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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares Outstanding
Class at July 31, 2003
----- ----------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - (UNAUDITED):
CONSOLIDATED BALANCE SHEETS......................................................... 1
CONSOLIDATED STATEMENTS OF INCOME................................................... 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME........................................................ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS............................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................... 28
ITEM 4. CONTROLS AND PROCEDURES............................................................. 29
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 30
SIGNATURES........................................................................................ 31
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2003 2002
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks....................................................... $ 165,354 194,519
Interest-bearing deposits with other financial institutions
with maturities of three months or less..................................... 2,786 832
Federal funds sold............................................................ 116,100 7,900
------------ -----------
Total cash and cash equivalents.......................................... 284,240 203,251
------------ -----------
Investment securities:
Available for sale, at fair value............................................. 860,462 1,120,894
Held to maturity, at amortized cost (fair value of $14,104 and $16,978
at June 30, 2003 and December 31, 2002, respectively)....................... 13,486 16,426
------------ -----------
Total investment securities.............................................. 873,948 1,137,320
------------ -----------
Loans:
Commercial, financial and agricultural........................................ 1,401,159 1,443,016
Real estate construction and development...................................... 1,066,585 989,650
Real estate mortgage.......................................................... 2,442,267 2,444,122
Lease financing............................................................... 97,622 126,738
Consumer and installment...................................................... 87,438 86,763
Loans held for sale........................................................... 299,254 349,965
------------ -----------
Total loans.............................................................. 5,394,325 5,440,254
Unearned discount............................................................. (8,726) (7,666)
Allowance for loan losses..................................................... (107,848) (99,439)
------------ -----------
Net loans................................................................ 5,277,751 5,333,149
------------ -----------
Derivative instruments............................................................. 88,239 97,887
Bank premises and equipment, net of accumulated
depreciation and amortization................................................. 146,979 152,418
Goodwill........................................................................... 142,167 140,112
Bank-owned life insurance.......................................................... 95,022 92,616
Accrued interest receivable........................................................ 33,515 35,638
Deferred income taxes.............................................................. 87,846 92,157
Other assets....................................................................... 69,532 58,252
------------ -----------
Total assets............................................................. $ 7,099,239 7,342,800
============ ===========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2003 2002
---- ----
(unaudited)
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing........................................................ $ 1,041,668 986,674
Interest-bearing............................................................ 846,030 819,429
Savings....................................................................... 2,107,417 2,176,616
Time:
Time deposits of $100 or more............................................... 416,192 469,904
Other time deposits......................................................... 1,603,479 1,720,197
------------ -----------
Total deposits........................................................... 6,014,786 6,172,820
Short-term borrowings.............................................................. 197,410 265,644
Note payable....................................................................... 34,500 7,000
Guaranteed preferred beneficial interests in
subordinated debentures....................................................... 210,701 270,039
Accrued interest payable........................................................... 9,395 11,751
Deferred income taxes.............................................................. 51,104 61,204
Accrued expenses and other liabilities............................................. 42,826 35,301
------------ -----------
Total liabilities........................................................ 6,560,722 6,823,759
------------ -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding............................................................. -- --
Class A convertible, adjustable rate, $20.00 par value, 750,000
shares authorized, 641,082 shares issued and outstanding.................... 12,822 12,822
Class B adjustable rate, $1.50 par value, 200,000 shares authorized,
160,505 shares issued and outstanding....................................... 241 241
Common stock, $250.00 par value, 25,000 shares authorized,
23,661 shares issued and outstanding.......................................... 5,915 5,915
Additional paid-in capital......................................................... 5,910 5,910
Retained earnings.................................................................. 467,092 433,689
Accumulated other comprehensive income............................................. 46,537 60,464
------------ -----------
Total stockholders' equity............................................... 538,517 519,041
------------ -----------
Total liabilities and stockholders' equity............................... $ 7,099,239 7,342,800
============ ===========
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Interest and fees on loans............................................ $ 89,680 98,782 180,292 197,824
Investment securities................................................. 8,278 7,868 16,831 15,149
Federal funds sold and other.......................................... 312 653 754 942
-------- -------- -------- --------
Total interest income............................................ 98,270 107,303 197,877 213,915
-------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................. 1,478 2,281 3,151 3,953
Savings............................................................. 5,785 9,265 12,571 18,434
Time deposits of $100 or more....................................... 3,336 4,889 7,021 10,179
Other time deposits................................................. 11,088 16,970 23,282 35,851
Short-term borrowings................................................. 519 912 1,121 1,829
Note payable.......................................................... 50 181 186 530
Guaranteed preferred debentures....................................... 5,001 7,117 10,369 13,329
-------- -------- -------- --------
Total interest expense........................................... 27,257 41,615 57,701 84,105
-------- -------- -------- --------
Net interest income.............................................. 71,013 65,688 140,176 129,810
Provision for loan losses.................................................. 10,000 12,000 21,000 25,000
-------- -------- -------- --------
Net interest income after provision for loan losses.............. 61,013 53,688 119,176 104,810
-------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees......... 9,005 7,014 17,649 13,494
Gain on mortgage loans sold and held for sale......................... 10,058 7,292 20,736 12,459
Net gain on sales of available-for-sale investment securities......... 307 -- 6,566 92
Bank-owned life insurance investment income........................... 1,433 1,526 2,704 2,813
Net gain (loss) on derivative instruments............................. 419 90 426 (249)
Other................................................................. 4,209 4,607 8,995 10,755
-------- -------- -------- --------
Total noninterest income......................................... 25,431 20,529 57,076 39,364
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits........................................ 31,500 28,895 60,859 56,156
Occupancy, net of rental income....................................... 5,549 4,964 10,483 9,636
Furniture and equipment............................................... 4,535 4,396 9,104 8,539
Postage, printing and supplies........................................ 1,292 1,317 2,598 2,859
Information technology fees........................................... 8,409 8,497 16,442 16,597
Legal, examination and professional fees.............................. 2,165 2,106 3,771 3,597
Amortization of intangibles associated with
the purchase of subsidiaries........................................ 658 482 1,190 964
Communications........................................................ 668 908 1,273 1,704
Advertising and business development.................................. 925 1,507 2,234 2,951
Other................................................................. 8,350 6,148 15,782 13,075
-------- -------- -------- --------
Total noninterest expense........................................ 64,051 59,220 123,736 116,078
-------- -------- -------- --------
Income before provision for income taxes and
minority interest in income of subsidiary.................... 22,393 14,997 52,516 28,096
Provision for income taxes................................................. 7,693 5,328 18,785 10,099
-------- -------- -------- --------
Income before minority interest in income of subsidiary ......... 14,700 9,669 33,731 17,997
Minority interest in income of subsidiary.................................. -- 301 -- 629
-------- -------- -------- --------
Net income....................................................... 14,700 9,368 33,731 17,368
Preferred stock dividends.................................................. 132 132 328 328
-------- -------- -------- --------
Net income available to common stockholders...................... $ 14,568 9,236 33,403 17,040
======== ======== ======== ========
Basic earnings per common share............................................ $ 615.70 390.35 1,411.74 720.18
======== ======== ======== ========
Diluted earnings per common share.......................................... $ 606.04 384.48 1,390.06 712.75
======== ======== ======== ========
Weighted average common stock outstanding.................................. 23,661 23,661 23,661 23,661
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Six Months Ended June 30, 2003 and 2002 and Six Months Ended December 31, 2002
(dollars expressed in thousands, except per share data)
Adjustable Rate Accu-
Preferred Stock mulated
--------------- Other Total
Class A Additional Compre- Compre- Stock-
Conver- Common Paid-In hensive Retained hensive holders'
tible Class B Stock Capital Income Earnings Income Equity
----- ------- ----- ------- ------ -------- ------ ------
Consolidated balances, December 31, 2001......... $12,822 241 5,915 6,074 389,308 34,297 448,657
Six months ended June 30, 2002:
Comprehensive income:
Net income................................. -- -- -- -- 17,368 17,368 -- 17,368
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 7,620 -- 7,620 7,620
Derivative instruments:
Current period transactions............ -- -- -- -- 6,397 -- 6,397 6,397
------
Comprehensive income....................... 31,385
======
Class A preferred stock dividends,
$0.50 per share.......................... -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share.......................... -- -- -- -- (7) -- (7)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- (116) -- -- (116)
------- ---- ----- ----- ------- ------ -------
Consolidated balances, June 30, 2002............. 12,822 241 5,915 5,958 406,348 48,314 479,598
Six months ended December 31, 2002:
Comprehensive income:
Net income................................. -- -- -- -- 27,799 27,799 -- 27,799
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 1,289 -- 1,289 1,289
Derivative instruments:
Current period transactions............ -- -- -- -- 10,861 -- 10,861 10,861
------
Comprehensive income....................... -- -- -- -- 39,949
======
Class A preferred stock dividends,
$0.70 per share.......................... -- -- -- -- (448) -- (448)
Class B preferred stock dividends,
$0.07 per share.......................... -- -- -- -- (10) -- (10)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- (48) -- -- (48)
------- ---- ----- ----- ------- ------ -------
Consolidated balances, December 31, 2002......... 12,822 241 5,915 5,910 433,689 60,464 519,041
Six months ended June 30, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 33,731 33,731 -- 33,731
Other comprehensive income, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (6,288) -- (6,288) (6,288)
Derivative instruments:
Current period transactions............ -- -- -- -- (7,639) -- (7,639) (7,639)
------
Comprehensive income....................... 19,804
======
Class A preferred stock dividends,
$0.50 per share.......................... -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share.......................... -- -- -- -- (7) -- (7)
------- ---- ----- ----- ------- ------ -------
Consolidated balances, June 30, 2003............. $12,822 241 5,915 5,910 467,092 46,537 538,517
======= ==== ===== ===== ======= ====== =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, December 31,
------------------ ----------------
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
Unrealized (losses) gains on investment securities
arising during the period.............................. $(430) 7,086 (2,020) 7,680 1,288
Less reclassification adjustment for gains
(losses) included in net income........................ 200 -- 4,268 60 (1)
----- ----- ------ ------ -----
Unrealized (losses) gains on investment securities........ $(630) 7,086 (6,288) 7,620 1,289
===== ===== ====== ===== =====
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Six Months Ended
June 30,
-----------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income........................................................................... $ 33,731 17,368
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of bank premises and equipment....................... 9,713 9,261
Amortization, net of accretion..................................................... 11,706 7,020
Originations and purchases of loans held for sale.................................. (1,190,559) (806,713)
Proceeds from the sale of loans held for sale...................................... 1,125,264 757,023
Provision for loan losses.......................................................... 21,000 25,000
Provision for income taxes......................................................... 18,785 10,099
Payments of income taxes........................................................... (18,804) (15,792)
Decrease (increase)in accrued interest receivable.................................. 2,810 (218)
Interest accrued on liabilities.................................................... 57,701 84,105
Payments of interest on liabilities................................................ (60,201) (81,341)
Gain on mortgage loans sold and held for sale...................................... (20,736) (12,459)
Net gain on sales of available-for-sale investment securities...................... (6,566) (92)
Net (gain) loss on derivative instruments.......................................... (426) 249
Other operating activities, net.................................................... 5,376 3,147
Minority interest in income of subsidiary.......................................... -- 629
---------- ---------
Net cash used in operating activities........................................... (11,206) (2,714)
---------- ---------
Cash flows from investing activities:
Cash received for acquired entities, net of cash
and cash equivalents............................................................... 14,870 44,097
Proceeds from sales of investment securities available for sale...................... 120,784 192
Maturities of investment securities available for sale............................... 600,347 398,629
Maturities of investment securities held to maturity................................. 3,024 2,405
Purchases of investment securities available for sale................................ (324,419) (416,673)
Purchases of investment securities held to maturity.................................. (102) (2,260)
Net decrease in loans................................................................ 21,830 118,128
Recoveries of loans previously charged-off........................................... 10,317 8,297
Purchases of bank premises and equipment............................................. (1,858) (7,621)
Other investing activities, net...................................................... 4,369 4,721
---------- ---------
Net cash provided by investing activities....................................... 449,162 149,915
---------- ---------
Cash flows from financing activities:
(Decrease) increase in demand and savings deposits................................... (38,337) 58,743
Decrease in time deposits............................................................ (212,505) (114,739)
Decrease in federal funds purchased.................................................. (55,000) (81,000)
Decrease in Federal Home Loan Bank advances.......................................... (3,165) (4,600)
(Decrease) increase in securities sold under agreements to repurchase................ (11,617) 23,267
Advances drawn on note payable....................................................... 34,500 36,500
Repayments of note payable........................................................... (7,000) (54,000)
Proceeds from issuance of guaranteed preferred beneficial interests
in subordinated debentures......................................................... 68,735 24,233
Payments for redemption of guaranteed preferred beneficial
interests in subordinated debentures............................................... (132,250) --
Payment of preferred stock dividends................................................. (328) (328)
---------- ---------
Net cash used in financing activities........................................... (356,967) (111,924)
---------- ---------
Net increase in cash and cash equivalents....................................... 80,989 35,277
Cash and cash equivalents, beginning of period............................................ 203,251 241,874
---------- ---------
Cash and cash equivalents, end of period.................................................. $ 284,240 277,151
========== =========
Noncash investing and financing activities:
Loans transferred to other real estate............................................... $ 10,850 1,622
Loans held for sale transferred to loans............................................. 7,066 2,741
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of First Banks, Inc. and
subsidiaries (First Banks or the Company) are unaudited and should be read in
conjunction with the consolidated financial statements contained in the 2002
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and conform to predominant practices within the banking
industry. Management of First Banks has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from those
estimates. In the opinion of management, all adjustments, consisting of normal
recurring accruals considered necessary for a fair presentation of the results
of operations for the interim periods presented herein, have been included.
Operating results for the three and six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
The consolidated financial statements include the accounts of First
Banks, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications of 2002 amounts
have been made to conform to the 2003 presentation.
First Banks operates through its wholly owned subsidiary bank holding
company, The San Francisco Company (SFC), headquartered in San Francisco,
California, and SFC's wholly owned subsidiary bank, First Bank, headquartered in
St. Louis County, Missouri.
(2) ACQUISITIONS, ACQUISITION AND INTEGRATION COSTS AND OTHER CORPORATE
TRANSACTIONS
On March 31, 2003, First Banks completed its acquisition of Bank of
Ste. Genevieve, Ste. Genevieve, Missouri, from Allegiant Bancorp, Inc.
(Allegiant) in exchange for approximately 974,150 shares of Allegiant common
stock that were previously held by First Banks. The purpose of the acquisition
was to further expand the Company's Midwest banking franchise. First Banks
continues to own approximately 232,000 shares, or approximately 1.52% of the
issued and outstanding shares of Allegiant common stock. At the time of the
transaction, Bank of Ste. Genevieve had $115.1 million in total assets, $42.9
million in loans, net of unearned discount, $797,000 in investment securities,
$93.7 million in deposits and operated two banking locations. The transaction
was accounted for using the purchase method of accounting. First Banks recorded
a gain of $6.3 million on the exchange of the common stock and goodwill of
approximately $2.1 million, which is not expected to be deductible for tax
purposes. The core deposit intangibles, which are expected to be deductible for
tax purposes, were approximately $3.5 million and will be amortized over seven
years utilizing the straight-line method. Bank of Ste. Genevieve was merged with
and into First Bank. Due to the immaterial effect on previously reported
financial information, pro forma disclosures have not been presented for the
aforementioned transaction.
On March 31, 2003, First Banks completed the merger of its two
wholly-owned bank subsidiaries, First Bank and First Bank & Trust, to allow
certain administrative and operational economies not available while the two
banks maintained separate charters.
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 various time periods generally
ranging from two to 15 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 $1.9
million identified in the following table is comprised of contractual
obligations under salary continuation agreements to 11 individuals and have
remaining terms ranging from six months to approximately 13 years. As the
obligation to make payments under these agreements are accrued at the
consummation dates, such payments do not have any impact on our consolidated
statements of income.
A summary of the cumulative acquisition and integration costs
attributable to our acquisitions, which were accrued as of the consummation
dates of the respective acquisitions, 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
--------- --------------- -----
(dollars expressed in thousands)
Balance at December 31, 2002..................................... $ 2,351 28 2,379
Six Months Ended June 30, 2003:
Amounts accrued at acquisition date........................... 100 350 450
Payments...................................................... (599) (242) (841)
-------- ----- ------
Balance at June 30, 2003......................................... $ 1,852 136 1,988
======== ===== ======
We also incur costs associated with our acquisitions that are expensed
in our consolidated statements of income. These costs relate exclusively to
additional costs incurred in conjunction with the data processing conversions of
the respective entities.
(3) INTANGIBLE ASSETS ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES, NET OF
AMORTIZATION
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at June 30, 2003 and December 31,
2002:
June 30, 2003 December 31, 2002
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles.............. $ 17,391 (2,988) 13,871 (1,869)
Goodwill associated with
purchases of branch offices......... 2,210 (790) 2,210 (718)
--------- ------- ------- -------
Total............................ $ 19,601 (3,778) 16,081 (2,587)
========= ======= ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 140,747 138,620
========= =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $658,000 and $1.2 million for the three and
six months ended June 30, 2003, respectively, and $482,000 and $964,000 for the
comparable periods in 2002. Amortization of intangibles associated with the
purchase of subsidiaries, including amortization of core deposit intangibles and
branch purchases, has been estimated through 2008 in the following table, and
does not take into consideration any potential future acquisitions or branch
purchases.
(dollars expressed in thousands)
Year ending December 31:
2003 (1)........................................... $ 2,506
2004............................................... 2,632
2005............................................... 2,632
2006............................................... 2,632
2007............................................... 2,632
2008............................................... 2,632
--------
Total........................................... $ 15,666
========
------------------------
(1)Includes $1.2 million of amortization for the six months ended June 30, 2003.
Changes in the carrying amount of goodwill for the three and six months
ended June 30, 2003 and 2002 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period.................................... $ 141,102 128,670 140,112 115,860
Goodwill acquired during period................................. -- -- 1,026 12,577
Acquisition-related adjustments................................. 1,101 (838) 1,101 (569)
Amortization - purchases of branch offices...................... (36) (36) (72) (72)
--------- -------- -------- --------
Balance, end of period.......................................... $ 142,167 127,796 142,167 127,796
========= ======== ======== ========
(4) MORTGAGE BANKING ACTIVITIES
At June 30, 2003 and December 31, 2002, First Banks serviced loans for
others amounting to $1.28 billion and $1.29 billion, respectively. Borrowers'
escrow balances held by First Banks on such loans were $2.2 million and $517,000
at June 30, 2003 and December 31, 2002, respectively. Mortgage servicing rights
are amortized in proportion to the related estimated net servicing income on a
basis that approximates the disaggregated, discounted basis over the estimated
lives of the related mortgages considering the level of current and anticipated
repayments, which range from five to ten years. The weighted average
amortization period of the mortgage servicing rights is approximately five
years.
Changes in mortgage servicing rights, net of amortization, for the
periods indicated were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period................................ $ 15,678 11,746 14,882 10,125
Originated mortgage servicing rights........................ 2,521 1,522 4,494 3,960
Amortization................................................ (1,220) (914) (2,397) (1,731)
-------- ------- ------- -------
Balance, end of period...................................... $ 16,979 12,354 16,979 12,354
======== ======= ======= =======
The fair value of mortgage servicing rights was approximately $18.2
million and $18.8 million at June 30, 2003 and 2002, respectively, and $17.2
million at December 31, 2002. The excess of the fair value of mortgage servicing
rights over the carrying value was approximately $1.2 million and $6.4 million
at June 30, 2003 and 2002, respectively, and $2.3 million at December 31, 2002.
The decline in the excess of the fair value of mortgage servicing rights over
the carrying value represents the declining mortgage interest rate environment
in 2002 that resulted in a significant increase in the number of mortgages being
prepaid or refinanced. In addition, the increased prepayment experience that
occurred as a result of the reduced mortgage interest rate environment during
2002 resulted in a decline in the fair value of the remaining mortgage servicing
rights. However, the decline in the fair value of the mortgage servicing rights
did not result in the fair value being reduced below the carrying value at June
30, 2003.
Amortization of mortgage servicing rights, as it relates to the balance
at June 30, 2003 of $17.0 million, has been estimated through 2008 in the
following table:
(dollars expressed in thousands)
Year ending December 31:
2003 (1)........................................... $ 2,489
2004............................................... 4,592
2005............................................... 4,248
2006............................................... 3,521
2007............................................... 1,845
2008............................................... 284
---------
Total........................................... $ 16,979
=========
-----------------------------
(1) Excludes $2.4 million of amortization for the six months ended June 30, 2003.
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share (EPS) computations for the periods
indicated:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except per share data)
Three months ended June 30, 2003:
Basic EPS - income available to common stockholders............. $ 14,568 23,661 $ 615.70
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 588 (9.66)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 14,696 24,249 $ 606.04
========= ======= ==========
Three months ended June 30, 2002:
Basic EPS - income available to common stockholders............. $ 9,236 23,661 $ 390.35
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 695 (5.87)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 9,364 24,356 $ 384.48
========= ======= ==========
Six months ended June 30, 2003:
Basic EPS - income available to common stockholders............. $ 33,403 23,661 $ 1,411.74
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 600 (21.68)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 33,724 24,261 $ 1,390.06
========= ======= ==========
Six months ended June 30, 2002:
Basic EPS - income available to common stockholders............. $ 17,040 23,661 $ 720.18
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 696 (7.43)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 17,361 24,357 $ 712.75
========= ======= ==========
(6) TRANSACTIONS WITH RELATED PARTIES
First Title Guarantee LLC (First Title), a corporation established and
administered by and for the benefit of First Banks' Chairman and members of his
immediate family, received approximately $138,000 and $251,000 for the three and
six months ended June 30, 2003, and $85,000 and $168,000 for the comparable
periods in 2002, respectively, in commissions for policies purchased by First
Banks or customers of First Bank from unaffiliated, third-party insurors. The
insurance premiums on which the aforementioned commissions were earned were
competitively bid, and First Banks deems the commissions First Title earned from
unaffiliated third-party companies to be comparable to those that would have
been earned by an unaffiliated third-party agent.
First Brokerage America, L.L.C., a limited liability corporation which
is indirectly owned by First Banks' Chairman and members of his immediate
family, received approximately $725,000 and $1.6 million for the three and six
months ended June 30, 2003, and $978,000 and $1.7 million for the comparable
periods in 2002, respectively, in commissions paid by unaffiliated third-party
companies. The commissions received were primarily in connection with the sales
of annuities, securities and other insurance products to customers of First
Bank.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and members of his immediate family, provides information
technology and various related services to First Banks, Inc. and First Bank.
Fees paid under agreements with First Services, L.P. were $7.0 million and $13.7
million for the three and six months ended June 30, 2003 and 2002. During the
three months ended June 30, 2003 and 2002, First Services, L.P. paid First Banks
$1.0 and $975,000, respectively, and during the six months ended June 30, 2003
and 2002, First Services, L.P. paid First Banks $2.2 million and $1.9 million,
respectively, in rental fees for the use of data processing and other equipment
owned by First Banks.
During 2002, First Capital America, Inc., a corporation owned by First
Banks' Chairman and members of his immediate family, received approximately $1.0
million of origination and servicing fees associated with commercial leases
originated and serviced for First Bank by the employees of First Capital
America, Inc. Effective January 1, 2003, this relationship was discontinued.
First Bank has had in the past, and may have in the future, loan
transactions in the ordinary course of business with its directors or their
affiliates. These loan transactions have been on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and did not involve more than the normal
risk of collectibility or present other unfavorable features. Loans to
directors, their affiliates and executive officers of First Banks, Inc. were
approximately $16.3 million and $12.8 million at June 30, 2003 and December 31,
2002, respectively. First Bank does not extend credit to its officers or to
officers of First Banks, Inc., except for extensions of credit secured by
mortgages on personal residences, loans to purchase automobiles, overdraft
protection lines and personal credit card accounts.
(7) REGULATORY CAPITAL
First Banks and its subsidiary bank are subject to various regulatory
capital requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on First Banks' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, First Banks and its subsidiary bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and its subsidiary bank to maintain minimum amounts
and ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of June 30, 2003, First Banks and its subsidiary bank were each
well capitalized under the applicable regulations.
As of June 30, 2003, the most recent notification from First Banks'
primary regulator categorized First Banks and its subsidiary bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, First Banks and its subsidiary bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table below. At June 30, 2003 and December 31, 2002, First
Banks' and its subsidiary bank's required and actual capital ratios were as
follows:
Actual To Be Well
------------------------ Capitalized Under
June 30, December 31, For Capital Prompt Corrective
2003 2002 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.11% 10.68% 8.0% 10.0%
First Bank.............................. 10.60% 10.75 8.0 10.0
First Bank & Trust (1).................. -- 10.18 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 8.12 7.47 4.0 6.0
First Bank.............................. 9.34 9.49 4.0 6.0
First Bank & Trust (1).................. -- 8.93 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 7.12 6.45 3.0 5.0
First Bank.............................. 8.20 7.79 3.0 5.0
First Bank & Trust (1) ................. -- 8.26 3.0 5.0
---------------------------
(1) First Bank & Trust was merged with and into First Bank on March 31, 2003.
(8) BUSINESS SEGMENT RESULTS
First Banks' business segment is its subsidiary bank. The reportable
business segment is consistent with the management structure of First Banks, the
subsidiary bank and the internal reporting system that monitors performance.
Through its branch network, First Bank provides similar products and
services in its defined geographic areas. The products and services offered
include a broad range of commercial and personal deposit products, including
demand, savings, money market and time deposit accounts. In addition, First Bank
markets 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. First Bank also offers 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 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 and trust, private banking and
institutional money management services. The revenues generated by First Bank
consist primarily of interest income, generated from the loan and investment
security portfolios, and service charges and fees, generated from the deposit
products and services. The geographic areas include eastern Missouri, Illinois,
southern and northern California and Houston, Dallas, Irving, McKinney and
Denton, Texas. The products and services are offered to customers primarily
within First Bank's respective geographic areas.
The business segment results are consistent with First Banks' internal
reporting system and, in all material respects, with accounting principles
generally accepted in the United States of America and practices predominant in
the banking industry.
The business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------- ----------------------- ------------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2003 2002 (2) 2003 2002 2003 2002
---- -------- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $ 868,765 1,114,479 5,183 22,841 873,948 1,137,320
Loans, net of unearned discount......... 5,385,599 5,432,589 -- (1) 5,385,599 5,432,588
Goodwill................................ 142,167 140,112 -- -- 142,167 140,112
Total assets............................ 7,099,926 7,357,155 (687) (14,355) 7,099,239 7,342,800
Deposits................................ 6,036,318 6,189,928 (21,532) (17,108) 6,014,786 6,172,820
Note payable............................ -- -- 34,500 7,000 34,500 7,000
Stockholders' equity.................... 779,132 777,548 (240,615) (258,507) 538,517 519,041
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
---------- --------------------- -----------------------
Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30,
---------------------- ---------------------- -----------------------
2003 2002 (2) 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Income statement information:
Interest income......................... $ 98,168 107,162 102 141 98,270 107,303
Interest expense........................ 22,278 34,352 4,979 7,263 27,257 41,615
---------- --------- -------- -------- --------- ---------
Net interest income................ 75,890 72,810 (4,877) (7,122) 71,013 65,688
Provision for loan losses............... 10,000 12,000 -- -- 10,000 12,000
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses........ 65,890 60,810 (4,877) (7,122) 61,013 53,688
Noninterest income...................... 25,362 21,079 69 (550) 25,431 20,529
Noninterest expense..................... 62,497 58,585 1,554 635 64,051 59,220
---------- --------- -------- -------- --------- ---------
Income before provision for
income taxes and minority
interest in income of
subsidiary....................... 28,755 23,304 (6,362) (8,307) 22,393 14,997
Provision for income taxes.............. 10,410 8,087 (2,717) (2,759) 7,693 5,328
---------- --------- -------- -------- --------- ---------
Income before minority interest
in income of subsidiary.......... 18,345 15,217 (3,645) (5,548) 14,700 9,669
Minority interest in income
of subsidiary.................... -- -- -- 301 -- 301
---------- --------- -------- -------- --------- ---------
Net income......................... $ 18,345 15,217 (3,645) (5,849) 14,700 9,368
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------ ---------------------- -----------------------
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
------------------------ ---------------------- -----------------------
2003 2002 (2) 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Income statement information:
Interest income.......................... $ 197,696 213,770 181 145 197,877 213,915
Interest expense......................... 47,282 70,443 10,419 13,662 57,701 84,105
--------- --------- -------- -------- --------- ---------
Net interest income................. 150,414 143,327 (10,238) (13,517) 140,176 129,810
Provision for loan losses................ 21,000 25,000 -- -- 21,000 25,000
--------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses......... 129,414 118,327 (10,238) (13,517) 119,176 104,810
Noninterest income....................... 50,989 40,486 6,087 (1,122) 57,076 39,364
Noninterest expense...................... 121,810 114,266 1,926 1,812 123,736 116,078
--------- --------- -------- -------- --------- ---------
Income before provision for
income taxes and
minority interest in
income of subsidiary.............. 58,593 44,547 (6,077) (16,451) 52,516 28,096
Provision for income taxes............... 20,893 15,555 (2,108) (5,456) 18,785 10,099
--------- --------- -------- -------- --------- ---------
Income before minority interest in
income of subsidiary.............. 37,700 28,992 (3,969) (10,995) 33,731 17,997
Minority interest in income
of subsidiary..................... -- -- -- 629 -- 629
--------- --------- -------- -------- --------- ---------
Net income.......................... $ 37,700 28,992 (3,969) (11,624) 33,731 17,368
========= ========= ======== ======== ========= =========
- ---------------------------
(1) Corporate and other includes $5.0 million and $7.1 million of guaranteed preferred debentures expense for the three
months ended June 30, 2003 and 2002, respectively. The applicable income tax benefit associated with the guaranteed
preferred debentures expense was $1.8 million and $2.5 million for the three months ended June 30, 2003 and 2002,
respectively. For the six months ended June 2003 and 2002, corporate and other includes $10.4 million and $13.3
million of guaranteed preferred debenture expense, respectively. The applicable income tax benefit associated with
the guaranteed preferred debentures expense was $3.6 million and $4.7 million for the six months ended June 30, 2003
and 2002, respectively. In addition, corporate and other includes holding company expenses.
(2) First Bank & Trust was merged with and into First Bank on March 31, 2003 as further described in Note 2 to our
accompanying consolidated financial statements. Accordingly, the 2002 amounts have been restated to reflect this
combination of entities under common control.
(9) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBENTURES
On March 20, 2003, First Bank Statutory Trust (FBST), a newly formed
Connecticut statutory trust subsidiary of First Banks, issued 25,000 shares of
8.10% cumulative trust preferred securities at $1,000 per share in a private
placement, and issued 774 shares of common securities to First Banks at $1,000
per share. First Banks owns all of the common securities of FBST. The gross
proceeds of the offering were used by FBST to purchase $25.0 million of 8.10%
junior subordinated debentures from First Banks, maturing on March 20, 2033. The
maturity date of the subordinated debentures may be shortened to a date not
earlier than March 20, 2008, if certain conditions are met. The subordinated
debentures are the sole asset of FBST. In connection with the issuance of the
FBST preferred securities, First Banks made certain guarantees and commitments
that, in the aggregate, constitute a full and unconditional guarantee by First
Banks of the obligations of FBST under the FBST preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to FBST, net of
offering expenses, were $24.5 million. Distributions on FBST's preferred
securities are payable quarterly in arrears, beginning March 31, 2003, and are
included in interest expense in the consolidated statements of income.
Distributions on FBST's preferred securities were $528,000 and $592,000 for the
three and six months ended June 30, 2003, respectively.
On April 1, 2003, First Preferred Capital Trust IV (First Preferred
IV), a newly formed Delaware business trust subsidiary of First Banks, issued
1.84 million shares of 8.15% cumulative trust preferred securities at $25 per
share in an underwritten public offering, and issued 56,908 shares of common
securities to First Banks at $25 per share. First Banks owns all of First
Preferred IV's common securities. The gross proceeds of the offering were used
by First Preferred IV to purchase approximately $47.4 million of 8.15%
subordinated debentures from First Banks, maturing on June 30, 2033. The
maturity date may be shortened to a date not earlier than June 30, 2008, if
certain conditions are met. The subordinated debentures are the sole asset of
First Preferred IV. In connection with the issuance of the preferred securities,
First Banks made certain guarantees and commitments that, in the aggregate,
constitute a full and unconditional guarantee by First Banks of the obligations
of First Preferred IV under the First Preferred IV preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to First
Preferred IV, net of underwriting fees and offering expenses, were approximately
$44.2 million. Distributions on First Preferred IV's preferred securities are
payable quarterly in arrears, beginning on June 30, 2003, and are included in
interest expense in the consolidated statements of income. Distributions on
First Preferred IV's preferred securities were $956,000 for the three and six
months ended June 30, 2003. First Banks utilized the entire net proceeds of the
offering to redeem $88.9 million of 9.25% trust preferred securities issued by
First Preferred Capital Trust in 1997. The remaining funds necessary for the
redemption were provided from available cash of approximately $20.2 million and
the net proceeds of $24.5 million from FBST's issuance of additional trust
preferred securities as described above.
On June 30, 2003, First Banks completed its redemption in full of the
$47.2 million of 8.50% trust preferred securities issued by First America
Capital Trust (FACT) in 1998. The funds necessary for the redemption were
provided from available cash of $12.7 million and an advance of $34.5 million on
First Banks' revolving credit line with a group of unaffiliated financial
institutions.
(10) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty
contracts. For value received, and for the purpose of inducing a pension fund
and its trustees and a welfare fund and its trustees (the Funds) to conduct
business with Missouri Valley Partners, Inc. (MVP), First Bank's institutional
investment management subsidiary, First Banks irrevocably and unconditionally
guaranteed payment of and promised to pay to each of the Funds any amounts up to
the sum of $5,000,000 to the extent MVP is liable to the Funds for a breach of
the Investment Management Agreements (including the Investment Policy Statement
and Investment Guidelines), by and between MVP and the Funds and/or any
violation of the Employee Retirement Income Security Act by MVP resulting in
liability to the Funds. The guaranties are continuing guaranties of all
obligations that may arise for transactions occurring prior to termination of
the Investment Management Agreements and are co-existent with the term of the
Investment Management Agreements. The Investment Management Agreements have no
specified term but may be terminated at any time upon written notice by the
Trustees or, at First Banks' option, upon thirty days written notice to the
Trustees. In the event of termination of the Investment Management Agreements,
such termination shall have no effect on the liability of First Banks with
respect to obligations incurred before such termination. The obligations of
First Banks are joint and several with those of MVP. First Banks does not have
any recourse provisions that would enable it to recover from third parties any
amounts paid under the contracts nor does First Banks hold any assets as
collateral that, upon occurrence of a required payment under the contract, could
be liquidated to recover all or a portion of the amount(s) paid. At June 30,
2003 and December 31, 2002, First Banks had not recorded a liability for the
obligations associated with these guaranty contracts, as the likelihood that
First Banks will be required to make payments under the contracts is remote.
(11) SUBSEQUENT EVENT - NOTE PAYABLE
On August 14, 2003, First Banks entered into a revolving credit line
with a group of unaffiliated financial institutions (Credit Agreement). The
Credit Agreement, dated August 14, 2003, replaced a similar revolving credit
agreement dated August 22, 2002. The Credit Agreement provides a $60.0 million
revolving credit line and a $20.0 million letter of credit facility. Interest is
payable on outstanding principal loan balances at a floating rate equal to
either the lender's prime rate or, at First Banks' option, the London Interbank
Offering Rate plus a margin determined by the outstanding loan balances and
First Banks' net income for the preceding four calendar quarters. If the loan
balances outstanding under the revolving credit line are accruing at the prime
rate, interest is paid monthly. If the loan balances outstanding under the
revolving credit line are accruing at the London Interbank Offering Rate,
interest is payable based on the one, two, three or six-month London Interbank
Offering Rate, as selected by First Banks. Amounts may be borrowed under the
Credit Agreement until August 12, 2004, at which time the principal and
interest outstanding is due and payable.
The Credit Agreement requires maintenance of certain minimum capital
ratios for First Banks and its subsidiary bank, certain maximum nonperforming
assets ratios for First Banks and its subsidiary bank and a minimum return on
assets ratio for First Banks. In addition, it prohibits the payment of dividends
on First Banks' common stock. Loans under the Credit Agreement are secured by
First Banks' ownership interest in the capital stock of its subsidiaries.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and in the economy, including the negative impact on the economy resulting
from the events of September 11, 2001 in New York City and Washington D.C. and
the national response to those events as well as the threat of future terrorist
activities, existing and 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 our Form 10-Q should therefore not place
undue reliance on forward-looking statements.
General
We are a registered bank holding company incorporated in Missouri and
headquartered in St. Louis County, Missouri. Through the operation of our
subsidiaries, we offer a broad array of financial services to consumer and
commercial customers. We operate through our wholly owned subsidiary bank
holding company, The San Francisco Company, or SFC, headquartered in San
Francisco, California, and its wholly owned subsidiary bank, First Bank,
headquartered in St. Louis County, Missouri. First Bank currently operates 151
branch offices throughout California, Illinois, Missouri and Texas. At June 30,
2003, we had total assets of $7.10 billion, loans, net of unearned discount, of
$5.39 billion, total deposits of $6.01 billion and total stockholders' equity of
$538.5 million.
Through our subsidiary bank, 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 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 and
trust, private banking and institutional money management services.
Primary responsibility for managing our subsidiary banking unit rests
with its officers and directors. However, in keeping with our policy, we
centralize overall corporate policies, procedures and administrative functions
and provide operational support functions for our subsidiary bank. This practice
allows us to achieve various operating efficiencies while allowing our
subsidiary bank officers and directors to focus on customer service.
Financial Condition
Our total assets were $7.10 billion and $7.34 billion at June 30, 2003
and December 31, 2002, respectively. The decrease in total assets is primarily
attributable to weak loan demand and an anticipated level of attrition
associated with low deposit rates offset by the acquisition of Bank of Ste.
Genevieve on March 31, 2003, which provided assets of $115.1 million. Federal
funds sold increased by $108.2 million due to the investment of excess funds
resulting from reduced loan demand and maturities of investment securities.
Investment securities decreased $263.4 million to $873.9 million at June 30,
2003 from $1.14 million at December 31, 2002 primarily due to $603.4 million of
maturities of investment securities, $120.8 million of sales of
available-for-sales investment securities and $17.9 million relating to the
exchange of Allegiant Bancorp, Inc. common stock for a 100% ownership interest
in Bank of Ste. Genevieve, offset by purchases of investment securities of
$324.5 million and $797,000 in investment securities acquired with Bank of Ste.
Genevieve. The net proceeds associated with the decline in investment securities
were utilized primarily to fund our reduction in total deposits as further
discussed below. The decrease in our assets also reflects a decrease in loans,
net of unearned discount, of $47.0 million, which is further discussed under
"--Loans and Allowance for Loan Losses." Our derivative financial instruments
declined to $88.2 million from $97.9 million, consistent with a decline in the
fair value of certain derivative financial instruments and the call of a $46.0
million interest rate swap agreement by the counterparty, offset by two
additional interest rate swap agreements aggregating $71.0 million that we
entered into in 2003 as further discussed under "--Interest Rate Risk
Management." In addition, other assets increased $11.2 million to $69.5 million
at June 30, 2003 from $58.3 million at December 31, 2002. This increase
primarily results from a $7.5 million net increase in other real estate as
further discussed under "--Loans and Allowance for Loan Losses," and a $2.1
million increase in mortgage servicing rights.
Total deposits decreased by $158.0 million to $6.01 billion at June 30,
2003 from $6.17 billion at December 31, 2002. The decrease primarily reflects an
anticipated level of attrition associated with low deposit rates and continued
aggressive competition within our market areas offset by the $93.7 million in
deposits acquired from Bank of Ste. Genevieve. Short-term borrowings decreased
$68.2 million to $197.4 million at June 30, 2003 from $265.6 million at December
31, 2002, primarily due to a $55.0 million reduction in federal funds purchased
and a $11.6 million reduction in securities sold under agreements to repurchase.
Our note payable was fully repaid in February 2003 through dividends from our
subsidiaries. However, on June 30, 2003, we obtained a $34.5 million advance to
partially fund the redemption of $46.0 million of trust preferred securities.
Guaranteed preferred beneficial interests in subordinated debentures decreased
$59.3 million primarily due to the redemtion of $86.3 million of trust preferred
securities issued by First Preferred Capital Trust and $46.0 million of trust
preferred securities issued by First America Capital Trust, partially offset by
the additional trust preferred securities issued by First Bank Statutory Trust
on March 20, 2003 and First Preferred Capital Trust IV on April 1, 2003, as more
fully described in Note 9 to our consolidated financial statements and under
"--Interest Rate Risk Management." Furthermore, accrued expenses and other
liabilities increased $7.5 million to $42.8 million at June 30, 2003 compared to
$35.3 million at December 31, 2002. The increase primarily reflects an increase
in accrued real estate and income taxes and lease termination obligations as
well as the timing of certain payments. Accumulated other comprehensive income
decreased $14.0 million to $46.5 million at June 30, 2003 from $60.5 million at
December 31, 2002 due to $6.3 million associated with the change in unrealized
gains on available-for-sale investment securities as accounted for under
Statement of Financial Accounting Standards, or SFAS, No. 115, including the
$6.3 million reversal of the unrealized gain attributable to the exchange of the
Allegiant common stock, and $7.6 million associated with our derivative
financial instruments as accounted for under SFAS No. 133.
Results of Operations
Net Income
Net income was $14.7 million and $33.7 million for the three and six
months ended June 30, 2003, respectively, compared to $9.4 million and $17.4
million for the comparable periods in 2002. Results for the three and six months
ended June 30, 2003 reflect increased net interest income, noninterest income
and slightly reduced provisions for loan losses, offset by higher operating
expenses. Included in the first quarter of 2003 was a gain of $6.3 million,
before related income taxes, relating to the partial exchange of our investment
in Allegiant Bancorp, Inc. for a 100% ownership interest in Bank of Ste.
Genevieve as further described in Note 2 to our consolidated financial
statements. The increase in earnings in 2003 reflects our adaptation to the low
interest rate environment and weak economic conditions that have prevailed
during the last two years. During this time, we have focused on increasing our
net interest margin, improving asset quality and further strengthening our
overall financial position. Throughout 2002, we experienced higher-than-normal
loan charge-offs, loan delinquencies and nonperforming loans that led to
increased provisions for loan losses, thereby reducing net income. While we
believe we were successful in addressing the asset quality problems during 2002,
we are continuing to closely monitor our operations to address the ongoing
challenges posed by the current economic environment, including reduced loan
demand and lower prevailing interest rates. We experienced continuing growth of
net interest income primarily resulting from reduced deposit rates, the earnings
on our interest rate swap agreements that we entered into in conjunction with
our interest rate risk management program and a reduction in our outstanding
trust preferred securities. In addition, earning assets increased as a result of
our acquisitions of Bank of Ste. Genevieve in March 2003, which provided assets
of $115.1 million and Plains Financial Corporation in January 2002 and two Texas
branch purchases in June 2002, which provided assets of $256.3 million and $63.7
million, respectively. However, prevailing low interest rates, generally weaker
loan demand and overall economic conditions continue to exert pressure on our
net interest income.
Noninterest income was $25.4 million and $57.1 million for the three
and six months ended June 30, 2003, respectively, in comparison to $20.5 million
and $39.4 million for the comparable periods in 2002. The increase in
noninterest income is primarily due to a $6.3 million gain on the exchange of
common stock of Allegiant Bancorp, Inc. held by us for a 100% ownership interest
in Bank of Ste. Genevieve, as further described in Note 2 to our consolidated
financial statements. The increase also reflects increased gains on mortgage
loans sold and held for sale, resulting from growth of our mortgage banking
activities as well as high volumes of new originations and refinancings related
to continued reductions in mortgage loan rates, and increased service charges on
deposit accounts and customer service fees.
Operating expenses were $64.1 million and $123.7 million for the three
and six months ended June 30, 2003, respectively, compared to $59.2 million and
$116.1 million for the comparable periods in 2002. The increased operating
expenses in 2003 primarily result from increased salaries and employee benefit
expenses associated with acquisitions and staff realignments surrounding our
core business strategies and write-downs on operating leases associated with our
commercial leasing business. These higher operating expenses, exclusive of the
operating leases, are reflective of recently completed acquisitions and ongoing
investments made in conjunction with the execution of our overall business plan.
Net Interest Income
Net interest income (expressed on a tax equivalent basis) increased to
$71.4 million, or 4.44% of average interest-earning assets, for the three months
ended June 30, 2003, from $66.1 million, or 4.24% of average interest-earning
assets, for the comparable period in 2002. For the six months ended June 30,
2003 and 2002, net interest income (expressed on a tax equivalent basis) was
$140.9 million, or 4.40% of average interest-earning assets, and $130.5 million,
or 4.22% of average interest-earning assets, respectively. We credit the
increased net interest income primarily to reduced deposit rates, earnings on
our interest rate swap agreements that we entered into in conjunction with our
interest rate risk management program, which mitigate the effects of decreasing
interest rates, and a $61.3 million net reduction in our outstanding trust
preferred securities. As further discussed under "--Interest Rate Risk
Management," our derivative financial instruments used to hedge our interest
rate risk contributed $15.8 million and $30.8 million to net interest income for
the three and six months ended June 30, 2003, respectively, compared to $12.6
million and $23.8 million for the comparable periods in 2002. In addition,
during the second quarter of 2003, we redeemed $132.3 million of our trust
preferred securities that had been issued during 1997 and 1998. As more fully
described in Note 9 to our consolidated financial statements, in March 2003,
First Bank Statutory Trust issued $25.0 million of trust preferred securities in
a private placement and in April 2003, First Preferred Capital Trust IV issued
$46.0 million of trust preferred securities in an underwritten public offering.
These transactions, coupled with the use of additional derivative financial
instruments, have allowed us to reduce our overall expense associated with the
utilization of trust preferred securities, thereby improving our overall
financial performance; however, prevailing low interest rates, generally weak
loan demand and overall economic conditions continue to exert pressure on our
net interest margin.
Average loans, net of unearned discount, were $5.39 billion and $5.38
billion for the three and six months ended June 30, 2003, respectively, compared
to $5.39 billion and $5.44 billion for the comparable periods in 2002.
Additionally, the yield on our loan portfolio decreased to 6.68% and 6.77% for
the three and six months ended June 30, 2003, respectively, compared to 7.36%
and 7.34% for the comparable periods in 2002. We attribute the decline in the
average balance and yields primarily to general economic conditions resulting in
continued weak loan demand and lower prevailing interest rates. The reduced
level of interest income earned on our loan portfolio as a result of declining
interest rates and increased competition within our market areas was partially
mitigated by the earnings associated with our interest rate swap agreements.
For the three and six months ended June 30, 2003, the aggregate
weighted average rate paid on our deposit portfolio decreased to 1.72% and
1.81%, respectively, compared to 2.71% and 2.80% for the comparable periods in
2002. We attribute the decline in rates paid for the three and six months ended
June 30, 2003 primarily to rates paid on savings and time deposits, which have
continued to decline in conjunction with the interest rate reductions previously
discussed. The decline also reflects our continued efforts to restructure the
composition of our deposit base as the majority of our deposit development
programs are directed toward increased transaction accounts, such as demand and
savings accounts, rather than time deposits, and emphasize attracting more than
one account relationship with customers.
The aggregate weighted average rate paid on our note payable was 52.36%
and 17.44% for the three and six months ended June 30, 2003, respectively,
compared to 3.65% and 3.24% for the comparable periods in 2002. The increase in
the weighted average rate paid for the three and six months ended June 30, 2003
primarily reflects increased commitment, arrangement and other fees paid to
amend our secured credit agreement. Due to the small average balance outstanding
on our note payable during the three and six months ended June 30, 2003, the
timing of the recognition of these fees results in a disproportionate weighted
average rate paid for the periods. At December 31, 2002, our note payable had an
outstanding balance of $7.0 million, which was fully repaid from available cash
in February 2003. On June 30, 2003, we obtained a $34.5 million advance to fund
the redemption of our trust preferred securities issued by First America Capital
Trust in 1998, as further described in Note 9 to our consolidated financial
statements. Amounts outstanding under our $45.0 million line of credit with a
group of unaffiliated financial institutions bear interest at the lead bank's
corporate base rate or, at our option, at the London Interbank Offering Rate
plus a margin determined by the outstanding balance and our profitability. Thus,
our revolving credit line represents a relatively high-cost funding source as
increased advances have the effect of increasing the weighted average rate of
non-deposit liabilities. The overall cost of this funding source, however, has
been significantly mitigated by the reductions in the prime lending rate and in
the outstanding balance of our note payable. The aggregate weighted average rate
paid on our short-term borrowings also declined for the three and six months
ended June 30, 2003, as compared to the comparable periods in 2002, reflecting
the current interest rate environment.
Guaranteed preferred debentures expense was $5.0 million and $10.4
million for the three and six months ended June 30, 2003, respectively, compared
to $7.1 million and $13.3 million for the comparable periods in 2002. As
previously discussed and as more fully described in Note 9 to our consolidated
financial statements, the decrease for 2003 primarily reflects the redemption of
$132.3 million of outstanding trust preferred securities, the issuance of $71.0
million of trust preferred securities at lower interest rates and earnings
associated with our interest rate swap agreements entered into in May and June
of 2002 and in March and April of 2003 as further discussed under "--Interest
Rate Risk Management." The aggregate weighted average rate paid on our
guaranteed preferred debentures declined to 6.99% and 7.46% for the three and
six months ended June 30, 2003, respectively, from 11.01% and 10.85% for the
comparable periods in 2002.
The following table sets forth, on a tax-equivalent basis, certain
information relating to First Banks' average balance sheets, and reflects the
average yield earned on interest-earning assets, the average cost of
interest-bearing liabilities and the resulting net interest income for the three
and six months ended June 30, 2003 and 2002:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------------- -----------------------------------------------
2003 2002 2003 2002
------------------------- ---------------------- ---------------------- -----------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ------ ------- ------- ------ ------- ------- ------ ------- ------- ------
(dollars expressed in thousands)
Assets
------
Interest-earning assets:
Loans (1)(2)(3)(4)......... $5,394,650 89,802 6.68% $5,391,165 98,916 7.36% $5,377,314 180,540 6.77% $5,443,106 198,038 7.34%
Investment securities (4).. 941,811 8,523 3.63 701,470 8,127 4.65 951,131 17,314 3.67 679,733 15,644 4.64
Federal funds sold
and other................ 111,365 312 1.12 156,675 653 1.67 127,416 754 1.19 115,364 942 1.65
---------- ------ ---------- ------- ---------- ------- ---------- -------
Total interest-
earning assets...... 6,447,826 98,637 6.14 6,249,310 107,696 6.91 6,455,861 198,608 6.20 6,238,203 214,624 6.94
------ ------- ------- -------
Nonearning assets............ 712,762 663,241 717,565 667,649
---------- ---------- ---------- ----------
Total assets.......... $7,160,588 $6,912,551 $7,173,426 $6,905,852
========== ========== ========== ==========
Liabilities and
---------------
Stockholders' Equity
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits............... $ 866,540 1,478 0.68% $ 731,513 2,281 1.25% $ 853,487 3,151 0.74% $ 695,901 3,953 1.15%
Savings deposits......... 2,115,298 5,785 1.10 1,928,691 9,265 1.93 2,141,369 12,571 1.18 1,921,210 18,434 1.93
Time deposits of $100
or more (3)............ 418,893 3,336 3.19 497,267 4,889 3.94 438,131 7,021 3.23 501,252 10,179 4.10
Other time deposits (3).. 1,654,476 11,088 2.69 1,794,830 16,970 3.79 1,672,850 23,282 2.81 1,812,161 35,851 3.99
---------- ------ ---------- ------- ---------- ------- ---------- -------
Total interest-
bearing deposits.... 5,055,207 21,687 1.72 4,952,301 33,405 2.71 5,105,837 46,025 1.81 4,930,524 68,417 2.80
Short-term borrowings...... 173,068 519 1.20 191,568 912 1.91 177,247 1,121 1.28 183,718 1,829 2.01
Notes payable.............. 383 50 52.36 19,911 181 3.65 2,151 186 17.44 32,987 530 3.24
Guaranteed preferred
debentures (3)......... 286,927 5,001 6.99 259,233 7,117 11.01 280,196 10,369 7.46 247,657 13,329 10.85
---------- ------ ---------- ------- ---------- ------- ---------- -------
Total interest-
bearing
liabilities......... 5,515,585 27,257 1.98 5,423,013 41,615 3.08 5,565,431 57,701 2.09 5,394,886 84,105 3.14
------ ------- ------- -------
Noninterest-bearing
liabilities:
Demand deposits............ 994,395 898,862 960,771 918,829
Other liabilities.......... 116,262 130,394 116,528 136,610
---------- ---------- ---------- ----------
Total liabilities..... 6,626,242 6,452,269 6,642,730 6,450,325
Stockholders' equity......... 534,346 460,282 530,696 455,527
---------- ---------- ---------- ----------
Total liabilities
and stockholders'
equity.............. $7,160,588 $6,912,551 $7,173,426 $6,905,852
========== ========== ========== ==========
Net interest income.......... 71,380 66,081 140,907 130,519
====== ======= ======= =======
Interest rate spread......... 4.16 3.83 4.11 3.80
Net interest margin (5)...... 4.44% 4.24% 4.40% 4.22%
===== ===== ===== =====
- --------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $368,000 and $731,000 for the three and six months ended June 30, 2003, and $393,000 and $709,000 for
the comparable periods in 2002, respectively.
(5) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-
earning assets.
Provision for Loan Losses
The provision for loan losses was $10.0 million and $21.0 million for
the three and six months ended June 30, 2003, respectively, compared to $12.0
million and $25.0 million for the comparable periods in 2002. Beginning in late
2001, we experienced a higher level of problem loans and related loan
charge-offs and past due loans resulting from the economic conditions within our
markets, additional problems identified in two acquired loan portfolios and
continuing deterioration in the portfolio of leases to the airline industry,
necessitating a higher provision for loan losses than in prior periods. Net loan
charge-offs were $10.8 million and $13.3 million for the three and six months
ended June 30, 2003, respectively, compared to $7.9 million and $19.7 million
for the comparable periods in 2002. Net loan charge-offs for the six months
ended June 30, 2003 include charge-offs of $10.4 million associated with our
commercial leasing portfolio and were primarily concentrated in two equipment
leases aggregating $7.0 million. Nonperforming assets at June 30, 2003 increased
slightly to $83.2 million from $82.8 million at December 31, 2002 and $77.1
million at June 30, 2002. In recognition of this and other factors, our
allowance for loan losses increased to $107.8 million at June 30, 2003, compared
to $99.4 million at December 31, 2002 and $103.8 million at June 30, 2002.
Management expects nonperforming assets to remain at the higher levels recently
experienced and considers these trends in its overall assessment of the adequacy
of the allowance for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $25.4 million and $57.1 million for the three
and six months ended June 30, 2003, respectively, in comparison to $20.5 million
and $39.4 million for the comparable periods in 2002. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, net gain on sales of available-for-sale
investment securities, bank owned life insurance investment income and other
income.
Service charges on deposit accounts and customer service fees were $9.0
million and $17.6 million for the three and six months ended June 30, 2003,
respectively, in comparison to $7.0 million and $13.5 million for the comparable
periods in 2002. We attribute the increase in service charges and customer
service fees to:
>> our acquisitions completed during 2002 and 2003;
>> additional products and services available and utilized by retail
and commercial customers;
>> increased fee income resulting from revisions of customer service
charge rates, effective July 1, 2002, and enhanced control of fee
waivers; and
>> increased income associated with automated teller machine
services and debit cards.
The gain on mortgage loans sold and held for sale was $10.1 million and
$20.7 million for the three and six months ended June 30, 2003, respectively, in
comparison to $7.3 million and $12.5 million for the comparable periods in 2002.
The increase reflects continued growth of our mortgage banking activities as
well as further reductions in mortgage loan rates, resulting in continued high
volumes of new originations and refinancings.
During the three months ended March 31, 2003, we recorded a $6.3
million gain on the exchange of 974,150 shares of our Allegiant common stock for
a 100% ownership interest in Bank of Ste. Genevieve as further discussed in Note
2 to our consolidated financial statements.
The net gain on derivative instruments was $419,000 and $426,000 for
the three and six months ended June 30, 2003, respectively, compared to a net
gain of $90,000 for the three months ended June 30, 2002 and a net loss of
$249,000 for the six months ended June 30, 2002, reflecting changes in the fair
value of our interest rate cap agreements and fair value hedges.
Other income was $4.2 million and $9.0 million for the three and six
months ended June 30, 2003, respectively, in comparison to $4.6 million and
$10.8 million for the comparable periods in 2002. The primary components of the
decrease in 2003 were:
>> a decline of approximately $1.0 million in loan servicing fees
that is primarily attributable to increased amortization of
mortgage servicing rights and a higher level of interest
shortfall, which equals the difference between the interest
collected from a loan-servicing customer upon prepayment of the
loan and a full month's interest that is required to be remitted
to the security owner;
>> an increase of approximately $664,000 in net losses associated
with the sale of repossessed assets, primarily related to leasing
equipment associated with our commercial leasing business;
>> a gain of approximately $448,000 recorded in March 2002 on the
sale of certain operating lease equipment associated with
equipment leasing activities that we acquired in conjunction with
our acquisition of Bank of San Francisco in December 2000;
>> a decline of approximately $215,000 in brokerage revenue
primarily associated with overall market conditions and customer
demand;
>> a decline of approximately $128,000 in rental income associated
with our reduced commercial leasing activities; partially offset
by
>> increased rental fees from First Services, L.P. of approximately
$344,000 for the use of data processing and other equipment owned
by First Banks;
>> increased portfolio management fee income of approximately
$230,000 associated with our Institutional Money Management
division;
>> increased earnings associated with our international banking
products; and
>> our acquisitions completed during 2002.
Noninterest Expense
Noninterest expense was $64.1 million and $123.7 million for the three
and six mo