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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2002
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Commission file number 0-10849
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ALLEGIANT BANCORP, INC.
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(Exact name of registrant as specified in its charter)
MISSOURI 43-1262037
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
2122 KRATKY ROAD
ST. LOUIS, MISSOURI 63114
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(Address of principal executive offices) (Zip Code)
(314) 692-8200
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(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 /X/ No / /
Number of shares
Title of class outstanding as of November 1, 2002
- --------------------------------- -------------------------------------------
Common stock, $0.01 par value 16,105,140
ALLEGIANT BANCORP, INC.
FORM 10-Q
INDEX
Page
PART 1. FINANCIAL INFORMATION..................................................................................1
ITEM 1. FINANCIAL STATEMENTS...................................................................................1
CONDENSED CONSOLIDATED BALANCE SHEETS - SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) AND DECEMBER 31, 2001......1
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - THREE MONTHS AND
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001............................................................2
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) - NINE MONTHS ENDED SEPTEMBER 30, 2002..........3
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001..............................................................................4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.......................................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.........................................................................................8
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST RATES - THREE MONTHS
ENDED SEPTEMBER 30, 2002 AND 2001.......................................................................12
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST RATES - NINE MONTHS
ENDED SEPTEMBER 30, 2002 AND 2001.......................................................................13
RATE/VOLUME ANALYSIS - QUARTER ENDED SEPTEMBER 30, 2002 AND NINE MONTHS ENDED SEPTEMBER 30, 2002..........14
INVESTMENT SECURITIES PORTFOLIO...........................................................................16
LENDING AND CREDIT MANAGEMENT.............................................................................17
RISK ELEMENTS - NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS..............................................19
SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION...................................................21
DEPOSIT LIABILITY COMPOSITION.............................................................................22
LIQUIDITY MANAGEMENT AND CAPITAL RESOURCES................................................................23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................25
ITEM 4. CONTROLS AND PROCEDURES...............................................................................25
PART II. OTHER INFORMATION.....................................................................................25
ITEM 5. OTHER INFORMATION.....................................................................................25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................................26
SIGNATURES................................................................................................27
CERTIFICATIONS............................................................................................28
EXHIBIT INDEX.............................................................................................30
EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE..........................................................31
EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER...................................................32
EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER...................................................33
i
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLEGIANT BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31, September 30,
2002 2001 2001
(Unaudited) (Unaudited)
------------- ------------ -------------
(Dollars in thousands)
ASSETS:
Cash and due from banks................................... $ 53,883 $ 56,992 $ 59,783
Federal funds sold and other investments.................. 12,481 14,642 47,735
Investment securities:
Available-for-sale (at estimated market value)......... 411,369 439,038 385,348
Held-to-maturity (estimated market value of
$18,708, $24,532 and $28,854, respectively).......... 17,657 24,599 28,852
Loans, net of allowance for loan losses of
$18,460, $18,905 and $19,692, respectively........... 1,615,416 1,400,891 1,410,755
Loans held for sale....................................... 20,982 61,459 14,000
Premises and equipment.................................... 47,087 47,941 42,408
Accrued interest and other assets......................... 73,662 68,506 72,594
Cost in excess of fair value of net assets acquired....... 56,170 56,411 66,081
------------ ------------ ------------
Total assets......................................... $ 2,308,707 $ 2,170,479 $ 2,127,556
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing................................... $ 207,588 $ 201,216 $ 177,999
Interest bearing....................................... 1,330,583 1,291,351 1,205,695
Certificates of deposit over $100,000.................. 162,388 195,048 178,303
------------ ------------ ------------
Total deposits....................................... 1,700,559 1,687,615 1,561,997
------------ ------------ ------------
Short-term borrowings..................................... 72,230 73,027 52,116
Federal Home Loan Bank advances........................... 305,814 196,191 288,123
Guaranteed preferred beneficial interests in
subordinated debentures................................ 57,250 57,250 57,250
Accrued expenses and other liabilities.................... 12,408 18,328 21,917
------------ ------------ ------------
Total liabilities.................................... 2,148,261 2,032,411 1,981,403
------------ ------------ ------------
Shareholders' equity:
Common Stock, $0.01 par value - authorized 20,000,000
shares; issued 15,889,500 shares, 15,209,566 shares
and 14,881,581 shares, respectively.................. 163 157 154
Capital surplus........................................ 116,070 111,234 121,002
Retained earnings...................................... 39,942 27,223 22,903
Accumulated other comprehensive income (loss).......... 4,271 (546) 2,094
------------ ------------ ------------
Total shareholders' equity........................... 160,446 138,068 146,153
------------ ------------ ------------
Total liabilities and shareholders' equity........... $ 2,308,707 $ 2,170,479 $ 2,127,556
============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
1
ALLEGIANT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------
(In thousands, except share and per share data)
2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest income:
Interest and fees on loans......................... $ 26,761 $ 18,723 $ 77,405 $ 57,052
Investment securities.............................. 4,652 2,920 14,997 7,784
Federal funds sold and overnight investments....... 44 52 164 860
----------- ----------- ----------- -----------
Total interest income............................ 31,457 21,695 92,566 65,696
----------- ----------- ----------- -----------
Interest expense:
Deposits........................................... 9,205 9,433 29,464 30,037
Short-term borrowings.............................. 1,482 1,500 3,228 4,520
Federal Home Loan Bank advances.................... 2,262 1,224 7,217 2,970
Guaranteed preferred beneficial interests in
subordinated debentures.......................... 1,372 442 4,115 1,327
----------- ----------- ----------- -----------
Total interest expense........................... 14,321 12,599 44,024 38,854
----------- ----------- ----------- -----------
Net interest income................................... 17,136 9,096 48,542 26,842
Provision for loan losses............................. 2,010 2,000 5,510 3,700
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses.................................... 15,126 7,096 43,032 23,142
----------- ----------- ----------- -----------
Other income:
Service charges on deposits........................ 1,744 986 5,131 2,932
Net gain on sale of securities..................... 235 1,810 1,927 2,725
Other income....................................... 3,204 1,408 8,149 4,672
----------- ----------- ----------- -----------
Total other income............................... 5,183 4,204 15,207 10,329
----------- ----------- ----------- -----------
Other expenses:
Salaries and employee benefits..................... 6,320 3,940 18,091 11,439
Occupancy and furniture and equipment.............. 1,876 1,022 5,300 3,062
Other operating expenses........................... 3,847 2,147 11,230 6,091
----------- ----------- ----------- -----------
Total other expenses............................. 12,043 7,109 34,621 20,592
----------- ----------- ----------- -----------
Income before income taxes............................ 8,266 4,191 23,618 12,879
Provision for income taxes............................ 2,933 1,294 7,939 4,617
----------- ----------- ----------- -----------
Net income....................................... $ 5,333 $ 2,897 $ 15,679 $ 8,262
=========== =========== =========== ===========
Per share data:
Earnings per share:
Basic............................................ $ 0.33 $ 0.32 $ 1.00 $ 0.93
Diluted.......................................... 0.33 0.32 0.98 0.92
Weighted average common shares outstanding:
Basic............................................ 15,881,743 8,995,753 15,653,136 8,910,966
Diluted.......................................... 16,254,171 9,141,781 16,006,182 9,002,177
See Notes to Condensed Consolidated Financial Statements.
2
ALLEGIANT BANCORP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Accumulated
Other Total
Common Capital Retained Comprehensive Shareholders' Comprehensive
Stock Surplus Earnings Gain (Loss) Equity Income
--------- ----------- --------- ------------ ------------- -------------
(In thousands)
Balance December 31, 2001...... $ 157 $ 111,234 $ 27,223 $ (546) $ 138,068
Net income..................... - - 15,679 - 15,679 $ 15,679
Change in net unrealized gains
(losses) on available-for-
sale securities............. - - - 4,817 4,817 4,817
-----------
Comprehensive income........... - - - - - $ 20,496
===========
Issuance of common stock....... 6 4,836 - - 4,842
Dividends...................... - - (2,960) - (2,960)
--------- ----------- --------- ----------- ------------
Balance September 30, 2002..... $ 163 $ 116,070 $ 39,942 $ 4,271 $ 160,446
========= =========== ========= =========== ============
Reclassification adjustments:
Unrealized gains on
available-for-sale
securities $ 6,744
Less:
Reclassification adjustment
for gains realized
included in net income.... 1,927
-----------
Net unrealized gains on
available-for-sale
securities.................. $ 4,817
===========
See Notes to Condensed Consolidated Financial Statements.
3
ALLEGIANT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
----------------------------
2002 2001
--------- ---------
(In thousands)
OPERATING ACTIVITIES:
Net income........................................................ $ 15,679 $ 8,262
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................. 3,297 2,192
Provision for loan losses..................................... 5,510 3,700
Net gain on sale of fixed assets.............................. (67) (41)
Net realized gains on securities available-for-sale........... (1,927) (2,724)
Net gain on sale of mortgage loans............................ (601) (20)
Other changes in assets and liabilities:
Accrued interest receivable and other assets................ (5,985) (11,310)
Accrued expenses and other liabilities...................... (5,920) 9,663
--------- ---------
Cash provided by operating activities..................... 9,986 9,722
--------- ---------
INVESTING ACTIVITIES:
Merger-related recapitalization related to the acquisition of
Equality Bancorp, Inc. and Southside Bancshares Corp............ - (5,051)
Adjustment to cash received in acquisition of branches............ (571) -
Proceeds from maturities of securities held-to-maturity........... 6,942 917
Proceeds from maturities of securities available-for-sale......... 144,920 46,160
Proceeds from sales of securities available-for-sale.............. 106,638 60,480
Purchase of investment securities available-for-sale.............. (214,564) (172,036)
Loans made to customers, net of repayments........................ (194,644) (155,779)
Proceeds from sale of mortgage loans.............................. 15,687 67,432
Purchase of bank-owned life insurance............................. (1,752) (5,803)
Additions to premises and equipment............................... (1,564) (2,476)
--------- ---------
Cash used in investing activities......................... (138,908) (166,156)
--------- ---------
FINANCING ACTIVITIES:
Net increase in deposits.......................................... 12,944 94,771
Net increase in short-term borrowings............................. 109,157 46,354
Increase in long-term debt........................................ - 35,000
Repayment of long-term debt....................................... (331) 329
Proceeds from issuance of guaranteed preferred
beneficial interest in subordinated debentures.................. - 40,000
Proceeds from issuance of common stock............................ 4,842 1,909
Payment of dividends.............................................. (2,960) (1,554)
--------- ---------
Cash provided by financing activities..................... 123,652 216,809
--------- ---------
Net (decrease) increase in cash and cash equivalents.............. (5,270) 60,375
Cash and cash equivalents, beginning of period.................... 71,634 47,143
--------- ---------
Cash and cash equivalents, end of period.......................... $ 66,364 $ 107,518
========= =========
See Notes to Condensed Consolidated Financial Statements.
4
ALLEGIANT BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
The accompanying condensed consolidated financial statements
include the accounts of Allegiant Bancorp, Inc. and its subsidiaries. The
terms "Allegiant," "company," "we," "our," and "corporation" as used in this
report refer to Allegiant Bancorp, Inc. and its subsidiaries as a
consolidated entity, except where we clearly indicate that it means only
Allegiant Bancorp, Inc. Also, sometimes we refer to Allegiant Bank, Bank of
Ste. Genevieve and State Bank of Jefferson County, our bank subsidiaries, as
the "banks."
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month and nine-month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in our Annual Report on Form 10-K
for the year ended December 31, 2001.
Comprehensive Income
During the third quarter of 2002 and 2001, total comprehensive
income amounted to $6.4 million and $2.9 million, respectively. Year-to-
date comprehensive income for the first nine months of 2002 and 2001
was $20.5 million and $9.6 million, respectively.
Acquisitions
On September 28, 2001, we acquired Southside Bancshares Corp.
("Southside"). Before the acquisition, Southside was a bank holding company
with four subsidiary banks in and around St. Louis, Missouri, which at
closing reported consolidated total assets of approximately $804.9 million.
Under the terms of the agreement, one-half of the Southside shares were
converted into the right to receive cash in the amount of $14 per share and
the other half into the right to receive 1.39 shares of Allegiant stock per
share. Under the terms of the agreement, we exchanged a total of
approximately 5.9 million shares of Allegiant common stock plus $59 million
in cash for all of the outstanding common stock of Southside. The issuance
of Allegiant shares and cash to the former Southside shareholders was
completed on November 2, 2001. We financed the cash portion of the purchase
price through the issuance of trust preferred securities and bank
borrowings. We accounted for the acquisition under the purchase method and
recorded goodwill and a core deposit intangible of $33.6 million and $11.0
million, respectively. The core deposit intangible is being amortized over
an estimated
5
useful life of ten years and none of this amortization is expected to be
deductible for tax purposes. During October 2001 and May 2002, respectively,
we merged Southside National Bank and the Bank of St Charles County, two of
the four subsidiary banks acquired from Southside, into Allegiant Bank. In
October 2002, we also merged the State Bank of Jefferson County, a
subsidiary bank acquired from Southside, into Allegiant Bank.
On December 12, 2001, we acquired five St. Louis County branches
from Guardian Savings Bank ("Guardian") which is headquartered in Houston,
Texas. In addition to the branch facilities, we assumed $109.3 million in
related deposit liabilities. As a result of the Guardian branch acquisition,
we recorded $2.2 million of goodwill. The acquisitions of Southside and the
Guardian branches significantly enhanced the scale of our banking business
and positioned us for further growth and to compete effectively by offering
personalized banking products and services in the St. Louis community.
On September 18, 2002, we announced the signing of a definitive
exchange agreement that provides for First Banks to acquire Allegiant's
wholly-owned banking subsidiary, Bank of Ste. Genevieve (BSG). Under the
terms of the agreement, First Banks will acquire BSG in exchange for
approximately 974,150 shares of Allegiant common stock that is currently
held by First Banks. As a part of our Project 2004 initiative, this
transaction will increase Allegiant's focus on the higher growth St. Louis
metropolitan area, reduce the number of outstanding shares without
decreasing our float and is expected to be immediately accretive to our
earnings per share. The transaction, which is subject to regulatory
approvals, is expected to be completed in the first quarter of 2003.
On October 1, 2002, we completed the acquisition of Investment
Counselors, Incorporated ("Investment Counselors"), a privately held
investment advisory firm located in St. Louis, Missouri. Under terms of the
agreement, we exchanged approximately 195,000 shares of Allegiant common
stock for all of the common shares of Investment Counselors. This
acquisition is consistent with our strategy of focusing on the growth of
non-interest income and will allow us to offer a more comprehensive
selection of wealth management products and services. In addition to
increasing Allegiant's assets under management to approximately $800
million, the Investment Counselors acquisition brought several individuals
to Allegiant with significant management expertise in St. Louis. Investment
Counselors has been serving institutional and high net worth individuals in
the Midwest since 1968.
Recently Issued Accounting Standards
Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets. In accordance with this
statement, goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to impairment tests in
accordance with the Statement. Other intangible assets will continue to be
amortized over their estimated useful lives. During 2002, the Company is
performing the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of those tests will be on the future consolidated
earnings and financial position of the Company. If for any future period we
determine that there has been impairment in the carrying value of our
goodwill balances, we will record a charge to our earnings, which could have
a material adverse effect on our net income.
6
In the third quarter of 2002, Allegiant adopted SFAS 147,
Acquisition of Certain Financial Institutions. As permitted by the new
accounting standard issued on October 1, 2002, we reclassified previously
recorded intangible assets associated with branch acquisitions to goodwill.
As required by SFAS 147, we restated previously reported 2002 six-month
earnings to reflect the non-amortization of goodwill related to our branch
acquisitions. For the six months ended June 30, 2002, the impact related to
implementation of SFAS 147 was an increase to net income of $345,000 and an
increase in diluted earnings per share of $0.02 per share.
The adoption of SFAS 147 increased net income by $517,050 or $0.03
per diluted share for the nine months ended September 30, 2002 and is
projected to increase full-year 2002 earnings by approximately $700,000, or
$0.04 per diluted share.
Restatement
We also restated previously reported 2002 six-month earnings to
recognize the impact of a $700,000 deferred loan fee which had not been
accreted into income due to an accounting oversight during the three months
ended March 31, 2002 and June 30, 2002 in accordance with SFAS 91,
Accounting for Non-refundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. For the six months ended
June 30, 2002, the impact of this adjustment was to increase net income by
$291,000 and diluted earnings per share by $0.02 per share.
The combined impact of SFAS 147 adoption and the deferred loan fee
adjustment on the results for the six months ended June 30, 2002 was to
reflect restated diluted earnings per share of $0.65 per share, compared to
$0.61 per share previously reported and restated net income of $10.3
million, compared to previously reported $9.7 million.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains certain forward-looking statements with
respect to the financial condition, results of operations and business of
Allegiant and our subsidiaries. These forward-looking statements involve
certain risks and uncertainties. For example, by accepting deposits at fixed
rates, at different times and for different terms, and lending funds at
fixed rates for fixed periods, we accept the risk that the cost of funds may
rise and interest on loans and investment securities may be at a fixed rate.
Similarly, the cost of funds may fall, but we may have committed by virtue
of the term of a deposit to pay what becomes an above-market rate.
Investments may decline in value in a rising interest rate environment.
Loans have the risk that the borrower will not repay all funds in a timely
manner, as well as the risk of total loss. Collateral may or may not have
the value attributed to it. The loan loss reserve, while believed adequate,
may prove inadequate if one or more large borrowers, or numerous smaller
borrowers, or a combination of both, experience financial difficulty for
individual, national or international reasons. Because the business of
banking is highly regulated, decisions of governmental authorities, such as
the rate of deposit insurance, can have a major effect on operating results.
All of these uncertainties, as well as others, are present in a banking
operation and we caution shareholders that management's view of the future
on which it prices our products, evaluates collateral, sets loan loss
reserves and estimates costs of operation and regulation may prove to be
other than anticipated.
The profitability of our operations depends on our net interest
income, provision for loan losses, non-interest income and non-interest
expense. Net interest income is the difference between the income we receive
on our loan and investment portfolios and our cost of funds, which consists
of interest paid on deposits and borrowings. The provision for loan losses
reflects the cost of credit risk in our loan portfolio. Non-interest income
consists primarily of service charges on deposit accounts and fees for
ancillary banking services and, to a lesser extent, revenues generated from
our mortgage banking, securities brokerage, insurance brokerage and trust
operations. Non-interest expense includes salaries and employee benefits, as
well as occupancy, data processing, marketing, professional fees, insurance
and other expenses. Under recently adopted accounting rules, we will be
required to periodically evaluate the carrying values of our goodwill
balances to determine whether the values have been impaired. If we determine
that there has been an impairment, we will recognize a charge to our
earnings, which could be material.
Our net interest income depends on the amounts and yields of
interest-earning assets compared to the amounts and rates on interest
bearing liabilities. Net interest income is sensitive to changes in market
rates of interest and our asset/liability management procedures in managing
those changes. The provision for loan losses is dependent on increases in
the loan portfolio, management's assessment of the collectibility of the
loan portfolio and loss experience, as well as economic and market factors.
OVERVIEW
We are a bank holding company headquartered in St. Louis, Missouri.
Our bank subsidiaries, Allegiant Bank and Bank of Ste. Genevieve, offer
full-service banking and personal trust services to individuals, commercial
business and municipalities in the St. Louis metropolitan area. Our services
include commercial, real estate and installment loans, checking, savings and
time deposit accounts, personal trust and other fiduciary services and other
financial services such as securities brokerage, insurance and safe deposit
boxes. As of
8
September 30, 2002, we reported, on a consolidated basis, total assets of
$2.3 billion, loans of $1.6 billion, deposits of $1.7 billion and
shareholders' equity of $160.4 million.
Since our inception in 1989, we have grown through a combination
of internal growth and acquisitions of other financial institutions. Our
internal growth has been achieved by positioning Allegiant as one of the
leading St. Louis community banking operations. We have supplemented our
growth by acquiring 31 branch locations in our community from four different
thrifts and another banking organization. Our primary goals have been to
expand our branch network in the St. Louis market while increasing our
earnings per share. We have also acquired a mortgage company and an asset
management firm. In December 1998, we sold four branches located in more
rural markets in northeast Missouri, in order to focus our operations
exclusively in the St. Louis metropolitan area. In November 2000, we
acquired Equality Bancorp, Inc. a community-based thrift holding company
with seven branches in the St. Louis area and total assets of approximately
$300.4 million. As a continuation of our acquisition and growth strategies,
in September 2001, we acquired Southside Bancshares Corp., another
community-based bank holding company serving the St. Louis area, with total
assets of approximately $804.9 million. In addition, in December 2001, we
acquired five St. Louis branch facilities from Guardian Savings Bank and
assumed approximately $109.3 million in related deposit liabilities.
Since the beginning of 1998, we have focused on improving the
profitability of our banking operations. As a result, we have reduced the
amount of one- to four-family mortgages we hold in our loan portfolio and
have increased our amount of higher yielding commercial loans. We have hired
more than 20 banking professionals averaging more than 10 years of
experience in the St. Louis metropolitan area to help grow our commercial
loans and deposits. We have also implemented company-wide cost-control
efforts to enhance efficiencies throughout our operations. These steps taken
since the beginning of 1998 have improved our efficiency, return on average
assets, return of average equity and earnings per share.
Our primary financial objectives are to continue to grow our loan
portfolio while maintaining high asset quality, expand our core deposit base
to provide a cost-effective and stable source of funding our loan portfolio
and increase non-interest income while maintaining strong expense controls.
We have sought to maintain high asset quality while managing growth both
internally and by acquisition.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2002 was $5.3
million, an 83% increase over the $2.9 million earned in the third quarter
of 2001. Basic earnings per share were $0.33 for the third quarter of 2002
compared to $0.32 for the third quarter of 2001. Diluted earnings per share
increased 3% to $0.33 for the third quarter of 2002 compared to $0.32 for
the third quarter of 2001. The annualized return on average assets was 0.94%
for both the third quarter of 2002 and 2001. The return on average equity on
an annualized basis was 13.50% for the third quarter of 2002 compared to
13.22% for the third quarter of 2001.
Net income for the nine-month period ended September 30, 2002 was
$15.7 million, a 90% increase over the $8.3 million earned in the nine-month
period ended September 30, 2001. Basic earnings per share were $1.00 and
$0.93, respectively, for the nine-month periods ended September 30, 2002 and
2001. Diluted earnings per share were $0.98 and $0.92, respectively, for the
nine-month periods ended September 30, 2002 and 2001. The annualized return
on average assets for the first nine months of 2002 was 0.95%, compared to
the 0.94% annualized
9
return on average assets reported for the first nine months of 2001. The
return on average equity on an annualized basis improved to 13.95% for the
first nine months of 2002 compared to 13.19% for the first nine months of
2001.
As a result of newly effective accounting pronouncements, we have
discontinued the amortization of goodwill in 2002 and will periodically
determine whether the carrying value of our goodwill is impaired. As
required by these pronouncements, we continue to amortize core deposit
premiums and other identifiable intangibles as a noncash charge that
increases our operating expenses. Intangible asset amortization included as
an operating expense totaled $271,000 and $231,000 for the three-month
periods ended September 30, 2002 and 2001, respectively. Intangible asset
amortization included as an operating expense totaled $812,000 and $712,000
for the nine-month periods ended September 30, 2002 and 2001, respectively.
Total assets at September 30, 2002 were $2.3 billion, an increase
of $181.1 million or 9% from September 30, 2001, due largely to a $203.4
million or 14% increase in loans. At September 30, 2002, total loans
increased to $1.6 billion and total deposits increased to $1.7 billion.
Net Interest Income. Net interest income for the three months ended
September 30, 2002 was $17.1 million, an 88% increase compared to the $9.1
million reported for the third quarter of 2001. The growth in net interest
income was attributable to an increase of $913 million in average earning
assets primarily from our September 2001 acquisition of Southside Bancshares
Corp. The $9.8 million increase in interest income was partially offset by a
$1.7 million increase in interest expense. The increase in interest expense
was the result of an $855 million increase in average interest bearing
liabilities, partially offset by a decrease of 178 basis points in the
average interest rate paid between the periods.
The net interest margin for the third quarter of 2002 improved 16
basis points from the third quarter of 2001. The earning assets yield
decreased 144 basis points while the overall interest rate paid on interest
bearing liabilities decreased 178 basis points. The net interest spread
increased 34 basis points comparing the third quarter of 2002 to the third
quarter of 2001.
Interest expense on deposits decreased $228,000 and reflected a
$625,000 increase in average interest bearing deposits that was offset by a
decrease in the average rate paid on deposits from 4.56% in the third
quarter of 2001 to 2.53% for the comparable period in 2002. The growth in
our deposit base was primarily the result of the Southside acquisition, and
was coupled with internal growth from deposit promotions and the purchase of
$60 million of brokered deposits.
Interest expense on other interest bearing liabilities increased
$1.9 million in the third quarter of 2002 compared to the third quarter of
2001 as average short- and long-term borrowings increased $194 million. The
average rate paid on short-term borrowings decreased 210 basis points while
the rate paid on long-term borrowings decreased 67 basis points in the third
quarter of 2002 compared to the third quarter of 2001.
10
Net interest income for the nine months ended September 30, 2002
was $48.5 million, an increase of $21.7 million or 81% from the
corresponding period of 2001. The increase was attributable to average
earning assets growth of $917 million primarily from our September 2001
acquisition of Southside. The $26.9 million increase in interest income was
partially offset by a $5.2 million increase in interest expense. The
increase in interest expense was the result of an $868 million increase in
average interest bearing liabilities partially offset by a 207 basis points
decline in the average interest rate paid between the periods.
The net interest margin for the first nine months of 2002 decreased
6 basis points compared to the first nine months of 2001. The earning assets
yield decreased 190 basis points while the overall interest rate paid on
interest bearing liabilities decreased 207 basis points. The net interest
spread increased 17 basis points comparing year-to-date 2002 to year-to-date
2001.
11
The following table sets forth the condensed average balance sheets
for the quarterly periods reported. Also shown is the average yield on each
category of interest-earning assets and the average rate paid on interest
bearing liabilities for each of the periods reported.
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST RATES
Three Months Ended September 30,
---------------------------------------------------------------------------
2002 2001
------------------------------------ ---------------------------------
Average Int. earned/ Yield/ Average Int. earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ------------ ---- ------- ------------ ----
(Dollars in thousands)
Assets:
Interest earning assets:
Loans(1) (2).............................. $ 1,616,353 $ 26,761 6.57% $ 945,153 $ 18,723 7.86%
Taxable investment securities............. 405,488 4,279 4.19 191,222 2,836 5.88
Non-taxable investment securities(3)...... 35,726 373 4.14 5,963 84 5.59
Federal funds sold and other
investments............................. 3,022 44 5.78 5,427 52 3.80
----------- ----------- ----------- -----------
Total interest earning assets......... 2,060,589 31,457 6.06 1,147,765 21,695 7.50
----------- ----------- ----------- -----------
Non-interest earning assets:
Cash and due from banks................... 52,592 24,495
Premises and equipment.................... 47,181 19,432
Other assets.............................. 127,948 51,044
Allowance for loan losses................. (18,010) (12,216)
----------- -----------
Total assets.......................... $ 2,270,300 $ 1,230,520
=========== ===========
Liabilities and shareholders' equity:
Interest bearing liabilities:
Money market and NOW accounts............. $ 410,253 $ 1,577 1.53% $ 231,976 $ 1,821 3.11%
Savings deposits.......................... 218,685 1,138 2.06 59,367 502 3.35
Certificates of deposit................... 570,923 4,241 2.95 370,879 4,927 5.27
Certificates of deposit over $100,000..... 161,351 1,267 3.12 112,037 1,398 4.95
IRA certificates.......................... 83,849 982 4.65 46,133 785 6.75
----------- ----------- ----------- -----------
Total interest bearing deposits....... 1,445,061 9,205 2.53 820,392 9,433 4.56
----------- ----------- ----------- -----------
Federal funds purchased, repurchase
agreements and other short-term
borrowings.............................. 228,370 1,482 2.57 127,510 1,500 4.67
Other borrowings.......................... 174,432 2,262 5.14 83,529 1,224 5.81
Guaranteed preferred beneficial
interest in subordinated debentures..... 57,250 1,372 9.51 18,554 442 9.45
----------- ----------- ----------- -----------
Total interest bearing liabilities.... 1,905,113 14,321 2.98 1,049,985 12,599 4.76
----------- ----------- ----------- -----------
Non-interest bearing liabilities and equity:
Demand deposits........................... 191,569 86,214
Other liabilities......................... 15,610 6,664
Shareholders' equity...................... 158,008 87,657
----------- -----------
Total liabilities and shareholders'
equity.............................. $ 2,270,300 $ 1,230,520
=========== ===========
Net interest income................... $ 17,136 $ 9,096
=========== ===========
Net interest spread................... 3.08% 2.74%
Net interest margin................... 3.30 3.14
- ---------------
(1) Average balances include non-accrual loans.
(2) Interest income includes loan origination fees.
(3) Presented at actual yield rather than tax-equivalent yield.
12
The following table sets forth the condensed average balance sheets
for the year-to-date periods reported. Also shown is the average yield on each
category of interest-earning assets and the average rate paid on interest
bearing liabilities for each of the periods reported.
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST RATES
Nine Months Ended September 30,
---------------------------------------------------------------------------
2002 2001
------------------------------------ ---------------------------------
Average Int. earned/ Yield/ Average Int. earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ------------ ---- ------- ------------ ----
(Dollars in thousands)
Assets:
Interest earning assets:
Loans(1) (2).............................. $ 1,531,416 $ 77,405 6.76% $ 900,451 $ 57,052 8.47%
Taxable investment securities............. 425,366 13,890 4.37 157,110 7,537 6.41
Non-taxable investment securities(3)...... 35,398 1,107 4.18 5,941 247 5.56
Federal funds sold and other
investments............................. 11,395 164 1.92 22,994 860 5.00
----------- --------- ----------- ---------
Total interest earning assets......... 2,003,575 92,566 6.18 1,086,496 65,696 8.08
----------- --------- ----------- ---------
Non-interest earning assets:
Cash and due from banks................... 38,448 25,463
Premises and equipment.................... 47,605 19,356
Other assets.............................. 127,205 48,230
Allowance for loan losses................. (18,009) (11,995)
----------- -----------
Total assets.......................... $ 2,198,824 $ 1,167,590
=========== ===========
Liabilities and shareholders' equity:
Interest bearing liabilities:
Money market and NOW accounts............. $ 419,062 $ 5,017 1.60% $ 219,909 $ 5,979 3.64%
Savings deposits.......................... 208,176 3,676 2.36 38,903 790 2.72
Certificates of deposit................... 573,059 13,338 3.11 396,939 17,127 5.77
Certificates of deposit over $100,000..... 168,034 4,349 3.46 95,390 3,808 5.34
IRA certificates.......................... 87,123 3,084 4.73 45,988 2,333 6.78
----------- --------- ----------- ----------
Total interest bearing deposits....... 1,455,454 29,464 2.71 797,129 30,037 5.04
----------- --------- ----------- ----------
Federal funds purchased, repurchase
agreements and other short-term
borrowings.............................. 158,701 3,228 2.72 112,125 4,520 5.39
Other borrowings.......................... 189,851 7,217 5.08 65,926 2,970 6.02
Guaranteed preferred beneficial
interest in subordinated debentures..... 57,250 4,115 9.61 17,690 1,327 10.03
----------- --------- ----------- ----------
Total interest bearing liabilities.... 1,861,256 44,024 3.16 992,870 38,854 5.23
----------- --------- ----------- ----------
Non-interest bearing liabilities and equity:
Demand deposits........................... 172,201 83,831
Other liabilities......................... 15,521 7,368
Shareholders' equity...................... 149,846 83,521
----------- -----------
Total liabilities and shareholders'
equity.............................. $ 2,198,824 $ 1,167,590
=========== ===========
Net interest income................... $ 48,542 $ 26,842
========= ==========
Net interest spread................... 3.02% 2.85%
Net interest margin................... 3.24 3.30
(1) Average balances include non-accrual loans.
(2) Interest income includes loan origination fees.
(3) Presented at actual yield rather than tax-equivalent yield.
13
The following table sets forth for the periods indicated the
changes in interest income and interest expense which were attributable to
change in average volume and changes in average rates. Volume variances are
computed using the change in volume multiplied by the previous year's rate.
Rate variances are computed using the changes in rate multiplied by the
previous year's volume.
RATE/VOLUME ANALYSIS
Quarter Ended September 30, 2002 Nine Months Ended September 30, 2002
Compared to the Compared to the
Quarter Ended September 30, 2001 Nine Months Ended September 30, 2001
--------------------------------- -------------------------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(In thousands)
Interest earned on:
Loans............................... $ 11,522 $ (3,484) $ 8,038 $ 33,683 $ (13,330) $ 20,353
Taxable investment securities....... 2,446 (1,003) 1,443 9,397 (3,044) 6,353
Non-taxable investment
securities........................ 317 (28) 289 937 (77) 860
Federal funds sold and other
investments....................... (30) 22 (8) (313) (383) (696)
-------- --------- --------- --------- ---------- ----------
Total interest income........... 14,255 (4,493) 9,762 43,704 (16,834) 26,870
-------- --------- --------- --------- ---------- ----------
Interest paid on:
Money market/NOW accounts........... 965 (1,209) (244) 3,552 (4,514) (962)
Savings deposits.................... 895 (259) 636 3,005 (119) 2,886
Certificates of deposit............. 2,010 (2,696) (686) 5,888 (9,677) (3,789)
Certificates of deposit
over $100,000..................... 491 (622) (131) 2,205 (1,664) 541
IRA certificates.................... 498 (301) 197 1,616 (865) 751
Federal funds purchased,
repurchase agreements and
other short-term borrowings....... 849 (867) (18) 1,454 (2,746) (1,292)
Other borrowings.................... 1,195 (157) 1,038 4,778 (531) 4,247
Guaranteed preferred beneficial
interests in subordinated
debentures........................ 928 2 930 2,847 (59) 2,788
-------- --------- --------- --------- ---------- ---------
Total interest expense.......... 7,831 (6,109) 1,722 25,345 (20,175) 5,170
-------- --------- --------- --------- ---------- ---------
Net interest income............. $ 6,424 $ 1,616 $ 8,040 $ 18,359 $ 3,341 $ 21,700
======== ========= ========= ========= ========== =========
Note: The change in interest due to the combined rate-volume variance has
been allocated to rate and volume changes in proportion to the absolute
dollar amount of the changes in each.
14
Other Income. Other income increased 23% to $5.2 million in the
third quarter of 2002 compared to $4.2 million for the three months ended
September 30, 2001.
Service charge income for the three-month period ended September
30, 2002 increased $758,000 or 77%, compared to the third quarter of 2001.
This increase was attributable to an increased deposit base stemming from
our acquisitions and our focus on revenue enhancement programs. Gains on the
sales of securities decreased to $235,000 for the quarter ended September
30, 2002 from $1.8 million for the comparable period in 2001.
For the quarter ended September 30, 2002 mortgage banking revenue
was $1.6 million compared to $736,000 for the quarter ended September 30,
2001, and included a $600,000 gain on the sale of mortgage loans acquired in
the Southside acquisition. Income on bank-owned life insurance increased to
$458,000 for the three months ended September 30, 2002 compared to $299,000
for the three months ended September 30, 2001, primarily due to the
Southside acquisition.
Other income increased 47% to $15.2 million for the nine months
ended September 30, 2002 compared to $10.3 million for the corresponding
period of 2001.
Service charge income for the nine-month period ended September 30,
2002 increased $2.2 million or 75%, compared to the nine-month period ended
September 30, 2001. This increase was attributable to the growth in our
deposit base from the acquisitions discussed above and our focus on revenue
enhancement programs. Gains on the sales of securities decreased to $1.9
million for the nine months ended September 30, 2002 from $2.7 million for
the comparable period in 2001.
For the nine months ended September 30, 2002 mortgage banking
revenue was $3.4 million compared to $2.3 million for the nine-month period
ended September 30, 2001. Income on bank-owned life insurance increased to
$1.5 million for the nine months ended September 30, 2002 compared to
$808,000 for the nine months ended September 30, 2001, primarily due to the
Southside acquisition.
Other Expenses. For the third quarter of 2002, other expenses
increased $4.9 million, or 69% from the third quarter of 2001. The increased
expenses reflected ongoing operating costs associated with the branches
acquired in our business combination with Southside in September 2001, as
well as the five St. Louis branches acquired from Guardian Savings in
December 2001.
Salaries and employee benefits increased 60% to $6.3 million for
the three months ended September 30, 2002 compared to $3.9 million for the
three months ended September 30, 2001. We had 534 full-time equivalent
employees at September 30, 2002 compared to 319 full-time equivalent
employees at September 30, 2001. Total annualized cost per full-time
equivalent employee was $45,171 for the three months ended September 30,
2002 compared to $49,404 for the corresponding period of 2001.
Expenses associated with occupancy and equipment increased $564,000
and $290,000, respectively, for the three-month period ended September 30,
2002 compared to the third quarter of 2001. This increase was primarily due
to the additional costs associated with operating the Southside and Guardian
branches acquired in 2001.
15
For the nine-month period ended September 30, 2002, other expenses
increased 68%, to $34.6 million from $20.6 million for the nine-month period
ended September 30, 2001. The increased expenses reflected ongoing operating
costs associated with the branches acquired in our business combination with
Southside in September 2001, as well as the five St. Louis branches acquired
from Guardian Savings in December 2001.
Our efficiency ratio was 54.3% for the nine months ended
September 30, 2002 compared to 55.4% for the third quarter of 2001.
Securities Portfolio. Our securities portfolio consists of
securities classified as held-to-maturity and available-for-sale. We
designate these securities at the time of purchase into one of these two
categories. At September 30, 2002, held-to-maturity securities amounted to
approximately $17.7 million representing those securities we intended to
hold to maturity. Securities designated as available-for-sale totaled $411.4
million representing securities which we may sell to meet liquidity needs or
in response to significant changes in interest rates or prepayment patterns.
For purposes of this discussion, held-to-maturity and
available-for-sale securities are referred to collectively as the securities
portfolio. At September 30, 2002, the securities portfolio totaled $429.0
million, a decrease of $34.6 million from December 31, 2001. This decrease
is due in part to the funding needs for our loan growth. We maintain a
conventional short-term laddered portfolio investment strategy to provide
adequate liquidity while minimizing interest rate risk.
The carrying values of the securities portfolio at the dates
indicated were as follows:
INVESTMENT SECURITIES PORTFOLIO
September 30, December 31, September 30,
2002 2001 2001
------------- ------------- -------------
(In thousands)
U.S. government and agency securities................ $ 145,043 $ 133,514 $ 159,897
State and municipal securities....................... 38,528 38,458 38,012
Mortgage-backed securities........................... 210,982 259,912 194,643
Federal Home Loan Bank stock......................... 17,734 15,228 15,228
Other securities..................................... 16,739 16,525 6,420
------------- ------------- ------------
Total investment securities....................... $ 429,026 $ 463,637 $ 414,200
============= ============= ============
16
Loans. Loans historically have been the primary component of our
earning assets. At September 30, 2002, loans totaled $1.6 billion, an
increase of 15% from year-end 2001. Substantially all of these loans were
originated in our market area. At September 30, 2002, we had no foreign
loans and only a minimal amount of participations purchased.
Real estate construction and multi-family commercial real estate
mortgage loans showed the largest increases from year-end 2001. The increase
in these loans reflected our efforts to grow our commercial real estate loan
portfolio, including loans originated by our expanded commercial lending
staff. Real estate construction loans comprised 15.0% of the portfolio at
September 30, 2002 compared to 11.6% at December 31, 2001. Multi-family and
commercial real estate mortgage loans comprised 41.8% of the portfolio at
September 30, 2002 compared to 42.8% at year-end 2001. The increase in
construction loans was primarily related to residential loans to finance
projects developed by experienced home builders in the St. Louis market.
Consumer loans decreased $13.6 million or 17.1% as our lending focus
continues to be weighted more toward commercial loans.
The following table summarizes the composition of our loan
portfolio at the dates indicated:
LENDING AND CREDIT MANAGEMENT
September 30, December 31, September 30,
2002 2001 2001
--------------------- ---------------------- ---------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Commercial, financial,
agricultural, municipal and
industrial development.............. $ 312,021 19.1% $ 255,181 18.0% $ 266,254 18.6%
Real estate - construction............ 245,200 15.0 164,831 11.6 163,902 11.5
Real estate - mortgage:
One- to four-family residential..... 329,273 20.2 313,547 22.1 351,889 24.6
Multi-family and commercial......... 682,843 41.8 607,550 42.8 571,859 40.0
Consumer and other.................... 66,098 4.0 79,749 5.6 77,398 5.4
Less: unearned income................. (1,559) (0.1) (1,062) (0.1) (855) (0.1)
----------- ----- ----------- ----- ----------- -----
Total loans(1).................... $ 1,633,876 100.0% $ 1,419,796 100.0% $ 1,430,447 100.0%
=========== ===== =========== ===== =========== =====
- -------------------------
(1)We had no outstanding foreign loans at the dates reported.
17
Asset Quality. Non-performing assets consist of the following:
non-accrual loans on which the ultimate collectibility of the full amount of
interest is uncertain; loans which have been renegotiated to provide for a
reduction or deferral of interest or principal because of a deterioration in
the financial condition of the borrower; loans past due 90 days or more as
to principal or interest; and other real estate owned. Non-performing assets
decreased to $15.4 million at September 30, 2002 compared to $15.5 million
at June 30, 2002, and $20.1 million at December 31, 2001. At September 30,
2002, non-performing assets represented 0.67% of total assets compared to
0.70% at June 30, 2002, and 0.93% at December 31, 2001. Non-accrual loans
totaled $13.8 million at September 30, 2002 compared to $13.5 million at
June 30, 2002, and $14.5 million at December 31, 2001. We continue to work
aggressively to collect all non-performing assets.
We continually analyze our loan portfolio to identify potential
risk elements. During the year-to-date, non-accrual multi-family and
commercial real estate loans have decreased $4.9 million and non-accrual
commercial loans have increased $4.7 million. The loan portfolio is reviewed
by lending management and the banks' internal loan review staff. As an
integral part of their examination process, the various regulatory agencies
periodically review our allowance for loan losses.
18
The following table summarizes, for the periods presented,
nonperforming assets by category:
RISK ELEMENTS - NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
September 30, December 31, September 30,
2002 2001 2001
-------------- ------------- -------------
(Dollars in thousands)
Commercial, financial, agricultural, municipal and
industrial development:
Past due 90 days or more.................................. $ 177 $ 196 $ 83
Non-accrual............................................... 5,812 1,118 6,132
Restructured terms........................................ 51 54 55
Real estate - construction:
Past due 90 days or more.................................. 100 - 173
Non-accrual............................................... 312 2,622 2,800
Restructured terms........................................ - - -
Real estate - mortgage:
One- to four-family residential:
Past due 90 days or more.................................. 120 1,050 410
Non-accrual............................................... 3,389 1,698 1,558
Restructured terms........................................ - - -
Multi-family and commercial:
Past due 90 days or more.................................. - 3,643 95
Non-accrual............................................... 4,050 8,892 5,275
Restructured terms........................................ - - 99
Consumer and other, net of unearned income:
Past due 90 days or more.................................. 93 222 68
Non-accrual............................................... 264 215 172
Restructured terms........................................ - - -
------------- ------------ -----------
Total nonperforming loans..................................... 14,368 19,710 16,920
Other real estate............................................. 1,082 370 1,018
------------- ------------ -----------
Total nonperforming assets.................................... $ 15,450 $ 20,080 $ 17,938
============= ============ ===========
Ratios:
Nonperforming loans to total loans.......................... 0.88% 1.39% 1.18%
Nonperforming assets to total assets........................ 0.67 0.93 0.84
Nonperforming loans to shareholders' equity................. 8.96 14.28 11.58
Allowance for loan losses to total loans.................... 1.13 1.33 1.38
Allowance for loan losses to nonperforming loans............ 128.48 95.92 116.38
19
Allowance for Loan Losses. The provision for loan losses was $5.5
million during the first nine months of 2002 compared to $3.7 million for
the first nine months of 2001. Net charge-offs were $6.0 million for the
nine-month period ended September 30, 2002 compared to $2.9 million for the
first nine months of 2001. Net charge-offs for the first nine months of 2002
represented 0.39% of average loans, compared to 0.33% for the first nine
months of 2001.
The allowance for loan losses totaled $18.5 million at September
30, 2002 compared to $18.9 million at December 31, 2001 and $19.7 million at
September 30, 2001. As a percentage of loans outstanding, the allowance
represented 1.13% of loans at September 30, 2002 compared to 1.33% at
December 31, 2001, and 1.38% at September 30, 2001.
The higher provision and net charge-offs were the result of our
efforts to identify and recognize potential losses in our loan portfolio and
are also related to the recognition of loss exposure in specific problem
loans. Since 1998, we have changed the composition of the loan portfolio and
shifted our lending focus to higher yielding commercial relationships. This
shift, while providing higher earnings potential, does entail greater risk
than traditional residential mortgage loans. Specific allowances have been
increased on certain commercial real estate loans based on individual
reviews of these loans and our estimate of the borrower's ability to repay
the loan given the availability of collateral, other sources of cash flow
and collection options available to us.
The allowance for loan losses is provided at a level considered
adequate to provide for potential losses inherent in the Company's portfolio
and, among other things, is based on management's evaluation of the
anticipated impact on the loan portfolio of current economic conditions,
changes in the character and size of the loan portfolio, evaluation of
potential problem loans identified based on existing circumstances known to
management and recent loan loss experience. We continually monitor the
quality of the loan portfolio to ensure the timely charge-off of problem
loans and to determine the adequacy of the level of the allowance for loan
losses. We presently believe that our asset quality, as measured by the
statistics in the following table, continues to be high and that our
allowance is adequate to absorb potential losses inherent in the portfolio
at September 30, 2002.
20
The following table summarizes, for the periods indicated, activity
in the allowance for loan losses, including amounts of loans charged off,
amounts of recoveries and additions to the allowance charged to operating
expense.
SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION
Nine Months Ended
September 30,
---------------------------------
2002 2001
-------------- -------------
(In thousands)
Allowance for loan losses (beginning of period)................. $ 18,905 $ 11,433
Loans charged off:
Commercial, financial, agricultural, municipal
and industrial development.................................. (1,634) (1,698)
Real estate - construction.................................... (1,154) (1,092)
Real estate - mortgage:
One- to four-family residential............................. (1,106) (150)
Multi-family and commercial................................. (2,742) (410)
Consumer and other............................................ (414) 117
------------- -------------
Total loans charged off................................... (7,050) (3,233)
------------- -------------
Recoveries of loans previously charged off:
Commercial, financial, agricultural, municipal
and industrial development.................................. 969 392
Real estate - construction.................................... - -
Real estate - mortgage:
One- to four-family residential............................. 53 163
Multi-family and commercial................................. 4 32
Consumer and other............................................ 69 11
------------- -------------
Total recoveries.......................................... 1,095 298
------------- -------------
Net loans charged off........................................... (5,955) (2,935)
Acquired subsidiaries balances.................................. - 7,494
Provision for loan losses....................................... 5,510 3,700
------------- -------------
Allowance for loan losses (end of period)....................... $ 18,460 $ 19,692
============= =============
Loans:
Average....................................................... $ 1,531,416 $ 900,451
End of period................................................. 1,633,876 1,430,447
Ratios:
Net charge-offs to average loans ............................. 0.39% 0.33%
Net charge-offs to provision for loans losses................. 108.08 79.32
Provision for loan losses to average loans.................... 0.36 0.41
Allowance for loan loss to total loans........................ 1.13 1.38
21
Deposits. Total deposits increased to $1.7 billion at September 30,
2002, an increase of 9% from September 30, 2001 and of 1% from December 31,
2001. The increase in deposits from September 30, 2001 was primarily the
result of the Southside acquisitions, coupled with internal growth from
deposit promotions and the purchase of $60 million of brokered deposits in
the third quarter of this year. Non-interest bearing deposits totaled $207.6
million at September 30, 2002. We have been successful in expanding our
deposit base while maintaining our focus on personal service. Our lending
officers have increased commercial deposits while our retail banking staff
continues efforts to increase our core deposits.
The following table summarizes deposits as of the dates indicated:
DEPOSIT LIABILITY COMPOSITION
September 30, December 31, September 30,
2002 2001 2001
--------------------- --------------------- ---------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Demand deposits....................... $ 207,588 12.2% $ 201,216 11.9% $ 177,999 11.4%
NOW accounts.......................... 124,946 7.3 113,887 6.7 101,959 6.5
Money market accounts................ 273,244 16.1 301,648 17.9 297,184 19.0
Savings deposits...................... 222,169 13.1 185,652 11.0 137,635 8.8
Certificates of deposit............... 625,985 36.8 602,295 35.7 580,116 37.1
Certificates of deposit
over $100,000....................... 162,388 9.6 195,048 11.6 178,303 11.5
IRA certificates...................... 84,239 4.9 87,869 5.2 88,801 5.7
----------- ----- ----------- ----- ----------- -----
Total deposits.................... $ 1,700,559 100.0% $ 1,687,615 100.0% $ 1,561,997 100.0%
=========== ===== =========== ===== =========== =====
22
LIQUIDITY MANAGEMENT AND CAPITAL RESOURCES
Liquidity Management. Long-term liquidity is a function of the core
deposit base and an adequate capital base. We are committed to growth of our
core deposit base and maintenance of our capital base. The growth of the
deposit base is internally generated through product pricing and product
development. In addition, we periodically raise funds through brokered
certificates of deposit. Both of these elements contributed to developing
and maintaining our long-term liquidity. Our capital position has been
maintained through earnings retention and raising of capital. See "Capital
Resources."
Short-term liquidity needs arise from continuous fluctuations in
the flow of funds on both sides of the balance sheet, resulting from growth
and seasonal and cyclical customer demands. The securities portfolio
provides stable long-term earnings as well as being a primary source of
liquidity. The designation of securities as available-for-sale and
held-to-maturity does not impact the portfolio as a source of liquidity due
to the ability to transact repurchase agreements using those securities.
We anticipate continued loan demand in our market area as the
banking industry consolidation continues. We have utilized, and expect to
continue to utilize, Federal Home Loan Bank borrowings to fund a portion of
future loan growth. We have a $351.3 million secured credit facility with
the Federal Home Loan Bank, under which $305.8 million and $196.2 million
was outstanding at September 30, 2002 and December 31, 2001, respectively.
We continue to utilize Federal Home Loan Bank borrowings to fund loan growth
while systematically seeking to build our deposit base. We anticipate
similar use of the Federal Home Loan Bank credit facility in the foreseeable
future.
Our assets and deposits remained relatively the same from December
31, 2001 to September 30, 2002. We strive to grow our core deposits while
utilizing Federal Home Loan Bank borrowings, federal funds purchased and
brokered certificates of deposit as necessary to balance liquidity and cost
effectiveness. We closely monitor our level of liquidity in view of expected
future needs.
Capital Resources. Total shareholders' equity was $160.4 million at
September 30, 2002, compared to $138.1 million at year-end 2001. The
increase in total equity was primarily the result of earnings retention,
stock options exercised to purchase our common stock and an increase during
the first nine months of 2002 of $4.8 million in net unrealized gains on
available-for-sale securities.
Our capital requirements historically have been financed through
offerings of debt and equity securities, retained earnings and borrowings
from a commercial bank. Our subsidiary banks also utilize their borrowing
capacity with the Federal Home Loan Bank. The principal amount of our term
loan was $35.0 million as of September 30, 2002, and was renewed in the
third quarter of 2002.
From time to time, we have purchased brokered certificates of
deposit in order to fund loan growth and meet other liquidity needs. At
September 30, 2002 brokered deposits totaled $60 million and have maturity
dates ranging from 1-2 years.
23
Dividends paid during the third quarter of 2002 were $0.065 per
share, an increase of 8% compared to the $0.06 per share paid for the third
quarter of 2001. Our dividend payout ratio was 18.9% for the first nine
months of 2002.
We also analyze our capital and the capital position of our banks
in terms of regulatory risked-based capital guidelines. This analysis of
capital is dependent upon a number of factors including asset quality,
earnings strength, liquidity, economic conditions and combinations thereof.
The Federal Reserve Board has issued standards for measuring capital
adequacy for bank holding companies. These standards are designed to provide
risk-responsive capital guidelines and to incorporate a consistent framework
for use by financial institutions. Our management believes that, as of
September 30, 2002, we and our subsidiaries met all capital adequacy
requirements. We will seek to maintain a strong equity base while executing
our controlled expansion plans.
As of September 30, 2002, December 31, 2001 and September 30, 2001,
Allegiant's and Allegiant Bank's capital ratios were as follows:
September 30, 2002 December 31, 2001 September 30, 2001
------------------------- --------------------------- ---------------------------
Allegiant Allegiant Bank Allegiant Allegiant Bank Allegiant Allegiant Bank
--------- -------------- --------- -------------- --------- --------------
Total capital
(to risk-weighted assets). 9.87% 10.33% 10.01% 10.48% 10.07% 10.98%
Tier 1 capital
(to risk-weighted assets). 8.51 9.28 8.11 9.62 8.82 9.78
Tier 1 capital
(to average assets)....... 6.82 7.58 6.32 7.62 11.64 8.16
As of September 30, 2002, the capital ratios of our two subsidiary
banks were as follows:
Bank of State Bank of
Ste. Genevieve Jefferson County
-------------- ----------------
Total capital
(to risk-weighted assets). 22.54% 16.41%
Tier 1 capital
(to risk-weighted assets). 21.33 15.28
Tier 1 capital
(to average assets)....... 13.03 10.40
On September 18, 2002, we announced the signing of a definitive
exchange agreement that provides for First Banks to acquire Allegiant's
wholly-owned banking subsidiary, Bank of Ste. Genevieve (BSG). Under the
terms of the agreement, First Banks will acquire BSG in exchange for
approximately 974,150 shares of Allegiant common stock that is currently
held by First Banks. As a part of our Project 2004 initiative, this
transaction will increase Allegiant's focus on the higher growth St. Louis
metropolitan area, reduce the number of outstanding shares without
decreasing our float and is expected to be immediately accretive to our
earnings per share. The transaction, which is subject to regulatory
approvals, is expected to be completed in the first quarter of 2003.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information provided
in our Annual Report on Form 10-K for the year ended December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2002, an evaluation was performed under the
supervision and with the participation of the Company's management,
including the CEO and CFO, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the CEO and CFO, concluded
that the Company's disclosure controls and procedures were effective as of
September 30, 2002. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect
internal controls subsequent to September 30, 2002.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In the third quarter of 2002, Allegiant adopted SFAS 147,
Acquisition of Certain Financial Institutions. As permitted by the new
accounting standard issued on October 1, 2002, we reclassified previously
recorded intangible assets associated with branch acquisitions to goodwill.
As required by SFAS 147, we restated previously reported 2002 six-month
earnings to reflect the non-amortization of goodwill related to our branch
acquisitions. For the six months ended June 30, 2002, the impact related to
implementation of SFAS 147 was an increase to net income of $345,000 and an
increase in diluted earnings per share of $0.02 per share.
The adoption of SFAS 147 increased net income by $517,050 or $0.03
per diluted share for the nine months ended September 30, 2002 and is
projected to increase full-year 2002 earnings by approximately $700,000, or
$0.04 per diluted share.
We also restated previously reported 2002 six-month earnings to
recognize the impact of a $700,000 deferred loan fee which had not been
accreted into income due to an accounting oversight during the three months
ended March 31, 2002 and June 30, 2002 in accordance with SFAS 91,
Accounting for Non-refundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. For the six months ended
June 30, 2002, the impact of this adjustment was to increase net income by
$291,000 and diluted earnings per share by $0.02 per share.
The combined impact of SFAS 147 adoption and the deferred loan fee
adjustment on the results for the six months ended June 30, 2002 was to
reflect restated diluted earnings per share of $0.65 per share, compared to
$0.61 per share previously reported and restated net income of $10.3
million, compared to previously recorded $9.7 million.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: See Exhibit Index attached hereto.
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 2002.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized. The undersigned signs this
report in his dual capacities as a duly authorized officer of the registrant
and also as the registrant's Chief Financial Officer.
ALLEGIANT BANCORP, INC.
November 14, 2002 By: /s/ Thomas A. Daiber
---------------------------------------
Thomas A. Daiber, Executive Vice
President and Chief Financial Officer
27
CERTIFICATIONS
I, Shaun R. Hayes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allegiant
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
(a) designated such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a dated within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002 By: /s/ Shaun R. Hayes
----------------------------------
Shaun R. Hayes, President and
Chief Executive Officer
28
I, Thomas A. Daiber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allegiant
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
(a) designated such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a dated within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002 By: /s/ Thomas A. Daiber
---------------------------------------
Thomas A. Daiber, Executive Vice
President and Chief Financial Officer
29
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11.1 Computation of Earnings Per Share
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
30