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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 2004
----- ------------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
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............................................................. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 32
ITEM 4. CONTROLS AND PROCEDURES................................................................... 33
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 34
SIGNATURES................................................................................................ 35
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2004 2003
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks.............................................................. $ 166,376 179,802
Short-term investments............................................................... 41,339 33,735
---------- ---------
Total cash and cash equivalents................................................. 207,715 213,537
---------- ---------
Investment securities:
Available for sale................................................................... 1,234,275 1,038,787
Held to maturity (fair value of $27,282 and $11,341, respectively)................... 27,310 10,927
---------- ---------
Total investment securities..................................................... 1,261,585 1,049,714
---------- ---------
Loans:
Commercial, financial and agricultural............................................... 1,391,668 1,407,626
Real estate construction and development............................................. 1,183,414 1,063,889
Real estate mortgage................................................................. 2,605,890 2,582,264
Lease financing...................................................................... 9,585 67,282
Consumer and installment............................................................. 55,273 71,652
Loans held for sale.................................................................. 164,928 145,746
---------- ---------
Total loans..................................................................... 5,410,758 5,338,459
Unearned discount.................................................................... (11,375) (10,384)
Allowance for loan losses............................................................ (120,966) (116,451)
---------- ---------
Net loans....................................................................... 5,278,417 5,211,624
---------- ---------
Derivative instruments.................................................................... 13,356 49,291
Bank premises and equipment, net of accumulated depreciation and amortization............. 130,365 136,739
Goodwill.................................................................................. 145,255 145,548
Bank-owned life insurance................................................................. 99,870 97,521
Deferred income taxes..................................................................... 105,970 102,844
Other assets.............................................................................. 81,543 100,122
---------- ---------
Total assets.................................................................... $7,324,076 7,106,940
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand........................................................... $1,059,045 1,034,367
Interest-bearing demand ............................................................. 815,189 843,001
Savings.............................................................................. 2,146,332 2,128,683
Time deposits of $100 or more........................................................ 475,533 436,439
Other time deposits.................................................................. 1,459,828 1,519,125
---------- ---------
Total deposits.................................................................. 5,955,927 5,961,615
Other borrowings.......................................................................... 532,548 273,479
Note payable.............................................................................. -- 17,000
Subordinated debentures................................................................... 206,795 209,320
Deferred income taxes..................................................................... 24,613 41,683
Accrued expenses and other liabilities.................................................... 48,245 54,028
---------- ---------
Total liabilities............................................................... 6,768,128 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......................................................................... 539,658 495,714
Accumulated other comprehensive income (loss)............................................. (8,598) 29,213
---------- ---------
Total stockholders' equity...................................................... 555,948 549,815
---------- ---------
Total liabilities and stockholders' equity...................................... $7,324,076 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 Six Months Ended
June 30, June 30,
------------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Interest and fees on loans........................................... $ 83,755 89,680 167,975 180,292
Investment securities................................................ 12,693 8,489 24,314 17,249
Short-term investments............................................... 137 312 423 754
--------- -------- -------- --------
Total interest income........................................... 96,585 98,481 192,712 198,295
--------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................ 824 1,478 1,791 3,151
Savings............................................................ 4,593 5,785 9,370 12,571
Time deposits of $100 or more...................................... 3,039 3,336 5,995 7,021
Other time deposits................................................ 8,173 11,088 16,660 23,282
Other borrowings..................................................... 757 519 1,401 1,121
Note payable......................................................... 64 50 169 186
Subordinated debentures.............................................. 3,529 5,212 7,067 10,787
--------- -------- -------- --------
Total interest expense.......................................... 20,979 27,468 42,453 58,119
--------- -------- -------- --------
Net interest income............................................. 75,606 71,013 150,259 140,176
Provision for loan losses................................................. 3,000 10,000 15,750 21,000
--------- -------- -------- --------
Net interest income after provision for loan losses............. 72,606 61,013 134,509 119,176
--------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees........ 9,792 9,005 18,741 17,649
Gain on mortgage loans sold and held for sale........................ 3,961 3,552 8,190 8,132
Net gain on sales of available-for-sale investment securities........ -- 307 -- 6,566
Gain on sales of branches, net of expenses........................... 630 -- 1,020 --
Bank-owned life insurance investment income.......................... 1,276 1,433 2,619 2,704
Other................................................................ 4,445 4,628 10,093 9,421
--------- -------- -------- --------
Total noninterest income........................................ 20,104 18,925 40,663 44,472
--------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits....................................... 28,203 24,994 55,889 48,255
Occupancy, net of rental income...................................... 4,433 5,549 9,070 10,483
Furniture and equipment.............................................. 4,290 4,535 8,703 9,104
Postage, printing and supplies....................................... 1,221 1,292 2,543 2,598
Information technology fees.......................................... 7,992 8,409 15,988 16,442
Legal, examination and professional fees............................. 1,688 2,165 3,251 3,771
Amortization of intangibles associated with the
purchase of subsidiaries.......................................... 658 658 1,316 1,190
Communications....................................................... 399 668 864 1,273
Advertising and business development................................. 1,324 925 2,605 2,234
Other................................................................ 5,197 8,350 7,778 15,782
--------- -------- -------- --------
Total noninterest expense....................................... 55,405 57,545 108,007 111,132
--------- -------- -------- --------
Income before provision for income taxes........................ 37,305 22,393 67,165 52,516
Provision for income taxes................................................ 11,302 7,693 22,893 18,785
--------- -------- -------- --------
Net income...................................................... 26,003 14,700 44,272 33,731
Preferred stock dividends................................................. 132 132 328 328
--------- -------- -------- --------
Net income available to common stockholders..................... $ 25,871 14,568 43,944 33,403
========= ======== ======== ========
Basic earnings per common share........................................... $1,093.42 615.70 1,857.23 1,411.74
========= ======== ======== ========
Diluted earnings per common share......................................... $1,074.06 606.04 1,827.13 1,390.06
========= ======== ======== ========
Weighted average common stock outstanding................................. 23,661 23,661 23,661 23,661
========= ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Six Months Ended June 30, 2004 and 2003 and Six Months Ended December 31, 2003
(dollars expressed in thousands, except per share data)
Accu-
Adjustable Rate mulated
Preferred Stock Other
--------------- Compre- Total
Class A Additional Compre- hensive Stock-
Conver- Common Paid-In hensive Retained Income holders'
tible Class B Stock Capital Income Earnings (Loss) Equity
----- ------- ----- ------- ------- -------- ------ ------
Consolidated balances, December 31, 2002......... $12,822 241 5,915 5,910 433,689 60,464 519,041
Six months ended June 30, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 33,731 33,731 -- 33,731
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (6,288) -- (6,288) (6,288)
Derivative instruments:
Current period transactions............ -- -- -- -- (7,639) -- (7,639) (7,639)
-------
Comprehensive income....................... 19,804
=======
Class A preferred stock dividends,
$0.50 per share............................ -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share............................ -- -- -- -- (7) -- (7)
------- ----- ----- ----- ------- ------- -------
Consolidated balances, June 30, 2003............. 12,822 241 5,915 5,910 467,092 46,537 538,517
Six months ended December 31, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 29,080 29,080 -- 29,080
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (3,698) -- (3,698) (3,698)
Derivative instruments:
Current period transactions............ -- -- -- -- (13,626) -- (13,626) (13,626)
-------
Comprehensive income....................... 11,756
=======
Class A preferred stock dividends,
$0.70 per share............................ -- -- -- -- (448) -- (448)
Class B preferred stock dividends,
$0.07 per share............................ -- -- -- -- (10) -- (10)
------- ----- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2003......... 12,822 241 5,915 5,910 495,714 29,213 549,815
Six months ended June 30, 2004:
Comprehensive income:
Net income................................. -- -- -- -- 44,272 44,272 -- 44,272
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (19,116) -- (19,116) (19,116)
Derivative instruments:
Current period transactions............ -- -- -- -- (18,695) -- (18,695) (18,695)
-------
Comprehensive income....................... 6,461
=======
Class A preferred stock dividends,
$0.50 per share............................ -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share............................ -- -- -- -- (7) -- (7)
------- ----- ----- ----- ------- ------- -------
Consolidated balances, June 30, 2004............. $12,822 241 5,915 5,910 539,658 (8,598) 555,948
======= ===== ===== ===== ======= ======= =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, December 31,
----------------- ---------------
2004 2003 2004 2003 2003
---- ---- ---- ---- ----
Unrealized losses on investment securities arising
during the period.................... ......................... $(24,607) (430) (19,116) (2,020) (2,271)
Less reclassification adjustment for gains included
in net income.................................................. -- 200 -- 4,268 1,427
-------- ---- ------- ------ ------
Unrealized losses on investment securities........................ $(24,607) (630) (19,116) (6,288) (3,698)
======== ==== ======= ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Six Months Ended
June 30,
-----------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 44,272 33,731
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of bank premises and equipment..................... 9,451 9,713
Amortization, net of accretion................................................... 8,708 11,706
Originations and purchases of loans held for sale................................ (588,123) (1,190,559)
Proceeds from sales of loans held for sale....................................... 461,514 1,112,660
Provision for loan losses........................................................ 15,750 21,000
Provision for income taxes....................................................... 22,893 18,785
Payments of income taxes......................................................... (24,231) (18,804)
Decrease in accrued interest receivable.......................................... 595 2,820
Interest accrued on liabilities.................................................. 42,453 58,119
Payments of interest on liabilities.............................................. (42,699) (60,629)
Gain on mortgage loans sold and held for sale.................................... (8,190) (8,132)
Net gain on sales of available-for-sale investment securities.................... -- (6,566)
Gain on sales of branches, net of expenses....................................... (1,020) --
Other operating activities, net.................................................. (2,477) 4,950
--------- ----------
Net cash used in operating activities......................................... (61,104) (11,206)
--------- ----------
Cash flows from investing activities:
Cash received for acquired entities, net of cash
and cash equivalents paid........................................................ -- 14,870
Proceeds from sales of investment securities available for sale.................... -- 3,251
Maturities of investment securities available for sale............................. 250,867 721,971
Maturities of investment securities held to maturity............................... 2,126 3,024
Purchases of investment securities available for sale.............................. (429,267) (326,616)
Purchases of investment securities held to maturity................................ (18,523) (102)
Net (increase) decrease in loans................................................... (15,809) 21,830
Recoveries of loans previously charged-off......................................... 13,539 10,317
Purchases of bank premises and equipment........................................... (3,565) (1,858)
Other investing activities, net.................................................... 12,513 4,369
--------- ----------
Net cash (used in) provided by investing activities........................... (188,119) 451,056
--------- ----------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits................................. 23,751 (38,337)
Decrease in time deposits.......................................................... (2,738) (212,505)
Decrease in federal funds purchased................................................ -- (55,000)
Decrease in Federal Home Loan Bank advances........................................ -- (3,165)
Increase (decrease) in securities sold under agreements to repurchase.............. 259,069 (11,617)
Advances drawn on note payable..................................................... -- 34,500
Repayments of note payable......................................................... (17,000) (7,000)
Proceeds from issuance of subordinated debentures.................................. -- 70,932
Payments for redemptions of subordinated debentures................................ -- (136,341)
Cash paid for sales of branches, net of cash
and cash equivalents sold........................................................ (19,353) --
Payment of preferred stock dividends............................................... (328) (328)
--------- ----------
Net cash provided by (used in) financing activities........................... 243,401 (358,861)
--------- ----------
Net (decrease) increase in cash and cash equivalents.......................... (5,822) 80,989
Cash and cash equivalents, beginning of period.......................................... 213,537 203,251
--------- ----------
Cash and cash equivalents, end of period................................................ $ 207,715 284,240
========= ==========
Noncash investing and financing activities:
Loans transferred to other real estate............................................. $ 2,498 10,850
========= ==========
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 U.S. generally accepted accounting principles 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
U.S. generally accepted accounting principles. Actual results could differ from
those estimates. In the opinion of management, all adjustments, consisting of
normal recurring accruals considered necessary for a fair presentation of the
results of operations for the interim periods presented herein, have been
included. Operating results for the three and six months ended June 30, 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
First Banks and Small Business Loan Source, Inc. (SBLS), headquartered
in Houston, Texas, entered into an Asset Purchase Agreement on March 26, 2004,
and subsequently entered into an Amended and Restated Asset Purchase Agreement
on July 27, 2004, 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 is expected to
be completed during the third quarter of 2004, subject to the approval of the
United States Small Business Administration (SBA) and the expiration of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
SBLS reported assets of approximately $49.5 million, including $30.4 million of
SBA loans, at June 30, 2004.
On April 9, 2004, First Banks and Continental Mortgage Corporation -
Delaware (CMC), entered into an Agreement and Plan of Reorganization that
provided for First Banks to acquire CMC and its wholly owned banking subsidiary,
Continental Community Bank and Trust Company (CCB). As further discussed in Note
11 to the Consolidated Financial Statements, First Banks completed its
acquisition of CMC and CCB on July 30, 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 $1.1 million identified in the following table is comprised
of contractual obligations under salary continuation agreements to nine
individuals with original terms ranging from three to 15 years and remaining
terms ranging from approximately six months to 12 years. As the obligation to
make payments under these agreements is accrued at the consummation date, such
payments do not have any impact on the consolidated statements of income. First
Banks also incurs costs associated with acquisitions that are expensed in the
consolidated statements of income. These costs relate principally to additional
costs incurred in conjunction with the data processing conversions of the
respective entities.
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
Six Months Ended June 30, 2004:
Payments....................................................................... (332)
-------
Balance at June 30, 2004......................................................... $ 1,080
=======
On February 6, 2004, First Bank completed its divestiture of one branch
office in rural 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.
On April 16, 2004, First Bank completed its divestiture of one branch
office in southern Illinois. This branch divestiture resulted in a reduction of
the deposit base of approximately $15.0 million, and a pre-tax gain of
approximately $630,000, which is included in noninterest income.
On June 30, 2004, First Bank completed the sale of a significant
portion of the leases in its commercial leasing portfolio. The sale reduced the
Company's commercial leasing portfolio by approximately $33.1 million to $9.6
million at June 30, 2004. No gain or loss was recorded on the transaction. In
conjunction with the transaction, First Bank established a $2.0 million
liability associated with related recourse obligations for certain leases sold,
as further discussed in Note 10 to the Consolidated Financial Statements.
(3) INTANGIBLE ASSETS ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES, NET OF
AMORTIZATION
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at June 30, 2004 and December 31,
2003:
June 30, 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 (5,478) 17,391 (4,233)
Goodwill associated with
purchases of branch offices......... 2,210 (932) 2,210 (861)
--------- --------- -------- --------
Total............................ $ 19,601 (6,410) 19,601 (5,094)
========= ========= ======== ========
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 143,977 144,199
========= ========
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $658,000 and $1.3 million for the three and
six months ended June 30, 2004, respectively, and $658,000 and $1.2 million for
the comparable periods 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...................................................... $ 1,316
2005................................................................ 2,632
2006................................................................ 2,632
2007................................................................ 2,632
2008................................................................ 2,632
2009 ............................................................... 726
-------
Total............................................................ $12,570
=======
Changes in the carrying amount of goodwill for the three and six months
ended June 30, 2004 and 2003 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ---------------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period......................... $ 145,513 141,102 145,548 140,112
Goodwill acquired during period...................... -- -- -- 1,026
Acquisition-related adjustments...................... (222) 1,101 (222) 1,101
Amortization - purchases of branch offices........... (36) (36) (71) (72)
--------- -------- -------- --------
Balance, end of period............................... $ 145,255 142,167 145,255 142,167
========= ======== ======== ========
(4) MORTGAGE BANKING ACTIVITIES
At June 30, 2004 and December 31, 2003, First Banks serviced loans for
others amounting to $1.10 billion and $1.22 billion, respectively. Borrowers'
escrow balances held by First Banks on such loans were $8.3 million and $4.7
million at June 30, 2004 and December 31, 2003, respectively.
Changes in mortgage servicing rights, net of amortization, for the
periods indicated were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $ 13,960 15,678 15,408 14,882
Originated mortgage servicing rights................ 465 2,521 819 4,494
Amortization........................................ (1,892) (1,220) (3,694) (2,397)
-------- ------- ------- -------
Balance, end of period.............................. $ 12,533 16,979 12,533 16,979
======== ======= ======= =======
The fair value of mortgage servicing rights was approximately $17.2
million and $18.2 million at June 30, 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 $4.7 million and $1.2 million
at June 30, 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...................................................... $ 2,112
2005................................................................ 4,072
2006................................................................ 3,477
2007................................................................ 2,112
2008................................................................ 760
--------
Total.......................................................... $ 12,533
========
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted earnings per
share computations for the periods indicated:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except share and per share data)
Three months ended June 30, 2004:
Basic EPS - income available to common stockholders............. $ 25,871 23,661 $ 1,093.42
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 546 (19.36)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 25,999 24,207 $ 1,074.06
========= ======= ==========
Three months ended June 30, 2003:
Basic EPS - income available to common stockholders............. $ 14,568 23,661 $ 615.70
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 588 (9.66)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 14,696 24,249 $ 606.04
========= ======= ==========
Six months ended June 30, 2004:
Basic EPS - income available to common stockholders............. $ 43,944 23,661 $ 1,857.23
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 565 (30.10)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 44,265 24,226 $ 1,827.13
========= ======= ==========
Six months ended June 30, 2003:
Basic EPS - income available to common stockholders............. $ 33,403 23,661 $ 1,411.74
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 600 (21.68)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 33,724 24,261 $ 1,390.06
========= ======= ==========
(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. decreased to
$6.6 million and $13.3 million for the three and six months ended June 30, 2004,
respectively, from $7.0 million and $13.7 million for the comparable periods in
2003. First Services, L.P. recorded reduced information technology costs as a
result of the renegotiation of vendor service contracts and passed the cost
reduction through to First Banks, Inc. and its subsidiaries. During the three
months ended June 30, 2004 and 2003, First Services, L.P. paid First Bank $1.1
million and $1.0 million, respectively, and during the six months ended June 30,
2004 and 2003, First Services, L.P. paid First Banks $2.2 million 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 $876,000 and $1.8 million for the three and six months
ended June 30, 2004, respectively, and $725,000 and $1.6 million for the
comparable periods in 2003 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 $105,000 and $204,000
for the three and six months ended June 30, 2004, respectively, and $138,000 and
$251,000 for the comparable periods in 2003 in commissions for policies
purchased by First Banks or customers of First Bank from unaffiliated,
third-party insurers.
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 $28.3 million and $20.0 million at June 30, 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 June 30, 2004, First Banks and First Bank were each well
capitalized.
As of June 30, 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 June 30, 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
June 30, December 31, For Capital Prompt Corrective
2004 2003 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.84% 10.27% 8.0% 10.0%
First Bank.............................. 10.66 10.41 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 9.26 8.46 4.0 6.0
First Bank.............................. 9.40 9.15 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 8.31 7.62 3.0 5.0
First Bank.............................. 8.55 8.22 3.0 5.0
On May 6, 2004, the Board of Governors of the Federal Reserve System
(the Board) requested public comment on newly proposed rules that would allow
bank holding companies to retain trust preferred securities in their Tier 1
capital, subject to stricter quantitative and qualitative standards. The
proposed rules would implement several significant changes to the current
regulatory capital rules. Under the proposal, the aggregate amount of trust
preferred securities and certain other core capital elements would be limited to
25% of Tier 1 capital, net of goodwill. Additionally, qualifying trust preferred
securities and Class C minority interest in excess of the 25% limit would be
allowable in Tier 2 capital, but limited, together with subordinated debt and
limited-life preferred stock, to 50% of Tier 1 capital. The proposed rules also
provide that in the last five years before maturity of the underlying
subordinated note, the associated trust preferred securities would be treated as
limited-life preferred stock, at one-fifth amortization per year, and would be
excluded from Tier 1 capital and included in Tier 2 capital, subject, together
with subordinated debt and other limited-life preferred stock, to a limit of 50%
of Tier 1 capital. The public comment period on the newly proposed rules ended
on July 11, 2004. First Banks is awaiting further guidance from the Board
pending the outcome of the newly proposed rules, and is continuing to evaluate
the proposed changes and their overall impact on the Company's financial
condition and results of operations. Management expects that implementation of
the Board's proposed rules, as currently stated, would reduce the Company's
regulatory capital ratios. However, management believes its regulatory capital
levels will continue to meet the well capitalized thresholds under the
regulatory framework for prompt corrective action if the rules are adopted in
the form proposed.
(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 U.S. generally accepted
accounting principles and practices predominant in the banking industry.
The business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------ ------------------------ --------------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $1,254,679 1,042,809 6,906 6,905 1,261,585 1,049,714
Loans, net of unearned discount......... 5,399,383 5,328,075 -- -- 5,399,383 5,328,075
Goodwill................................ 145,255 145,548 -- -- 145,255 145,548
Total assets............................ 7,313,573 7,097,635 10,503 9,305 7,324,076 7,106,940
Deposits................................ 5,965,870 5,977,042 (9,943) (15,427) 5,955,927 5,961,615
Note payable............................ -- -- -- 17,000 -- 17,000
Subordinated debentures................. -- -- 206,795 209,320 206,795 209,320
Stockholders' equity.................... 750,915 766,397 (194,967) (216,582) 555,948 549,815
========= ========= ======== ======== ======== =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
----------------------- ----------------------- --------------------
Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30,
----------------------- ----------------------- -----------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Income statement information:
Interest income......................... $ 96,446 98,168 139 313 96,585 98,481
Interest expense........................ 17,399 22,278 3,580 5,190 20,979 27,468
--------- --------- -------- -------- -------- ---------
Net interest income................ 79,047 75,890 (3,441) (4,877) 75,606 71,013
Provision for loan losses............... 3,000 10,000 -- -- 3,000 10,000
--------- --------- -------- -------- -------- ---------
Net interest income after
provision for loan losses........ 76,047 65,890 (3,441) (4,877) 72,606 61,013
--------- --------- -------- -------- -------- ---------
Noninterest income...................... 20,250 18,856 (146) 69 20,104 18,925
Noninterest expense..................... 54,388 55,991 1,017 1,554 55,405 57,545
--------- --------- -------- -------- -------- ---------
Income before provision for
income taxes............... 41,909 28,755 (4,604) (6,362) 37,305 22,393
Provision for income taxes.............. 15,706 10,410 (4,404) (2,717) 11,302 7,693
--------- --------- -------- -------- -------- ---------
Net income......................... $ 26,203 18,345 (200) (3,645) 26,003 14,700
========= ========= ======== ======== ======== =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
----------------------- ----------------------- ------------------------
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
----------------------- ----------------------- ------------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Income statement information:
Interest income.......................... $ 192,433 197,696 279 599 192,712 198,295
Interest expense......................... 35,246 47,282 7,207 10,837 42,453 58,119
--------- ------- ------- -------- -------- ---------
Net interest income................. 157,187 150,414 (6,928) (10,238) 150,259 140,176
Provision for loan losses................ 15,750 21,000 -- -- 15,750 21,000
--------- ------- ------- -------- -------- ---------
Net interest income after
provision for loan losses......... 141,437 129,414 (6,928) (10,238) 134,509 119,176
--------- ------- ------- -------- -------- ---------
Noninterest income....................... 40,969 38,385 (306) 6,087 40,663 44,472
Noninterest expense...................... 105,905 109,206 2,102 1,926 108,007 111,132
--------- ------- ------- -------- -------- ---------
Income before provision for
income taxes...................... 76,501 58,593 (9,336) (6,077) 67,165 52,516
Provision for income taxes............... 28,950 20,893 (6,057) (2,108) 22,893 18,785
--------- ------- ------ -------- -------- ---------
Net income.......................... $ 47,551 37,700 (3,279) (3,969) 44,272 33,731
========= ======= ======= ======== ======== =========
- ------------------
(1) Corporate and other includes $2.3 million and $3.4 million of interest expense on subordinated debentures, after applicable
income tax benefit of $1.2 million and $1.8 million for the three months ended June 30, 2004 and 2003, respectively. For the
six months ended June 30, 2004 and 2003, corporate and other includes $4.6 million and $7.0 million of interest expense on
subordinated debentures, after applicable income tax benefits of $2.5 million and $3.8 million, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at June 30, 2004 and
December 31, 2003:
June 30, December 31,
2004 2003
--------------- ----------------
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily............................................................... $ 175,548 166,479
Term................................................................ 350,000 100,000
Federal Home Loan Bank borrowings........................................ 7,000 7,000
--------- -------
Total other borrowings.......................................... $ 532,548 273,479
========= =======
In conjunction with First Banks' interest rate risk management program,
First Banks entered into the following transactions with the objective of
stabilizing net interest income over time:
>> Effective January 12, 2004, First Banks consummated a $150.0
million three-year reverse repurchase agreement under a master
repurchase agreement with a single unaffiliated third party.
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.
>> Effective June 14, 2004, First Banks consummated two $50.0
million three-year reverse repurchase agreements under a master
repurchase agreement with a single unaffiliated third party.
Interest is paid quarterly and is equivalent to the three-month
London Interbank Offering Rate minus 0.60% and 0.61%,
respectively, plus a floating amount equal to the differential
between the three-month London Interbank Offing Rate reset in
arrears and the strike price of 5.00%, if the three-month London
Interbank Offering Rate reset in arrears exceeds 5.00%. The
underlying securities associated with the reverse repurchase
agreements are callable U.S. Government agency securities and are
not under First Banks' physical control. In conjunction with
these transactions, First Banks purchased $100.0 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 June 30,
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.
On June 30, 2004, as further discussed in Note 2 to the Consolidated
Financial Statements, First Bank recorded a liability of $2.0 million for
recourse obligations related to the completion of the sale of a portion of its
commercial leasing portfolio. For value received, First Bank, as seller,
indemnified the buyer of certain leases from any liability or loss resulting
from defaults subsequent to the transaction sale. First Bank's indemnification
for the recourse obligations is limited to a specified percentage, ranging from
15% to 25%, of the aggregate lease purchase price of specific pools of leases
sold.
(11) SUBSEQUENT EVENTS
On July 30, 2004, First Banks completed its acquisition of CMC, and its
wholly owned banking subsidiary, CCB, acquiring all of the outstanding common
stock of CMC in exchange for $4.2 million in cash. In addition, First Banks
redeemed in full all of the outstanding subordinated promissory notes of CMC,
including accumulated accrued and unpaid interest, of $4.5 million in aggregate.
The transaction was funded through internally generated funds. CMC, through CCB,
operated two banking offices in the Chicago suburban communities of Aurora and
Villa Park. At the time of the transaction, CMC had $140.7 million in total
assets, $73.9 million in loans, net of unearned discount, and $100.8 million in
deposits. The transaction was accounted for using the purchase method of
accounting. Goodwill was approximately $1.9 million and the core deposit
intangibles, which are amortized over seven years utilizing the straight-line
method, were approximately $2.0 million. CMC was merged with and into SFC and
CCB was merged with and into First Bank.
On August 12, 2004, First Banks entered into a first amendment to its
revolving credit line with a group of unaffiliated financial institutions. The
material changes in the First Amendment to Secured Credit Agreement (Credit
Agreement) are amendments to the termination date and an increase in the
revolving credit line and letter of credit facility. The Credit Agreement
provides a $75.0 million revolving credit line and a $25.0 million letter of
credit facility. Interest is payable on outstanding principal loan balances at a
floating rate equal to either the lender's prime rate or, at First Banks'
option, the London Interbank Offering Rate plus a margin determined by the
outstanding loan balances and First Banks' net income for the preceding four
calendar quarters. If the loan balances outstanding under the revolving credit
line are accruing at the prime rate, interest is paid monthly. If the loan
balances outstanding under the revolving credit line are accruing at the London
Interbank Offering Rate, interest is payable based on the one, two, three or
six-month London Interbank Offering Rate, as selected by First Banks. Amounts
may be borrowed under the Credit Agreement until August 11, 2005, at which time
the principal and interest outstanding is due and payable. The Credit Agreement
requires maintenance of certain minimum capital ratios for First Banks and its
subsidiary bank, certain maximum nonperforming assets ratios for First Banks and
its subsidiary bank and a minimum return on assets ratio for First Banks. In
addition, it prohibits the payment of dividends on First Banks' common stock and
contains additional covenants. Loans under the Credit Agreement are secured by
First Banks' ownership interest in the capital stock of its subsidiaries.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause 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 in
1978 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. At June 30, 2004, we
had total assets of $7.32 billion, loans, net of unearned discount, of $5.40
billion, total deposits of $5.96 billion and total stockholders' equity of
$555.9 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 $7.32 billion and $7.11 billion at June 30, 2004 and
December 31, 2003, respectively, an increase of 3.06%. The $217.1 million
increase in total assets is primarily attributable to increases in investment
securities and loans, net of unearned discount, which were primarily funded by
increases in other borrowings. Investment securities increased $211.9 million,
or 20.18%, to $1.26 billion at June 30, 2004 from $1.05 billion at December 31,
2003, reflecting purchases of $447.8 million and maturities of $253.0 million.
Loans, net of unearned discount, increased $71.3 million to $5.40 billion at
June 30, 2004 from $5.33 billion at December 31, 2003, and the allowance for
loan losses increased to $121.0 million at June 30, 2004 from $116.5 million at
December 31, 2003, as further discussed under "--Loans and Allowance for Loan
Losses." The overall increase in total assets was partially offset by a $35.9
million decline in our derivative instruments to $13.4 million from $49.3
million due to a decline in the fair value of certain derivative financial
instruments, particularly $600.0 million notional amount of interest rate swap
agreements designated as cash flow hedges which will mature in September 2004
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 $18.6 million to $81.5 million at June 30, 2004
from $100.1 million at December 31, 2003. This decrease primarily results from a
$9.2 million net decrease in other real estate, as further discussed under
"--Loans and Allowance for Loan Losses," and a $2.9 million decrease in mortgage
servicing rights.
Total deposits reflected a slight decrease of $5.7 million, or 0.10%,
from December 31, 2003 to $5.96 billion at June 30, 2004. The decrease is
primarily attributable to the divestiture of two Midwest branch offices during
the first and second quarters of 2004, which resulted in a reduction of our
deposit base of approximately $23.4 million. This decrease is partially offset
by an increase in deposits due to the expansion of our banking franchise with
the opening of two de novo branch offices, one in West St. Louis County,
Missouri and one in Houston, Texas. In addition, our continued 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 deposit growth despite continued aggressive competition
within our market areas and an anticipated level of attrition associated with
ongoing low deposit rates. 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 $259.1 million to $532.5 million at June 30,
2004 from $273.5 million at December 31, 2003. The increase is primarily
attributable to $250.0 million of term securities sold under agreements to
repurchase that we entered into during the first and second quarters of 2004, as
further discussed in Note 9 to our Consolidated Financial Statements. Our note
payable was fully repaid in April 2004 through dividends from our subsidiary
bank, resulting in a decrease of $17.0 million since December 31, 2003. Our
subordinated debentures decreased $2.5 million to $206.8 million at June 30,
2004 from $209.3 million at December 31, 2003. This decrease is primarily
attributable to a decrease in the fair value of our interest rate swap
agreements that are designated as fair value hedges and utilized to hedge
certain issues of our subordinated debentures. The decrease was partially offset
by the continued amortization of debt issuance costs that contributed to an
increase in our subordinated debentures during the first six months of 2004.
Our deferred income tax liability decreased from $41.7 million at
December 31, 2003 to $24.6 million at June 30, 2004, and is primarily
attributable to taxes associated with changes in our unrealized gains and losses
on available-for-sale investment securities and changes in our derivative
financial instruments.
Stockholders' equity was $555.9 million and $549.8 million at June 30,
2004 and December 31, 2003, respectively, reflecting an increase of $6.1
million. The increase is primarily attributable to net income of $44.3 million,
partially offset by a $37.8 million decrease in accumulated other comprehensive
income. The decrease in accumulated other comprehensive income is comprised of
$19.1 million associated with the change in our unrealized gains and losses on
available-for-sale investment securities and $18.7 million associated with the
change in our derivative financial instruments. The decrease is reflective of
changes in prevailing interest rates as well as a decline in the fair value of
our derivative financial instruments, specifically associated with $600.0
million notional amount of our interest rate swap agreements, designated as cash
flow hedges, which will mature in September 2004.
Results of Operations
Net Income
Net income was $26.0 million and $44.3 million for the three and six
months ended June 30, 2004, respectively, compared to $14.7 million and $33.7
million for the comparable periods in 2003. Results for the three months ended
June 30, 2004 reflect increased net interest income and noninterest income and a
reduced provision for loan losses and noninterest expenses, partially offset by
an increased provision for income taxes. Results for the six months ended June
30, 2004 over the comparable period in 2003 reflect increased net interest
income and reduced provisions for loan losses and noninterest expenses,
partially offset by a decline in noninterest income and an increased provision
for income taxes. Our return on average assets was 1.43% and 1.22% for the three
and six months ended June 30, 2004, respectively, compared to 0.82% and 0.95%
for the comparable periods in 2003. Our return on average stockholders' equity
was 18.21% and 15.72% for the three and six months ended June 30, 2004,
respectively, compared to 11.03% and 12.82% for the comparable periods in 2003.
Included in the first quarter of 2003 was a nonrecurring 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
interest in Bank of Ste. Genevieve, or BSG, located in Ste. Genevieve, Missouri.
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 improve asset quality,
maintain an acceptable net interest margin in the current low interest rate
environment, improve our noninterest income 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. Our overall asset quality levels have substantially
improved during the second quarter of 2004, resulting in a $19.1 million
reduction in nonperforming assets since December 31, 2003. We also sold a
majority of the leases in our commercial leasing portfolio on June 30, 2004 to
further reduce our outstanding balances within this segment of our portfolio,
consistent with our business strategy initiated in late 2002 to reduce our
commercial leasing activities. Residual problems in our loan portfolio that
primarily resulted from weak economic conditions in our markets remain a primary
focus of management as we continue our ongoing efforts to further reduce our
nonperforming asset levels. 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. Although we have realized a substantial reduction in
nonperforming assets in 2004, 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 $20.1 million and $40.7 million for the three
and six months ended June 30, 2004, respectively, in comparison to $18.9 million
and $44.5 million for the comparable periods in 2003. The decrease for the six
months ended June 30, 2004 is primarily due to a nonrecurring $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 BSG. Excluding
this transaction, noninterest income for the six months ended June 30, 2004
increased $2.5 million, or 6.41%, over the comparable period in 2003. The
increase is attributable to increased service charges on deposit accounts and
customer service fees, increased portfolio management fees associated with our
institutional money management subsidiary, gains, net of expenses, recognized on
the sale of two Midwest branch banking offices and a decrease in losses on the
valuation or sale of certain assets, primarily related to our commercial leasing
portfolio. This increase was partially offset by reduced loan servicing fees.
Noninterest expense was $55.4 million and $108.0 million for the three
and six months ended June 30, 2004, respectively, in comparison to $57.5 million
and $111.1 million for the comparable periods in 2003. Our efficiency ratio,
which is defined as the ratio of noninterest expense to the sum of net interest
income and noninterest income, improved to 57.89% and 56.57% for the three and
six months ended June 30, 2004, respectively, from 63.98% and 60.19% for the
comparable periods in 2003. The decrease in noninterest expense reflects a
reduction in expenses and losses, net of gains, on other real estate, primarily
related to 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 also reflects a reduction in write-downs on commercial
operating leases as well as a decrease in occupancy and furniture and equipment
expenses, primarily related to a lease termination obligation incurred in the
second quarter of 2003. The decrease in noninterest expense was partially offset
by an 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. This resulted from the slowdown in the volume of mortgage loans
originated and sold coupled with an increase in the volume of mortgage loans
originated that we retained in our loan portfolio, as further discussed under
"--Loans and Allowance for Loan Losses."
Net Interest Income
Net interest income (expressed on a tax equivalent basis) increased to
$75.9 million and $150.9 million for the three and six months ended June 30,
2004, respectively, compared to $71.4 million and $140.9 million for the
comparable periods in 2003, reflecting an increase of 6.35% and 7.08%,
respectively. Net interest margin improved 13 basis points to 4.56% for the
three months ended June 30, 2004, from 4.43% for the comparable period in 2003.
Net interest margin improved 16 basis points to 4.56% for the six months ended
June 30, 2004, from 4.40% 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 $15.4 million and $31.7 million to net
interest income for the three and six months ended June 30, 2004, respectively,
compared to $15.8 million and $30.8 million for the comparable periods in 2003.
Average interest-earning assets increased to $6.70 billion and $6.65 billion for
the three and six months ended June 30, 2004, respectively, from $6.46 billion
for the three and six months ended June 30, 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, issued during
1997 and 1998, in the second quarter of 2003 and the issuance of $73.2 million
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 $1.26 billion and $1.21 billion for
the three and six months ended June 30, 2004, respectively, in comparison to
$950.7 million and $959.8 million for the comparable periods in 2003. The yield
on our investment portfolio increased to 4.11% for the three and six months
ended June 30, 2004, compared to 3.68% and 3.73% for the comparable periods in
2003, respectively. Funds available from maturities of investment securities
were used to purchase additional investment securities during the first six
months of 2004, including purchases of $250.0 million of callable U.S.
Government agency securities. These securities represented the underlying
securities associated with $250.0 million, in aggregate, of three-year reverse
repurchase agreements under a master repurchase agreement that we consummated in
the first and second quarters of 2004, as further described in Note 9 to our
Consolidated Financial Statements.
Average loans, net of unearned discount, were $5.38 billion and $5.35
billion for the three and six months ended June 30, 2004, respectively, compared
to $5.39 billion and $5.38 billion for the comparable periods in 2003,
reflecting decreases of $19.5 million and $23.1 million, respectively. The yield
on our loan portfolio decreased to 6.27% and 6.32% for the three and six months
ended June 30, 2004, respectively, compared to 6.68% and 6.77% for the
comparable periods 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. Mortgage loans held for sale declined
approximately $162.8 million due to 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. This decision contributed to an increase in
average real estate mortgage loan volumes retained in our portfolio of
approximately $147.8 million. Average real estate construction and development
loans increased approximately $80.7 million primarily as a result of seasonal
increases on existing and available credit lines. Average lease financing
volumes decreased approximately $64.7 million primarily resulting from our
business strategy initiated in late 2002 to reduce our commercial leasing
activities and the sale of a significant portion of the remaining leases in our
commercial leasing portfolio in June 2004, as further discussed under "--Loans
and Allowance for Loan Losses."
Average deposits decreased to $6.01 billion and $6.00 billion for the
three and six months ended June 30, 2004, respectively, from $6.05 billion and
$6.07 billion for the comparable periods in 2003. For the three and six months
ended June 30, 2004, the aggregate weighted average rate paid on our deposit
portfolio decreased 36 basis points and 45 basis points to 1.36%, and 1.37%,
respectively, compared to 1.72% and 1.82% for the comparable periods in 2003. We
attribute the decline in rates paid 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 to $4.07 billion and
$4.06 billion for the three and six months ended June 30, 2004, respectively,
from $3.98 billion and $3.96 billion for the comparable periods in 2003. Average
total time deposits decreased to $1.93 billion and $1.94 billion for the three
and six months ended June 30, 2004, respectively, from $2.07 billion and $2.11
billion for the comparable periods in 2003.
Average other borrowings increased to $439.1 million and $413.9 million
for the three and six months ended June 30, 2004, respectively, compared to
$173.1 million and $177.2 million for the comparable periods in 2003. The
aggregate weighted average rate paid on our other borrowings was 0.69% and 0.68%
for the three and six months ended June 30, 2004, respectively, compared to
1.20% and 1.28% for the comparable periods in 2003, reflecting reductions in the
current interest rate environment. The increase in average other borrowings is
primarily attributable to $250.0 million of term securities sold under
agreements to repurchase that we consummated during 2004 as further described in
Note 9 to our Consolidated Financial Statements.
The aggregate weighted average rate paid on our note payable was 23.66%
and 7.20% for the three and six months ended June 30, 2004, respectively,
compared to 52.36% and 17.44% for the comparable periods in 2003. The unusually
high weighted average rates paid reflect commitment, arrangement and other fees
paid on our secured credit agreement. Amounts outstanding under our 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 $209.0 million and $210.0 million
for the three and six months ended June 30, 2004, respectively, compared to
$295.8 million and $288.9 million for the comparable periods in 2003. The
aggregate weighted average rate paid on our subordinated debentures was 6.79%
and 6.77% for the three and six months ended June 30, 2004, respectively, and
7.07% and 7.53% for the comparable periods in 2003. Interest expense on our
subordinated debentures was $3.5 million and $7.1 million for the three and six
months ended June 30, 2004, respectively, compared to $5.2 million and $10.8
million for the comparable periods 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 June 30, Six Months Ended June 30,
--------------------------------------------------- -----------------------------------------------
2004 2003 2004 2003
-------------------------- ------------------------ ------------------------ ----------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- -------- ---- ------- ------- ---- ------- -------- ---- ------- ------- ----
(dollars expressed in thousands)
Assets
------
Interest-earning assets:
Loans (1)(2)(3)(4).......... $5,375,102 83,861 6.27% $5,394,650 89,803 6.68% $5,354,228 168,189 6.32% $5,377,314 180,540 6.77%
Investment securities (4)... 1,263,191 12,894 4.11 950,672 8,734 3.68 1,208,927 24,725 4.11 959,786 17,732 3.73
Federal funds sold
and other................ 58,164 137 0.95 111,365 312 1.12 90,461 423 0.94 127,416 754 1.19
--------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-earning
assets............... 6,696,457 96,892 5.82 6,456,687 98,849 6.14 6,653,616 193,337 5.84 6,464,516 199,026 6.21
------ ------ ------- -------
Nonearning assets.............. 631,260 712,851 641,890 717,658
---------- ---------- ---------- ----------
Total assets........... $7,327,717 $7,169,538 $7,295,506 $7,182,174
========== ========== ========== ==========
Liabilities and
Stockholders' Equity
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits................ $ 854,874 824 0.39% $ 866,540 1,478 0.68% $ 861,793 1,791 0.42% $ 853,487 3,151 0.74%
Savings deposits.......... 2,143,816 4,593 0.86 2,115,298 5,785 1.10 2,152,863 9,370 0.88 2,141,369 12,571 1.18
Time deposits of $100
or more (3)............. 459,164 3,039 2.66 418,893 3,336 3.19 448,791 5,995 2.69 438,131 7,021 3.23
Other time deposits (3)... 1,474,899 8,173 2.23 1,654,476 11,088 2.69 1,489,267 16,660 2.25 1,672,850 23,282 2.81
---------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
deposits............. 4,932,753 16,629 1.36 5,055,207 21,687 1.72 4,952,714 33,816 1.37 5,105,837 46,025 1.82
Other borrowings............ 439,070 757 0.69 173,068 519 1.20 413,932 1,401 0.68 177,247 1,121 1.28
Note payable (5)............ 1,088 64 23.66 383 50 52.36 4,717 169 7.20 2,151 186 17.44
Subordinated debentures (3). 209,036 3,529 6.79 295,788 5,212 7.07 209,963 7,067 6.77 288,851 10,787 7.53
---------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
liabilities.......... 5,581,947 20,979 1.51 5,524,446 27,468 1.99 5,581,326 42,453 1.53 5,574,086 58,119 2.10
------ ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits............. 1,073,988 994,395 1,047,866 960,771
Other liabilities........... 97,585 116,351 99,955 116,621
---------- ---------- ---------- ----------
Total liabilities...... 6,753,520 6,635,192 6,729,147 6,651,478
Stockholders' equity........... 574,197 534,346 566,359 530,696
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity. $7,327,717 $7,169,538 $7,295,506 $7,182,174
========== ========== ========== ==========
Net interest income............ 75,913 71,381 150,884 140,907
====== ====== ======= =======
Interest rate spread........... 4.31 4.15 4.31 4.11
Net interest margin (6)........ 4.56% 4.43% 4.56% 4.40%
===== ===== ===== =====
- --------------------
(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
$307,000 and $625,000 for the three and six months ended June 30, 2004, and $368,000 and $731,000 for the comparable periods in
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 $3.0 million and $15.8 million for
the three and six months ended June 30, 2004, respectively, compared to $10.0
million and $21.0 million for the comparable periods in 2003. Net loan
charge-offs were $5.4 million and $10.8 million for the three and six months
ended June 30, 2004, respectively, compared to $10.8 million and $13.3 million
for the comparable periods in 2003. 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. The reduced provision during the second quarter of 2004 resulted
from an overall improvement in asset quality and a reduction in nonperforming
loans, primarily resulting from significant loan payoffs. Nonperforming assets
were $67.4 million at June 30, 2004, reflecting a substantial decline from $90.2
million at March 31, 2004, $86.5 million at December 31, 2003 and $83.2 million
at June 30, 2003. The decrease in nonperforming assets during 2004 primarily
reflects transactions associated with three significant customer relationships:
(a) the sale of a residential