets.
(4) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms.
(5) Nonperforming assets consist of nonperforming loans and other real estate.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following presents management's discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. You should read this discussion in conjunction with our
"Selected Financial Data," our consolidated financial statements and the related
notes thereto, and the other financial data contained elsewhere in this report.
This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ significantly from those
anticipated in these forward-looking statements as a result of various factors.
See "Special Note Regarding Forward-Looking Statements" appearing elsewhere in
this report.
RESULTS OF OPERATIONS
Overview
Net income was $45.2 million, $64.5 million and $56.1 million for the
years ended December 31, 2002, 2001 and 2000 respectively. Results for 2002
reflect increased net interest income offset by higher operating expenses
primarily resulting from our acquisitions completed in 2001 and 2002. We also
experienced increased provisions for loan losses, indicative of the current
economic environment, reflected in increased charge-off, past due and
nonperforming trends. For the three months ended December 31, 2002 and 2001, our
net income was $14.8 million and $29.9 million, respectively. Included in our
results for the fourth quarter and year ended December 31, 2001 were a
nonrecurring gain of $12.4 million, net of related income taxes, relating to the
exchange of our investment in an unaffiliated financial institution for cash and
stock in another unaffiliated financial institution, and a nonrecurring
adjustment of our deferred income tax valuation reserve of $8.1 million, both of
which increased net income.
The implementation of Statement of Financial Accounting Standards, or
SFAS, No. 142, Goodwill and Other Intangible Assets, on January 1, 2002,
resulted in the discontinuation of amortization of certain intangibles
associated with the purchase of subsidiaries. If we had implemented SFAS No. 142
at the beginning of 2001, net income for the three months and year ended
December 31, 2001 would have increased $2.6 million and $8.1 million,
respectively. In addition, the implementation of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, 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. Excluding this item, net income
would have been $65.9 million for the year ended December 31, 2001.
The decline in our earnings in 2002 primarily resulted from the reduced
interest rate environment and weak economic conditions within our market areas,
as well as the related decline in asset quality. Throughout 2002, we experienced
higher than normal loan charge-offs, loan delinquencies and nonperforming loans
that led to significant increases in the provision for loan losses, thereby
reducing net income. While we believe we have aggressively addressed the asset
quality problems that have arisen throughout the year, we continue to closely
monitor our operations to address the challenges posed by the current economic
environment, including reduced loan demand and lower prevailing interest rates.
We attribute the improved earnings for 2001 primarily to increased net interest
income and noninterest income, including a gain on the exchange of an equity
investment in an unaffiliated financial institution in October 2001, as well as
a reduced provision for income taxes. The improvement in our earnings for 2001
was significantly offset by reductions in prevailing interest rates throughout
2001, resulting in an overall decline in our net interest rate margin. Our
earnings progress for 2000 was primarily driven by increased net interest income
generated from our acquisitions completed in 1999 and 2000, continued growth and
diversification in the composition of our loan portfolio, and increases in
prevailing interest rates which resulted in increased yields on our
interest-earning assets.
Financial Condition and Average Balances
Our average total assets were $7.05 billion for the year ended December
31, 2002, compared to $5.99 billion and $5.15 billion for the years ended
December 31, 2001 and 2000, respectively. We attribute the increase of $1.06
billion in total average assets for 2002 primarily to our 2002 acquisitions of
Plains and the UP branches, which provided assets of $256.3 million and $63.7
million, respectively, and our acquisitions of Charter Pacific Bank, BYL Bancorp
and Union, completed during the fourth quarter of 2001. The increase in total
assets was partially offset by lower loan demand and an anticipated level of
attrition associated with these acquisitions. We attribute the increase in total
average assets for 2001 primarily to our acquisitions completed during the
fourth quarter of 2000 and in 2001; internal loan growth generated through the
efforts of our business development staff; increased bank premises and equipment
associated with the expansion and renovation of various corporate and branch
offices; and valuation of derivative instruments on the consolidated balances
sheets resulting from a change in accounting principle. The acquisition of
Union, which provided total assets of $360.0 million, was completed on December
31, 2001, and therefore did not have a significant impact on our average total
assets for the year ended December 31, 2001, but has contributed to the overall
increase in average total assets in 2002.
The increase in assets for 2002 was primarily funded by an increase in
average deposits of $867.3 million to $5.96 billion for the year ended December
31, 2002, and an increase of $36.0 million in average short-term borrowings to
$194.1 million for the year ended December 31, 2002. We utilized the majority of
the funds generated from our deposit growth to invest in available-for-sale
investment securities and the remaining funds were temporarily invested in
federal funds sold, resulting in increases in average federal funds sold and
average investment securities of $29.7 million and $362.4 million, respectively,
to $123.3 million and $813.8 million, respectively, for the year ended December
31, 2002. Similarly, we funded the increase in assets for 2001 by an increase in
average deposits of $612.9 million to $5.09 billion for the year ended December
31, 2001, and an increase of $51.9 million in average short-term borrowings to
$158.0 million for the year ended December 31, 2001. We utilized the majority of
the funds generated from our deposit growth to fund a portion of our loan
growth, and the remaining funds were either temporarily invested in federal
funds sold or invested in available-for-sale investment securities, resulting in
increases in average federal funds sold and average investment securities of
$26.1 million and $19.4 million, respectively, to $93.6 million and $451.4
million, respectively, for the year ended December 31, 2001.
Loans, net of unearned discount, averaged $5.42 billion, $4.88 billion
and $4.29 billion for the years ended December 31, 2002, 2001 and 2000,
respectively. The acquisitions we completed during 2001 and 2002 provided loans,
net of unearned discount, of $508.7 million and $151.0 million, respectively.
The increase for 2002 is primarily due to the loans provided by acquisitions as
well as a $36.1 million increase in residential real estate lending, due to
increased volumes resulting from the current interest rate environment. These
increases were offset by a $119.3 million decline in commercial lending,
primarily due to reduced loan demand resulting from current economic conditions
prevalent within our markets. We also experienced continuing reductions in
consumer and installment loans, net of unearned discount, which decreased $44.1
million to $79.1 million at December 31, 2002. This decrease reflects reductions
in new loan volumes and the repayment of principal on our existing portfolio,
and is also consistent with our objectives of de-emphasizing consumer lending
and expanding commercial lending. These changes result from the focus we have
placed on our business development efforts and the portfolio repositioning which
we originally began in the mid-1990s. This repositioning provided for
substantially all of our residential mortgage loan production to be sold in the
secondary mortgage market and the origination of indirect automobile loans to be
substantially reduced.
In addition to the growth provided by acquisitions, for 2001, $174.6
million of net loan growth was provided by corporate banking business
development, consisting of increases of $24.9 million of lease financing, $145.8
million of commercial real estate loans and $8.4 million of real estate
construction and development loans, offset by a decrease of $4.5 million of
commercial, financial and agricultural loans. Furthermore, the increase in loans
is also attributable to an increase in residential real estate lending,
including loans held for sale, of $48.6 million for the year ended December 31,
2001. We primarily attribute this increase to be the result of a significantly
higher volume of residential mortgage loans originated, including both new
fundings and refinancings, as a result of declining interest rates experienced
throughout 2001 as well as an expansion of our mortgage banking activities.
These overall increases were partially offset by continuing reductions in
consumer and installment loans, net of unearned discount, which decreased $75.3
million to $122.1 million at December 31, 2001 due to the sale of our student
loan and credit card portfolios, and is consistent with our objectives of
de-emphasizing consumer lending and expanding commercial lending.
Investment securities averaged $813.8 million, $451.4 million and
$431.9 million for the years ended December 31, 2002, 2001 and 2000,
respectively, reflecting increases of $362.4 million and $19.5 million for the
years ended December 31, 2002 and 2001, respectively. The significant increase
in 2002 is primarily attributable to an increase in purchases of
available-for-sale investment securities due to reduced loan demand and our
acquisition of Plains, which provided us with $81.0 million in investment
securities. The increase for 2001 is primarily associated with investment
securities that we acquired in conjunction with our 2000 and 2001 acquisitions
and the investment of excess funds available due to reduced loan demand. This
increase was partially offset by the liquidation of certain acquired investment
securities, a higher than normal level of calls of investment securities prior
to their normal maturity dates experienced throughout 2001 resulting from the
general decline in interest rates, and sales of certain available-for-sale
investment securities.
Nonearning assets averaged $687.8 million for the year ended December
31, 2002, compared to $562.9 million and $359.2 million for the years ended
December 31, 2001 and 2000, respectively. The increases in average nonearning
assets in 2002 and 2001 are primarily due to additional derivative instruments
associated with three new swap agreements entered into in 2002, and the
implementation of SFAS No. 133 in January 2001, respectively. Bank premises and
equipment, net of depreciation and amortization, was $152.4 million at December
31, 2002, in comparison to $149.6 million and $114.8 million at December 31,
2001 and 2000, respectively. We primarily attribute the increase in bank
premises and equipment to our acquisitions, the purchase and remodeling of a new
operations center and corporate administrative building during 2001, and the
construction and/or renovation of various branch offices. In addition, the
increase in intangibles of $26.7 million from $125.4 million at December 31,
2001 to $152.1 million at December 31, 2002 results from goodwill attributable
to our 2002 acquisitions, including $12.4 million associated with the purchase
of the public shares of FBA.
We use deposits as our primary funding source and acquire them from a
broad base of local markets, including both individual and corporate customers.
Deposits averaged $5.96 billion, $5.09 billion and $4.48 billion for the years
ended December 31, 2002, 2001 and 2000, respectively. Total deposits increased
by $488.9 million to $6.17 billion at December 31, 2002 from $5.68 billion at
December 31, 2001. We credit the increases primarily to our acquisitions
completed during the respective periods and the expansion of our deposit product
and service offerings available to our customer base. The increase for 2002 also
reflects an increase in savings accounts offset by a decline in certain large
commercial accounts due primarily to general economic conditions resulting from
the fact that consumers are generally more inclined to retain a higher level of
liquid assets during times of economic uncertainty. The overall increase for
2001 was partially offset by an anticipated level of account attrition
associated with our acquisitions during the fourth quarter of 2000 and $50.0
million of time deposits of $100,000 or more that either matured or were called
in September 2001.
Short-term borrowings averaged $194.1 million, $158.0 million and
$106.1 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The increase in the average balance for 2002 reflects a $54.1
million increase in securities sold under agreements to repurchase principally
in connection with the cash management activities of our commercial deposit
customers as well as a $15.0 million increase in federal funds purchased, offset
by a $17.0 million decline in Federal Home Loan Bank advances. Short-term
borrowings increased by $102.5 million to $243.1 million at December 31, 2001
from $140.6 million at December 31, 2000. This increase reflects a $17.5 million
increase in securities sold under agreements to repurchase, a $15.1 million
increase in Federal Home Loan Bank advances acquired in conjunction with our
Union acquisition, and a $70.0 million increase in federal funds purchased.
Our note payable averaged $17.9 million, $41.6 million and $51.9
million for the years ended December 31, 2002, 2001 and 2000, respectively. Our
note payable decreased by $20.5 million to $7.0 million at December 31, 2002
from $27.5 million at December 31, 2001 due to repayments funded primarily
through dividends from our subsidiaries and the issuance of additional trust
preferred securities in April 2002, offset by a $36.5 million advance utilized
to fund our acquisition of Plains in January 2002. Similarly, the reduction for
2001 was primarily funded with dividends from our subsidiaries and the issuance
of additional trust preferred securities in November 2001. The balance of our
note payable at December 31, 2002 results from a $7.0 million advance drawn on
December 31, 2002 to partially fund our purchase of the public shares of FBA.
During October 2000, First Preferred Capital Trust II issued $57.5
million of 10.24% trust preferred securities. Proceeds from this offering, net
of underwriting fees and offering expenses, were $55.1 million and were used to
reduce borrowings and subsequently to partially fund our acquisitions of
Commercial Bank of San Francisco in October 2000 and Millennium Bank in December
2000. Distributions payable on these trust preferred securities were $5.9
million for the years ended December 31, 2002 and 2001, and $1.2 million for the
year ended December 31, 2000. During November 2001, First Preferred Capital
Trust III issued $55.2 million of 9.00% trust preferred securities. Proceeds
from this offering, net of underwriting fees and offering expenses, were $52.9
million and were used to reduce borrowings. Distributions payable on these trust
preferred securities were $5.0 million and $634,000 for the years ended December
31, 2002 and 2001, respectively. On April 10, 2002, First Bank Capital Trust
issued $25.0 million of variable rate cumulative trust preferred securities in a
private placement. Proceeds from this offering, net of underwriting fees and
offering expenses, were $24.2 million and were used to reduce borrowings.
Distributions payable on these trust preferred securities were $1.1 million for
the year ended December 31, 2002. The distributions on all issues of our trust
preferred securities are recorded as interest expense in our consolidated
financial statements appearing elsewhere in this report.
Stockholders' equity averaged $478.6 million, $404.1 million and $321.9
million for the years ended December 31, 2002, 2001 and 2000, respectively. We
primarily attribute the increase for 2002 to net income of $45.2 million and an
increase in accumulated other comprehensive income of $26.2 million, offset by
dividends paid on our Class A and Class B preferred stock. The $26.2 million
increase in accumulated other comprehensive income reflects $17.3 million
associated with our derivative financial instruments as accounted for under SFAS
No. 133 and $8.9 million associated with the change in unrealized gains and
losses on available