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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 September 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 October 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.......................... 29
ITEM 4. CONTROLS AND PROCEDURES............................................................. 30
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 31
SIGNATURES...................................................................................... 32
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
September 30, December 31,
2003 2002
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks....................................................... $ 176,090 194,519
Interest-bearing deposits with other financial institutions
with maturities of three months or less..................................... 5,367 832
Federal funds sold............................................................ 141,200 7,900
------------ -----------
Total cash and cash equivalents.......................................... 322,657 203,251
------------ -----------
Investment securities:
Available for sale, at fair value............................................. 871,281 1,120,894
Held to maturity, at amortized cost (fair value of $12,813 and $16,978
at September 30, 2003 and December 31, 2002, respectively).................. 12,363 16,426
------------ -----------
Total investment securities.............................................. 883,644 1,137,320
------------ -----------
Loans:
Commercial, financial and agricultural........................................ 1,435,756 1,443,016
Real estate construction and development...................................... 1,081,576 989,650
Real estate mortgage.......................................................... 2,490,255 2,444,122
Lease financing............................................................... 79,334 126,738
Consumer and installment...................................................... 78,879 86,763
Loans held for sale........................................................... 280,830 349,965
------------ -----------
Total loans.............................................................. 5,446,630 5,440,254
Unearned discount............................................................. (8,967) (7,666)
Allowance for loan losses..................................................... (110,734) (99,439)
------------ -----------
Net loans................................................................ 5,326,929 5,333,149
------------ -----------
Derivative instruments............................................................. 68,399 97,887
Bank premises and equipment, net of accumulated
depreciation and amortization................................................. 143,317 152,418
Goodwill........................................................................... 143,368 140,112
Bank-owned life insurance.......................................................... 96,266 92,616
Accrued interest receivable........................................................ 31,302 35,638
Deferred income taxes.............................................................. 88,409 92,157
Other assets....................................................................... 64,630 58,252
------------ -----------
Total assets............................................................. $ 7,168,921 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)
September 30, December 31,
2003 2002
---- ----
(unaudited)
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing........................................................ $ 1,041,154 986,674
Interest-bearing............................................................ 841,960 819,429
Savings....................................................................... 2,179,305 2,176,616
Time:
Time deposits of $100 or more............................................... 413,786 469,904
Other time deposits......................................................... 1,546,014 1,720,197
------------ -----------
Total deposits........................................................... 6,022,219 6,172,820
Other borrowings................................................................... 270,716 265,644
Note payable....................................................................... 31,000 7,000
Guaranteed preferred beneficial interests in
subordinated debentures....................................................... 205,380 270,039
Accrued interest payable........................................................... 9,329 11,751
Deferred income taxes.............................................................. 43,685 61,204
Accrued expenses and other liabilities............................................. 44,135 35,301
------------ -----------
Total liabilities........................................................ 6,626,464 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.................................................................. 480,596 433,689
Accumulated other comprehensive income............................................. 36,973 60,464
------------ -----------
Total stockholders' equity............................................... 542,457 519,041
------------ -----------
Total liabilities and stockholders' equity............................... $ 7,168,921 7,342,800
============ ===========
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Interest and fees on loans............................................ $ 88,504 96,080 268,796 293,904
Investment securities................................................. 7,176 9,219 24,007 24,368
Federal funds sold and other.......................................... 345 512 1,099 1,454
-------- -------- -------- --------
Total interest income............................................ 96,025 105,811 293,902 319,726
-------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................. 1,195 1,786 4,346 5,739
Savings............................................................. 5,520 8,819 18,091 27,253
Time deposits of $100 or more....................................... 3,028 4,624 10,049 14,803
Other time deposits................................................. 8,865 15,986 32,147 51,837
Other borrowings...................................................... 550 806 1,671 2,635
Note payable.......................................................... 388 309 574 839
Guaranteed preferred debentures....................................... 3,399 5,300 13,768 18,629
-------- -------- -------- --------
Total interest expense........................................... 22,945 37,630 80,646 121,735
-------- -------- -------- --------
Net interest income.............................................. 73,080 68,181 213,256 197,991
Provision for loan losses.................................................. 15,000 13,700 36,000 38,700
-------- -------- -------- --------
Net interest income after provision for loan losses.............. 58,080 54,481 177,256 159,291
-------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees......... 9,175 8,491 26,824 21,985
Gain on mortgage loans sold and held for sale......................... 12,425 7,857 33,161 20,316
Net gain (loss) on sales of available-for-sale investment securities.. 266 (2) 6,832 90
Bank-owned life insurance investment income........................... 1,325 1,505 4,029 4,318
Net (loss) gain on derivative instruments............................. (383) 1,963 43 1,714
Other................................................................. 3,375 5,662 12,370 16,417
-------- -------- -------- --------
Total noninterest income......................................... 26,183 25,476 83,259 64,840
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits........................................ 29,422 28,350 90,281 84,506
Occupancy, net of rental income....................................... 4,916 6,302 15,399 15,938
Furniture and equipment............................................... 4,610 4,191 13,714 12,730
Postage, printing and supplies........................................ 1,311 1,346 3,909 4,205
Information technology fees........................................... 8,126 7,814 24,568 24,411
Legal, examination and professional fees.............................. 1,781 2,866 5,552 6,463
Amortization of intangibles associated with
the purchase of subsidiaries........................................ 658 516 1,848 1,480
Communications........................................................ 677 671 1,950 2,375
Advertising and business development.................................. 762 1,181 2,996 4,132
Other................................................................. 8,208 5,917 23,990 18,992
-------- -------- -------- --------
Total noninterest expense........................................ 60,471 59,154 184,207 175,232
-------- -------- -------- --------
Income before provision for income taxes and
minority interest in income of subsidiary.................... 23,792 20,803 76,308 48,899
Provision for income taxes................................................. 10,092 7,372 28,877 17,471
-------- -------- -------- --------
Income before minority interest in income of subsidiary ......... 13,700 13,431 47,431 31,428
Minority interest in income of subsidiary.................................. -- 437 -- 1,066
-------- -------- -------- --------
Net income....................................................... 13,700 12,994 47,431 30,362
Preferred stock dividends.................................................. 196 196 524 524
-------- -------- -------- --------
Net income available to common stockholders...................... $ 13,504 12,798 46,907 29,838
======== ======== ======== ========
Basic earnings per common share............................................ $ 570.75 540.87 1,982.48 1,261.05
======== ======== ======== ========
Diluted earnings per common share.......................................... $ 565.09 534.32 1,954.63 1,246.05
======== ======== ======== ========
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)
Nine Months Ended September 30, 2003 and 2002 and Three 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
Nine months ended September 30, 2002:
Comprehensive income:
Net income................................. -- -- -- -- 30,362 30,362 -- 30,362
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 7,121 -- 7,121 7,121
Derivative instruments:
Current period transactions............ -- -- -- -- 20,702 -- 20,702 20,702
-------
Comprehensive income....................... 58,185
=======
Class A preferred stock dividends,
$0.80 per share............................ -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share............................ -- -- -- -- (11) -- (11)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- (124) -- -- (124)
------- --- ----- ----- ------- ------- -------
Consolidated balances, September 30, 2002........ 12,822 241 5,915 5,950 419,146 62,120 506,194
Three months ended December 31, 2002:
Comprehensive income:
Net income................................. -- -- -- -- 14,805 14,805 -- 14,805
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 1,788 -- 1,788 1,788
Derivative instruments:
Current period transactions............ -- -- -- -- (3,444) -- (3,444) (3,444)
-------
Comprehensive income....................... -- -- -- -- 13,149
=======
Class A preferred stock dividends,
$0.40 per share............................ -- -- -- -- (256) -- (256)
Class B preferred stock dividends,
$0.04 per share............................ -- -- -- -- (6) -- (6)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- (40) -- -- (40)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2002......... 12,822 241 5,915 5,910 433,689 60,464 519,041
Nine months ended September 30, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 47,431 47,431 -- 47,431
Other comprehensive income, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (9,335) -- (9,335) (9,335)
Derivative instruments:
Current period transactions............ -- -- -- -- (14,156) -- (14,156) (14,156)
-------
Comprehensive income....................... 23,940
=======
Class A preferred stock dividends,
$0.80 per share............................ -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share............................ -- -- -- -- (11) -- (11)
------- --- ---- ----- ------- ------- -------
Consolidated balances, September 30, 2003........ $12,822 241 5,915 5,910 480,596 36,973 542,457
======= === ===== ===== ======= ======= =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Nine Months Ended Three Months Ended
September 30, September 30, December 31,
------------------- -----------------
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
Unrealized (losses) gains on investment securities
arising during the period..................................... $(2,874) (500) (4,894) 7,180 1,788
Less reclassification adjustment for gains (losses)
included in net income........................................ 173 (1) 4,441 59 --
------- ---- ------ ----- -----
Unrealized (losses) gains on investment securities................ $(3,047) (499) (9,335) 7,121 1,788
======= ==== ====== ===== =====
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Nine Months Ended
September 30,
--------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income........................................................................... $ 47,431 30,362
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of bank premises and equipment....................... 14,596 13,857
Amortization, net of accretion..................................................... 20,599 11,869
Originations and purchases of loans held for sale.................................. (1,815,712) (1,299,522)
Proceeds from the sale of loans held for sale...................................... 1,679,908 1,092,359
Provision for loan losses.......................................................... 36,000 38,700
Provision for income taxes......................................................... 28,877 17,471
Payments of income taxes........................................................... (27,441) (18,096)
Decrease in accrued interest receivable............................................ 5,023 3,891
Interest accrued on liabilities.................................................... 80,646 121,735
Payments of interest on liabilities................................................ (83,212) (125,303)
Gain on mortgage loans sold and held for sale...................................... (33,161) (20,316)
Net gain on sales of available-for-sale investment securities...................... (6,832) (90)
Net gain on derivative instruments................................................. (43) (1,714)
Other operating activities, net.................................................... 993 13,381
Minority interest in income of subsidiary.......................................... -- 1,066
---------- ----------
Net cash used in operating activities........................................... (52,328) (120,350)
---------- ----------
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...................... 152,776 55,130
Maturities of investment securities available for sale............................... 1,001,496 855,121
Maturities of investment securities held to maturity................................. 4,143 3,456
Purchases of investment securities available for sale................................ (744,314) (957,312)
Purchases of investment securities held to maturity.................................. (103) (2,260)
Net (increase) decrease in loans..................................................... (3,863) 114,333
Recoveries of loans previously charged-off........................................... 17,024 11,692
Purchases of bank premises and equipment............................................. (4,213) (13,576)
Other investing activities, net...................................................... 11,165 8,622
---------- ----------
Net cash provided by investing activities....................................... 448,981 119,303
---------- ----------
Cash flows from financing activities:
Increase in demand and savings deposits.............................................. 28,967 213,963
Decrease in time deposits............................................................ (269,674) (157,154)
Decrease in federal funds purchased.................................................. (55,000) (81,000)
Decrease in Federal Home Loan Bank advances.......................................... (3,548) (10,600)
(Decrease) increase in daily securities sold under agreements to repurchase.......... (37,928) 44,399
Increase in term securities sold under agreements to repurchase...................... 100,000 --
Advances drawn on note payable....................................................... 34,500 36,500
Repayments of note payable........................................................... (10,500) (64,000)
Proceeds from issuance of guaranteed preferred beneficial interests
in subordinated debentures......................................................... 68,710 24,233
Payments for redemption of guaranteed preferred beneficial
interests in subordinated debentures............................................... (132,250) --
Payments of preferred stock dividends................................................ (524) (524)
---------- ----------
Net cash (used in) provided by financing activities............................. (277,247) 5,817
---------- ----------
Net increase in cash and cash equivalents....................................... 119,406 4,770
Cash and cash equivalents, beginning of period............................................ 203,251 241,874
---------- ----------
Cash and cash equivalents, end of period.................................................. $ 322,657 246,644
========== ==========
Noncash investing and financing activities:
Loans transferred to other real estate............................................... $ 11,999 3,584
Loans held for sale transferred to loans............................................. 66,482 2,923
========== ==========
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 nine months ended September 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
continued to own approximately 232,000 shares, or approximately 1.52% of the
issued and outstanding shares of Allegiant common stock subsequent to the
acquisition. On October 27, 2003, First Banks contributed all of these shares to
a charitable foundation as further described in Note 13 to the consolidated
financial statements. At the time of the acquisition, 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 $3.4 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 are being 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.
First Banks accrues certain costs associated with its 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 incurred 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 First Banks' existing operations are normally paid to the
recipients within 90 days of the applicable consummation date. The accrued
severance balance of $1.6 million identified in the following table is comprised
of contractual obligations under salary continuation agreements to 11
individuals with remaining terms ranging from three months to approximately 13
years. As the obligation to make payments under these agreements is accrued at
the consummation dates, such payments do not have any impact on the consolidated
statements of income.
A summary of the cumulative acquisition and integration costs
attributable to the Company's 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 the consolidated financial statements.
Information
Severance Technology Fees Total
--------- --------------- -----
(dollars expressed in thousands)
Balance at December 31, 2002............................ $ 2,351 28 2,379
Nine Months Ended September 30, 2003:
Amounts accrued at acquisition date................... 100 350 450
Reversal to goodwill.................................. (39) (108) (147)
Payments.............................................. (781) (270) (1,051)
-------- ------ -------
Balance at September 30, 2003........................... $ 1,631 -- 1,631
======== ====== =======
First Banks also incurs costs associated with acquisitions that are
expensed in the 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 September 30, 2003 and December
31, 2002:
September 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 (3,611) 13,871 (1,869)
Goodwill associated with
purchases of branch offices......... 2,210 (826) 2,210 (718)
--------- ------- ------- -------
Total............................ $ 19,601 (4,437) 16,081 (2,587)
========= ======= ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 141,984 138,620
========= =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $658,000 and $1.8 million for the three and
nine months ended September 30, 2003, respectively, and $516,000 and $1.5
million 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)........................................... $ 2,504
2004............................................... 2,632
2005............................................... 2,632
2006............................................... 2,632
2007............................................... 2,632
2008............................................... 2,632
---------
Total........................................... $ 15,664
=========
--------------------
(1)Includes $1.8 million of amortization for the nine months ended September 30, 2003.
Changes in the carrying amount of goodwill for the three and nine
months ended September 30, 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period.............................. $ 142,167 127,796 140,112 115,860
Goodwill acquired during period........................... -- -- 1,026 12,577
Acquisition-related adjustments........................... 1,237 -- 2,338 (569)
Amortization - purchases of branch offices................ (36) (36) (108) (108)
--------- -------- -------- --------
Balance, end of period.................................... $ 143,368 127,760 143,368 127,760
========= ======== ======== ========
(4) MORTGAGE BANKING ACTIVITIES
At September 30, 2003 and December 31, 2002, First Banks serviced loans
for others amounting to $1.20 billion and $1.29 billion, respectively.
Borrowers' escrow balances held by First Banks on such loans were $2.4 million
and $517,000 at September 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 Nine Months Ended
September 30, September 30,
---------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period................................ $ 16,979 12,354 14,882 10,125
Originated mortgage servicing rights........................ 3,125 1,998 7,619 5,958
Amortization................................................ (3,278) (984) (5,675) (2,715)
Impairment valuation allowance.............................. (800) -- (800) --
Reversal of impairment valuation allowance.................. 166 -- 166 --
-------- ------- ------- -------
Balance, end of period...................................... $ 16,192 13,368 16,192 13,368
======== ======= ======= =======
The fair value of mortgage servicing rights was approximately $18.3
million and $19.5 million at September 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 $2.1 million and $6.1
million at September 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 and 2003 that resulted in a significant
increase in the number of mortgages being prepaid or refinanced. During the
three and nine months ended September 30, 2003, First Banks recognized
impairment of $800,000 through a valuation allowance associated with a decline
in the fair value of an individual mortgage servicing rights stratum below its
carrying value. Subsequently, First Banks reversed $166,000 of this valuation
allowance based upon an increase in the fair value of the mortgage servicing
rights stratum above the carrying value, net of the valuation allowance. At
September 30, 2003, the fair value of mortgage servicing rights exceeded the net
carrying value by approximately $2.1 million.
Amortization of mortgage servicing rights, as it relates to the balance
at September 30, 2003 of $16.2 million, has been estimated through 2008 in the
following table:
(dollars expressed in thousands)
Year ending December 31:
2003 (1)........................................... $ 1,301
2004............................................... 4,716
2005............................................... 4,365
2006............................................... 3,730
2007............................................... 2,186
2008............................................... 528
--------
Total (2)....................................... $ 16,826
========
----------------------------
(1) Excludes $5.7 million of amortization for the nine months
ended September 30, 2003.
(2) The total mortgage servicing rights to be amortized to
expense excludes the impairment valuation allowance, which
was $634,000 at September 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 September 30, 2003:
Basic EPS - income available to common stockholders............. $ 13,504 23,661 $ 570.75
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 577 (5.66)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 13,696 24,238 $ 565.09
========= ======= ==========
Three months ended September 30, 2002:
Basic EPS - income available to common stockholders............. $ 12,798 23,661 $ 540.87
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 650 (6.55)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 12,990 24,311 $ 534.32
========= ======= ==========
Nine months ended September 30, 2003:
Basic EPS - income available to common stockholders............. $ 46,907 23,661 $ 1,982.48
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 600 (27.85)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 47,420 24,261 $ 1,954.63
========= ======= ==========
Nine months ended September 30, 2002:
Basic EPS - income available to common stockholders............. $ 29,838 23,661 $ 1,261.05
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 696 (15.00)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 30,351 24,357 $ 1,246.05
========= ======= ==========
(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 $128,000 and $379,000 for the three and
nine months ended September 30, 2003, and $116,000 and $284,000 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 $795,000 and $2.3 million for the three and nine
months ended September 30, 2003, and $918,000 and $2.7 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 $6.9 million and $20.6
million for the three and nine months ended September 30, 2003, and $6.6 million
and $20.3 million for the comparable periods in 2002, respectively. During the
three months ended September 30, 2003 and 2002, First Services, L.P. paid First
Banks $985,000 and $993,000, respectively, and during the nine months ended
September 30, 2003 and 2002, First Services, L.P. paid First Banks $3.2 million
and $2.9 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 $17.8 million and $12.8 million at September 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 September 30, 2003, First Banks and its subsidiary bank were
each well capitalized under the applicable regulations.
As of September 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 September 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
September 30, December 31, For Capital Prompt Corrective
2003 2002 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.24% 10.68% 8.0% 10.0%
First Bank.............................. 10.69 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............................. 8.33 7.47 4.0 6.0
First Bank.............................. 9.43 9.49 4.0 6.0
First Bank & Trust (1).................. -- 8.93 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 7.36 6.45 3.0 5.0
First Bank.............................. 8.31 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
----------------------------- --------------------------- ----------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2003 2002 (2) 2003 2002 2003 2002
---- -------- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $ 878,535 1,114,479 5,109 22,841 883,644 1,137,320
Loans, net of unearned discount......... 5,437,663 5,432,589 -- (1) 5,437,663 5,432,588
Goodwill................................ 143,368 140,112 -- -- 143,368 140,112
Total assets............................ 7,159,679 7,357,155 9,242 (14,355) 7,168,921 7,342,800
Deposits................................ 6,029,052 6,189,928 (6,833) (17,108) 6,022,219 6,172,820
Note payable............................ -- -- 31,000 7,000 31,000 7,000
Guaranteed preferred beneficial
interests in subordinated debentures.. -- -- 205,380 270,039 205,380 270,039
Stockholders' equity.................... 779,864 777,548 (237,407) (258,507) 542,457 519,041
=========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
---------------------------- -------------------------- ----------------------------
Three Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
---------------------------- -------------------------- ----------------------------
2003 2002 (2) 2003 2002 2003 2002
---- -------- ---- ---- ---- ----
Income statement information:
Interest income......................... $ 96,053 105,699 (28) 112 96,025 105,811
Interest expense........................ 19,166 32,078 3,779 5,552 22,945 37,630
----------- --------- -------- -------- --------- ---------
Net interest income................ 76,887 73,621 (3,807) (5,440) 73,080 68,181
Provision for loan losses............... 15,000 13,700 -- -- 15,000 13,700
----------- --------- -------- -------- --------- ---------
Net interest income after provision
for loan losses.................. 61,887 59,921 (3,807) (5,440) 58,080 54,481
Noninterest income...................... 26,133 25,926 50 (450) 26,183 25,476
Noninterest expense..................... 58,612 57,979 1,859 1,175 60,471 59,154
----------- --------- -------- -------- --------- ---------
Income before provision for income
taxes and minority interest
in income of subsidiary.......... 29,408 27,868 (5,616) (7,065) 23,792 20,803
Provision for income taxes.............. 12,040 9,662 (1,948) (2,290) 10,092 7,372
----------- --------- -------- -------- --------- ---------
Income before minority interest in
income of subsidiary............. 17,368 18,206 (3,668) (4,775) 13,700 13,431
Minority interest in income
of subsidiary.................... -- -- -- 437 -- 437
----------- --------- -------- -------- --------- ---------
Net income......................... $ 17,368 18,206 (3,668) (5,212) 13,700 12,994
=========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
---------------------------- -------------------------- ----------------------------
Nine Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30,
---------------------------- -------------------------- ----------------------------
2003 2002 (2) 2003 2002 2003 2002
---- -------- ---- ---- ---- ----
Income statement information:
Interest income......................... $ 293,749 319,469 153 257 293,902 319,726
Interest expense........................ 66,448 102,521 14,198 19,214 80,646 121,735
----------- --------- -------- -------- --------- ---------
Net interest income................ 227,301 216,948 (14,045) (18,957) 213,256 197,991
Provision for loan losses............... 36,000 38,700 -- -- 36,000 38,700
----------- -------- -------- -------- --------- ---------
Net interest income after
provision for loan losses........ 191,301 178,248 (14,045) (18,957) 177,256 159,291
Noninterest income...................... 77,122 66,412 6,137 (1,572) 83,259 64,840
Noninterest expense..................... 180,422 172,245 3,785 2,987 184,207 175,232
----------- --------- -------- -------- --------- ---------
Income before provision
for income taxes
and minority interest in
income of subsidiary............. 88,001 72,415 (11,693) (23,516) 76,308 48,899
Provision for income taxes.............. 32,933 25,217 (4,056) (7,746) 28,877 17,471
-------- --------- -------- -------- --------- ---------
Income before minority interest
in income of subsidiary.......... 55,068 47,198 (7,637) (15,770) 47,431 31,428
Minority interest in income
of subsidiary...................... -- -- -- 1,066 -- 1,066
----------- --------- -------- -------- --------- ---------
Net income......................... $ 55,068 47,198 (7,637) (16,836) 47,431 30,362
=========== ========= ======== ======== ========= =========
- ----------------
(1) Corporate and other includes $3.4 million and $5.3 million of guaranteed preferred debentures expense for the three months
ended September 30, 2003 and 2002, respectively. The applicable income tax benefit associated with the guaranteed preferred
debentures expense was $1.2 million and $1.9 million for the three months ended September 30, 2003 and 2002, respectively.
For the nine months ended September 30, 2003 and 2002, corporate and other includes $13.8 million and $18.6 million of
guaranteed preferred debenture expense, respectively. The applicable income tax benefit associated with the guaranteed
preferred debentures expense was $4.8 million and $6.5 million for the nine months ended September 30, 2003 and 2002,
respectively. In addition, corporate and other includes holdingcompany expenses.
(2) First Bank & Trust was merged with and into First Bank on March 31, 2003 as further described in Note 2 to the 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 $518,000 and $1.1 million for
the three and nine months ended September 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 $937,000 and $1.9 million for the
three and nine months ended September 30, 2003, respectively. 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 September
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) OTHER BORROWINGS
Other borrowings were comprised of the following at September 30, 2003
and December 31, 2002:
September 30, December 31,
2003 2002
--------------- --------------
(dollars expressed in thousands)
Federal funds purchased....................................... $ -- 55,000
Securities sold under agreements to repurchase:
Daily..................................................... 158,716 196,644
Term...................................................... 100,000 --
Federal Home Loan Bank borrowings............................. 12,000 14,000
----------- ---------
Total other borrowings.................................. $ 270,716 265,644
=========== =========
In the third quarter of 2003, First Banks entered into $100.0 million
of term securities sold under agreements to repurchase. On July 30, 2003, First
Banks entered into a $50 million five-year reverse repurchase agreement under a
master repurchase agreement. Interest is paid quarterly and is equivalent to the
three-month London Interbank Offering Rate minus 0.68% plus a floating amount
equal to the differential between the three-month London Interbank Offering Rate
and the strike price of 3.50%, if the three-month London Interbank Offering Rate
exceeds 3.50%. On August 13, 2003, First Banks entered into an additional $50
million five-year reverse repurchase agreement under a master repurchase
agreement. Interest is paid quarterly and is equivalent to the three-month
London Interbank Offering Rate minus 0.565% plus a floating amount equal to the
differential between the three-month London Interbank Offering Rate and the
strike price of 3.00%, if the three-month London Interbank Offering Rate exceeds
3.00%. The underlying securities associated with the reverse repurchase
agreements are mortgage-backed securities and are not under First Banks'
physical control.
(12) 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. There were outstanding loan balances under the
Credit Agreement at September 30, 2003 of $31.0 million. Outstanding loan
balances under the previous credit agreement were $7.0 million at December 31,
2002.
The Credit Agreement requires First Banks to comply with various
covenants, including maintenance of certain minimum capital ratios for First
Banks and its subsidiary bank, certain maximum nonperforming asset 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.
(13) SUBSEQUENT EVENT
On October 27, 2003, First Banks contributed 231,779 shares of
Allegiant common stock with a fair value of $5.1 million to The Dierberg
Foundation, a charitable trust created by and for the benefit of First Banks'
Chairman and members of his immediate family. In conjunction with this
transaction, First Banks recorded charitable contribution expense of $5.1
million, which was partially offset by a gain on the contribution of these
available-for-sale investment securities of $2.3 million, representing the
difference between the cost basis and the fair value of the common stock on the
date of the contribution. In addition, First Banks recorded a tax benefit of
$2.5 million associated with this transaction. The contribution of this stock
eliminated First Banks' investment in Allegiant.
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 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 September
30, 2003, we had total assets of $7.17 billion, loans, net of unearned discount,
of $5.44 billion, total deposits of $6.02 billion and total stockholders' equity
of $542.5 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 $7.17 billion and $7.34 billion at September 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 our acquisition of Bank of Ste.
Genevieve on March 31, 2003, which provided assets of $115.1 million. Federal
funds sold increased by $133.3 million due to the investment of excess funds
resulting from reduced loan demand and maturities of investment securities.
Investment securities decreased $253.7 million to $883.6 million at September
30, 2003 from $1.14 billion at December 31, 2002 primarily due to $1.01 billion
of maturities of investment securities, $152.8 million of sales of
available-for-sale investment securities and $17.9 million relating to the
exchange of Allegiant Bancorp, Inc., or Allegiant, common stock for a 100%
ownership interest in Bank of Ste. Genevieve, offset by purchases of investment
securities of $744.4 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 was partially
offset by an increase in loans, net of unearned discount, of $5.1 million, which
is further discussed under "--Loans and Allowance for Loan Losses." Our
derivative financial instruments declined to $68.4 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 three additional interest rate swap agreements
aggregating $271.0 million that we entered into in 2003 as further discussed
under "--Interest Rate Risk Management." In addition, other assets increased
$6.4 million to $64.6 million at September 30, 2003 from $58.3 million at
December 31, 2002. This increase primarily results from a $2.9 million net
increase in other real estate as further discussed under "--Loans and Allowance
for Loan Losses," and a $1.3 million increase in mortgage servicing rights.
Total deposits decreased by $150.6 million to $6.02 billion at
September 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 of deposits that we acquired from Bank of Ste. Genevieve. Other
borrowings increased $5.1 million to $270.7 million at September 30, 2003 from
$265.6 million at December 31, 2002. We attribute this increase to $100.0
million of term securities sold under agreements to repurchase that we entered
into during the third quarter of 2003, as further discussed in Note 11 to our
consolidated financial statements, offset by a $55.0 million reduction in
federal funds purchased and a $37.9 million reduction in daily 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 $64.7 million primarily due to the redemption 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." Deferred income taxes
payable decreased by $17.5 million to $43.7 million at September 30, 2003 from
$61.2 million at December 31, 2002. We attribute this decrease to reductions in
unrealized gains/losses on available-for-sale investment securities and
derivative financial instruments. Furthermore, accrued expenses and other
liabilities increased $8.8 million to $44.1 million at September 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 $23.5 million to $37.0 million at September 30,
2003 from $60.5 million at December 31, 2002. This decrease is comprised of $9.3
million associated with the change in unrealized gains on available-for-sale
investment securities as accounted for under SFAS No. 115, including a $6.3
million reversal of the unrealized gain attributable to the exchange of the
Allegiant common stock as further discussed in Note 2 to our consolidated
financial statements and a $14.2 million decrease associated with our derivative
financial instruments as accounted for under SFAS No. 133.
Results of Operations
Net Income
Net income was $13.7 million and $47.4 million for the three and nine
months ended September 30, 2003, respectively, compared to $13.0 million and
$30.4 million for the comparable periods in 2002. Results for the three months
ended September 30, 2003 reflect increased net interest income and noninterest
income, offset by slightly higher operating expenses, an increased provision for
loan losses and an increase in the effective tax rate. The increase for the nine
months ended September 30, 2003 over the comparable period in 2002 is primarily
attributable to increased net interest income resulting from reduced deposit
rates and earnings on interest rate swap agreements in association with our
interest rate risk management program, increased gains on mortgage loans sold
and held for sale, a gain relating to the partial exchange of our investment in
Allegiant for a 100% ownership interest in Bank of Ste. Genevieve as further
described in Note 2 to our consolidated financial statements partially offset by
increased provisions for state income taxes attributable to higher taxable
income and the 2003 merger of our two bank charters, which resulted in increased
taxable income allocations in states where we file separate state tax returns.
The increase in earnings in 2003 continues to reflect our adaptation to the
current interest rate environment and weak economic conditions that have
prevailed over the last two years. Our ongoing efforts to maintain an acceptable
net interest margin in the current low interest rate environment, improve our
noninterest income, address credit losses and control operating expenses are
reflected in our financial performance. Higher-than-historical levels of loan
charge-offs, loan delinquencies and nonperforming loans led to increased
provisions for loan losses during 2002. These nonperforming trends remain at
elevated levels in 2003, thus contributing to continued higher-than-normal
provisions for loan losses, primarily attributable to charge-offs concentrated
within our commercial leasing portfolio. We continue to monitor our loan and
leasing portfolios and focus on asset quality and related challenges stemming
from the current economic environment, including weak loan demand and lower
prevailing interest rates.
Noninterest income was $26.2 million and $83.3 million for the three
and nine months ended September 30, 2003, respectively, in comparison to $25.5
million and $64.8 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 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 overall
reductions in mortgage loan rates, and increased service charges on deposit
accounts and customer service fees.
Operating expenses were $60.5 million and $184.2 million for the three
and nine months ended September 30, 2003, respectively, compared to $59.2
million and $175.2 million for the comparable periods in 2002. The increased
operating expenses in 2003 primarily result from increased salaries and employee
benefit expenses associated with our 2002 and 2003 acquisitions, increased
commissions paid to mortgage loan originators due to continued high loan
volumes, 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
$73.4 million, or 4.49% of average interest-earning assets, for the three months
ended September 30, 2003, from $68.6 million, or 4.24% of average
interest-earning assets, for the comparable period in 2002. For the nine months
ended September 30, 2003 and 2002, net interest income (expressed on a tax
equivalent basis) was $214.3 million, or 4.43% of average interest-earning
assets, and $199.1 million, or 4.23% 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 $17.3 million and $48.1 million
to net interest income for the three and nine months ended September 30, 2003,
respectively, compared to $14.2 million and $38.0 million for the comparable
periods in 2002. 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. Furthermore, 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 $5.42 billion and $5.39
billion for the three and nine months ended September 30, 2003, respectively,
compared to $5.36 billion and $5.42 billion for the comparable periods in 2002.
Additionally, the yield on our loan portfolio decreased to 6.48% and 6.67% for
the three and nine months ended September 30, 2003, respectively, compared to
7.12% and 7.26% 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.
Average deposits increased to $6.05 billion and $6.06 billion for the
three and nine months ended September 30, 2003, respectively, from $6.00 billion
and $5.90 billion for the comparable periods in 2002. For the three and nine
months ended September 30, 2003, the aggregate weighted average rate paid on our
deposit portfolio decreased to 1.48% and 1.71%, respectively, from 2.44% and
2.67% for the comparable periods in 2002. We attribute the decline in rates paid
for the three and nine months ended September 30, 2003 primarily to rates paid
on our 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 transactional accounts, such as demand and savings accounts, rather
than time deposits, and emphasize attracting more than one account relationship
with customers. Demand and savings deposits increased to $4.06 billion and $3.99
billion for the three and nine months ended September 30, 2003, respectively,
from $3.69 billion and $3.59 billion for the comparable periods in 2002, whereas
time deposits declined to $1.99 billion and $2.07 billion for the three and nine
months ended September 30, 2003, respectively, from $2.31 billion for the
comparable periods in 2002.
The aggregate weighted average rate paid on our note payable was 4.80%
and 6.33% for the three and nine months ended September 30, 2003, respectively,
compared to 21.37% and 4.69% for the comparable periods in 2002. Due to lower
average balances outstanding on our note payable during the three months ended
June 30, 2003 and September 30, 2002, the timing of commitment, arrangement and
other renewal fees recognized resulted in a disproportionate weighted average
rates paid for those 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. At September 30, 2003, our note payable had an outstanding balance
of $31.0 million. Amounts outstanding under our $60.0 million line of credit
with a group of unaffiliated financial institutions bear interest 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 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 other borrowings also
declined for the three and nine months ended September 30, 2003, from the
comparable periods in 2002, reflecting the current interest rate environment.
The aggregate weighted average rate paid on our other borrowings was 0.88% and
1.11% for the three and nine months ended September 30, 2003, respectively,
compared to 1.64% and 1.88% for the comparable periods in 2002.
Guaranteed preferred debentures expense was $3.4 million and $13.8
million for the three and nine months ended September 30, 2003, respectively,
compared to $5.3 million and $18.6 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 6.65% and 7.24% for the three
and nine months ended September 30, 2003, respectively, from 7.88% and 9.80% 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 nine months ended September 30, 2003 and 2002:
Three Months Ended September 30, Nine Months Ended September 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)........... $5,420,342 88,588 6.48% $5,361,625 96,236 7.12% $5,391,656 269,128 6.67% $5,415,946 294,274 7.26%
Investment securities (4).... 920,242 7,409 3.19 938,971 9,479 4.01 940,835 24,723 3.51 766,146 25,123 4.38
Federal funds sold and other. 145,589 345 0.94 115,703 512 1.76 133,474 1,099 1.10 115,477 1,454 1.68
---------- ------ ---------- ------- ---------- ------- ---------- -------
Total interest-earning
assets................ 6,486,173 96,342 5.89 6,416,299 106,227 6.57 6,465,965 294,950 6.10 6,297,569 320,851 6.81
------ ------- ------- -------
Nonearning assets.............. 692,415 694,685 709,182 676,661
---------- ---------- ---------- ----------
Total assets............ $7,178,588 $7,110,984 $7,175,147 $6,974,230
========== ========== ========== ==========
Liabilities and
Stockholders' Equity
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits................. $ 851,014 1,195 0.56% $ 774,144 1,786 0.92% $ 852,663 4,346 0.68% $ 721,982 5,739 1.06%
Savings deposits........... 2,152,529 5,520 1.02 1,999,395 8,819 1.75 2,145,089 18,091 1.13 1,947,271 27,253 1.87
Time deposits of $100
or more.................. 413,724 3,028 2.90 500,657 4,624 3.66 429,995 10,049 3.12 501,054 14,803 3.95
Other time deposits (3).... 1,575,197 8,865 2.23 1,810,274 15,986 3.50 1,640,299 32,147 2.62 1,811,532 51,837 3.83
---------- ------ ---------- ------- ---------- ------- ---------- -------
Total interest-bearing
deposits.............. 4,992,464 18,608 1.48 5,084,470 31,215 2.44 5,068,046 64,633 1.71 4,981,839 99,632 2.67
Other borrowings............. 246,790 550 0.88 195,465 806 1.64 200,428 1,671 1.11 187,634 2,635 1.88
Note payable (5)............. 32,091 388 4.80 5,738 309 21.37 12,131 574 6.33 23,904 839 4.69
Guaranteed preferred
debentures (3)............. 202,808 3,399 6.65 266,817 5,300 7.88 254,400 13,768 7.24 254,044 18,629 9.80
---------- ------ ---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities........... 5,474,153 22,945 1.66 5,552,490 37,630 2.69 5,535,005 80,646 1.95 5,447,421 121,735 2.99
------ ------- ------- -------
Noninterest-bearing liabilities:
Demand deposits.............. 1,054,587 912,807 992,043 916,822
Other liabilities............ 106,835 152,086 113,298 141,769
---------- ---------- ---------- ----------
Total liabilities....... 6,635,575 6,617,383 6,640,346 6,506,012
Stockholders' equity........... 543,013 493,601 534,801 468,218
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity.. $7,178,588 $7,110,984 $7,175,147 $6,974,230
========== ========== ========== ==========
Net interest income............ 73,397 68,597 214,304 199,116
====== ======= ======= =======
Interest rate spread........... 4.23 3.88 4.15 3.82
Net interest margin (6)........ 4.49% 4.24% 4.43% 4.23%
==== =====