UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 Number - 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 Number)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
10.24% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust II
and guaranteed by First Banks, Inc.)
(Title of class)
9.00% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust III
and guaranteed by First Banks, Inc.)
(Title of class)
8.15% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust IV
and guaranteed by First Banks, Inc.)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ X ]
None of the voting stock of the Company is held by nonaffiliates. All
of the voting stock of the Company is owned by various trusts, which were
created by and for the benefit of Mr. James F. Dierberg, the Company's Chairman
of the Board of Directors, and members of his immediate family.
At March 25, 2004, there were 23,661 shares of the registrant's common
stock outstanding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause our actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and 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 this Annual Report on Form 10-K should
therefore not place undue reliance on forward-looking statements.
FIRST BANKS, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 14
Item 3. Legal Proceedings...................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................... 14
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 15
Item 6. Selected Financial Data................................................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 48
Item 8. Financial Statements and Supplementary Data............................................ 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................... 48
Item 9A. Controls and Procedures................................................................ 48
Part III
Item 10. Directors and Executive Officers of the Registrant..................................... 50
Item 11. Executive Compensation................................................................. 54
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 55
Item 13. Certain Relationships and Related Transactions......................................... 56
Item 14. Principal Accountant Fees and Services................................................. 56
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 57
Signatures ....................................................................................... 99
PART I
Item 1. Business
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 147
branch offices in California, Illinois, Missouri and Texas. Since 1994, our
organization has grown significantly, primarily as a result of our acquisition
strategy, as well as through internal growth. At December 31, 2003, we had total
assets of $7.11 billion, total loans, net of unearned discount, of $5.33
billion, total deposits of $5.96 billion and total stockholders' equity of
$549.8 million.
Through First 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 banking units rests with the
officers and directors of each unit, but we centralize overall corporate
policies, procedures and administrative functions and provide centralized
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our banking units to focus
on customer service.
In February 1997, our initial financing entity, First Preferred Capital
Trust, issued $86.25 million of 9.25% cumulative trust preferred securities,
and, in July 1998, our second financing entity, First America Capital Trust,
issued $46.0 million of 8.50% cumulative trust preferred securities. The
cumulative trust preferred securities issued by First Preferred Capital Trust
and First America Capital Trust were redeemed in full on May 5, 2003 and June
30, 2003, respectively, and these financing entities were dissolved. In October
2000, our third financing entity, First Preferred Capital Trust II, issued $57.5
million of 10.24% cumulative trust preferred securities, and, in November 2001,
our fourth financing entity, First Preferred Capital Trust III, issued $55.2
million of 9.00% cumulative trust preferred securities. In April 2002, our fifth
financing entity, First Bank Capital Trust, issued $25.0 million of variable
rate cumulative trust preferred securities. On March 20, 2003, our sixth
financing entity, First Bank Statutory Trust, issued $25.0 million of 8.10%
cumulative trust preferred securities, and, on April 1, 2003, our seventh
financing entity, First Preferred Capital Trust IV, issued $46.0 million of
8.15% cumulative trust preferred securities.
Each of our existing financing entities operates as a Delaware business
trust with the exception of First Bank Statutory Trust, which operates as a
Connecticut statutory trust. The trust preferred securities issued by First
Preferred Capital Trust II and First Preferred Capital Trust III are publicly
held and traded on the Nasdaq Stock Market's National Market system. The trust
preferred securities issued by First Bank Capital Trust and First Bank Statutory
Trust were issued in private placements and rank equal to the trust preferred
securities issued by First Preferred Capital Trust II and First Preferred
Capital Trust IV, and junior to the trust preferred securities issued by First
Preferred Capital Trust III. The trust preferred securities issued by First
Preferred Capital Trust IV are publicly held and traded on the New York Stock
Exchange. The trust preferred securities have no voting rights except in certain
limited circumstances.
In conjunction with the formation of our financing entities and their
issuance of the trust preferred securities, we issued subordinated debentures to
each of our financing entities in amounts equivalent to the respective trust
preferred securities plus the amount of the common securities of the individual
trusts, as more fully described in Note 12 to our Consolidated Financial
Statements. We pay interest on our subordinated debentures to our respective
financing entities. In turn, our financing entities pay distributions to the
holders of the trust preferred securities. These interest and distribution
payments are paid quarterly in arrears on March 31st, June 30th, September 30th,
and December 31st of each year, with the exception of the First Bank Capital
Trust trust preferred securities and related subordinated debentures, which are
payable semi-annually in arrears on April 22nd and October 22nd of each year.
The distributions payable on our subordinated debentures are included in
interest expense in the consolidated statements of income.
Various trusts, which were created by and are administered by and for
the benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of
his immediate family, own all of our voting stock. Mr. Dierberg and his family,
therefore, control our management and policies.
Strategy. In the development of our banking franchise, we acquire other
financial institutions as one means of achieving our growth objectives.
Acquisitions may serve to enhance our presence in a given market, to expand the
extent of our market area or to enable us to enter new or noncontiguous markets.
Due to the nature of our ownership, we have elected to only engage in those
acquisitions that can be accomplished for cash. However, by using cash in our
acquisitions, the characteristics of the acquisition arena may, at times, place
us at a competitive disadvantage relative to other acquirers offering stock
transactions. This results from the market attractiveness of other financial
institutions' stock and the advantages of tax-free exchanges to the selling
shareholders. Our acquisition activities are generally somewhat sporadic because
we may consummate multiple transactions in a particular period, followed by a
substantially less active acquisition period. Furthermore, the intangible assets
recorded in conjunction with these acquisitions create an immediate reduction in
regulatory capital. This reduction, as required by regulatory policy, provides
further financial disincentives to paying large premiums in cash acquisitions.
Recognizing these facts, we follow certain patterns in our
acquisitions. First, we typically acquire several smaller institutions,
sometimes over an extended period of time, rather than a single larger one. We
attribute this approach to the constraints imposed by the amount of funds
required for a larger transaction, as well as the opportunity to minimize the
aggregate premium required through smaller individual transactions. Secondly, in
some acquisitions, we may acquire institutions having significant asset-quality,
ownership, regulatory or other problems. We seek to address the risks of these
issues by adjusting the acquisition pricing, accompanied by appropriate remedial
attention after consummation of the transaction. In these institutions, these
issues may diminish their attractiveness to other potential acquirers, and
therefore may reduce the amount of acquisition premium required. Finally, we may
pursue our acquisition strategy in other geographic areas, or pursue internal
growth more aggressively because cash transactions may not be economically
viable in extremely competitive acquisition markets.
During the five years ended December 31, 2003, we primarily
concentrated our acquisitions in California, completing 12 acquisitions of banks
and three purchases of branch offices, which provided us with an aggregate of
$2.15 billion in total assets and 45 banking locations as of the dates of the
acquisitions. More recent acquisitions have occurred in our other geographic
markets of Missouri, Illinois and Texas. In 2002, we completed our acquisition
of a bank holding company in Des Plaines, Illinois, as well as the purchase of
two branch offices in Denton and Garland, Texas. On March 31, 2003, we further
expanded our Midwest banking franchise with our acquisition of Bank of Ste.
Genevieve in Ste. Genevieve, Missouri. These acquisitions have allowed us to
significantly expand our presence throughout our geographic areas, improve
operational efficiencies, convey a more consistent image and quality of service
and more cohesively market and deliver our products and services.
Following our acquisitions, various tasks are necessary to effectively
integrate the acquired entities into our business systems and culture. While the
activities required are specifically dependent upon the individual circumstances
surrounding each acquisition, the majority of our efforts have been concentrated
in various areas including, but not limited to:
>> improving asset quality;
>> reducing unnecessary, duplicative and/or excessive expenses
including personnel, information technology and certain other
operational and administrative expenses;
>> maintaining, repairing and, in some cases, refurbishing bank
premises necessitated by the deferral of such projects by some of
the acquired entities;
>> renegotiating long-term leases which provide space in excess of
that necessary for banking activities and/or rates in excess of
current market rates, or subleasing excess space to third
parties;
>> relocating branch offices which are not adequate, conducive or
convenient for banking operations; and
>> managing actual or potential litigation that existed with respect
to acquired entities to minimize the overall costs of
negotiation, settlement or litigation.
The post-acquisition process also included the combining of separate
and distinct entities together to form a cohesive organization with common
objectives and focus. We invested significant resources to reorganize staff,
recruit personnel where needed, and establish the direction and focus necessary
for the combined entity to take advantage of the opportunities available to it.
This investment contributed to the increases in noninterest expense, and
resulted in the creation of new banking entities, which conveyed a more
consistent image and quality of service. The new banking entities provided a
broad array of banking products to their customers and compete effectively in
their marketplaces, even in the presence of other financial institutions with
much greater resources. While some of these modifications did not contribute to
reductions of noninterest expense, they contributed to the commercial and retail
business development efforts of the banks, and ultimately to their prospects for
improving future profitability.
Recently, our acquisition prospects have been somewhat limited
primarily due to the current market environment requiring significantly higher
premiums in order to transact financial institution acquisitions. As a result,
we have expanded our business strategy to include the opening of de novo branch
offices as another means of further achieving our growth objectives. Our de novo
branch strategy also provides similar opportunities to our acquisition strategy
by allowing us to enhance our presence in our existing markets and enter new
markets. Additionally, we generally have more flexibility in selecting the most
opportunistic sites for our de novo branches, constructing the branch offices in
accordance with our standard business model and marketing and promoting our
customized products and services under our long-established trade name. In
February 2004, we opened two new de novo branches, one in Houston, Texas and one
in West St. Louis County, Missouri. We currently have plans to open additional
de novo branches throughout 2004 in McKinney, Texas, San Diego, California and
Farmington, Missouri. We also expect to further concentrate our efforts on this
portion of our business strategy while continuing to identify viable acquisition
candidates at more reasonable acquisition premiums that are commensurate with
our established acquisition strategy.
In conjunction with our de novo and acquisition strategy, we have also
focused on building and reorganizing the infrastructure necessary to accomplish
our objectives for internal growth. This process has required significant
increases in the resources dedicated to commercial and consumer business
development, financial service product line and delivery systems, branch
development and training, advertising and marketing programs, and administrative
and operational support. In addition, during 1999, we began an internal
restructuring process designed to better position us for future growth and
opportunities expected to become available as consolidation and changes continue
in the delivery of financial services. The magnitude of this project was
extensive and covered almost every area of our organization. We continue to
focus on modifying and effectively repositioning our internal and external
resources to better serve the markets in which we operate. Although these
efforts have led to certain increased capital expenditures and noninterest
expenses, we expect they will lead to additional internal growth, more efficient
operations and improved profitability over the long term.
Lending Activities. Our enhanced business development resources assisted in the
realignment of certain acquired loan portfolios, which were skewed toward loan
types that reflected the abilities and experiences of the management of the
acquired entities. In order to achieve a more diversified portfolio, to address
asset-quality issues in the portfolios and to achieve a higher interest yield on
our loan portfolio, we reduced a substantial portion of the loans which were
acquired during this time through payments, refinancing with other financial
institutions, charge-offs, and, in certain instances, sales of loans. As a
result, our portfolio of one-to-four family residential real estate loans, after
reaching a high of $1.20 billion or 44.4% of total loans, excluding loans held
for sale, at December 31, 1995, has decreased to $811.7 million or 15.7% of
total loans, excluding loans held for sale, at December 31, 2003. Similarly, our
portfolio of consumer and installment loans, net of unearned discount, decreased
significantly from $274.4 million or 8.0% of total loans, excluding loans held
for sale, at December 31, 1998 to $61.3 million or 1.2% of total loans,
excluding loans held for sale, at December 31, 2003. The decrease reflects the
reduction in new consumer and installment loan volumes and the repayment of
principal on our existing consumer and installment loan portfolio, all of which
are consistent with our objectives of expanding commercial lending and reducing
the amount of less profitable loan types. The decline also reflects the sale of
our student loan and credit card portfolios in 2001, which totaled approximately
$16.9 million and $13.5 million, respectively, at the time of sale. We recorded
gains of $1.9 million and $229,000 on the sale of our credit card and student
loan portfolios, respectively, and we do not have any continuing involvement in
the transferred assets.
As these components of our loan portfolio decreased, we replaced them
with higher yielding loans that were internally generated by our business
development function. With our acquisitions, we expanded our business
development function into the new market areas in which we were then operating.
Consequently, in spite of relatively large reductions in acquired portfolios,
our aggregate loan portfolio, net of unearned discount, increased 48.8% from
$3.58 billion at December 31, 1998 to $5.33 billion at December 31, 2003.
Our business development efforts are focused on the origination of
loans in three general types: commercial, financial and agricultural loans,
which totaled $1.41 billion at December 31, 2003; commercial real estate
mortgage loans, which totaled $1.66 billion at December 31, 2003; and
construction and land development loans, which totaled $1.06 billion at December
31, 2003.
The primary component of commercial, financial and agricultural loans
is commercial loans which are made based on the borrowers' general credit
strength and ability to generate cash flows for repayment from income sources.
Most of these loans are made on a secured basis, generally involving the use of
company equipment, inventory and/or accounts receivable as collateral.
Regardless of collateral, substantial emphasis is placed on the borrowers'
ability to generate cash flow sufficient to operate the business and provide
coverage of debt servicing requirements. Commercial loans are frequently
renewable annually, although some terms may be as long as five years. These
loans typically require the borrower to maintain certain operating covenants
appropriate for the specific business, such as profitability, debt service
coverage and current asset and leverage ratios, which are generally reported and
monitored on a quarterly basis and subject to more detailed annual reviews.
Commercial loans are made to customers primarily located in First Bank's
geographic trade areas of Missouri, Illinois, California and Texas who are
engaged in manufacturing, retailing, wholesaling and service businesses. This
portfolio is not concentrated in large specific industry segments that are
characterized by sufficient homogeneity that would result in significant
concentrations of credit exposure. Rather, it is a highly diversified portfolio
that encompasses many industry segments. The largest general concentration in
this portfolio, which is not homogeneous in nature, is agricultural which totals
approximately $34.0 million, representing approximately 2% of the commercial,
financial and agricultural portfolio. This portfolio, however, is diverse in
geography and collateral, secured by a mixture of agricultural equipment,
livestock and crop production. The largest homogeneous industry segment included
within this portfolio is the fast-food restaurant segment, in which we had total
loans outstanding of approximately $48.3 million, representing 3.4% of this
portfolio, at December 31, 2003. Diversity in this segment of our portfolio is
represented by both geography and a mixture of loans to both franchisees and
franchisors, with approximately 77.0% of the portfolio involving loans to
franchisees and 23.0% to franchisors. Within both real estate and commercial
lending portfolios, we strive for the highest degree of diversity that is
practicable. We also emphasize the development of other service relationships
with our commercial borrowers, particularly deposit accounts.
Commercial real estate loans include loans for which the intended
source of repayment is the rental and other income from the real estate,
including both commercial real estate developed for lease and owner occupied
commercial real estate. The underwriting of owner occupied commercial real
estate loans generally follows the procedures for commercial lending described
above, except that the collateral is real estate, and the loan term may be
longer. The primary emphasis in underwriting loans for which the source of
repayment is the performance of the collateral is the projected cash flow from
the real estate and its adequacy to cover the operating costs of the project and
the debt service requirements. Secondary emphasis is placed on the appraised
value of the real estate, although the appraised liquidation value of the
collateral must be adequate to repay the debt and related interest in the event
the cash flow becomes insufficient to service the debt. Generally, underwriting
terms require the loan principal not to exceed 80% of the appraised value of the
collateral and the loan maturity not to exceed seven years. Commercial real
estate loans are made for commercial office space, retail properties,
hospitality, industrial and warehouse facilities and recreational properties. We
rarely finance commercial real estate or rental properties that do not have
lease commitments from a majority of tenants.
Construction and land development loans include commitments for
construction of both residential and commercial properties. Commercial real
estate projects require commitments for permanent financing from other lenders
upon completion of the project and, more typically, may include a short-term
amortizing component of the financing from the bank. Commitments for
construction of multi-tenant commercial and retail projects require lease
commitments from a substantial primary tenant or tenants prior to commencement
of construction. We finance some projects for borrowers whose home office is
within our trade area for which the particular project may be outside our normal
trade area. However, we generally do not engage in developing commercial and
residential construction lending business outside of our trade area. Residential
real estate construction and development loans are made based on the cost of
land acquisition and development, as well as the construction of the residential
units. Although we finance the cost of display units and units held for sale, a
substantial portion of the loans for individual residential units have purchase
commitments prior to funding. Residential condominium projects are funded as the
building construction progresses, but funding of unit finishing is generally
based on firm sales contracts.
In addition to underwriting based on estimates and projection of
financial strength, collateral values and future cash flows, many loans to
borrowing entities other than individuals require the personal guarantees of the
principals of the borrowing entity.
Our commercial leasing portfolio totaled $67.3 million and $126.7
million at December 31, 2003 and 2002, respectively. This portfolio consists of
leases originated by our former subsidiary, First Capital Group, Inc.,
Albuquerque, New Mexico, primarily through third parties, on commercial
equipment including aircraft parts and equipment. During 2002, we changed the
nature of this business, ultimately deciding to discontinue the operations of
First Capital Group, Inc. and the transfer of all responsibilities for the
existing portfolio to a new leasing staff in St. Louis, Missouri.
At December 31, 2001, within our commercial leasing portfolio, there
were approximately $60.1 million of leases of parts and equipment to the
commercial airline industry and related aircraft service providers. This
equipment consisted primarily of engines, landing gear and replacement parts,
most of which was used in maintenance operations by commercial airlines or by
third party vendors performing maintenance for the airlines. In addition, there
were several leases for smaller aircraft used by charter services. Earlier in
2001, it became apparent that the airline industry in general was experiencing
problems with overcapacity, and as a result, had begun reducing its requirements
for new and replacement aircraft. This was evidenced by airlines taking portions
of their fleets, particularly older less efficient aircraft, out of service and
reducing orders for new equipment. This affected maintenance operations because
as the usage of aircraft decreased, the maintenance requirements were also
reduced. Consequently, by late 2001, we discontinued new leases of equipment
related to the airline industry.
While some of the leases in our portfolio had evidenced problems by
early 2001, overcapacity problems and resulting financial distress in the
commercial airline industry became more critical after the terrorist attacks.
Following these events, we re-evaluated our aviation related lease portfolio to
examine our overall exposure to the industry, the effects of recent trends on
valuations of equipment and the financial strength of our lessees. As a result
of our review, for the year ended December 31, 2001, we incurred $4.5 million of
charge-offs in connection with the aircraft leasing portfolio and had $2.6
million of nonperforming aviation related leases at December 31, 2001. The
evaluation process has evolved into an ongoing monitoring of this portfolio
through continuous communication with lessees to establish information
concerning their use of equipment under lease, monitoring the use of that
equipment, and tracking of changes in equipment and related residual valuations.
When problems are detected, we obtain new valuations of the equipment, and
recognize any impairment in valuation by adjustments to reserves or income as
appropriate depending upon the type of lease. Sources of information for valuing
our leased assets include the Aircraft Bluebook, other public information from a
variety of sources, consultation with other lessors and brokers of aviation
equipment and specific engagement of an independent asset management company for
equipment valuation as well as management of repossessed assets. Specifically
with respect to residual values, and to establish formality in our process, we
obtained an appraisal of leased assets that involve residual risk by an
International Society of Transport Aircraft Trading certified appraiser of
aviation assets. The information received from these various specialized sources
assists us in valuing our lease portfolio and recognizing any impairment on
these assets. By December 31, 2002, the portfolio of leases on commercial
aircraft and parts and equipment had been reduced to $46.5 million, with $8.6
million of nonperforming aviation related leases, and $619,000 of charge-offs in
connection with this aircraft leasing portfolio for the year ended December 31,
2002. At December 31, 2003, this portfolio has been further reduced to $19.6
million, with $4.4 million of nonperforming aviation related leases, and $4.2
million of charge-offs in connection with the aircraft leasing portfolio for the
year ended December 31, 2003. Furthermore, we recorded $5.5 million in net lease
charge-offs related to three equipment leases that were unrelated to the airline
industry in 2003 as further discussed under "--Loans and Allowance for Loan
Losses."
Our expanded level of commercial lending carries with it greater credit
risk, which we manage through uniform loan policies, procedures, underwriting
and credit administration. As a consequence of such greater risk, the growth of
our loan portfolio must also be accompanied by adequate allowances for loan
losses. We associate the increased level of commercial lending activities and
our acquisitions with the increases of $7.9 million and $14.1 million in
nonperforming loans for the years ended December 31, 2002 and 2001,
respectively. Nonperforming loans remained relatively constant in 2003, with a
$199,000 increase from December 31, 2002. In addition, the loan portfolios of
Millennium Bank and Union Financial Group, Ltd., or Union, which we acquired in
2000 and 2001, respectively, exhibited significant distress, which further
contributed to the overall increase in nonperforming loans.
Millennium Bank, which we acquired on December 29, 2000, operated a
factoring business for doctors, hospitals and other health care professionals.
This business had been started by Millennium Bank the year before our
acquisition, and had approximately $11.0 million of receivables at the time of
our acquisition. Due to the relatively short life of this operation, the
portfolio did not exhibit signs of problems at that time. Consequently, we
allowed the business to continue after the acquisition to determine whether it
would be an appropriate line of business in the future. However, in late 2001,
the factoring receivables began to exhibit signs of distress, and in early 2002,
we determined one of the larger borrowers was incorrectly accounting for its
receivables, causing the factored balance to be substantially overfunded. During
2002, other asset quality issues arose and we charged off approximately $2.6
million, or 24.8%, of the health care factoring portfolio. At December 31, 2002,
we had $10.2 million of factoring business receivables, which further declined
to $2.1 million at December 31, 2003, reflecting our decision to discontinue
this line of business. Since no value was assigned to goodwill or other
intangible assets of this line of business in the acquisition, and the problems
arose subsequent to the acquisition, we determined that this did not create an
impairment of the goodwill that we recorded in connection with the acquisition.
In evaluating the loan portfolios of Union's two subsidiary banks prior
to its acquisition, it was clear that substantial problems existed in those
portfolios. Generally, credit documentation was poor, underwriting standards
were lax and loan terms were aggressive. As we conducted our due diligence
review, we applied the same asset quality standards, risk rating system and
allowance methodology that we apply to our own loan portfolio. Based on this
review, and to address concerns we had regarding Union's loan portfolios and the
level of its allowance for loan and lease losses, an escrow account of
approximately $1.6 million was established by withholding that amount from the
purchase price. This escrow account was available to absorb losses during the
two-year period following the acquisition from Union Bank's loan portfolio that
were in excess of Union Bank's allowance for loan and lease losses at the time
of the due diligence review. Union's consolidated allowance for loan and lease
losses was $8.6 million relative to an aggregate loan portfolio of $262.3
million at December 31, 2001, the date of acquisition.
While we believed there were substantial problems with the Union
portfolios, few of these had been identified or addressed by Union as of
December 31, 2001. Consequently, when we assimilated these loans into our
systems and procedures, the problems in the portfolio surfaced, causing an
increase in the amount of problem assets, as well as contributing to the level
of loans charged-off during 2002. Loan charge-offs from the Union portfolios
were $1.4 million for the year ended December 31, 2003 and $5.2 million for the
year ended December 31, 2002, including an amount within the Union Bank
portfolio that was in excess of the allowance at the date of our due diligence
review and the entire $1.6 million escrow account. Furthermore, nonperforming
loans in the Union portfolios increased from $6.9 million at December 31, 2002
to $7.5 million at December 31, 2003. Because these problems had been
anticipated in negotiating the acquisition price, they did not affect the amount
of goodwill recorded in connection with this acquisition.
For the years ended December 31, 2003 and 2002, our nonperforming
assets increased $3.7 million and $11.2 million, respectively. Nonperforming
loans were $75.4 million and $75.2 million at December 31, 2003 and 2002,
respectively, as compared to $67.3 million at December 31, 2001. The increase in
nonperforming loans in 2002 and 2003 is primarily attributable to general
economic conditions, additional problems identified in the acquired loan
portfolios and the continued deterioration of the portfolio of leases in our
commercial leasing portfolio, particularly the segment related to the airline
industry. In addition, in January 2003, we foreclosed on a residential and
recreational development property that had been placed on nonaccrual status
during the second quarter of 2002. The relationship relates to a residential and
recreational development project that had significant financial difficulties and
experienced inadequate project financing, project delays and weak project
management. As more fully described in Note 25 to our Consolidated Financial
Statements, we sold this property in February 2004, thereby reducing our
nonperforming assets by $9.2 million. Loan charge-offs, net of recoveries,
although still at higher-than-historical levels, decreased to $32.7 million for
2003, compared to $54.6 million for 2002 and $22.0 million for 2001 as further
discussed under "--Loans and Allowance for Loan Losses." We believe these
increases, while partially attributable to the overall risk in our loan
portfolio, are reflective of cyclical trends experienced within the banking
industry as a result of weak economic conditions within our market areas.
During 2001 and 2002, the nation generally experienced a relatively
mild, but prolonged economic slow down that has affected much of the banking
industry, including us. This was exacerbated by the terrorist attacks in late
2001 and the effects the attacks and related governmental responses had on
economic activity. In 2003, we continued to experience weak economic conditions
in our market areas, despite some slight economic improvements in certain
sectors. The overall effects of the economic downturn have been inconsistent
between various geographic areas of the country, as well as different segments
of the economy. To us, the effects of the downturn can be observed in generally
lower interest rates, which have a negative impact on our net interest income,
and on the performance of our loan portfolio, which is reflected in higher
delinquencies, nonperforming assets, charge-offs and provisions for loan losses,
as well as reduced loan demand from customers. The impact of lower interest
rates has been significantly reduced through the use of various derivative
financial instruments that provide hedges of this interest rate risk, as further
discussed under "--Interest Rate Risk Management." However, during 2002 and
2003, we incurred continued asset quality issues that were at least partially
attributable to economic conditions.
Within our market areas, the impact of the economy has become evident
at different times. In our midwestern markets, a perceptible increase in loan
delinquencies began in late 2000 and continued throughout 2001, with some modest
improvement in 2002 and 2003. The increase in delinquencies was primarily
focused in commercial, financial and agricultural loans, lease financing loans
and, to a lesser extent, commercial real estate loans, and initially involved
borrowers that had already encountered some operating problems that continued to
deteriorate as the economy became weaker. Included in this were loans on hotels
and leases to the commercial airline industry. In both instances, the industry
had been suffering from overcapacity prior to 2001, which then became much worse
with the economic downturn and the events of terrorist attacks. As the recession
continued, the effects expanded to companies that had been stronger, but
succumbed to the ongoing effects of slowed economic activity. Net loan
charge-offs for our Midwest banking region were $25.7 million and $22.1 million
for the years ended December 31, 2003 and 2002, respectively, compared to $16.3
million for the year ended December 31, 2001. Nonperforming loans and leases for
this region were $56.2 million and $50.5 million at December 31, 2003 and 2002,
respectively, compared to $47.7 million at December 31, 2001.
Generally, the effects on us of the economic downturn in California
have been limited to the San Francisco Bay area, including the area known as
"Silicon Valley." Although we have a substantial banking presence in the San
Francisco Bay area, we have relatively little direct exposure to the high
technology companies. Consequently, the decline in that industry beginning in
2000 had little direct effect on our California operations. However, as the
magnitude of the problems in the high technology sector increased, the effects
spread to companies that were suppliers and servicers of the high technology
sector, and to commercial real estate in the area. As a result, our asset
quality issues in California have been concentrated within the San Francisco Bay
area, and generally do not involve Southern California or the
Sacramento-Roseville area in Northern California. Furthermore, these issues
primarily arose during 2002. Consequently, our California banking region
incurred net loan charge-offs of $27.6 million and $5.4 million for the years
ended December 31, 2002 and 2001, respectively, in comparison to net loan
recoveries of $680,000 in 2003. Nonperforming loans for our California banking
region were $13.0 million, $17.2 million and $14.1 million at December 31, 2003,
2002 and 2001, respectively.
Our Texas banking operation represents a somewhat smaller portion of
our overall lending function. However, the Texas economy has generally continued
to be fairly strong, resulting in relatively few asset quality issues. We
recorded net loan charge-offs of $7.7 million for the year ended December 31,
2003, which included $6.6 million on three credit relationships. Net loan
charge-offs were $4.9 million for the year ended December 31, 2002, which
included a charge-off of $5.3 million on a single loan to a company engaged in
leasing equipment, primarily to manufacturers. This company encountered
significant operating problems from rapid expansion, principally through
acquisition, accompanied by the economic downturn, which particularly affected
the manufacturing sector. Total nonperforming loans for this region were $6.2
million, $5.5 million and $3.5 million at December 31, 2003, 2002 and 2001,
respectively.
In addition to restructuring our loan portfolio, we also have changed
the composition of our deposit base. The deposit mix of 2003 reflects our
continued efforts in this regard as a majority of our deposit development
programs are directed toward increased transaction accounts, such as demand and
savings accounts, rather than time deposits. We have also expanded our
development of multiple account relationships with individual customers. This
growth is accomplished by cross-selling various products and services, packaging
account types and offering incentives to deposit customers on other deposit or
non-deposit services. In addition, commercial borrowers are encouraged to
maintain their operating deposit accounts with us. At December 31, 1998, total
time deposits were $1.80 billion, or 45.8% of total deposits. Although time
deposits have increased to $1.96 billion at December 31, 2003, they represented
only 32.8% of total deposits, reflecting our continued focus on transactional
accounts and full service deposit relationships with our customers.
Despite the significant expenses we incurred in the amalgamation of the
acquired entities into our corporate culture and systems, and in the expansion
of our organizational capabilities, the earnings of the acquired entities and
the increased net interest income resulting from the transition in the
composition of our loan and deposit portfolios have contributed to improving net
income. For the years ended December 31, 2003 and 2002, net income was $62.8
million and $45.2 million, respectively, compared to $64.5 million, $56.1
million and $44.2 million in 2001, 2000 and 1999, respectively. The factors that
led to the decline in our earnings for 2002 include the current interest rate
environment, asset quality issues requiring additional provisions for loan
losses, and increased operating expenses. The higher-than-historical provisions
for loan losses in 2003 and 2002 reflect the current economic environment and
significantly increased loan charge-off, delinquency and nonperforming trends as
further discussed under "--Comparison of Results of Operations for 2003 and 2002
- - Provision for Loan Losses." Although we anticipate certain short-term adverse
effects on our operating results associated with acquisitions, we believe the
long-term benefits of our acquisition program will exceed the short-term issues
encountered with some acquisitions. As such, in addition to concentrating on
internal growth through continued efforts to further develop our corporate
infrastructure and product and service offerings, we expect to continue to
identify and pursue opportunities for growth through acquisitions and
expansionary de novo branch activities.
Acquisitions. In the development of our banking franchise, we emphasize
acquiring other financial institutions as one means of achieving our growth
objectives. Acquisitions may serve to enhance our presence in a given market, to
expand the extent of our market area or to enable us to enter new or
noncontiguous market areas. After we consummate an acquisition, we expect to
enhance the franchise of the acquired entity by supplementing the marketing and
business development efforts to broaden the customer bases, strengthening
particular segments of the business or filling voids in the overall market
coverage. We have primarily utilized cash, borrowings and the issuance of
subordinated debentures through our various statutory and business trusts, which
serve as financing entities, to meet our growth objectives under our acquisition
program.
During the three years ended December 31, 2003, we completed five
acquisitions of banks and two branch office purchases. As demonstrated in the
following table, our acquisitions during the three years ended December 31, 2003
have primarily served to increase our presence in the California markets that we
originally entered during 1995 and to further augment our existing markets and
our Midwest banking franchise. These transactions are summarized as follows:
Number
Loans, Net of of
Total Unearned Investment Banking
Entity Closing Date Assets Discount Securities Deposits Locations
------ ------------ ------ -------- ---------- --------- ---------
(dollars expressed in thousands)
2003
----
Bank of Ste. Genevieve
Ste. Genevieve, Missouri March 31, 2003 $ 115,100 43,700 47,800 93,700 2
========= ======== ======= ======== ====
2002
----
Union Planters Bank, N.A.
Denton and Garland, Texas
branch offices June 22, 2002 $ 63,700 600 -- 64,900 2
Plains Financial Corporation
Des Plaines, Illinois January 15, 2002 256,300 150,400 81,000 213,400 4
--------- -------- ------- -------- ----
$ 320,000 151,000 81,000 278,300 6
========= ======== ======= ======== ====
2001
----
Union Financial Group, Ltd.
Swansea, Illinois December 31, 2001 $ 360,000 263,500 1,150 283,300 9
BYL Bancorp
Orange, California October 31, 2001 281,500 175,000 12,600 251,800 7
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 70,200 7,500 89,000 2
--------- -------- ------- -------- ----
$ 743,000 508,700 21,250 624,100 18
========= ======== ======= ======== ====
We funded the completed acquisitions from available cash reserves,
proceeds from the exchange, sales and maturities of available-for-sale
investment securities, borrowings under our revolving credit line with a group
of unaffiliated banks and proceeds from the issuance of subordinated debentures.
Completed Acquisitions and Other Corporate Transactions
On January 15, 2002, we completed our acquisition of Plains Financial
Corporation, or Plains, and its wholly owned banking subsidiary, PlainsBank of
Illinois, National Association, Des Plaines, Illinois, in exchange for $36.5
million in cash. Plains operated a total of three banking facilities in Des
Plaines, Illinois, and one banking facility in Elk Grove Village, Illinois. At
the time of the transaction, Plains had $256.3 million in total assets, $150.4
million in loans, net of unearned discount, $81.0 million in investment
securities and $213.4 million in deposits. This transaction was accounted for
using the purchase method of accounting. Goodwill was approximately $12.6
million, and the core deposit intangibles, which are being amortized over seven
years utilizing the straight-line method, were approximately $2.9 million.
Plains was merged with and into Union and PlainsBank of Illinois was merged with
and into First Bank.
On June 22, 2002, First Bank & Trust completed its assumption of the
deposits and certain liabilities and the purchase of certain assets of the
Garland and Denton, Texas branch offices of Union Planters Bank, National
Association, or UP branches. The transaction resulted in the acquisition of
$15.3 million in deposits and one branch office in Garland and $49.6 million in
deposits and one branch office and a detached drive-thru facility, in Denton.
The core deposit intangibles associated with the branch purchases were $1.4
million and are being amortized over seven years utilizing the straight-line
method.
On December 31, 2002, we completed our acquisition of all of the
outstanding capital stock of First Banks America, Inc., or FBA, San Francisco,
California, that we did not already own for a price of $40.54 per share, or
approximately $32.4 million. Prior to this transaction, there were 798,753
shares, or approximately 6.22% of our former majority-owned subsidiary's
outstanding stock, held publicly. We owned the other 93.78%. In conjunction with
this transaction, FBA became a wholly owned subsidiary of First Banks, and was
merged with and into First Banks. This transaction was accounted for using the
purchase method of accounting. Goodwill was approximately $14.6 million.
On March 31, 2003, we completed our acquisition of Bank of Ste.
Genevieve, or BSG, Ste. Genevieve, Missouri, from Allegiant Bancorp, Inc., or
Allegiant, in exchange for approximately 974,150 shares of Allegiant common
stock that we previously held. The purpose of the transaction was to further
expand our Midwest banking franchise. At the time of the acquisition, BSG had
$115.1 million in total assets, $43.7 million in loans, net of unearned
discount, $47.8 million in investment securities, and $93.7 million in deposits
and operated two locations in Ste. Genevieve, Missouri. The transaction was
accounted for using the purchase method of accounting. We recorded a gain of
$6.3 million on the exchange of the Allegiant common stock and goodwill of
approximately $3.4 million. The core deposit intangibles were approximately $3.5
million and are being amortized over seven years utilizing the straight-line
method. BSG was merged with and into First Bank. Subsequent to the acquisition,
we continued to own 231,779 shares, or approximately 1.52% of the issued and
outstanding shares of Allegiant common stock. On October 27, 2003, we
contributed our remaining shares of Allegiant common stock to a previously
established charitable foundation. In conjunction with this transaction, we
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, we recorded a tax benefit of $2.5 million associated with this
transaction. The contribution of this stock eliminated our investment in
Allegiant.
On March 31, 2003, we completed the merger of our 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.
On October 17, 2003, First Bank completed its divestiture of three
branch offices in the northern and central Illinois market area, and on December
5, 2003, First Bank completed its divestiture of one branch office in eastern
Missouri. These branch divestitures resulted in a reduction of First Bank's
deposit base of approximately $88.3 million, and a pre-tax gain of approximately
$4.0 million.
Acquisition and Integration Costs
We accrue certain costs associated with our acquisitions as of the
respective consummation dates. Essentially all of these accrued costs relate
either to adjustments to the staffing levels of the acquired entities or to the
anticipated termination of information technology or item processing contracts
of the acquired entities prior to their stated contractual expiration dates. The
most significant costs that we incur relate to salary continuation agreements,
or other similar agreements, of executive management and certain other employees
of the acquired entities that were in place prior to the acquisition dates.
These agreements provide for payments over periods ranging from 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. Our accrued severance balance of $1.4 million, as further described in
Note 2 to our Consolidated Financial Statements, is comprised of contractual
obligations under salary continuation agreements to ten individuals that have
remaining terms ranging from four months to approximately 13 years. Payments
made under these agreements are paid from accrued liabilities and consequently
do not have any impact on our consolidated statements of income.
A summary of acquisition and integration costs attributable to the
acquisitions included in the foregoing table, which were accrued as of the
consummation dates of the respective acquisition, is included in Note 2 to our
Consolidated Financial Statements. Acquisition and integration costs are
reflected in accrued expenses and other liabilities in our consolidated
financial statements.
As further discussed and quantified under "--Comparison of Results of
Operations for 2003 and 2002," and "--Comparison of Results of Operations for
2002 and 2001," 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.
Market Area. As of December 31, 2003, First Bank's 147 banking facilities were
located in California, eastern Missouri, Illinois and Texas. Our primary market
area is the St. Louis, Missouri metropolitan area. Our second and third largest
market areas are southern and northern California, respectively. We also have
locations throughout Illinois, in the Houston, Dallas, Irving, McKinney and
Denton, Texas metropolitan areas and rural eastern Missouri.
The following table lists the market areas in which First Bank
operates, total deposits, deposits as a percentage of total deposits and the
number of locations as of December 31, 2003:
Total Deposits Number
Deposits as a Percentage of
Geographic Area (in millions) of Total Deposits Locations
--------------- ------------- ----------------- ---------
St. Louis, Missouri metropolitan area................................ $ 1,391.8 23.3% 29
Southern California.................................................. 1,302.9 21.9 31
Northern California.................................................. 1,033.1 17.3 16
Central and southern Illinois........................................ 1,010.2 16.9 34
Eastern Missouri..................................................... 480.4 8.1 15
Northern Illinois.................................................... 428.6 7.2 14
Texas................................................................ 314.6 5.3 8
--------- ----- ---
Total deposits.................................................. $ 5,961.6 100.0% 147
========= ===== ===
First Bank operates in the St. Louis metropolitan area, in eastern
Missouri and throughout Illinois, including Chicago. First Bank also operates in
southern California, including the greater Los Angeles metropolitan area,
including Ventura County, Riverside County and Orange County; in Santa Barbara
County; in northern California, including the greater San Francisco, San Jose
and Sacramento metropolitan areas; and in Texas in the Houston, Dallas, Irving,
McKinney and Denton metropolitan areas.
Competition and Branch Banking. First Bank engages in highly competitive
activities. Those activities and the geographic markets served primarily involve
competition with other banks, some of which are affiliated with large regional
or national holding companies. Financial institutions compete based upon
interest rates offered on deposit accounts, interest rates charged on loans and
other credit and service charges, the quality of services rendered, the
convenience of banking facilities and, in the case of loans to large commercial
borrowers, relative lending limits.
Our principal competitors include other commercial banks, savings
banks, savings and loan associations, mutual funds, finance companies, trust
companies, insurance companies, leasing companies, credit unions, mortgage
companies, private issuers of debt obligations and suppliers of other investment
alternatives, such as securities firms and financial holding companies. Many of
our non-bank competitors are not subject to the same degree of regulation as
that imposed on bank holding companies, federally insured banks and national or
state chartered banks. As a result, such non-bank competitors have advantages
over us in providing certain services. We also compete with major multi-bank
holding companies, which are significantly larger than us and have greater
access to capital and other resources.
We believe we will continue to face competition in the acquisition of
independent banks and savings banks from banks and financial holding companies.
We often compete with larger financial institutions that have substantially
greater resources available for making acquisitions.
Subject to regulatory approval, commercial banks operating in
California, Illinois, Missouri and Texas are permitted to establish branches
throughout their respective states, thereby creating the potential for
additional competition in our service areas.
Supervision and Regulation
General. Federal and state laws extensively regulate First Bank and us primarily
to protect depositors and customers of First Bank. To the extent this discussion
refers to statutory or regulatory provisions, it is not intended to summarize
all such provisions and is qualified in its entirety by reference to the
relevant statutory and regulatory provisions. Changes in applicable laws,
regulations or regulatory policies may have a material effect on our business
and prospects. We are unable to predict the nature or extent of the effects on
our business and earnings that new federal and state legislation or regulation
may have. The enactment of the legislation described below has significantly
affected the banking industry generally and is likely to have ongoing effects on
First Bank and us in the future.
We are a registered bank holding company under the Bank Holding Company
Act of 1956. Consequently, the Board of Governors of the Federal Reserve System,
or Federal Reserve, regulates, supervises and examines us. We file annual
reports with the Federal Reserve and provide to the Federal Reserve additional
information as it may require.
Since First Bank is an institution chartered by the State of Missouri
and a member of the Federal Reserve, both the State of Missouri Division of
Finance and the Federal Reserve supervise, regulate and examine First Bank.
First Bank is also regulated by the Federal Deposit Insurance Corporation, or
FDIC, which provides deposit insurance of up to $100,000 for each insured
depositor.
Bank Holding Company Regulation. Our activities and those of First Bank have in
the past been limited to the business of banking and activities "closely
related" or "incidental" to banking. Under the Gramm-Leach-Bliley Act, or GLB
Act, which was enacted in November 1999 and is discussed below, bank holding
companies now have the opportunity to seek broadened authority, subject to
limitations on investment, to engage in activities that are "financial in
nature" if all of their subsidiary depository institutions are well capitalized,
well managed and have at least a satisfactory rating under the Community
Reinvestment Act (discussed briefly below).
We are also subject to capital requirements applied on a consolidated
basis, which are substantially similar to those required of First Bank (briefly
summarized below). The Bank Holding Company Act also requires a bank holding
company to obtain approval from the Federal Reserve before:
>> acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls a majority of such
shares);
>> acquiring all or substantially all of the assets of another bank
or bank holding company; or
>> merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anti-competitive result, unless
the anti-competitive effects of the proposed transaction are clearly outweighed
by a greater public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve also considers capital adequacy and
other financial and managerial factors in reviewing acquisitions and mergers.
Safety and Soundness and Similar Regulations. We are subject to various
regulations and regulatory policies directed at the financial soundness of First
Bank. These include, but are not limited to, the Federal Reserve's source of
strength policy, which obligates a bank holding company such as us to provide
financial and managerial strength to its subsidiary banks; restrictions on the
nature and size of certain affiliate transactions between a bank holding company
and its subsidiary depository institutions and restrictions on extensions of
credit by its subsidiary banks to executive officers, directors, principal
stockholders and the related interests of such persons.
Regulatory Capital Standards. The federal bank regulatory agencies have adopted
substantially similar risk-based and leverage capital guidelines for banking
organizations. Risk-based capital ratios are determined by classifying assets
and specified off-balance-sheet obligations and financial instruments into
weighted categories, with higher levels of capital being required for categories
deemed to represent greater risk. Federal Reserve policy also provides that
banking organizations generally, and in particular those that are experiencing
internal growth or actively making acquisitions, are expected to maintain
capital positions that are substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Under the risk-based capital standard, the minimum consolidated ratio
of total capital to risk-adjusted assets required for bank holding companies is
8%. At least one-half of the total capital must be composed of common equity,
retained earnings, qualifying noncumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual preferred stock and minority interests
in the equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets, which amount is referred to as
"Tier I capital." The remainder may consist of qualifying hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier I
capital and a limited amount of loan and lease loss reserves, which amount,
together with Tier I capital, is referred to as "Total Risk-Based Capital."
In addition to the risk-based standard, we are subject to minimum
requirements with respect to the ratio of our Tier I capital to our average
assets less goodwill and certain other intangible assets, or the Leverage Ratio.
Applicable requirements provide for a minimum Leverage Ratio of 3% for bank
holding companies that have the highest supervisory rating, while all other bank
holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%.
The Office of the Comptroller of the Currency, or OCC, and the FDIC have
established capital requirements for banks under their respective jurisdictions
that are consistent with those imposed by the Federal Reserve on bank holding
companies. Information regarding our capital levels and First Bank's capital
levels under the federal capital requirements is contained in Note 21 to our
Consolidated Financial Statements appearing elsewhere in this report.
Prompt Corrective Action. The FDIC Improvement Act requires the federal bank
regulatory agencies to take prompt corrective action in respect to depository
institutions that do not meet minimum capital requirements. A depository
institution's status under the prompt corrective action provisions depends upon
how its capital levels compare to various relevant capital measures and other
factors as established by regulation.
The federal regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. Under the regulations, a
bank will be:
>> "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier I capital ratio of 6% or greater and a
Leverage Ratio of 5% or greater and is not subject to any order
or written directive by any such regulatory authority to meet and
maintain a specific capital level for any capital measure;
>> "adequately capitalized" if it has a total risk-based capital
ratio of 8% or greater, a Tier I capital ratio of 4% or greater
and a Leverage Ratio of 4% or greater (3% in certain
circumstances);
>> "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I capital ratio of less than 4% or a
Leverage Ratio of less than 4% (3% in certain circumstances);
>> "significantly undercapitalized" if it has a total risk-based
capital ratio of less than 6%, a Tier I capital ratio of less
than 3% or a Leverage Ratio of less than 3%; and
>> "critically undercapitalized" if its tangible equity is equal to
or less than 2% of its average quarterly tangible assets.
Under certain circumstances, a depository institution's primary federal
regulatory agency may use its authority to lower the institution's capital
category. The banking agencies are permitted to establish individual minimum
capital requirements exceeding the general requirements described above.
Generally, failing to maintain the status of "well capitalized" or "adequately
capitalized" subjects a bank to restrictions and limitations on its business
that become progressively more severe as the capital levels decrease.
A bank is prohibited from making any capital distribution (including
payment of a dividend) or paying any management fee to its holding company if
the bank would thereafter be "undercapitalized." Limitations exist for
"undercapitalized" depository institutions regarding, among other things, asset
growth, acquisitions, branching, new lines of business, acceptance of brokered
deposits and borrowings from the Federal Reserve System. These institutions are
also required to submit a capital restoration plan that includes a guarantee
from the institution's holding company. "Significantly undercapitalized"
depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
"adequately capitalized," requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. The appointment of a receiver or
conservator may be required for "critically undercapitalized" institutions.
Dividends. Our primary source of funds in the future is the dividends, if any,
paid by First Bank. The ability of First Bank to pay dividends is limited by
federal laws, by regulations promulgated by the bank regulatory agencies and by
principles of prudent bank management.
Customer Protection. First Bank is also subject to consumer laws and regulations
intended to protect consumers in transactions with depository institutions, as
well as other laws or regulations affecting customers of financial institutions
generally. These laws and regulations mandate various disclosure requirements
and substantively regulate the manner in which financial institutions must deal
with their customers. First Bank must comply with numerous regulations in this
regard and is subject to periodic examinations with respect to its compliance
with the requirements.
Community Reinvestment Act. The Community Reinvestment Act of 1977 requires
that, in connection with examinations of financial institutions within their
jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered in evaluating
mergers, acquisitions and other applications to expand.
The Gramm-Leach-Bliley Act. The GLB Act, enacted in 1999, amended and repealed
portions of the Glass-Steagall Act and other federal laws restricting the
ability of bank holding companies, securities firms and insurance companies to
affiliate with each other and to enter new lines of business. The GLB Act
established a comprehensive framework to permit financial companies to expand
their activities, including through such affiliations, and to modify the federal
regulatory structure governing some financial services activities. This
authority of financial firms to broaden the types of financial services offered
to customers and to affiliates with other types of financial services companies
may lead to further consolidation in the financial services industry. However,
it may lead to additional competition in the markets in which we operate by
allowing new entrants into various segments of those markets that are not the
traditional competitors in those segments. Furthermore, the authority granted by
the GLB Act may encourage the growth of larger competitors.
The GLB Act also adopted consumer privacy safeguards requiring
financial services providers to disclose their policies regarding the privacy of
customer information to their customers and, subject to some exceptions,
allowing customers to "opt out" of policies permitting such companies to
disclose confidential financial information to non-affiliated third parties.
Final regulations implementing the new privacy standards became effective in
2001.
The Sarbanes-Oxley Act. In July 2002, the Sarbanes-Oxley Act of 2002 was signed
into law. The Sarbanes-Oxley Act imposes a myriad of corporate governance and
accounting measures designed to ensure that the shareholders of corporate
America are treated fairly and have full and accurate information about the
public companies in which they invest. All public companies, including companies
that file periodic reports with the Securities and Exchange Commission, or SEC,
such as First Banks, are affected by the Sarbanes-Oxley Act.
Certain provisions of the Sarbanes-Oxley Act became effective
immediately, while other provisions will become effective as the SEC adopts
rules to implement those provisions. Some of the principal provisions of the
Sarbanes-Oxley Act which may affect us include:
>> the creation of an independent accounting oversight board to
oversee the audit of public companies and auditors who perform
such audits;
>> auditor independence provisions which restrict non-audit services
that independent accountants may provide to their audit clients;
>> additional corporate governance and responsibility measures which
(i) require the chief executive officer and chief financial
officer to certify financial statements and to forfeit salary and
bonuses in certain situations, and (ii) protect whistleblowers
and informants;
>> expansion of the audit committee's authority and responsibility
by requiring that the audit committee (i) have direct control of
the outside auditor, (ii) be able to hire and fire the auditor,
and (iii) approve all non-audit services;
>> mandatory disclosure by analysts of potential conflicts of
interest; and
>> enhanced penalties for fraud and other violations.
The Sarbanes-Oxley Act is expected to increase the administrative costs
and burden of doing business for public companies; however, we cannot predict
the significance of such increase at this time.
The USA Patriot Act. In October 2001, the Patriot Act was enacted in response to
the terrorist attacks in New York, Pennsylvania and Washington, D.C. that
occurred on September 11, 2001. The Patriot Act is intended to strengthen the
ability of U.S. law enforcement agencies and the intelligence communities to
work cohesively to combat terrorism on a variety of fronts. The potential impact
of the Patriot Act on financial institutions of all kinds is significant and
wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and imposes various regulations, including standards
for verifying client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering. The Patriot Act is expected to increase the administrative costs and
burden of doing business for financial institutions; however, while we cannot
predict the full impact of such an increase at this time, we do not expect it to
differ from that of other financial institutions.
Reserve Requirements: Federal Reserve System and Federal Home Loan Bank System.
The Federal Reserve requires all depository institutions to maintain reserves
against their transaction accounts and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements. Institutions are authorized to borrow
from the Federal Reserve Bank "discount window," but Federal Reserve regulations
require institutions to exhaust other reasonable alternative sources of funds,
including advances from Federal Home Loan Banks, before borrowing from the
Federal Reserve Bank.
First Bank is a member of the Federal Reserve System and the Federal
Home Loan Bank System. As members, First Bank is required to hold investments in
regional banks within those systems. First Bank was in compliance with these
requirements at December 31, 2003, with investments of $5.4 million in stock of
the Federal Home Loan Bank of Des Moines, $350,000 in stock of the Federal Home
Loan Bank of Chicago (associated with the acquisition of Union completed on
December 31, 2001), $285,000 in stock of the Federal Home Loan Bank of San
Francisco, and $18.1 million in stock of the Federal Reserve Bank of St. Louis.
Monetary Policy and Economic Control. The commercial banking business is
affected by legislation, regulatory policies and general economic conditions as
well as the monetary policies of the Federal Reserve. The instruments of
monetary policy available to the Federal Reserve include the following:
>> changes in the discount rate on member bank borrowings and the
targeted federal funds rate;
>> the availability of credit at the "discount window;"
>> open market operations;
>> the imposition of changes in reserve requirements against
deposits of domestic banks;
>> the imposition of changes in reserve requirements against
deposits and assets of foreign branches; and
>> the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates.
These monetary policies are used in varying combinations to influence
overall growth and distributions of bank loans, investments and deposits, and
this use may affect interest rates charged on loans or paid on liabilities. The
monetary policies of the Federal Reserve have had a significant effect on the
operating results of commercial banks and are expected to do so in the future.
Such policies are influenced by various factors, including inflation,
unemployment, and short-term and long-term changes in the international trade
balance and in the fiscal policies of the U.S. Government. We cannot predict the
effect that changes in monetary policy or in the discount rate on member bank
borrowings will have on our future business and earnings or those of First Bank.
Employees
As of March 25, 2004, we employed approximately 2,160 employees. None
of the employees are subject to a collective bargaining agreement. We consider
our relationships with our employees to be good.
Executive Officers of the Registrant
Information regarding executive officers is contained in Item 10 of
Part III hereof (pursuant to General Instruction G) and is incorporated herein
by this reference.
Item 2. Properties
We own our office building, which houses our principal place of
business, located at 135 North Meramec, Clayton, Missouri 63105. The property is
in good condition and consists of approximately 60,353 square feet, of which
approximately 981 square feet is currently leased to others. Of our other 146
offices and two operations and administrative facilities, 88 are located in
buildings that we own and 60 are located in buildings that we lease.
We consider the properties at which we do business to be in good
condition generally and suitable for our business conducted at each location. To
the extent our properties or those acquired in connection with our acquisition
of other entities provide space in excess of that effectively utilized in the
operations of First Bank, we seek to lease or sub-lease any excess space to
third parties. Additional information regarding the premises and equipment
utilized by First Bank appears in Note 7 to our Consolidated Financial
Statements appearing elsewhere in this report.
Item 3. Legal Proceedings
In the ordinary course of business, we and our subsidiaries become
involved in legal proceedings. Our management, in consultation with legal
counsel, believes the ultimate resolution of existing proceedings will not have
a material adverse effect on our business, financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information. There is no established public trading market for our common
stock. Various trusts, which were created by and are administered by and for the
benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of his
immediate family, own all of our voting stock.
Dividends. In recent years, we have paid minimal dividends on our Class A
Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible
Adjustable Rate Preferred Stock, and have paid no dividends on our Common Stock.
Our ability to pay dividends is limited by regulatory requirements and by the
receipt of dividend payments from First Bank, which is also subject to
regulatory requirements. The dividend limitations are included in Note 22 to our
Consolidated Financial Statements appearing elsewhere in this report.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below are derived
from our consolidated financial statements, which have been audited by KPMG LLP.
This information is qualified by reference to our consolidated financial
statements appearing elsewhere in this report. This information should be read
in conjunction with such consolidated financial statements, the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
As of or For the Year Ended December 31, (1)
-----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(dollars expressed in thousands, except share and per share data)
Income Statement Data:
Interest income................................... $ 391,153 425,721 445,385 423,294 353,456
Interest expense.................................. 104,026 157,551 210,246 201,320 171,125
---------- --------- --------- --------- ---------
Net interest income............................... 287,127 268,170 235,139 221,974 182,331
Provision for loan losses......................... 49,000 55,500 23,510 14,127 13,073
---------- --------- --------- --------- ---------
Net interest income after
provision for loan losses....................... 238,127 212,670 211,629 207,847 169,258
Noninterest income................................ 87,708 67,511 89,095 37,414 36,708
Noninterest expense............................... 227,069 210,812 202,157 152,626 133,815
---------- --------- --------- --------- ---------
Income before provision for income taxes,
minority interest in income of
subsidiary and cumulative effect of
change in accounting principle.................. 98,766 69,369 98,567 92,635 72,151
Provision for income taxes........................ 35,955 22,771 30,048 34,482 26,313
---------- --------- --------- --------- ---------
Income before minority interest in
income of subsidiary and cumulative effect
of change in accounting principle............... 62,811 46,598 68,519 58,153 45,838
Minority interest in income of subsidiary......... -- 1,431 2,629 2,046 1,660
---------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle............................ 62,811 45,167 65,890 56,107 44,178
Cumulative effect of change in
accounting principle, net of tax ............... -- -- (1,376) -- --
---------- --------- --------- --------- ---------
Net income........................................ $ 62,811 45,167 64,514 56,107 44,178
========== ========= ========= ========= =========
Dividends:
Preferred stock................................... $ 786 786 786 786 786
Common stock...................................... -- -- -- -- --
Ratio of total dividends declared to net income... 1.25% 1.74% 1.22% 1.40% 1.78%
Per Share Data:
Earnings per common share:
Basic:
Income before cumulative effect of change
in accounting principle...................... $ 2,621.39 1,875.69 2,751.54 2,338.04 1,833.91
Cumulative effect of change in
accounting principle, net of tax............. -- -- (58.16) -- --
---------- --------- --------- --------- ---------
Basic.......................................... $ 2,621.39 1,875.69 2,693.38 2,338.04 1,833.91
========== ========= ========= ========= =========
Diluted:
Income before cumulative effect of
change in accounting principle............... $ 2,588.31 1,853.64 2,684.93 2,267.41 1,775.47
Cumulative effect of change in
accounting principle, net of tax............. -- -- (58.16) -- --
---------- --------- --------- --------- ---------
Diluted........................................ $ 2,588.31 1,853.64 2,626.77 2,267.41 1,775.47
========== ========= ========= ========= =========
Weighted average common stock outstanding....... 23,661 23,661 23,661 23,661 23,661
Balance Sheet Data:
Investment securities............................. $1,049,714 1,145,670 638,644 569,403 455,737
Loans, net of unearned discount................... 5,328,075 5,432,588 5,408,869 4,752,265 3,996,324
Total assets...................................... 7,106,940 7,351,177 6,786,045 5,882,706 4,871,837
Total deposits.................................... 5,961,615 6,172,820 5,683,904 5,012,415 4,251,814
Notes payable..................................... 17,000 7,000 27,500 83,000 64,000
Subordinated debentures........................... 209,320 278,389 243,457 188,718 131,701
Common stockholders' equity....................... 536,752 505,978 435,594 339,783 281,842
Total stockholders' equity........................ 549,815 519,041 448,657 352,846 294,905
Earnings Ratios:
Return on average total assets.................... 0.87% 0.64% 1.08% 1.09% 0.95%
Return on average total stockholders' equity...... 11.68 9.44 15.96 17.43 15.79
Efficiency ratio (2).............................. 60.58 62.80 62.35 58.84 61.09
Net interest margin (3)........................... 4.45 4.23 4.34 4.65 4.24
Asset Quality Ratios:
Allowance for loan losses to loans................ 2.19 1.83 1.80 1.72 1.72
Nonperforming loans to loans (4).................. 1.41 1.38 1.24 1.12 0.99
Allowance for loan losses
to nonperforming loans (4)...................... 154.52 132.29 144.36 153.47 172.66
Nonperforming assets to loans
and other real estate (5)....................... 1.62 1.52 1.32 1.17 1.05
Net loan charge-offs to average loans............. 0.61 1.01 0.45 0.17 0.22
Capital Ratios:
Average total stockholders' equity
to average total assets......................... 7.48 6.78 6.74 6.25 6.00
Total risk-based capital ratio.................... 10.27 10.68 10.53 10.21 10.05
Leverage ratio.................................... 7.62 6.45 7.24 7.46 7.15
- ---------------------------------
(1) The comparability of the selected data presented is affected by the acquisitions of 12 banks and three branch
offices during the five-year period ended December 31, 2003. These acquisitions were accounted for as purchases
and, accordingly, the selected data includes the financial position and results of operations of each acquired
entity only for the periods subsequent to its respective date of acquisition.
(2) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income.
(3) Net interest rate margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average
interest-earning assets.
(4) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms.
(5) Nonperforming assets consist of nonperforming loans and other real estate.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following presents management's discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. You should read this discussion in conjunction with our
"Selected Financial Data," our consolidated financial statements and the related
notes thereto, and the other financial data contained elsewhere in this report.
This discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains 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. Various factors
may cause our actual results to differ materially from those contemplated by the
forward-looking statements herein. We do not have a duty to and will not update
these forward-looking statements. Readers of our Annual Report on Form 10-K
should therefore not place undue reliance on forward-looking statements. See
"Special Note Regarding Forward-Looking Statements" appearing elsewhere in this
report.
RESULTS OF OPERATIONS
Overview
Net income was $62.8 million, $45.2 million and $64.5 million for the
years ended December 31, 2003, 2002 and 2001, respectively. Our return on
average assets and our return on average stockholders' equity increased to 0.87%
and 11.68%, respectively, for the year ended December 31, 2003, compared to
0.64% and 9.44%, respectively, for 2002 and 1.08% and 15.96%, respectively, for
2001. Results for 2003 reflect increased net interest income and noninterest
income and decreased provisions for loan losses, which were partially offset by
higher operating expenses, primarily attributable to our acquisitions completed
in 2003 and 2002, and increased provisions for income taxes. For the three
months ended December 31, 2003 and 2002, our net income was $15.4 million and
$14.8 million, respectively.
The increase in net income for 2003 was primarily attributable to
increased net interest income resulting from reduced deposit rates and earnings
on our interest rate swap agreements associated with our interest rate risk
management program in addition to increased gains on mortgage loans sold and
held for sale. Results for 2003 also included a nonrecurring gain relating to
the partial exchange of our investment in the common stock of Allegiant, for a
100% ownership interest in BSG, Ste. Genevieve, Missouri. Our remaining
investment in the common stock of Allegiant was contributed in full to a
previously established charitable foundation in late 2003. This nonrecurring
charitable contribution expense was partially offset by the gain realized on the
increase in the market value of the Allegiant common stock and the related
income tax effects of the transaction. Throughout 2003, we continued to address
residual problems in our loan and lease portfolio stemming from the 2002 decline
in asset quality that was primarily a result of weak economic conditions within
our markets. Our provisions for loan losses, which declined from 2002 levels,
remained at higher-than-historical levels. We continue to closely monitor asset
quality and address ongoing challenges posed by the current economic environment
and expect nonperforming assets to remain at elevated levels during most of
2004. We have also focused our efforts on strengthening our net interest margin
and growing noninterest income while managing operating expenses. Our net
interest margin increased to 4.45% for the year ended December 31, 2003 compared
to 4.23% for 2002. Noninterest income increased 29.9% in 2003, and our
efficiency ratio improved to 60.58% in 2003 from 62.80% in 2002. This has placed
us in a position to benefit from improved economic conditions as they occur. The
decline in our earnings in 2002 primarily resulted from the reduced interest
rate environment and weak economic conditions within our market areas, as well
as the related decline in asset quality. Throughout 2002, we experienced higher
than normal loan charge-offs, loan delinquencies and nonperforming loans that
led to significant increases in the provision for loan losses, thereby reducing
net income.
The implementation of Statement of Financial Accounting Standards, or
SFAS, No. 142, Goodwill and Other Intangible Assets, on January 1, 2002,
resulted in the discontinuation of amortization of certain intangibles
associated with the purchase of subsidiaries. If we had implemented SFAS No. 142
at the beginning of 2001, net income for the year ended December 31, 2001 would
have increased $8.1 million. In addition, the implementation of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, on January 1,
2001, resulted in the recognition of a cumulative effect of change in accounting
principle of $1.4 million, net of tax, which reduced net income. Excluding this
item, net income would have been $65.9 million for the year ended December 31,
2001. Furthermore, on December 31, 2003, we implemented FASB Interpretation No.
46, Consolidation of Variable Interest Entities, an interpretation of ARB No.
51, which resulted in the deconsolidation of our five statutory and business
trusts that were created for the sole purpose of issuing trust preferred
securities. The implementation of this Interpretation had no material effect on
our financial position or results of operations.
Financial Condition and Average Balances
Our average total assets were $7.18 billion for the year ended December
31, 2003, compared to $7.06 billion and $6.00 billion for the years ended
December 31, 2002 and 2001, respectively. Total assets were $7.11 billion, $7.35
billion and $6.79 billion at December 31, 2003, 2002 and 2001, respectively. We
attribute the $244.2 million decrease in total assets for 2003 to weak loan
demand from our commercial customers, a reduction in loans and bank premises and
equipment related to the divestiture of four branch offices, an anticipated
level of deposit attrition associated with lower deposit rates, maturities and
exchanges of investment securities and a decline in derivative financial
instruments, partially offset by our acquisition of BSG on March 31, 2003, which
provided assets of $115.1 million. We attribute the increase of $1.06 billion in
total average assets for 2002 primarily to our 2002 acquisitions of Plains and
the UP branches, which provided assets of $256.3 million and $63.7 million,
respectively, and our acquisitions of Charter Pacific Bank, BYL Bancorp and
Union, completed during the fourth quarter of 2001. The increase in total assets
was partially offset by lower loan demand and an anticipated level of attrition
associated with these acquisitions.
The increase in average assets for 2003 was primarily funded by an
increase in average deposits of $98.1 million to $6.05 billion for the year
ended December 31, 2003, and an increase of $25.2 million in average other
borrowings to $219.3 million for the year ended December 31, 2003. We utilized
the majority of the funds generated from our deposit growth to invest in
available-for-sale investment securities, reduce our subordinated debenture
obligations and temporarily invest the remaining funds in federal funds sold,
resulting in increases in average investment securities and average federal
funds sold of $135.5 million and $19.8 million, respectively, to $957.4 million
and $143.0 million, respectively, for the year ended December 31, 2003. The
increase in average assets for 2002 was primarily funded by an increase in
average deposits of $867.3 million to $5.96 billion for the year ended December
31, 2002, and an increase of $36.0 million in average other borrowings to $194.1
million for the year ended December 31, 2002. We utilized the majority of the
funds generated from our deposit growth to invest in available-for-sale
investment securities and the remaining funds were temporarily invested in
federal funds sold, resulting in increases in average federal funds sold and
average investment securities of $29.7 million and $364.5 million, respectively,
to $123.3 million and $821.9 million, respectively, for the year ended December
31, 2002.
Loans, net of unearned discount, averaged $5.39 billion, $5.42 billion
and $4.88 billion for the years ended December 31, 2003, 2002 and 2001,
respectively. The acquisitions we completed during 2003 and 2002 provided loans,
net of unearned discount, of $43.7 million and $151.0 million, respectively. We
attribute the decrease in average loans in 2003 to general economic conditions
resulting in continued weak loan demand and lower prevailing interest rates as
well as increased competition within our markets areas. In addition to growth
provided by acquisitions, for 2003, internal loan growth was provided by a $73.6
million increase in our real estate construction and development portfolio and a
$100.6 million increase in our residential real estate mortgage portfolio due to
increased volumes resulting from the current interest rate environment and our
business strategy decision to retain a portion of our residential mortgage loan
production that would have previously been sold in the secondary mortgage
market. These increases were offset by a $204.2 million decline in our loans
held for sale resulting from the timing of loans sales in the secondary mortgage
market and reduced loan volumes in the fourth quarter of 2003, a continued
decline in our lease financing portfolio of $59.5 million that is consistent
with our overall business strategy to de-emphasize our commercial leasing
activities, a $56.1 million decline in commercial, financial and agricultural
loans and a $22.4 million decline in consumer and installment loans, net of
unearned discount. The increase in average loans for 2002 was primarily due to
loans provided by our acquisitions as well as a $36.1 million increase in
residential real estate lending, offset by a $119.3 million decline in
commercial lending as a result of reduced loan demand stemming from the then
current economic conditions prevalent within our markets. We also experienced
continued reductions in consumer and installment loans, net of unearned
discount, which decreased $44.1 million to $79.1 million at December 31, 2002.
This decrease reflects reductions in new loan volumes and the repayment of
principal on our existing portfolio, and is also consistent with our objectives
of de-emphasizing consumer lending and expanding commercial lending. These
changes result from the focus we have placed on our business development efforts
and the portfolio repositioning that originally began in the mid-1990's. This
repositioning provided for substantially all of our residential mortgage loan
production to be sold in the secondary mortgage market and the origination of
indirect automobile loans to be substantially reduced.
Investment securities averaged $957.4 million, $821.9 million and
$457.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively, reflecting increases of $135.5 million and $364.5 million for the
years ended December 31, 2003 and 2002, respectively. The increases in 2003 and
2002 are primarily attributable to increased purchases of available-for-sale
investment securities due to reduced loan demand and deposit growth as well as
our acquisitions of BSG and Plains, which provided us with $47.8 million and
$81.0 million of investment securities in 2003 and 2002, respectively. The
overall increase in 2003 was partially offset by the exchange of our Allegiant
common stock for our ownership in BSG and the subsequent charitable contribution
of our remaining Allegiant shares.
Nonearning assets averaged $698.7 million for the year ended December
31, 2003, compared to $687.8 million and $563.0 million for the years ended
December 31, 2002 and 2001, respectively. Derivative financial instruments
averaged $78.7 million for the year ended December 31, 2003, compared to $72.8
million and $45.7 million for the years ended December 31, 2002 and 2001,
respectively. However, our derivative financial instruments declined to $49.3
million at December 31, 2003 from $97.9 million at December 31, 2002, consistent
with a decline in the fair value of certain derivative financial instruments.
The increase for 2002 was primarily attributable to additional interest rate
swap agreements entered into in 2002. Bank premises and equipment, net of
depreciation and amortization, was $136.7 million at December 31, 2003, compared
to $152.4 million and $149.6 million at December 31, 2002 and 2001,
respectively. Our acquisitions, the purchase and remodeling of a new operations
center and corporate administrative building during 2001 and the construction
and/or renovation of various branch offices contributed to the increases in 2002
and 2001. In 2003, lower capital expenditures, continued depreciation and
amortization, and the divestiture of four branch offices contributed to the
overall decrease in bank premises and equipment. Intangible assets increased
$6.6 million in 2003 and $26.7 million in 2002 and are primarily attributable to
goodwill from our acquisitions of BSG, Plains and the purchase of the public
shares of FBA of $3.4 million, $12.6 million and $14.6 million, respectively. In
addition, we recorded core deposit intangibles of $3.5 million and $2.9 million,
respectively, on our BSG and Plains acquisitions, further contributing to the
overall increase.
We use deposits as our primary funding source and acquire them from a
broad base of local markets, including both individual and corporate customers.
Deposits averaged $6.05 billion, $5.96 billion and $5.09 billion for the years
ended December 31, 2003, 2002 and 2001, respectively. Total deposits decreased
by $211.2 million to $5.96 billion at December 31, 2003 and primarily reflects
an anticipated level of attrition associated with ongoing low deposit rates and
continued aggressive competition within our market areas as well as an $88.3
million reduction in our deposit base associated with our divestiture of four
branch offices in late 2003. The overall decline in deposits was partially
offset by $93.7 million of deposits acquired from BSG. The deposit mix for 2003
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 to further develop multiple account relationships with our
customers. In 2002, total deposits increased by $488.9 million to $6.17 billion
at December 31, 2002. We credit this increase primarily to our acquisitions and
the expansion of our deposit product and service offerings available to our
customer base. The increase for 2002 also reflects an increase in savings
accounts offset by a decline in certain large commercial accounts due primarily
to general economic conditions resulting from the fact that consumers are
generally more inclined to retain a higher level of liquid assets during times
of economic uncertainty.
Other borrowings averaged $219.3 million, $194.1 million and $158.0
million for the years ended December 31, 2003, 2002 and 2001, respectively. The
increase in the average balance for 2003 reflects $100.0 million of term
securities sold under agreements to repurchase that we entered into during the
third quarter of 2003, offset by a $55.0 million reduction in federal funds
purchased, a $30.2 million decrease in daily securities sold under agreements to
repurchase principally in connection with the cash management activities of our
commercial deposit customers as well as a $7.0 million reduction in Federal Home
Loan Bank advances. The increase in the average balance for 2002 reflects a
$54.1 million increase in daily securities sold under agreements to repurchase
as well as a $15.0 million increase in federal funds purchased, offset by a
$17.0 million decline in FHLB advances.
Our note payable averaged $15.4 million, $17.9 million and $41.6
million for the years ended December 31, 2003, 2002 and 2001, respectively. Our
note payable increased $10.0 million to $17.0 million at December 31, 2003. The
balance of our note payable at December 31, 2003 resulted from a $34.5 million
advance in June 2003 to partially fund the redemption of $47.4 million of our
subordinated debentures, and has subsequently been reduced by internally funded
repayments. Our note payable decreased by $20.5 million to $7.0 million at
December 31, 2002 due to repayments funded primarily through dividends from
First Bank and the issuance of additional subordinated debentures in April 2002,
offset by a $36.5 million advance utilized to fund our acquisition of Plains in
January 2002. The $7.0 million advance drawn in December 2002 to partially fund
our purchase of the public shares of FBA was repaid in February 2003.
Subordinated debentures issued to our statutory and business trusts
averaged $249.1 million, $265.5 million and $195.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively. In November 2001, we issued
$56.9 million of 9.00% subordinated debentures to First Preferred Capital Trust
III. Proceeds from this offering, net of underwriting fees and offering
expenses, were $54.6 million and were used to reduce borrowings. Distributions
paid on these subordinated debentures were $5.1 million for the years ended
December 31, 2003 and 2002, and $640,000 for the year ended December 31, 2001.
In April 2002, we issued $25.8 million of variable rate subordinated debentures
to First Bank Capital Trust in a private placement. Proceeds from this offering,
net of underwriting fees and offering expenses, were $25.0 million and were used
to reduce borrowings. Distributions paid on these subordinated debentures were
$1.4 million and $1.1 million for the years ended December 31, 2003 and 2002,
respectively. On March 20, 2003, we issued $25.8 million of 8.10% subordinated
debentures to First Bank Statutory Trust in a private placement. Proceeds from
this offering, net of underwriting fees and offering expenses, were $25.3
million. Distributions paid on these subordinated debentures were $1.7 million
for the year ended December 31, 2003. On April 1, 2003, we issued $47.4 million
of 8.15% subordinated debentures to First Preferred Capital Trust IV. Proceeds
from this offering, net of underwriting fees and offering expenses, were $45.6
million. Distributions paid on these subordinated debentures we