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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares Outstanding
Class at April 30, 2004
----- ------------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - (UNAUDITED):
CONSOLIDATED BALANCE SHEETS............................................................... 1
CONSOLIDATED STATEMENTS OF INCOME......................................................... 2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME.............................................................. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................. 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 26
ITEM 4. CONTROLS AND PROCEDURES................................................................... 27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 28
SIGNATURES........................................................................................... 29
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
March 31, December 31,
2004 2003
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks.............................................................. $ 167,391 179,802
Short-term investments............................................................... 88,768 33,735
---------- ---------
Total cash and cash equivalents................................................. 256,159 213,537
---------- ---------
Investment securities:
Available for sale................................................................... 1,268,500 1,038,787
Held to maturity (fair value of $10,437 and $11,341, respectively)................... 10,010 10,927
---------- ---------
Total investment securities..................................................... 1,278,510 1,049,714
---------- ---------
Loans:
Commercial, financial and agricultural............................................... 1,415,246 1,407,626
Real estate construction and development............................................. 1,091,423 1,063,889
Real estate mortgage................................................................. 2,600,360 2,582,264
Lease financing...................................................................... 48,905 67,282
Consumer and installment............................................................. 69,987 71,652
Loans held for sale.................................................................. 127,150 145,746
---------- ---------
Total loans..................................................................... 5,353,071 5,338,459
Unearned discount.................................................................... (10,179) (10,384)
Allowance for loan losses............................................................ (124,871) (116,451)
---------- ---------
Net loans....................................................................... 5,218,021 5,211,624
---------- ---------
Derivative instruments.................................................................... 46,174 49,291
Bank premises and equipment, net of accumulated depreciation and amortization............. 136,422 136,739
Goodwill.................................................................................. 145,513 145,548
Bank-owned life insurance................................................................. 98,732 97,521
Deferred income taxes..................................................................... 104,391 102,844
Other assets.............................................................................. 84,431 100,122
---------- ---------
Total assets.................................................................... $7,368,353 7,106,940
========== =========
LIABILITIES
Deposits: -----------
Noninterest-bearing demand........................................................... $1,072,898 1,034,367
Interest-bearing demand.............................................................. 870,305 843,001
Savings.............................................................................. 2,164,492 2,128,683
Time deposits of $100 or more........................................................ 453,799 436,439
Other time deposits.................................................................. 1,491,822 1,519,125
---------- ---------
Total deposits.................................................................. 6,053,316 5,961,615
Other borrowings.......................................................................... 418,014 273,479
Note payable.............................................................................. 4,500 17,000
Subordinated debentures................................................................... 213,222 209,320
Deferred income taxes..................................................................... 43,208 41,683
Accrued expenses and other liabilities.................................................... 67,357 54,028
---------- ---------
Total liabilities............................................................... 6,799,617 6,557,125
---------- ---------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued and outstanding....... -- --
Class A convertible, adjustable rate, $20.00 par value, 750,000
shares authorized, 641,082 shares issued and outstanding........................... 12,822 12,822
Class B adjustable rate, $1.50 par value, 200,000 shares authorized,
160,505 shares issued and outstanding.............................................. 241 241
Common stock, $250.00 par value, 25,000 shares authorized,
23,661 shares issued and outstanding................................................. 5,915 5,915
Additional paid-in capital................................................................ 5,910 5,910
Retained earnings......................................................................... 513,787 495,714
Accumulated other comprehensive income.................................................... 30,061 29,213
---------- ---------
Total stockholders' equity...................................................... 568,736 549,815
---------- ---------
Total liabilities and stockholders' equity...................................... $7,368,353 7,106,940
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
Three Months Ended
March 31,
---------------------
2004 2003
---- ----
Interest income:
Interest and fees on loans......................................................... $ 84,220 90,612
Investment securities.............................................................. 11,621 8,760
Short-term investments............................................................. 286 442
-------- --------
Total interest income......................................................... 96,127 99,814
-------- --------
Interest expense:
Deposits:
Interest-bearing demand.......................................................... 967 1,673
Savings.......................................................................... 4,777 6,786
Time deposits of $100 or more.................................................... 2,956 3,685
Other time deposits.............................................................. 8,487 12,194
Other borrowings................................................................... 644 602
Note payable....................................................................... 105 136
Subordinated debentures............................................................ 3,538 5,575
-------- --------
Total interest expense........................................................ 21,474 30,651
-------- --------
Net interest income........................................................... 74,653 69,163
Provision for loan losses............................................................... 12,750 11,000
-------- --------
Net interest income after provision for loan losses........................... 61,903 58,163
-------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees...................... 8,949 8,644
Gain on mortgage loans sold and held for sale...................................... 4,229 4,580
Net gain on sales of available-for-sale investment securities...................... -- 6,259
Gain on sales of branches, net of expenses......................................... 390 --
Bank-owned life insurance investment income........................................ 1,343 1,271
Other.............................................................................. 5,648 4,793
-------- --------
Total noninterest income...................................................... 20,559 25,547
-------- --------
Noninterest expense:
Salaries and employee benefits..................................................... 27,686 23,261
Occupancy, net of rental income.................................................... 4,637 4,934
Furniture and equipment............................................................ 4,413 4,569
Postage, printing and supplies..................................................... 1,322 1,306
Information technology fees........................................................ 7,996 8,033
Legal, examination and professional fees........................................... 1,563 1,606
Amortization of intangibles associated with the purchase of subsidiaries........... 658 532
Communications..................................................................... 465 605
Advertising and business development............................................... 1,281 1,309
Other.............................................................................. 2,581 7,432
-------- --------
Total noninterest expense..................................................... 52,602 53,587
-------- --------
Income before provision for income taxes...................................... 29,860 30,123
Provision for income taxes.............................................................. 11,591 11,092
-------- --------
Net income.................................................................... 18,269 19,031
Preferred stock dividends............................................................... 196 196
-------- --------
Net income available to common stockholders................................... $ 18,073 18,835
======== ========
Basic earnings per common share......................................................... $ 763.81 796.04
======== ========
Diluted earnings per common share....................................................... $ 753.93 784.29
======== ========
Weighted average shares of common stock outstanding..................................... 23,661 23,661
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Three Months Ended March 31, 2004 and 2003 and Nine Months Ended December 31, 2003
(dollars expressed in thousands, except per share data)
Adjustable Rate Accu-
Preferred Stock mulated
---------------- Other Total
Class A Additional Compre- Compre- Stock-
Conver- Common Paid-In hensive Retained hensive holders'
tible Class B Stock Capital Income Earnings Income Equity
----- ------- ----- ------- --------------- ------ ------
Consolidated balances, December 31, 2002......... $12,822 241 5,915 5,910 433,689 60,464 519,041
Three months ended March 31, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 19,031 19,031 -- 19,031
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (5,658) -- (5,658) (5,658)
Derivative instruments:
Current period transactions............ -- -- -- -- (3,624) -- (3,624) (3,624)
-------
Comprehensive income....................... 9,749
=======
Class A preferred stock dividends,
$0.30 per share............................ -- -- -- -- (192) -- (192)
Class B preferred stock dividends,
$0.03 per share............................ -- -- -- -- (4) -- (4)
------- ---- ----- ----- ------- ------- --------
Consolidated balances, March 31, 2003............ 12,822 241 5,915 5,910 452,524 51,182 528,594
Nine months ended December 31, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 43,780 43,780 -- 43,780
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (4,328) -- (4,328) (4,328)
Derivative instruments:
Current period transactions............ -- -- -- -- (17,641) -- (17,641) (17,641)
-------
Comprehensive income....................... 21,811
=======
Class A preferred stock dividends,
$0.90 per share............................ -- -- -- -- (577) -- (577)
Class B preferred stock dividends,
$0.08 per share............................ -- -- -- -- (13) -- (13)
------- ---- ----- ----- ------- ------- --------
Consolidated balances, December 31, 2003......... 12,822 241 5,915 5,910 495,714 29,213 549,815
Three months ended March 31, 2004:
Comprehensive income:
Net income................................. -- -- -- -- 18,269 18,269 -- 18,269
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 5,491 -- 5,491 5,491
Derivative instruments:
Current period transactions............ -- -- -- -- (4,643) -- (4,643) (4,643)
-------
Comprehensive income....................... 19,117
=======
Class A preferred stock dividends,
$0.30 per share............................ -- -- -- -- (192) -- (192)
Class B preferred stock dividends,
$0.03 per share............................ -- -- -- -- (4) -- (4)
------- ---- ----- ----- ------- ------- --------
Consolidated balances, March 31, 2004............ $12,822 241 5,915 5,910 513,787 30,061 568,736
======= ==== ===== ===== ======= ======= ========
- -------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Nine Months Ended
March 31, December 31,
------------------ -----------------
2004 2003 2003
---- ---- ----
Unrealized gains (losses) on investment
securities arising during the period........................... $ 5,491 (1,590) (2,701)
Less reclassification adjustment for gains
included in net income......................................... -- 4,068 1,627
------- ------ ------
Unrealized gains (losses) on investment securities................ $ 5,491 (5,658) (4,328)
======= ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Three Months Ended
March 31,
-------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 18,269 19,031
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment..................... 4,810 4,781
Amortization, net of accretion................................................... 4,566 5,350
Originations and purchases of loans held for sale................................ (251,421) (555,529)
Proceeds from sales of loans held for sale....................................... 221,196 557,226
Provision for loan losses........................................................ 12,750 11,000
Provision for income taxes....................................................... 11,591 11,092
Payments of income taxes......................................................... (63) (57)
Decrease in accrued interest receivable.......................................... 2,891 4,668
Interest accrued on liabilities.................................................. 21,474 30,651
Payments of interest on liabilities.............................................. (21,581) (31,599)
Gain on mortgage loans sold and held for sale.................................... (4,229) (4,580)
Net gain on sales of available-for-sale investment securities.................... -- (6,259)
Gain on sales of branches, net of expenses....................................... (390) --
Other operating activities, net.................................................. 1,801 12,406
--------- ---------
Net cash provided by operating activities..................................... 21,664 58,181
--------- ---------
Cash flows from investing activities:
Cash received for acquired entities, net of cash
and cash equivalents paid........................................................ -- 14,870
Maturities of investment securities available for sale............................. 115,532 442,399
Maturities of investment securities held to maturity............................... 1,012 1,082
Purchases of investment securities available for sale.............................. (318,293) (193,957)
Purchases of investment securities held to maturity................................ (100) (102)
Net (increase) decrease in loans................................................... (15,460) 22,848
Recoveries of loans previously charged-off......................................... 6,164 6,237
Purchases of bank premises and equipment........................................... (4,449) (2,633)
Other investing activities, net.................................................... 11,255 2,604
--------- ---------
Net cash (used in) provided by investing activities........................... (204,339) 293,348
--------- ---------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits................................. 105,784 (64,477)
Decrease in time deposits.......................................................... (5,602) (98,022)
Decrease in federal funds purchased................................................ -- (55,000)
Increase (decrease) in securities sold under agreements to repurchase.............. 144,535 (29,301)
Repayments of note payable......................................................... (12,500) (7,000)
Proceeds from issuance of subordinated debentures.................................. -- 25,208
Sales of branches.................................................................. (6,724) --
Payment of preferred stock dividends............................................... (196) (196)
--------- ---------
Net cash provided by (used in) financing activities........................... 225,297 (228,788)
--------- ---------
Net increase in cash and cash equivalents..................................... 42,622 122,741
Cash and cash equivalents, beginning of period.......................................... 213,537 203,251
--------- ---------
Cash and cash equivalents, end of period................................................ $ 256,159 325,992
========= =========
Noncash investing and financing activities:
Loans transferred to other real estate............................................. $ 1,480 10,351
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of First Banks, Inc. and
subsidiaries (First Banks or the Company) are unaudited and should be read in
conjunction with the consolidated financial statements contained in the 2003
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and conform to predominant practices within the banking
industry. Management of First Banks has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from those
estimates. In the opinion of management, all adjustments, consisting of normal
recurring accruals considered necessary for a fair presentation of the results
of operations for the interim periods presented herein, have been included.
Operating results for the three months ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.
The consolidated financial statements include the accounts of First
Banks, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications of 2003 amounts
have been made to conform to the 2004 presentation.
First Banks operates through its wholly owned subsidiary bank holding
company, The San Francisco Company (SFC), headquartered in San Francisco,
California, and SFC's wholly owned subsidiary bank, First Bank, headquartered in
St. Louis County, Missouri.
(2) ACQUISITIONS, INTEGRATION COSTS AND OTHER CORPORATE TRANSACTIONS
On March 26, 2004, First Banks and Small Business Loan Source, Inc.
(SBLS), headquartered in Houston, Texas, entered into an Asset Purchase
Agreement that provides for First Bank to purchase substantially all of the
assets and assume certain liabilities of SBLS in exchange for cash and certain
payments contingent on future valuations. The transaction, which is subject to
approval of the Small Business Administration (SBA) and the expiration of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
is expected to be completed during the second or third quarter of 2004. SBLS
reported assets of approximately $52.9 million, including $30.1 million of SBA
loans, at March 31, 2004.
First Banks accrues certain costs associated with its acquisitions as
of the respective consummation dates. Essentially all of these accrued costs
relate either to adjustments to the staffing levels of the acquired entities or
to the anticipated termination of information technology or item processing
contracts of the acquired entities prior to their stated contractual expiration
dates. The most significant costs incurred relate to salary continuation
agreements, or other similar agreements, of executive management and certain
other employees of the acquired entities that were in place prior to the
acquisition dates. These agreements provide for payments over various time
periods generally ranging from two to 15 years and are triggered as a result of
the change in control of the acquired entity. Other severance benefits for
employees that are terminated in conjunction with the integration of the
acquired entities into First Banks' existing operations are normally paid to the
recipients within 90 days of the applicable consummation date. The accrued
severance balance of $1.2 million identified in the following table is comprised
of contractual obligations under salary continuation agreements to 10
individuals with remaining terms ranging from one month to approximately 12
years. As the obligation to make payments under these agreements is accrued at
the consummation dates, such payments do not have any impact on the consolidated
statements of income.
A summary of the cumulative acquisition and integration costs
attributable to the Company's acquisitions, which were accrued as of the
consummation dates of the respective acquisitions, is listed below. These
acquisition and integration costs are reflected in accrued and other liabilities
in the consolidated balance sheets.
Severance
---------
(dollars expressed
in thousands)
Balance at December 31, 2003.......................... $ 1,412
Three Months Ended March 31, 2004:
Payments............................................ (173)
--------
Balance at March 31, 2004............................. $ 1,239
========
First Banks also incurs costs associated with acquisitions that are
expensed in the consolidated statements of income. These costs relate
exclusively to additional costs incurred in conjunction with the data processing
conversions of the respective entities.
On February 6, 2004, First Bank completed its divestiture of one branch
office in regional Missouri. This branch divestiture resulted in a reduction of
the deposit base of approximately $8.4 million, and a pre-tax gain of
approximately $390,000, which is included in noninterest income.
(3) INTANGIBLE ASSETS ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES, NET OF
AMORTIZATION
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at March 31, 2004 and December 31,
2003:
March 31, 2004 December 31, 2003
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles.............. $ 17,391 (4,856) 17,391 (4,233)
Goodwill associated with
purchases of branch offices......... 2,210 (896) 2,210 (861)
--------- ------- ------- -------
Total............................ $ 19,601 (5,752) 19,601 (5,094)
========= ======= ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 144,199 144,199
========= =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $658,000 for the three months ended March
31, 2004, and $532,000 for the comparable period in 2003. Amortization of
intangibles associated with the purchase of subsidiaries, including amortization
of core deposit intangibles and branch purchases, has been estimated through
2009 in the following table, and does not take into consideration any potential
future acquisitions or branch purchases.
(dollars expressed in thousands)
Year ending December 31:
2004 Remaining............................ $ 1,974
2005...................................... 2,632
2006...................................... 2,632
2007...................................... 2,632
2008...................................... 2,632
2009 ..................................... 726
--------
Total.................................. $ 13,228
========
Changes in the carrying amount of goodwill for the three months ended
March 31, 2004 and 2003 were as follows:
Three Months Ended
March 31,
-----------------------
2004 2003
(dollars expressed in thousands)
Balance, beginning of period................................................... $145,548 140,112
Goodwill acquired during period................................................ -- 1,026
Amortization - purchases of branch offices..................................... (35) (36)
-------- ---------
Balance, end of period......................................................... $145,513 141,102
======== =========
(4) MORTGAGE BANKING ACTIVITIES
At March 31, 2004 and December 31, 2003, First Banks serviced loans for
others amounting to $1.17 billion and $1.22 billion, respectively. Borrowers'
escrow balances held by First Banks on such loans were $502,000 and $4.7 million
at March 31, 2004 and December 31, 2003, respectively.
Changes in mortgage servicing rights, net of amortization, for the
three months ended March 31, 2004 and 2003 were as follows:
Three Months Ended
March 31,
----------------------------
2004 2003
---- ----
(dollars expressed in thousands)
Balance, beginning of period...................................... $ 15,408 14,882
Originated mortgage servicing rights.............................. 354 1,973
Amortization...................................................... (1,802) (1,177)
-------- --------
Balance, end of period............................................ $ 13,960 15,678
======== ========
The fair value of mortgage servicing rights was approximately $16.6
million and $17.1 million at March 31, 2004 and 2003, respectively, and $18.3
million at December 31, 2003. The excess of the fair value of mortgage servicing
rights over the carrying value was approximately $2.6 million and $1.4 million
at March 31, 2004 and 2003, respectively, and $2.9 million at December 31, 2003.
Amortization of mortgage servicing rights has been estimated through
2008 in the following table:
(dollars expressed in thousands)
Year ending December 31:
2004 Remaining............................. $ 3,365
2005....................................... 4,179
2006....................................... 3,577
2007....................................... 2,167
2008....................................... 672
--------
Total................................. $ 13,960
========
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted earnings per
share computations for the periods indicated:
Per Share
Income Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Three months ended March 31, 2004:
Basic EPS - income available to common stockholders........ $ 18,073 23,661 $ 763.81
Effect of dilutive securities:
Class A convertible preferred stock...................... 192 565 (9.88)
--------- ------- --------
Diluted EPS - income available to common stockholders...... $ 18,265 24,226 $ 753.93
========= ======= ========
Three months ended March 31, 2003:
Basic EPS - income available to common stockholders........ $ 18,835 23,661 $ 796.04
Effect of dilutive securities:
Class A convertible preferred stock...................... 192 599 (11.75)
--------- ------- --------
Diluted EPS - income available to common stockholders...... $ 19,027 24,260 $ 784.29
========= ======= ========
(6) TRANSACTIONS WITH RELATED PARTIES
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and members of his immediate family, provides information
technology and various related services to First Banks, Inc. and its
subsidiaries. Fees paid under agreements with First Services, L.P. were $6.6
million and $6.7 million for the three months ended March 31, 2004 and 2003,
respectively. During the three months ended March 31, 2004 and 2003, First
Services, L.P. paid First Bank $1.1 million and $1.2 million, respectively, in
rental fees for the use of data processing and other equipment owned by First
Banks.
First Brokerage America, L.L.C., a limited liability company which is
indirectly owned by First Banks' Chairman and members of his immediate family,
received approximately $886,000 and $868,000 for the three months ended March
31, 2004 and 2003, respectively, in commissions paid by unaffiliated third-party
companies. The commissions received were primarily in connection with the sales
of annuities, securities and other insurance products to customers of First
Bank.
First Title Guaranty LLC (First Title), a limited liability company
established and administered by and for the benefit of First Banks' Chairman and
members of his immediate family, received approximately $99,000 and $113,000 for
the three months ended March 31, 2004 and 2003, respectively, in commissions for
policies purchased by First Banks or customers of First Bank from unaffiliated,
third-party insurers. The insurance premiums on which the aforementioned
commissions were earned were competitively bid, and First Banks deems the
commissions First Title earned from unaffiliated third-party companies to be
comparable to those that would have been earned by an unaffiliated third-party
agent.
First Bank has had in the past, and may have in the future, loan
transactions in the ordinary course of business with its directors or
affiliates. These loan transactions have been on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and did not involve more than the normal
risk of collectibility or present other unfavorable features. Loans to
directors, their affiliates and executive officers of First Banks, Inc. were
approximately $24.1 million and $20.0 million at March 31, 2004 and December 31,
2003, respectively. First Bank does not extend credit to its officers or to
officers of First Banks, Inc., except for extensions of credit secured by
mortgages on personal residences, loans to purchase automobiles and personal
credit card accounts.
(7) REGULATORY CAPITAL
First Banks and First Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Banks' consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, First Banks and First Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and First Bank to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of March 31, 2004, First Banks and First Bank were each well
capitalized.
As of March 31, 2004, the most recent notification from First Banks'
primary regulator categorized First Banks and First Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, First Banks and First Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table below.
At March 31, 2004 and December 31, 2003, First Banks' and First Bank's
required and actual capital ratios were as follows:
Actual To Be Well
------------------------ Capitalized Under
March 31, December 31, For Capital Prompt Corrective
2004 2003 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.50% 10.27% 8.0% 10.0%
First Bank.............................. 10.54 10.41 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 8.79 8.46 4.0 6.0
First Bank.............................. 9.28 9.15 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 7.88 7.62 3.0 5.0
First Bank.............................. 8.32 8.22 3.0 5.0
(8) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business
segment is consistent with the management structure of First Banks, First Bank
and the internal reporting system that monitors performance. First Bank provides
similar products and services in its defined geographic areas through its branch
network. The products and services offered include a broad range of commercial
and personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, First Bank markets combined basic services for
various customer groups, including packaged accounts for more affluent
customers, and sweep accounts, lock-box deposits and cash management products
for commercial customers. First Bank also offers both consumer and commercial
loans. Consumer lending includes residential real estate, home equity and
installment lending. Commercial lending includes commercial, financial and
agricultural loans, real estate construction and development loans, commercial
real estate loans, asset-based loans and trade financing. Other financial
services include mortgage banking, debit cards, brokerage services,
credit-related insurance, internet banking, automated teller machines, telephone
banking, safe deposit boxes and trust, private banking and institutional money
management services. The revenues generated by First Bank consist primarily of
interest income, generated from the loan and investment security portfolios, and
service charges and fees, generated from the deposit products and services. The
geographic areas include eastern Missouri, Illinois, southern and northern
California and Houston, Dallas, Irving, McKinney and Denton, Texas. The products
and services are offered to customers primarily within First Bank's respective
geographic areas.
The business segment results are consistent with First Banks' internal
reporting system and, in all material respects, with accounting principles
generally accepted in the United States of America and practices predominant in
the banking industry.
The business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------ --------------------- -----------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $1,271,605 1,042,809 6,905 6,905 1,278,510 1,049,714
Loans, net of unearned discount......... 5,342,892 5,328,075 -- -- 5,342,892 5,328,075
Goodwill................................ 145,513 145,548 -- -- 145,513 145,548
Total assets............................ 7,355,910 7,097,635 12,443 9,305 7,368,353 7,106,940
Deposits................................ 6,062,427 5,977,042 (9,111) (15,427) 6,053,316 5,961,615
Note payable............................ -- -- 4,500 17,000 4,500 17,000
Subordinated debentures................. -- -- 213,222 209,320 213,222 209,320
Stockholders' equity.................... 778,594 766,397 (209,858) (216,582) 568,736 549,815
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------ --------------------- -----------------------
Three Months Ended Three Months Ended Three Months Ended
March 31, March 31, March 31,
------------------------ --------------------- -----------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Income statement information:
Interest income......................... $ 95,987 99,528 140 286 96,127 99,814
Interest expense........................ 17,847 25,004 3,627 5,647 21,474 30,651
---------- --------- -------- --------- --------- --------
Net interest income................ 78,140 74,524 (3,487) (5,361) 74,653 69,163
Provision for loan losses............... 12,750 11,000 -- -- 12,750 11,000
---------- --------- -------- --------- --------- --------
Net interest income after provision
for loan losses.................. 65,390 63,524 (3,487) (5,361) 61,903 58,163
---------- --------- -------- --------- --------- --------
Noninterest income...................... 20,719 19,529 (160) 6,018 20,559 25,547
Noninterest expense..................... 51,517 53,215 1,085 372 52,602 53,587
---------- --------- -------- --------- --------- --------
Income before provision for
income taxes..................... 34,592 29,838 (4,732) 285 29,860 30,123
Provision for income taxes.............. 13,244 10,483 (1,653) 609 11,591 11,092
---------- --------- -------- --------- --------- --------
Net income......................... $ 21,348 19,355 (3,079) (324) 18,269 19,031
========== ========= ======== ========= ========= ========
- --------------------
(1) Corporate and other includes $2.3 million and $3.6 million of interest expense on subordinated debentures, after
applicable income tax benefits of $1.2 million and $2.0 million, for the three months ended March 31, 2004 and
2003, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at March 31, 2004 and
December 31, 2003:
March 31, December 31,
2004 2003
--------------- ----------------
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily............................................................... $ 161,014 166,479
Term................................................................ 250,000 100,000
Federal Home Loan Bank borrowings........................................ 7,000 7,000
--------- --------
Total other borrowings.......................................... $ 418,014 273,479
========= ========
Effective January 12, 2004, First Banks consummated a $150.0 million
three-year reverse repurchase agreement under a master repurchase agreement.
Interest is paid quarterly and is equivalent to the three-month London Interbank
Offering Rate minus 0.8350% plus a floating amount equal to the differential
between the three-month London Interbank Offing Rate reset in arrears and the
strike price of 3.50%, if the three-month London Interbank Offering Rate reset
in arrears exceeds 3.50%. The underlying securities associated with the reverse
repurchase agreement are callable U. S. Government agency securities and are not
under First Banks' physical control. In conjunction with this transaction, First
Banks purchased $150.0 million of callable U. S. Government agency securities.
(10) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty
contracts. For value received, and for the purpose of inducing a pension fund
and its trustees and a welfare fund and its trustees (the Funds) to conduct
business with Missouri Valley Partners, Inc. (MVP), First Bank's institutional
investment management subsidiary, First Banks irrevocably and unconditionally
guaranteed payment of and promised to pay to each of the Funds any amounts up to
the sum of $5.0 million to the extent MVP is liable to the Funds for a breach of
the Investment Management Agreements (including the Investment Policy Statement
and Investment Guidelines), by and between MVP and the Funds and/or any
violation of the Employee Retirement Income Security Act by MVP resulting in
liability to the Funds. The guaranties are continuing guaranties of all
obligations that may arise for transactions occurring prior to termination of
the Investment Management Agreements and are co-existent with the term of the
Investment Management Agreements. The Investment Management Agreements have no
specified term but may be terminated at any time upon written notice by the
Trustees or, at First Banks' option, upon thirty days written notice to the
Trustees. In the event of termination of the Investment Management Agreements,
such termination shall have no effect on the liability of First Banks with
respect to obligations incurred before such termination. The obligations of
First Banks are joint and several with those of MVP. First Banks does not have
any recourse provisions that would enable it to recover from third parties any
amounts paid under the contracts nor does First Banks hold any assets as
collateral that, upon occurrence of a required payment under the contract, could
be liquidated to recover all or a portion of the amount(s) paid. At March 31,
2004 and December 31, 2003, First Banks had not recorded a liability for the
obligations associated with these guaranty contracts, as the likelihood that
First Banks will be required to make payments under the contracts is remote.
(11) SUBSEQUENT EVENT
On April 9, 2004, First Banks and Continental Mortgage Corporation -
Delaware (CMC), entered into an Agreement and Plan of Reorganization that
provides for First Banks to acquire CMC and its wholly-owned banking subsidiary,
Continental Community Bank and Trust Company (CCB). CMC is headquartered in
Aurora, Illinois, and through CCB, operates two banking offices in the Chicago
suburban communities of Aurora and Villa Park. CMC reported total assets of
approximately $149.9 million, loans, net of unearned discount, of approximately
$78.1 million and total deposits of approximately $110.6 million at March 31,
2004. The transaction, which is subject to regulatory approvals, is expected to
be completed during the second or third quarter of 2004.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause 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 Quarterly Report on Form 10-Q should
therefore not place undue reliance on forward-looking statements.
General
We are a registered bank holding company incorporated in Missouri and
headquartered in St. Louis County, Missouri. Through the operation of our
subsidiaries, we offer a broad array of financial services to consumer and
commercial customers. We operate through our wholly owned subsidiary bank
holding company, The San Francisco Company, or SFC, headquartered in San
Francisco, California, and its wholly owned subsidiary bank, First Bank,
headquartered in St. Louis County, Missouri. First Bank currently operates 148
branch offices in California, Illinois, Missouri and Texas. At March 31, 2004,
we had total assets of $7.37 billion, loans, net of unearned discount, of $5.34
billion, total deposits of $6.05 billion and total stockholders' equity of
$568.7 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 unit 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.
Financial Condition
Total assets were $7.37 billion and $7.11 billion at March 31, 2004 and
December 31, 2003, respectively, an increase of 3.68%. The increase in assets is
primarily attributable to increases in short-term investments, investment
securities and loans, net of unearned discount, which were primarily funded by
increased deposits and other borrowings. Short-term investments, consisting
primarily of federal funds sold, increased by $55.0 million due to the
investment of excess funds resulting from the deposit growth and an overall
decline in average loan volumes. Investment securities increased $228.8 million,
or 21.80%, to $1.28 billion at March 31, 2004 from $1.05 billion at December 31,
2003, reflecting purchases of $318.4 million and maturities of $116.5 million.
Loans, net of unearned discount, increased $14.8 million to $5.34 billion at
March 31, 2004 from $5.33 billion at December 31, 2003, and the allowance for
loan losses increased to $124.9 million at March 31, 2004 from $116.5 million at
December 31, 2003, as further discussed under "--Loans and Allowance for Loan
Losses." The overall increase in assets was partially offset by a decline in our
derivative instruments to $46.2 million from $49.3 million resulting from a
decline in the fair value of certain derivative financial instruments and the
maturity of $200.0 million notional amount of interest rate swap agreements, as
further discussed under "--Interest Rate Risk Management." In addition, other
assets decreased $15.7 million to $84.4 million at March 31, 2004 from $100.1
million at December 31, 2003. This decrease primarily results from an $8.2
million net decrease in other real estate as further discussed under "--Loans
and Allowance for Loan Losses," a $2.8 million decrease in accrued interest
receivable and a $1.4 million decrease in mortgage servicing rights. During the
first quarter of 2004, we expanded our banking franchise with the opening of two
de novo branch offices, one in West St. Louis County, Missouri and one in
Houston, Texas.
Total deposits increased by $91.7 million, or 1.54%, to $6.05 billion
at March 31, 2004 from $5.96 billion at December 31, 2003. Our deposit marketing
efforts and efforts to further develop multiple account relationships with our
customers in addition to slightly higher deposit rates on certain products have
contributed to the deposit growth, despite continued aggressive competition
within our market areas and the divestiture, in February 2004, of a Missouri
branch office with approximately $8.4 million in total deposits. The deposit mix
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
higher-yielding time deposits.
Other borrowings increased $144.5 million to $418.0 million at March
31, 2004 from $273.5 million at December 31, 2003. The increase is primarily
attributable to $150.0 million of term securities sold under agreement to
repurchase that we entered into during the first quarter of 2004, as further
discussed in Note 9 to our consolidated financial statements. Our note payable
was reduced by $12.5 million during the first quarter of 2004 through internally
generated funds. Subordinated debentures increased $3.9 million to $213.2
million at March 31, 2004 from $209.3 million at December 31, 2003. This
increase is primarily attributable to an increase in the fair value of our
interest rate swap agreements that are designated as fair value hedges and
utilized to hedge certain of our subordinated debentures. In addition, the
continued amortization of debt issuance costs has also contributed to the
overall increase in our subordinated debentures during the first quarter of
2004.
Results of Operations
Net Income
Net income was $18.3 million and $19.0 million for the three months
ended March 31, 2004 and 2003, respectively. Results for the three months ended
March 31, 2004 reflect increased net interest income, reduced noninterest income
and noninterest expense and increased provisions for loan losses. Our return on
average assets and return on average stockholders' equity were 1.01% and 13.16%,
respectively, for the three months ended March 31, 2004, compared to 1.07% and
14.64%, respectively, for the comparable period in 2003. Included in the first
quarter of 2003 was a gain of $6.3 million, before applicable income taxes,
relating to the exchange of part of our investment in Allegiant Bancorp, Inc.,
or Allegiant, for a 100% ownership in Bank of Ste. Genevieve, or BSG, located in
Ste. Genevieve, Missouri. Excluding this transaction, net of the related income
taxes, net income for the first quarter of 2004 increased 22.09% over the first
quarter of 2003. The increase in earnings in 2004 continues to reflect our
adaptation to the current interest rate environment and weak economic conditions
that have prevailed in recent years. Our ongoing efforts to maintain an
acceptable net interest margin in the current low interest rate environment,
improve our noninterest income, address asset quality issues and control
operating expenses are reflected in our financial performance. We experienced
continued growth of net interest income primarily resulting from the earnings on
our interest rate swap agreements that were entered into in conjunction with our
interest rate risk management program to mitigate the effects of decreasing
interest rates as well as a $63.1 million net reduction in our subordinated
debentures during the second quarter of 2003. However, prevailing low interest
rates, generally weak loan demand and overall economic conditions continue to
exert pressure on our net interest income. Due to economic conditions within our
markets, we experienced higher-than-historical levels of loan charge-offs, loan
delinquencies and nonperforming loans in 2003, which resulted in an increased
provision for loan losses. These nonperforming trends remain at elevated levels
in the first quarter of 2004, thus contributing to a continued
higher-than-normal provision for loan losses. Other real estate owned decreased
$8.2 million during the first quarter of 2004 primarily due to the sale of a
$9.2 million residential and recreational development property that was
foreclosed on in January 2003. However, this decrease in nonperforming assets
was offset by the addition to nonperforming loans of a $13.9 million credit
relationship in the southern California region that was placed on nonaccrual
status in March 2004. On April 29, 2004, we recorded a $3.9 million charge-off
on this credit relationship as a result of workout negotiations with the
borrower and on May 7, 2004, the remaining net balance of $10.0 million was
refinanced by an independent third party, resulting in our receipt of a cash
payment on the net remaining balance of this credit relationship. We continue to
monitor our loan and leasing portfolios and focus on asset quality and related
challenges stemming from the current economic environment, including weak loan
demand and lower prevailing interest rates.
Noninterest income was $20.6 million and $25.5 million for the three
months ended March 31, 2004 and 2003, respectively. The decrease is primarily
due to a $6.3 million gain recorded in the first quarter of 2003 on the exchange
of part of our investment in the common stock of Allegiant for a 100% ownership
interest in Bank of Ste. Genevieve. Excluding this transaction, noninterest
income for the first quarter of 2004 increased $1.3 million over the comparable
period in 2003. The increase is attributable to increased service charges on
deposit accounts, increased portfolio management fees associated with our
institutional money management subsidiary and decreased losses on the sale of
certain assets. This was partially offset by reduced loan servicing fees and
reduced gains on mortgage loans sold relating to the continued slowdown in the
volume of mortgage loans originated that we began to experience in the fourth
quarter of 2003. The increase also reflects a $390,000 gain, net of expenses, on
the sale of a Missouri branch banking office in February 2004.
Noninterest expense was $52.6 million and $53.6 million for the three
months ended March 31, 2004 and 2003, respectively. Our efficiency ratio, which
is defined as the ratio of noninterest expense to the sum of net interest income
and noninterest income, improved to 55.25% for the first three months of 2004
from 56.58% for the comparable period in 2003. Noninterest expense for the three
months ended March 31, 2004 reflects a $2.7 million gain recorded in February
2004 on the sale of a residential and recreational development property that was
foreclosed on in January 2003, as further discussed under "--Loans and Allowance
for Loan Losses." The decrease in noninterest expense is partially offset by a
$4.4 million increase in salary and employee benefit costs associated with
generally higher salary and employee benefit costs associated with employing and
retaining qualified personnel, offset by a decrease in the allocation of direct
loan origination costs from salaries and benefits expense to gains on loans sold
and held for sale due to the slowdown in the volume of mortgage loans originated
and sold. Noninterest expense for the three months ended March 31, 2003 includes
a $1.1 million write-down on an operating lease associated with our commercial
leasing business.
Net Interest Income
Net interest income (expressed on a tax equivalent basis) increased
7.83% to $75.0 million for the three months ended March 31, 2004 from $69.5
million for the comparable period in 2003. Net interest margin improved 20 basis
points to 4.56% for the three months ended March 31, 2004, from 4.36% for the
comparable period in 2003. We credit the increase in net interest income
primarily to lower rates on deposits and other borrowings, the earnings on our
interest rate swap agreements that were entered into in conjunction with our
interest rate risk management program to mitigate the effects of decreasing
interest rates, increased average investment securities with higher yields and a
$63.1 million net reduction in our outstanding subordinated debentures in 2003.
As further discussed under "--Interest Rate Risk Management," our derivative
financial instruments used to hedge our interest rate risk contributed $16.2
million and $15.0 million to net interest income for the three months ended
March 31, 2004 and 2003, respectively. Average interest-earning assets increased
$138.4 million to $6.61 billion for the three months ended March 31, 2004 from
$6.47 billion for the comparable period in 2003. The increase is primarily
attributable to our acquisition of BSG on March 31, 2003, which provided assets
of $115.1 million. In addition, the decline in prevailing interest rates led to
the early redemption of $136.3 million of subordinated debentures in the second
quarter of 2003 that were issued during 1997 and 1998 and the issuance of
additional subordinated debentures at lower interest rates, while providing
replacement regulatory capital through the associated trust preferred securities
issued by our financing business and statutory trusts. In March 2003, we issued
$25.8 million of subordinated debentures to First Bank Statutory Trust, and in
April 2003, we issued $47.4 million of subordinated debentures to First
Preferred Capital Trust IV. These transactions coupled with the use of
additional derivative financial instruments, have allowed us to reduce our
overall expense associated with our subordinated debentures. However, prevailing
low interest rates, generally weak loan demand, increased competition and
overall economic conditions continue to exert pressure on our net interest
margin.
Average investment securities were $1.15 billion for the three months
ended March 31, 2004, in comparison to $968.9 million for the three months ended
March 31, 2003, an increase of $185.8 million, or 19.17%. The yield on our
investment portfolio increased to 4.12% for the three months ended March 31,
2004, compared to 3.77% for the comparable period in 2003. Funds available from
maturities of investment securities in addition to funds available from deposit
growth were used to purchase additional investment securities during the first
quarter of 2004. Investment security purchases for the first quarter of 2004
included the purchase of $150.0 million of callable U.S. Government agency
securities. These securities represented the underlying securities associated
with a $150.0 million three-year reverse repurchase agreement under a master
repurchase agreement that we consummated in the first quarter of 2004, as
further described in Note 9 to our consolidated financial statements.
Average loans, net of unearned discount, were $5.33 billion for the
three months ended March 31, 2004, in comparison to $5.36 billion for the
comparable period in 2003, reflecting a decrease of $26.6 million. The yield on
our loan portfolio decreased to 6.36% for the three months ended March 31, 2004,
in comparison to 6.87% for the comparable period in 2003. We attribute the
decline in the average balance and yields primarily to increased competition and
general economic conditions within our market areas resulting in continued weak
loan demand and decreases in prevailing interest rates. The reduced level of
interest income earned on our loan portfolio was partially mitigated by the
earnings associated with our interest rate swap agreements. In addition, the
decrease in average loans is also attributable to a significant reduction in
average loans held for sale, which declined approximately $168.6 million,
resulting from a slowdown in overall loan volumes that began in the fourth
quarter of 2003 as well as management's business strategy decision in mid-2003
to retain a portion of new residential mortgage loan production in our portfolio
to offset continued weak loan demand in other sectors of our loan portfolio. As
a result of this decision, average real estate mortgage loan volumes retained in
our portfolio increased approximately $155.6 million during the first quarter of
2004 compared to the comparable period in 2003.
Average deposits decreased $89.2 million, or 1.47%, to $5.99 billion
for the three months ended March 31, 2004 from $6.08 billion for the comparable
period in 2003. For the three months ended March 31, 2004, the aggregate
weighted average rate paid on our deposit portfolio decreased 52 basis points to
1.39%, from 1.91% for the comparable period in 2003. We attribute the decline in
rates paid for the three months ended March 31, 2004 primarily to rates paid on
our savings and time deposits, which have continued to decline in conjunction
with the interest rate reductions previously discussed. The earnings associated
with certain of our interest rate swap agreements designated as fair value
hedges also contributed to the reduction in deposit rates paid on our time
deposits. However, the continued competitive pressures on our deposit pricing
within our market areas precluded us from fully reflecting the general interest
rate decreases in our deposit pricing while still providing an adequate funding
source for our loan portfolio. The change in average deposit mix reflects our
continued efforts to restructure the composition of our deposit base as the
majority of our deposit development programs are directed toward increased
transactional accounts, such as demand and savings accounts, rather than time
deposits, and emphasize attracting more than one account relationship with
customers. Average demand and savings deposits increased $117.3 million to $4.05
billion, or 67.60% of total average deposits, for the three months ended March
31, 2004, up from $3.94 billion, or 64.68% of total average deposits, for the
comparable period in 2003. Average total time deposits decreased $206.5 million
to $1.94 billion for the three months ended March 31, 2004, from $2.15 billion
for the comparable period in 2003.
Average other borrowings increased $207.4 million to $388.8 million for
the three months ended March 31, 2004 compared to $181.4 million for the
comparable period in 2003. The aggregate weighted average rate paid on our other
borrowings was 0.67% for the three months ended March 31, 2004, compared to
1.35% for the comparable period in 2003, reflecting reductions in the current
interest rate environment. The increase in average other borrowings is primarily
attributable to $150.0 million of term securities sold under agreement to
repurchase that we consummated during the first quarter of 2004 as further
described in Note 9 to our consolidated financial statements.
The aggregate weighted average rate paid on our note payable was 5.06%
for the three months ended March 31, 2004, compared to 14.07% for the comparable
period in 2003. The overall changes in the weighted average rates paid reflect
changing market interest rates during the periods reflected. In addition, the
higher weighted average rate paid for the three months ended March 31, 2003
primarily reflects increased commitment, arrangement and other fees paid to
amend our secured credit agreement during this time period. Amounts outstanding
under our $60.0 million revolving line of credit with a group of unaffiliated
financial institutions bear interest at the lead bank's corporate base rate or,
at our option, at the London Interbank Offering Rate plus a margin determined by
the outstanding balance and our profitability for the preceding four calendar
quarters. Thus, our revolving credit line represents a relatively high-cost
funding source as increased advances have the effect of increasing the weighted
average rate of non-deposit liabilities. However, the borrowing level for these
periods has been minimal.
Average subordinated debentures were $210.9 million for the three
months ended March 31, 2004 compared to $281.9 million for the three months
ended March 31, 2003. The aggregate weighted average rate paid on our
subordinated debentures was 6.75% and 8.02% for the three months ended March 31,
2004 and 2003, respectively. Interest expense on our subordinated debentures was
$3.5 million for the three months ended March 31, 2004, compared to $5.6 million
for the comparable period in 2003. As previously discussed, the decrease for
2004 primarily reflects the redemption of $136.3 million of subordinated
debentures and the issuance of $73.2 million of subordinated debentures at lower
interest rates, as well as the earnings impact of our interest rate swap
agreements as further discussed under "--Interest Rate Risk Management."
The following table sets forth, on a tax-equivalent basis, certain
information relating to our average balance sheets, and reflects the average
yield earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting net interest income for the periods indicated:
Three Months Ended March 31,
-------------------------------------------------------
2004 2003
-------------------------- --------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1) (2) (3) (4) ................................ $5,333,353 84,328 6.36% $5,359,976 90,737 6.87%
Investment securities (4) ............................ 1,154,663 11,831 4.12 968,899 8,998 3.77
Federal funds sold and other.......................... 122,757 286 0.94 143,470 442 1.25
---------- ------- ---------- -------
Total interest-earning assets.................. 6,610,773 96,445 5.87 6,472,345 100,177 6.28
------- -------
Nonearning assets......................................... 652,521 722,465
---------- ----------
Total assets................................... $7,263,294 $7,194,810
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand deposits................... $ 868,712 967 0.45% $ 840,434 1,673 0.81%
Savings deposits................................... 2,161,910 4,777 0.89 2,167,440 6,786 1.27
Time deposits of $100 or more...................... 438,418 2,956 2.71 457,368 3,685 3.27
Other time deposits (3)............................ 1,503,636 8,487 2.27 1,691,225 12,194 2.92
---------- ------- ---------- -------
Total interest-bearing deposits................ 4,972,676 17,187 1.39 5,156,467 24,338 1.91
Other borrowings...................................... 388,793 644 0.67 181,427 602 1.35
Note payable (5)...................................... 8,346 105 5.06 3,919 136 14.07
Subordinated debentures (3)........................... 210,890 3,538 6.75 281,915 5,575 8.02
---------- ------- ---------- -------
Total interest-bearing liabilities............. 5,580,705 21,474 1.55 5,623,728 30,651 2.21
------- -------
Noninterest-bearing liabilities:
Demand deposits....................................... 1,021,744 927,147
Other liabilities..................................... 102,323 116,890
---------- ----------
Total liabilities.............................. 6,704,772 6,667,765
Stockholders' equity...................................... 558,522 527,045
---------- ----------
Total liabilities and stockholders' equity..... $7,263,294 $7,194,810
========== ==========
Net interest income....................................... 74,971 69,526
======= =======
Interest rate spread...................................... 4.32 4.07
Net interest margin (6)................................... 4.56% 4.36%
===== ======
- --------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $318,000 and $363,000 for the three months ended March 31, 2004 and 2003, respectively.
(5) Interest expense on the note payable includes commitment, arrangement and renewal fees.
(6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-
earning assets.
Provision for Loan Losses
The provision for loan losses was $12.8 million and $11.0 million for
the three months ended March 31, 2004 and 2003, respectively. Net loan
charge-offs were $5.3 million and $2.5 million for the three months ended March
31, 2004 and 2003, respectively. In 2003, we continued to experience the higher
level of problem loans and related loan charge-offs and past due loans that we
began to experience in early 2002. This was a result of economic conditions
within our markets, additional problems identified in certain acquired loan
portfolios and continuing deterioration in our commercial leasing portfolio,
particularly the segment of the portfolio relating to the airline industry.
These factors necessitated higher provisions for loan losses than in prior
periods. Nonperforming assets at March 31, 2004 increased to $90.2 million from
$86.5 million at December 31, 2003 and $86.9 million at March 31, 2003. The net
increase in nonperforming assets for the first quarter of 2004 primarily
reflects two significant changes: the sale of a residential and recreational
development property that was foreclosed on in January 2003 with a carrying
value of $9.2 million, representing approximately 83.0% of total other real
estate assets at the time of sale; partially offset by the addition of a $13.9
million credit relationship in the southern California region to nonaccrual
status. In recognition of this and other factors, our allowance for loan losses
increased to $124.9 million at March 31, 2004, compared to $116.5 million at
December 31, 2003 and $108.7 million at March 31, 2003. On April 29, 2004, we
recorded a $3.9 million charge-off on the $13.9 million credit relationship that
had been placed on nonaccrual status during the first quarter of 2004 as a
result of workout negotiations with the borrower, and on May 7, 2004, the
remaining net balance of $10.0 million was refinanced by an independent third
party, resulting in the receipt of a cash payment on the remaining net balance
of this credit relationship. However, management expects the higher levels of
nonperforming assets to remain at elevated levels throughout most of 2004 and
considers this trend in its overall assessment of the adequacy of the allowance
for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $20.6 million and $25.5 million for the three
months ended March 31, 2004 and 2003, respectively. Noninterest income consists
primarily of service charges on deposit accounts and customer service fees,
mortgage-banking revenues, net gains on sales of available-for-sale investment
securities, investment income on bank owned life insurance and other income. The
reduction experienced in the first quarter of 2004 is primarily attributable to
a $6.3 million gain recorded in March 2003 on the exchange of common stock of
Allegiant, as further discussed below. Noninterest income for the first quarter
of 2004 increased $1.3 million, or 6.59%, from the comparable period in 2003,
after excluding this nonrecurring transaction.
Service charges on deposit accounts and customer service fees were $8.9
million and $8.6 million for the three months ended March 31, 2004 and 2003,
respectively. The increase in service charges and customer service fees is
primarily attributable to our acquisition of BSG completed in March 2003,
additional products and services available and utilized by our retail and
commercial customers, and increases in non-sufficient fund and returned check
fee rates that became effective in December 2003.
The gain on mortgage loans sold and held for sale was $4.2 million and
$4.6 million for the three months ended March 31, 2004 and 2003, respectively.
The decrease primarily reflects continued slowdown in the volume of mortgage
loans originated and sold that was initially experienced in the fourth quarter
of 2003 and continued into the first quarter of 2004.
In March 2003, we recorded a $6.3 million gain on the exchange of
974,150 shares of our Allegiant common stock for a 100% ownership interest in
BSG. There were no net gains on sales of available-for-sale investment
securities for the three months ended March 31, 2004.
On February 6, 2004, we sold one of our Missouri branch banking
offices, resulting in a $390,000 gain, net of expenses, upon consummation of
this transaction.
Other income was $5.6 million and $4.8 million for the three months
ended March 31, 2004 and 2003, respectively. We attribute the primary components
of the increase in 2004 to:
>> increased portfolio management fee income of $452,000 associated
with our Institutional Money Management division;
>> a decrease in net losses of $454,000 associated with the sale of
certain assets, primarily related to equipment associated with
our commercial leasing business;
>> an increase in income associated with standby letters of credit
of $177,000;
>> an increase in fees from fiduciary activities; and
>> our acquisition completed during 2003; partially offset by
>> a decline of $222,000 in rental income associated with our
reduced commercial leasing activities;
>> a decline of $208,000 in loan servicing fees. The net decrease is
attributable to increased amortization of mortgage servicing
rights and a higher level of interest shortfall, offset by an
increase in fees from loans serviced for others. Interest
shortfall is the difference between the interest collected from a
loan-servicing customer upon prepayment of the loan and a full
month's interest that is required to be remitted to the security
owner;
>> a decline of $61,000 in brokerage revenue primarily associated
with overall market conditions and reduced customer demand; and
>> decreased rental fees from First Services, L.P. of $38,000 for
the use of data processing and other equipment owned by First
Banks.
Noninterest Expense
Noninterest expense was $52.6 million and $53.6 million for the three
months ended March 31, 2004 and 2003, respectively, reflecting improvement in
our efficiency ratio to 55.25% for the three months ended March 31, 2004, from
56.58% for the comparable period in 2003. The decrease in noninterest expense
primarily reflects a decline in expenses and losses, net of gains, on other real
estate owned, offset by an increase in salaries and employee benefits expense.
These expenses and losses are included in other expense in our consolidated
statements of income as further discussed below.
Salaries and employee benefits were $27.7 million and $23.3 million for
the three months ended March 31, 2004 and 2003, respectively. We attribute the
overall increase to increased salary and benefit expenses associated with our
acquisition in 2003 and generally higher salary and employee benefit costs
associated with employing and retaining qualified personnel. Salaries and
employee benefits expense is reduced by an allocation of direct loan origination
costs from salaries and benefits expense to gains on mortgage loans sold and
held for sale. This allocation of direct loan origination costs decreased during
the first quarter of 2004 due to a slowdown in the volume of mortgage loans
originated and sold, management's decision to retain a portion of new mortgage
loan production in our real estate mortgage portfolio in mid-2003 and a change
in the fallout percentage applied to the allocation, thereby further
contributing to the increase in salaries and employee benefits expense.
Occupancy, net of rental income, and furniture and equipment expense
totaled $9.1 million and $9.5 million for the three months ended March 31, 2004
and 2003, respectively. The decrease is partially attributable to decreased rent
expense associated with various lease terminations in 2003, including a lease
buyout on a California branch facility recorded in the first quarter of 2003.
However, these overall expenses remain at relatively higher levels and are
attributable to acquisitions, technology expenditures for equipment, continued
expansion and renovation of various corporate and branch offices and the
relocation of certain branches and operational areas.
Information technology fees were $8.0 million for the three months
ended March 31, 2004 and 2003. As more fully described in Note 6 to our
consolidated financial statements, First Services, L.P. provides information
technology and operational support services to our subsidiaries and us. We
attribute the consistently higher level of fees to growth and technological
advancements consistent with our product and service offerings, continued
expansion and upgrades to technological equipment, networks and communication
channels, partially offset by expense reductions resulting from the data
processing conversion of BSG completed in 2003.
Legal, examination and professional fees were $1.6 million for the
three months ended March 31, 2004 and 2003. The continued expansion of overall
corporate activities, the ongoing professional services utilized by certain of
our acquired entities, and increased legal fees associated with commercial loan
documentation, collection efforts and certain defense litigation costs related
to acquired entities have all contributed to the overall expense levels in 2003
and 2004.
Amortization of intangibles associated with the purchase of
subsidiaries was $658,000 and $532,000 for the three months ended March 31, 2004
and 2003, respectively. The increase is solely attributable to core deposit
intangibles associated with our acquisition of BSG in March 2003.
Communications and advertising and business development expenses
decreased to $1.7 million for the three months ended March 31, 2004, from $1.9
million for the comparable period in 2003. Our continued efforts to reduce these
expenses through renegotiation of contracts, enhanced focus on advertising and
promotional activities in markets that offer greater benefits, as well as
ongoing cost containment efforts have all contributed to the overall decline in
these expenditures.
Other expense was $2.6 million and $7.4 million for the three months
ended March 31, 2004 and 2003, respectively. Other expense encompasses numerous
general and administrative expenses including travel, meals and entertainment,
insurance, freight and courier services, correspondent bank charges,
miscellaneous losses and recoveries, expenses on other real estate owned,
memberships and subscriptions, transfer agent fees and sales taxes. The decrease
is primarily attributable to:
>> a decrease of $3.6 million on expenditures and losses, net of
gains, on other real estate. In February 2004, we recorded a $2.7
million gain on the sale of a residential and recreational
development property that was transferred to other real estate in
January 2003, as further discussed under "--Loans and Allowance
for Loan Losses." Net expenditures on other real estate for the
first quarter of 2003 were $822,000 and primarily included
expenditures associated with the operation of the residential and
recreational development property that was sold in February 2004
as well as a $200,000 expenditure associated with an unrelated
residential real estate property located in the northern
California region;
>> write-downs of $1.1 million recorded in the first quarter of 2003
on various operating leases associated with our commercial
leasing business, which were primarily a result of reductions in
estimated residual values. No similar write-downs occurred in
2004;
>> a $200,000 reduction in expenditures associated with ATM repairs
and maintenance; and
>> decreased credit card expenses of $155,000 primarily associated
with the continued decline in this portfolio; partially offset by
>> expenses associated with our acquisition completed during 2003;
and
>> continued growth and expansion of our banking franchise.
Interest Rate Risk Management
We utilize derivative financial instruments to assist in our management
of interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The derivative instruments we
held as of March 31, 2004 and December 31, 2003 are summarized as follows:
March 31, 2004 December 31, 2003
----------------------- -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $1,100,000 2,683 1,250,000 2,857
Fair value hedges.................................... 276,200 9,394 326,200 12,614
Interest rate cap agreements......................... 450,000 -- 450,000 --
Interest rate lock commitments....................... 25,900 -- 15,500 --
Forward commitments to sell
mortgage-backed securities......................... 66,500 -- 58,500 --
========== ====== ========= =======
The notional amounts of our derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
our credit exposure through our use of these instruments. The credit exposure
represents the loss we would incur in the event the counterparties failed
completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value.
During the three months ended March 31, 2004 and 2003, we realized net
interest income on our derivative financial instruments of $16.2 million and
$15.0 million, respectively. The increase is primarily attributable to interest
income associated with the additional swap agreements that we entered into
during March, April and July 2003 as well as the continued decline in prevailing
interest rates in 2003. In addition, we recorded net gains on derivative
instruments, which are included in noninterest income in our consolidated
statements of income, of $32,000 and $7,000 for the three months ended March 31,
2004 and 2003, respectively. The increase in 2004 reflects changes in the fair
value of our interest rate cap agreements, fair value hedges and the underlying
hedged liabilities.
Cash Flow Hedges
During September 2000, March 2001, April 2001, March 2002 and July
2003, we entered into interest rate swap agreements of $600.0 million, $200.0
million, $175.0 million, $150.0 million and $200.0 million notional amount,
respectively, to effectively lengthen the repricing characteristics of certain
interest-earning assets to correspond more closely with their funding source
with the objective of stabilizing cash flow, and accordingly, net interest
income over time. The underlying hedged assets are certain loans within our
commercial loan portfolio. The swap agreements, which have been designated as
cash flow hedges, provide for us to receive a fixed rate of interest and pay an
adjustable rate of interest equivalent to the weighted average prime lending
rate minus 2.70%, 2.82%, 2.82%, 2.80% and 2.85%, respectively. The terms of the
swap agreements provide for us to pay and receive interest on a quarterly basis.
In November 2001, we terminated $75.0 million notional amount of the swap
agreements originally entered into in April 2001, which would have expired in
April 2006, in order to appropriately modify our overall hedge position in
accordance with our interest rate risk management program. In addition, the
$150.0 million notional amount swap agreement that we entered into in March 2002
matured on March 14, 2004. The amount receivable by us under the swap agreements
was $3.7 million and $3.9 million at March 31, 2004 and December 31, 2003,
respectively, and the amount payable by us under the swap agreements was
$967,000 and $1.1 million at March 31, 2004 and December 31, 2003, respectively.
The maturity dates, notional amounts, interest rates paid and received
and fair value of our interest rate swap agreements designated as cash flow
hedges as of March 31, 2004 and December 31, 2003 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
March 31, 2004:
September 20, 2004.............................. $ 600,000 1.30% 6.78% $ 15,268
March 21, 2005.................................. 200,000 1.18 5.24 7,378
April 2, 2006................................... 100,000 1.18 5.45 6,887
July 31, 2007................................... 200,000 1.15 3.08 3,541
---------- ---------
$1,100,000 1.24 5.71 $ 33,074
========== ===== ===== =========
December 31, 2003:
March 14, 2004.................................. $ 150,000 1.20% 3.93% $ 879
September 20, 2004.............................. 600,000 1.30 6.78 23,250
March 21, 2005.................................. 200,000 1.18 5.24 8,704
April 2, 2006................................... 100,000 1.18 5.45 6,881
July 31, 2007................................... 200,000 1.15 3.08 501
---------- ---------
$1,250,000