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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 MARCH 31, 2003
---------------------------------------------
Commission file number 000-10849
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ALLEGIANT BANCORP, INC.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MISSOURI 43-1262037
- -------------------------------- ----------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
10401 CLAYTON ROAD
ST. LOUIS, MISSOURI 63131
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(Address of principal executive offices)
(Zip Code)
(314) 692-8800
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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. /X/ Yes / / No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). /X/ Yes / / No
Number of shares
Title of class outstanding as of May 2, 2003
- ------------------------------------- -------------------------------------
Common stock, $0.01 par value 17,326,835
ALLEGIANT BANCORP, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION.....................................................................1
ITEM 1. FINANCIAL STATEMENTS..................................................................1
CONDENSED CONSOLIDATED BALANCE SHEETS - MARCH 31, 2003 AND 2002
(UNAUDITED) AND DECEMBER 31, 2002...................................................1
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - THREE
MONTHS ENDED MARCH 31, 2003 AND 2002................................................2
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) - THREE
MONTHS ENDED MARCH 31, 2003.........................................................3
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - THREE
MONTHS ENDED MARCH 31, 2003 AND 2002................................................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 MARCH 31, 2003 AND 2002........................13
RATE/VOLUME ANALYSIS - QUARTER ENDED MARCH 31, 2003..................................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
CRITICAL ACCOUNTING POLICIES.........................................................25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................26
ITEM 4. CONTROLS AND PROCEDURES..............................................................26
PART II. OTHER INFORMATION.......................................................................26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................26
SIGNATURES...........................................................................27
CERTIFICATIONS.......................................................................27
EXHIBIT INDEX........................................................................30
EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER................................32
EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER................................33
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLEGIANT BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, March 31,
2003 December 31, 2002
(Unaudited) 2002 (Unaudited)
----------- ------------ -----------
(Dollars in thousands)
ASSETS:
Cash and due from banks ........................................ $ 48,016 $ 41,890 $ 38,174
Federal funds sold and other investments ....................... 38,270 5,241 9,952
Investment securities:
Available-for-sale (at estimated market value) .............. 389,041 438,049 429,965
Held-to-maturity (estimated market value of
$12,878, $17,300 and $20,931, respectively) ............... 12,661 17,033 22,023
Loans, net of allowance for loan losses of
$18,730, $19,567 and $17,530, respectively ................ 1,645,443 1,683,342 1,431,791
Loans held for sale ............................................ 25,874 40,666 49,501
Premises and equipment ......................................... 44,170 47,663 47,553
Accrued interest and other assets .............................. 69,835 72,416 72,292
Cost in excess of fair value of net assets acquired ............ 54,168 58,016 56,452
---------- ---------- ----------
Total assets .............................................. $2,327,478 $2,404,316 $2,157,703
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-interest bearing ........................................ $ 197,306 $ 215,529 $ 176,935
Interest bearing ............................................ 1,315,660 1,350,417 1,292,866
Certificates of deposit over $100,000 ....................... 208,797 202,086 165,511
---------- ---------- ----------
Total deposits ............................................ 1,721,763 1,768,032 1,635,312
---------- ---------- ----------
Short-term borrowings .......................................... 78,558 94,882 72,180
Federal Home Loan Bank advances ................................ 302,895 304,853 235,850
Guaranteed preferred beneficial interests in
subordinated debentures ..................................... 57,250 57,250 57,250
Accrued expenses and other liabilities ......................... 12,904 12,057 12,975
---------- ---------- ----------
Total liabilities ......................................... 2,173,370 2,237,074 2,013,567
---------- ---------- ----------
Shareholders' equity:
Common Stock, $0.01 par value - authorized 30,000,000 shares;
issued 16,220,542 shares, 16,146,804 shares and 15,541,085
shares, respectively ...................................... 162 161 160
Capital surplus ............................................. 121,363 119,933 113,727
Retained earnings ........................................... 49,219 44,614 31,258
Accumulated other comprehensive income (loss) ............... 1,264 2,534 (1,009)
Treasury stock, at cost, 974,150 shares ..................... (17,900) - -
---------- ---------- ----------
Total shareholders' equity ................................ 154,108 167,242 144,136
---------- ---------- ----------
Total liabilities and shareholders' equity ................ $2,327,478 $2,404,316 $2,157,703
========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
1
ALLEGIANT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31,
-----------------------------------
(In thousands, except share and per
share data)
2003 2002
----------- -----------
Interest income:
Interest and fees on loans......................... $ 25,671 $ 25,107
Investment securities.............................. 4,121 5,071
Federal funds sold and overnight investments....... 49 56
----------- -----------
Total interest income............................ 29,841 30,234
----------- -----------
Interest expense:
Deposits........................................... 8,805 10,646
Short-term borrowings.............................. 1,230 648
Federal Home Loan Bank advances.................... 2,093 2,466
Guaranteed preferred beneficial interests in
subordinated debentures.......................... 1,372 1,372
----------- -----------
Total interest expense........................... 13,500 15,132
----------- -----------
Net interest income................................... 16,341 15,102
Provision for loan losses............................. 1,660 1,500
----------- -----------
Net interest income after provision
for loan losses..................................... 14,681 13,602
----------- -----------
Non-interest income:
Service charges on deposits........................ 1,685 1,627
Net gain on sale of securities..................... 1,723 10
Other income....................................... 3,613 2,425
----------- -----------
Total non-interest income........................ 7,021 4,062
----------- -----------
Non-interest expense:
Salaries and employee benefits..................... 7,127 5,604
Occupancy and furniture and equipment.............. 1,922 1,628
Other operating expenses........................... 4,437 3,461
----------- -----------
Total non-interest expense....................... 13,486 10,693
----------- -----------
Income before income taxes............................ 8,216 6,971
Provision for income taxes............................ 2,663 2,023
----------- -----------
Net income....................................... $ 5,553 $ 4,948
=========== ===========
Per share data:
Earnings per share:
Basic............................................ $ 0.34 $ 0.32
Diluted.......................................... 0.34 0.32
Weighted average common shares outstanding:
Basic............................................ 16,186,628 15,380,960
Diluted.......................................... 16,509,453 15,675,429
See Notes to Condensed Consolidated Financial Statements.
2
ALLEGIANT BANCORP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Accumulated
Other
Comprehensive Total
Common Capital Retained Income Treasury Shareholders' Comprehensive
Stock Surplus Earnings Gain (Loss) Stock Equity Income
------- --------- --------- ------------- --------- ------------- -------------
(In thousands)
Balance December 31, 2002..... $ 161 $ 119,933 $ 44,614 $ 2,534 $ - $ 167,242
Net income.................... - - 5,553 - - 5,553 $ 5,553
Change in net unrealized
losses on available-for-sale
securities, net of tax...... - - - (1,270) - (1,270) (1,270)
---------
Comprehensive income.......... - - - - - - $ 4,283
=========
Issuance of common
stock....................... 1 840 - - - 841
Amortization of restricted
stock....................... - 590 - - - 590
Repurchase of common stock.... - - - - (17,900) (17,900)
Dividends ($0.07 per share)... - - (948) - - (948)
------- --------- --------- --------- --------- ---------
Balance March 31, 2003........ $ 162 $ 121,363 $ 49,219 $ 1,264 $ (17,900) $ 154,108
======= ========= ========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
3
ALLEGIANT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
---------------------------------
2003 2002
-------------- --------------
(In thousands)
OPERATING ACTIVITIES:
Net income........................................................ $ 5,553 $ 4,948
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization................................. 1,767 1,052
Provision for loan losses..................................... 1,660 1,500
Net gain on sale of fixed assets.............................. (17)
Net realized gains on securities available-for-sale........... (1,723) (10)
Other changes in assets and liabilities:
Accrued interest receivable and other assets................ 2,522 (2,904)
Accrued expenses and other liabilities...................... 2,114 (5,353)
-------------- --------------
Cash provided by (used in) operating activities........... 11,876 (767)
-------------- --------------
INVESTING ACTIVITIES:
Adjustment to cash received in acquisition of branches............ - (312)
Decrease in cash and cash equivalents resulting from sale of
divested subsidiary............................................. (14,870) -
Proceeds from maturities of securities held-to-maturity........... 1,041 2,576
Proceeds from maturities of securities available-for-sale......... 104,061 42,928
Proceeds from sales of securities available-for-sale.............. 93,614 112
Purchase of investment securities available-for-sale.............. (194,163) (34,667)
Loans made to customers, net of repayments........................ 8,278 (20,442)
Purchase of bank-owned life insurance............................. (441) (664)
Additions to premises and equipment............................... (1,037) (364)
-------------- --------------
Cash used in investing activities......................... (3,517) (10,833)
-------------- --------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits............................... 47,600 (52,303)
Net increase (decrease) in short-term borrowings.................. (16,337) 39,147
Repayment of long-term debt....................................... (360) (335)
Proceeds from issuance of common stock............................ 841 2,496
Payment of dividends.............................................. (948) (913)
-------------- --------------
Cash provided by (used in) financing activities........... 30,796 (11,908)
-------------- --------------
Net increase (decrease) in cash and cash equivalents.............. 39,155 (23,508)
Cash and cash equivalents, beginning of period.................... 47,131 71,634
-------------- --------------
Cash and cash equivalents, end of period.......................... $ 86,286 $ 48,126
============== ==============
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 it is made clear that it means only
Allegiant. Also, sometimes we refer to our principal bank subsidiary,
Allegiant Bank as the "bank."
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 period ended March 31, 2003
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003.
The balance sheet at December 31, 2002 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, 2002.
Comprehensive Income
During the first quarter of 2003 and 2002, total comprehensive
income amounted to $4.3 million and $4.5 million, respectively.
Acquisitions and Divestitures
On March 31, 2003, we sold Bank of Ste. Genevieve, one of our two
subsidiary banks, to First Banks, Inc. Bank of Ste. Genevieve operates two
branches located outside of the St. Louis metropolitan area and had total
assets of approximately $114.6 million at the time of the sale. First Banks
acquired Bank of Ste. Genevieve in exchange for transferring to us 974,150
shares of our common stock held by First Banks. The net assets of Bank of
Ste. Genevieve as of the closing were approximately $17.9 million which
approximated the value of consideration we received. As a result, we did not
recognize any gain or loss as a result of the transaction. First Banks held
approximately 7.4% of our outstanding common stock prior to the sale and
held approximately 1.5% of our common stock upon completion of the sale.
5
On March 19, 2003, we entered into a Purchase and Assumption
Agreement with Heartland Bank, a federal savings association. Under the
purchase agreement, we will acquire Heartland's bank branch located at 4435
Chippewa, Saint Louis, Missouri. In addition to the branch facility, we will
assume approximately $24.6 million in related deposit liabilities. Pursuant
to the terms of the agreement, we will pay a purchase price equal to the
dollar amount of Heartland's assets acquired as of the closing date of the
transaction less a deposit premium equal to 5.05% of all assumed deposits.
We expect to close the transaction in the third quarter of 2003.
On October 1, 2002, we completed the acquisition of Investment
Counselors, Incorporated, a privately held investment advisory firm located
in St. Louis, Missouri. Under the terms of the agreement, we exchanged
194,610 shares of our common stock for all of the common shares of
Investment Counselors. We recorded goodwill and other identifiable
intangibles of $2.7 million and $0.5 million, respectively. The other
identifiable intangibles are being amortized over an estimated average life
of approximately 14 years. This acquisition was consistent with our strategy
of focusing on the growth of non-interest income and has allowed us to offer
a more comprehensive selection of wealth management products and services.
At March 31, 2003, Investment Counselors' assets under management totaled
$325.4 million.
Recently Issued Accounting Standards
In November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, Guarantor's Accounting and Disclosure for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN
45). FIN 45 requires certain guarantees to be recorded at fair value and
applies to contracts or indemnification agreements that contingently require
the guarantor to make payments to the guaranteed party based on changes
related to an underlying asset, liability or equity security of the
guaranteed party. The recognition requirements of FIN 45 are to be applied
prospectively to guarantees issued or modified subsequent to December 31,
2002. FIN 45 also expands the disclosures to be made by guarantors,
effective as of December 31, 2002, to include the nature of the guarantee,
the maximum potential amount of future payments that the guarantor could be
required to make under the guarantee, and the current amount of the
liability, if any, for the guarantor's obligation under the guarantee.
At March 31, 2003, the maximum amount of future payments that the
company could potentially be required to make under guarantees for standby
letters of credit was $19.6 million. Standby letters of credit are
conditional commitments issued by our banks to guarantee the performance of
a customer to a third party. Those guarantees are primarily issued to
support contractual obligations of our customers. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The fair values of commitments to
extend credit and standby letters of credit are estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements, the likelihood of the counterparties
drawing on such financial instruments and the present creditworthiness of
such counterparties.
6
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which provides
transition guidance from accounting under APB Opinion No. 25, Accounting for
Stock Issued to Employees, to SFAS No. 123, Accounting for Stock-Based
Compensation, which provides for a fair value method of accounting, if a
company elects. We have elected to continue to account for stock-based
employee compensation under APB Opinion No. 25. Accordingly, no stock option
based employee compensation cost is reflected in net income, as all options
granted under those plans had an exercise price equal to the market value of
the underlying common stock on the date of the grant. The following table
illustrates the effect on net income and earnings per share if the company
applied the fair value recognition provisions of SFAS No. 123 to stock
option based employee compensation.
Three Months
Ended March 31,
--------------------------------
2003 2002
------------ ------------
(In thousands, except per share data)
Net income, as reported.............................. $ 5,553 $ 4,948
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects......................... (280) (243)
------------ ------------
Pro forma net income................................. $ 5,273 $ 4,705
============ ============
Earnings per share:
Basic - as reported................................ $ 0.34 $ 0.32
Basic - pro forma.................................. 0.33 0.31
Diluted - as reported.............................. 0.34 0.32
Diluted - pro forma................................ 0.32 0.30
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to risks,
uncertainties and assumptions, including, among other things:
o the results of our efforts to implement our business strategy,
including Project 2004;
o adverse changes in the bank's loan portfolio and the resulting
credit risk-related losses and expenses;
o our ability to manage our growth, including the successful
expansion of the customer support, administrative
infrastructure and internal management systems necessary to
manage that growth;
o our ability to attract core deposits;
o adverse changes in the economy of our market area that could
increase credit-related losses and expenses;
o adverse changes in real estate market conditions that could
negatively affect credit risk;
o the consequences of continued bank acquisitions and mergers in
our market area, resulting in fewer but much larger and
financially stronger competitors, which could increase
competition for financial services to our detriment;
o fluctuations in interest rates and market prices, which could
negatively affect net interest margins, asset valuations and
expense expectations;
o changes in regulatory requirements of federal and state
agencies applicable to bank holding companies and our present
and future bank subsidiaries;
o changes in accounting principles;
o general economic conditions; and
o other risks and uncertainties detailed from time to time in
our filings with the Securities and Exchange Commission.
We undertake no obligation to publicly update or otherwise revise
any forward-looking statements, whether as a result of new information,
future events or otherwise. In light of these risks, uncertainties and
assumptions, the events discussed in any forward-looking statements in this
report might not occur.
8
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 wealth
management 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 the largest publicly held bank holding company headquartered
in the St. Louis metropolitan area. Our principal subsidiary, Allegiant
Bank, offers full-service banking and personal trust services to
individuals, businesses and municipalities in our market area. These
services include commercial real estate, commercial business and consumer
loans, checking, savings and time deposit accounts, wealth management and
other fiduciary services, as well as other financial services, including
mortgage banking, securities brokerage and insurance products. As of March
31, 2003, we reported, on a consolidated basis, total assets of $2.3
billion, loans of $1.7 billion and shareholders' equity of $154.1 million.
Our primary goal has been to expand our branch network in the St.
Louis market while increasing our earnings per share. Since our inception in
1989, we have grown through a combination of internal growth and
acquisitions. We have sought to maximize our internal growth opportunities
by positioning Allegiant as one of the leading St. Louis community banks.
We have supplemented our internal growth with several acquisitions
within our market area. Since 2000, we have completed a number of
significant acquisitions, including: Equality Bancorp, Inc., a
community-based thrift holding company with total assets of approximately
$300.4 million, in November 2000; Southside Bancshares Corp., a
community-based bank holding company with total assets of approximately
$804.9 million, in September 2001; and five branches from Guardian Savings
Bank with total deposits of $109.3 million, in December 2001. Additionally,
in order to diversify our operations and sources of income, in October 2002,
we acquired Investment Counselors, Incorporated, an investment advisory firm
with approximately $331.9 million of assets under management.
9
Consistent with our focus on establishing and maintaining a strong
presence in the most attractive areas in the St. Louis market, on March 31,
2003, we sold Bank of Ste. Genevieve, one of our two subsidiary banks, to
First Banks, Inc. Bank of Ste. Genevieve operates two branches located
outside of the St. Louis metropolitan area and had total assets of $114.6
million at the time of the sale. First Banks acquired Bank of Ste. Genevieve
in exchange for transferring to us 974,150 shares of our common stock held
by First Banks. The net assets of Bank of Ste. Genevieve as of the closing
were approximately $17.9 million, which approximated the value of
consideration we received. As a result, we did not recognize any gain or
loss as a result of the transaction. First Banks held approximately 7.4% of
our outstanding common stock prior to the sale and held approximately 1.5%
of our common stock upon completion of the sale.
In order to improve the profitability of our banking operations,
over the past several years we have reduced the number of residential
mortgages that we hold in our portfolio and have increased the amount of
higher yielding commercial loans. Since the beginning of 1998, and in part
as a result of opportunities that resulted from the consolidation of the St.
Louis banking market, we have hired 23 commercial lending professionals,
including a senior credit officer, who average more than 15 years of
commercial lending experience in the St. Louis metropolitan area. As these
local loan officers have joined our banking team, we have benefited from
their existing customer relationships, as well as their local banking
expertise. In addition, we have implemented a company-wide cost control
initiative intended to enhance efficiencies throughout our organization that
we refer to as "Project 2004" and we consolidated our banking operations
into one primary subsidiary, Allegiant Bank, during 2002. These steps taken
since the beginning of 1998 have improved our efficiency, return on average
assets, return on average equity and earnings per share. Commercial business
loans generally involve a higher degree of risk than our other types of
loans.
The St. Louis metropolitan area is the 18th largest metropolitan
market in the United States with a population of approximately 2.5 million.
The St. Louis area is home to 15 Fortune 1000 companies, including
Anheuser-Busch Companies, Inc., Emerson Electric Co. and The May Department
Stores Company. Over the past several years, a number of financial
institutions in our market area have been acquired by larger regional or
national out-of-town financial institutions. These acquisitions have
included: Marshall & Ilsley Corporation's 2002 acquisition of Mississippi
Valley Bancshares, Inc., Firstar Corporation's (now operating as U.S.
Bancorp) 1999 acquisition of Mercantile Bancorporation Inc., Union Planters
Corporation's 1998 acquisition of Magna Group, Inc. and NationsBank
Corporation's (now operating as Bank of America Corporation) 1997
acquisition of Boatmen's Bancshares, Inc. We believe we have capitalized on
opportunities created by this market consolidation and have built a strong,
customer-friendly, community-focused banking franchise.
We focus on serving customers with banking needs that no longer can
be adequately served by smaller local institutions but who still desire the
personalized service that larger, out-of-state institutions do not
effectively provide. Our community banking focus and streamlined management
and decision-making procedures allow us to respond quickly to the needs of
our individual and business customers and to tailor products and services to
meet their needs.
We seek to effectively meet the convenience and needs of customers
through our extensive branch network that provides our customers at least
one branch located within a 20-minute drive from all principal sectors of
the St. Louis metropolitan area. Our 37 branches and 59 ATMs throughout the
St. Louis metropolitan area also serve to increase recognition of the
Allegiant name. In addition, we have sought to further enhance our name
recognition by serving as the official bank of the St. Louis Rams football
team since July 2000.
10
Project 2004
In August 2002, we announced the launch of Project 2004. The
mission of Project 2004 is to improve our operating platform by leveraging
our acquisition expertise internally. We are approaching this project as if
we had acquired our own operations and have evaluated our systems and
strategies in order to enhance our delivery of products and services to
customers, to improve operating efficiencies and to provide increased
revenue. Based on our evaluations, we have undertaken improvement
initiatives, several of which have been completed.
Of our major initiatives, we expect to realize increases in
incremental revenue, beginning in the second half of 2003, at a rate of more
than $750,000 annually from improvements in our retail banking sales
training, measurement and tracking, and of up to $1.0 million annually from
the implementation of a specialized marketing plan for our 11 smallest
branches by deposit size. Our new sales measurement and tracking systems
will improve management's ability to identify products and practices that
are most profitable to us and focus our sales efforts on those products and
practices. Our new training will improve our employees' ability to offer
products to new and existing customers and to implement our most profitable
practices. Our specialized marketing plan includes mail programs and special
promotions directed to current and prospective customers in an effort to
increase deposits at our smaller branches.
In addition, in the first half of 2003 we will implement a new fee
structure, operating procedures and electronic processing systems from which
we expect to realize improvements in operating efficiencies and incremental
revenue at a rate of up to $1.0 million annually. Operating efficiencies we
expect to achieve include more efficient branch staffing, implementation of
an automated credit scoring system for consumer lending and streamlining a
variety of backroom functions such as loan document imaging. We expect to
achieve increases in incremental revenue through fees on new customer
services, including an overdraft protection program for electronic
transactions. However, we cannot assure you that we will be able to realize
all of the estimated revenues or efficiencies from our Project 2004
initiatives.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2003 was $5.6
million, a 12.2% increase over the $4.9 million earned in the first quarter
of 2002. Basic and diluted earnings per share increased 6.3% to $0.34 for
the first quarter of 2003 compared to $0.32 for the first quarter of 2002.
The annualized return on average assets was 0.92% for both the first quarter
of 2003 and 2002. The return on average equity on an annualized basis was
13.10% for the first quarter of 2003 compared to 13.95% for the first
quarter of 2002.
As a result of recent accounting pronouncements, we 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 non-cash charge that increases our operating
expenses. Intangible asset amortization included as an operating expense
totaled $279,000 and $271,000 for the three-month periods ended March 31,
2003 and 2002, respectively.
11
Total assets at March 31, 2003 were $2.3 billion, an increase of
$169.8 million, or 8%, from March 31, 2002, due largely to a $214.9 million,
or 15%, increase in loans. Total loans increased to $1.7 billion and total
deposits increased to $1.7 billion at March 31, 2003, reflecting a 15% and
5% increase from March 31, 2002, respectively. Consistent with our focus on
establishing and maintaining a strong presence in the most attractive areas
in the St. Louis market, in March 2003, we sold Bank of Ste. Genevieve, one
of our two subsidiary banks, to First Banks, Inc. Bank of Ste. Genevieve
operates two branches located outside of the St. Louis metropolitan area and
had total assets of $114.6 million at the time of the sale.
At March 31, 2003, shareholders' equity totaled $154.1 million, an
increase of 7% from March 31, 2002. On April 14, 2003 we completed a
secondary public offering and issued 2.1 million shares of common stock at a
public offering price of $16.50 per share. Net proceeds from the offering
totaled $31.9 million. We contributed substantially all of the net proceeds
to Allegiant Bank to strengthen the bank's capital position, to support the
bank's anticipated loan growth and for other general corporate purposes. The
bank has used a portion of the capital contributed to temporarily reduce
short-term indebtedness, which may be reborrowed, if necessary, to fund loan
growth. We will use the remaining proceeds that are not contributed to the
bank for general corporate and working capital purposes.
Net Interest Income. Net interest income for the three months ended
March 31, 2003 was $16.3 million, an 8% increase compared to the $15.1
million reported for the first quarter of 2002. The increase in net interest
income was primarily attributable to a $247.4 million, or 13%, increase in
average earning assets, due largely to a $228.6 million, or 15%, increase in
average loans, as loan growth in our market remained strong. As a result of
lower prevailing market rates, interest income decreased $393,000 from the
first quarter of 2002 which was more than offset by a $1.6 million decrease
in interest expense. The decrease in interest expense was the result of a 66
basis point decline in the average interest rate paid on interest bearing
liabilities partially offset by a $211.3 million increase in average
interest bearing liabilities.
Interest expense on deposits decreased $1.8 million from the first
quarter of 2002. This decrease reflected a 66 basis point decline in the
average rate paid on deposits from 2.91% in the first quarter of 2002 to
2.25% for the comparable period in 2003 which was partially offset by
average deposit growth of 6.9%.
Interest expense on other interest bearing liabilities increased
$209,000 in the first quarter of 2003 compared to the first quarter of 2002
as average short and long-term borrowings increased $109.1 million during
the period, respectively. The average rate paid on short-term borrowings
decreased 75 basis points while the rate paid on long-term borrowings
decreased 21 basis points in the first quarter of 2003 compared to the first
quarter of 2002.
The net interest margin in the first quarter of 2003 was 3.00%
compared to 3.13% and 3.05% during the first and fourth quarters of 2002,
respectively. The margin was negatively impacted as we reinvested the
proceeds of certain securities transactions into temporary short-term
investments. We expect our net interest margin to improve over the balance
of the year, in view of our expectation that we should be able to re-invest
these short-term investments into higher yielding loans and securities and
that a portion of our deposits and borrowings will reprice at lower market
rates. The net interest spread was 2.80% in the first quarter of 2003
compared to 2.90% in the first quarter of 2002 as the earning assets yield
declined 77 basis points while the overall interest rate paid on interest
bearing liabilities decreased 67 basis points.
12
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 March 31,
------------------------------------------------------------------------
2003 2002
--------------------------------- ---------------------------------
Average Int. earned/ Yield/ Average Int. earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ------------ ---- ------- ------------ ----
(Dollars in thousands)
Assets:
Interest earning assets:
Loans(1) (2).............................. $ 1,709,113 $ 25,671 6.09% $ 1,480,520 $ 25,107 6.88%
Taxable investment securities............. 442,407 3,745 3.43 427,296 4,703 4.46
Non-taxable investment securities(3)...... 36,257 376 4.21 35,780 368 4.17
Federal funds sold and other
investments............................. 17,757 49 1.12 14,528 56 1.56
----------- --------- ----------- ---------
Total interest earning assets......... 2,205,534 29,841 5.49 1,958,124 30,234 6.26
----------- --------- ----------- ---------
Non-interest earning assets:
Cash and due from banks................... 45,892 41,763
Premises and equipment.................... 47,811 48,107
Other assets.............................. 129,032 126,014
Allowance for loan losses................. (19,360) (18,709)
----------- -----------
Total assets.......................... $ 2,408,909 $ 2,155,299
=========== ===========
Liabilities and shareholders' equity:
Interest bearing liabilities:
Money market and NOW accounts............. $ 428,753 $ 1,227 1.16% $ 417,694 $ 1,693 1.64%
Savings deposits.......................... 226,123 845 1.52 203,563 1,518 3.02
Certificates of deposit................... 578,159 4,013 2.81 594,610 4,636 3.16
Certificates of deposit over $100,000..... 210,837 1,405 2.70 181,972 1,704 3.80
IRA certificates.......................... 83,075 922 4.50 87,242 1,095 5.09
Brokered deposits......................... 60,335 393 2.64 - - -
----------- --------- ----------- ---------
Total interest bearing deposits....... 1,587,282 8,805 2.25 1,485,081 10,646 2.91
----------- --------- ----------- ---------
Federal funds purchased, repurchase
agreements and other short-term
borrowings.............................. 218,085 1,230 2.29 86,578 648 3.04
Other borrowings.......................... 173,032 2,093 4.91 195,437 2,466 5.12
Guaranteed preferred beneficial
interest in subordinated debentures..... 57,250 1,372 9.72 57,250 1,372 9.72
----------- --------- ----------- ---------
Total interest bearing liabilities.... 2,035,649 13,500 2.69 1,824,346 15,132 3.36
----------- --------- ----------- ---------
Non-interest bearing liabilities and equity:
Demand deposits........................... 190,771 171,624
Other liabilities......................... 12,955 17,479
Shareholders' equity...................... 169,534 141,850
----------- -----------
Total liabilities and shareholders'
equity.............................. $ 2,408,909 $ 2,155,299
=========== ===========
Net interest income................... $ 16,341 $ 15,102
========= =========
Net interest spread................... 2.80% 2.90%
Net interest margin................... 3.00 3.13
- --------------------
(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
Three Months Ended March 31, 2003
Compared to the
Three Months Ended March 31, 2002
----------------------------------------------
Net
Volume Rate Change
----------- ------------ -----------
(In thousands)
Interest earned on:
Loans........................................... $ 3,630 $ (3,066) $ 564
Taxable investment securities................... 160 (1,118) (958)
Non-taxable investment securities............... 5 3 8
Federal funds sold and other investments........ 11 (18) (7)
----------- ------------ -----------
Total interest income....................... 3,806 (4,199) (393)
----------- ----------- -----------
Interest paid on:
Money market/NOW accounts....................... 42 (508) (466)
Savings deposits................................ 151 (824) (673)
Certificates of deposit......................... (126) (497) (623)
Certificates of deposit over $100,000........... 244 (543) (299)
IRA certificates................................ (51) (122) (173)
Brokered deposits............................... 393 - 393
Federal funds purchased, repurchase
agreements and other short-term
borrowings.................................... 778 (196) 582
Other borrowings................................ (274) (99) (373)
Guaranteed preferred beneficial interests
in subordinated debentures.................... - - -
----------- ------------ -----------
Total interest expense...................... 1,157 (2,789) (1,632)
----------- ----------- -----------
Net interest income......................... $ 2,649 $ (1,410) $ 1,239
=========== =========== ===========
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
Non-Interest Income. Non-interest income increased 73% to $7.0
million in the first quarter of 2003 compared to $4.1 million for the three
months ended March 31, 2002. The growth in non-interest income was
attributable to significant increases in mortgage banking revenues and fees
from our wealth management division. Excluding securities gains of $1.7
million in the first quarter of 2003, non-interest income increased 31%
compared to the first quarter of 2002.
For the quarter ended March 31, 2003, mortgage banking revenue
increased $786,000 to $1.6 million compared to $829,000 for the quarter
ended March 31, 2002 as lower interest rates facilitated increased mortgage
refinancings. Wealth management fees totaled $952,000 for the quarter ended
March 31, 2003, an increase of $337,000, or 54.8%, from the first quarter of
2002. The increase in wealth management fees reflected the October 1, 2002
acquisition of Investment Counselors, Incorporated. Our assets under
management totaled $760.4 million at March 31, 2003 compared to $441.6
million at March 31, 2002.
Service charge income for the three-month period ended March 31,
2003 increased $58,000, or 3.6%, compared to the first quarter of 2002 as
our branch locations generated increased transaction volume, coupled with
ongoing enhancements in our deposit account fee structure. Gains on the
sales of securities totaled $1.7 million for the quarter ended March 31,
2003. Securities gains recognized in 2003 reflected a continuation of our
strategy to increase the duration of our securities portfolio in response to
changes in market interest rates.
Non-Interest Expense. For the three months ended March 31, 2003,
non-interest expense totaled $13.5 million, an increase of $2.8 million, or
26%, from the first quarter of 2002. Non-interest expense in the fourth
quarter of 2002 totaled $13.1 million. The increased expense from the first
quarter of 2002 included ongoing expenses related to the acquisition of
Investment Counselors, a severance charge recognized in the first quarter,
increased professional fees associated with the roll-out of our Project 2004
initiative and higher health care and insurance costs, coupled with
increased expense associated with our investment in a community reinvestment
fund.
Salaries and employee benefits totaled $7.1 million for the three
months ended March 31, 2003 compared to $5.6 million for the three months
ended March 31, 2002. Salary expense for the first quarter of 2003 reflected
ongoing salary costs associated with the acquisition of Investment
Counselors, a severance charge reflective of cost containment efforts from
our Project 2004 initiative, higher health care costs and compensation
expense related to restricted stock plans.
Occupancy and equipment related expenses increased $294,000 for the
three-month period ended March 31, 2003 compared to the first quarter of
2002. This increase reflected centralization of our new wealth management
division under one location which has enabled us to more effectively serve
our customers and relocation of our headquarters facility.
Our efficiency ratio was 58% for the quarter ended March 31, 2003
compared to 56% for the first quarter of 2002. We anticipate improvement in
our efficiency ratio over the balance of the year as benefits from our
Project 2004 initiative are realized.
15
Income Taxes. Income taxes for the quarter ended March 31, 2003
increased to $2.7 million from $2.0 million in 2002. The effective tax rate
in the first quarter of 2003 was 32.4% compared to 29.0% in the first
quarter of 2002. The Company's effective tax rate is lower than the
statutory rate primarily due to tax-exempt interest and utilization of tax
credits, partially offset by intangible amortization and other nondeductible
expenses. The lower effective tax rate in 2002 was primarily due to the
realization of a tax benefit associated with the charitable donation of a
building acquired in the Southside transaction.
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 March 31, 2003, held-to-maturity securities amounted to $12.7
million, representing those securities we intend to hold to maturity.
Securities designated as available-for-sale totaled $389.0 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 described as the securities portfolio. At
March 31, 2003, the securities portfolio totaled $401.7 million, a decrease
of $53.4 million from December 31, 2002 which was primarily attributable to
the disposition of the securities portfolio associated with the sale of Bank
of Ste. Genevieve. 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
March 31, December 31, March 31,
2003 2002 2002
--------- ------------ ---------
(In thousands)
U.S. government and agency securities............ $ 162,952 $ 192,454 $ 141,096
State and municipal securities................... 33,148 39,962 36,759
Mortgage-backed securities....................... 169,392 188,242 242,145
Federal Home Loan Bank stock..................... 17,434 17,734 15,287
Other securities................................. 18,776 16,690 16,701
--------- --------- ---------
Total investment securities................... $ 401,702 $ 455,082 $ 451,988
========= ========= =========
16
Loans. Loans historically have been the primary component of our
earning assets. At March 31, 2003, loans totaled $1.7 billion, an increase
of 14.8% from March 31, 2002. Loans were down slightly from December 31,
2002 primarily as a result of the sale of our subsidiary, Bank of Ste.
Genevieve, on March 31, 2003, which had loans totaling approximately $43.5
million. Substantially all of our loans were originated in our primary
market areas. At March 31, 2003, we had no foreign loans and a minor amount
of participations purchased.
Multi-family and commercial real estate mortgage loans increased
$42.1 million from December 31, 2002. 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. Multi-family and
commercial real estate mortgage loans comprised 44.4% of the portfolio at
March 31, 2003 and 41.0% at year-end 2002. Commercial loans declined $46.8
million from December 31, 2002 primarily due to a few large pay-downs in the
first quarter of 2003 coupled with the disposition of the loan portfolio
associated with the sale of Bank of Ste. Genevieve. Loan growth in our
market remains strong and full year growth is expected to be in line with
historical growth trends. Consumer loans increased $1.1 million, or 1.7%,
from December 31, 2002 and will be an area of focus in 2003 as we expand our
emphasis in the retail sector.
The following table summarizes the composition of our loan
portfolio at the dates indicated:
LENDING AND CREDIT MANAGEMENT
March 31, December 31, March 31,
2003 2002 2002
------------------- ------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Commercial, financial,
agricultural, municipal and
industrial development.............. $ 267,910 16.1% $ 314,703 18.4% $ 257,312 17.7%
Real estate - construction............ 272,715 16.4 277,018 16.3 168,974 11.7
Real estate - mortgage:
One- to four-family residential..... 320,741 19.3 352,136 20.7 309,083 21.3
Multi-family and commercial......... 739,525 44.4 697,430 41.0 649,241 44.8
Consumer and other.................... 64,282 3.9 63,231 3.7 66,377 4.6
Less: unearned income................. (1,000) (0.1) (1,609) (0.1) (1,666) (0.1)
---------- ----- ---------- ----- ---------- -----
Total loans(1).................... $1,664,173 100.0% $1,702,909 100.0% $1,449,321 100.0%
========== ===== ========== ===== ========== =====
- --------------------
(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 $13.4 million at March 31, 2003 compared to $17.3 million at
March 31, 2002 and $16.3 million at December 31, 2002. At March 31, 2003,
non-performing assets represented 0.58% of total assets compared to 0.68% at
December 31, 2002 and 0.80% at March 31, 2002. Non-accrual loans totaled
$11.5 million at March 31, 2003 compared to $12.9 million at December 31,
2002 and $15.3 million at March 31, 2002. At March 31, 2003, approximately
57% or $6.5 million of our non-accrual loans were comprised of three
relationships. One of these relationships, with a carrying value of $1.1
million, was current on contractual principal and interest payments. We
continue to work aggressively to collect all non-performing assets.
We continually analyze our loan portfolio to identify potential
risk elements. The loan portfolio is reviewed by lending management and our
internal loan review staff. As an integral part of their examination
process, the various regulatory agencies periodically review our allowance
for loan losses. We believe that our allowance for loan losses at March 31,
2003 was adequate to absorb potential losses inherent in the loan portfolio.
The following table summarizes, for the periods presented,
non-performing assets by category:
18
RISK ELEMENTS - NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
March 31, December 31, March 31,
2003 2002 2002
----------- ------------ -----------
(Dollars in thousands)
Commercial, financial, agricultural,
municipal and industrial development:
Past due 90 days or more.................................. $ 914 $ 674 $ 1,095
Non-accrual............................................... 4,867 4,521 5,518
Restructured terms........................................ - 40 -
Real estate - construction:
Past due 90 days or more.................................. 344 540 -
Non-accrual............................................... 447 287 90
Restructured terms........................................ - - -
Real estate - mortgage:
One- to four-family residential:
Past due 90 days or more.................................. 482 820 460
Non-accrual............................................... 2,191 3,608 1,669
Restructured terms........................................ - 324 -
Multi-family and commercial:
Past due 90 days or more.................................. 135 151 -
Non-accrual............................................... 3,716 4,205 7,689
Restructured terms........................................ - - -
Consumer and other, net of unearned income:
Past due 90 days or more.................................. 119 152 171
Non-accrual............................................... 232 317 309
Restructured terms........................................ - - -
----------- ------------ -----------
Total non-performing loans.................................... 13,447 15,639 17,001
Other real estate............................................. - 611 280
----------- ------------ -----------
Total non-performing assets................................... $ 13,447 $ 16,250 $ 17,281
=========== ============ ===========
Ratios:
Non-performing loans to total loans......................... 0.81% 0.92% 1.17%
Non-performing assets to total assets....................... 0.58 0.68 0.80
Non-performing loans to shareholders' equity................ 8.73 9.35 11.82
Allowance for loan losses to total loans.................... 1.13 1.15 1.21
Allowance for loan losses to non-performing loans........... 139.29 125.12 103.11
19
Allowance for Loan Losses. The provision for loan losses was $1.7
million during the first three months of 2003 compared to $1.5 million for
the first quarter of 2002. Net charge-offs were $1.7 million for the three
months ended March 31, 2003 compared to $2.9 million for the first quarter
of 2002. Annualized net charge-offs for the first three months of 2003
represented 0.41% of average loans, compared to 0.78% for the first three
months of 2002 and 0.51% for the full year 2002.
The allowance for loan losses totaled $18.7 million at March 31,
2003 compared to $19.6 million at December 31, 2002 and to $17.5 million at
March 31, 2002. The decrease from December 31, 2002 was primarily
attributable to the $756,000 loan reserve of our Bank of Ste. Genevieve
which was sold on March 31, 2003. As a percentage of loans outstanding, the
allowance represented 1.13% of loans at March 31, 2003 compared to 1.15% at
December 31, 2002, and 1.21% at March 31, 2002. Our allowance for loan
losses as a percentage of loans has decreased from the first quarter of 2002
as a result of action taken in 2002 to resolve problem credits and in light
of our assessment of credit risk within the remaining portfolio. Net
charge-offs in the first quarter of 2003 totaled $1.7 million compared to
$2.9 million in the first quarter of 2002. Net charge-offs in the first
quarter of 2003 were primarily isolated within two relationships that
comprised approximately 84% of total net charge-offs and we believe that
they are not reflective of an overall deterioration in credit quality or
underwriting standards. Other key measures of asset quality have been
strengthened in recent quarters as our non-performing loan coverage has
improved. At March 31, 2003, our allowance for loan losses represented 139%
of non-performing loans compared to 103% at March 31, 2002 and 125% at
December 31, 2002. In addition, non-performing loans to total loans declined
from 1.17% at March 31, 2002 to 0.81% at March 31, 2003.
Our allowance for loan losses, 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.
In analyzing our allowance for loan losses, additional weight has been given
to the increased risks associated with the commercial and commercial real
estate portfolio. Specific allowances have been increased on certain
commercial and 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 loan losses. We continually monitor the
quality of our loan portfolio to ensure timely charge-off of problem loans
and to determine the adequacy of the level of the allowance for loan losses.
As mentioned previously, three relationships comprised $6.5 million, or 57%,
of our non-accrual loans. We believe that our allowance was adequate to
absorb losses inherent in the loan portfolio as of March 31, 2003.
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
expenses:
SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION
Three Months Ended
March 31,
---------------------------------
2003 2002
------------- -------------
(In thousands)
Allowance for loan losses (beginning of period)................. $ 19,567 $ 18,905
Loans charged off:
Commercial, financial, agricultural, municipal
and industrial development.................................. (514) (976)
Real estate - construction.................................... (195) (1,127)
Real estate - mortgage:
One- to four-family residential............................. (1,212) (403)
Multi-family and commercial................................. - (121)
Consumer and other............................................ (112) (365)
------------- -------------
Total loans charged off................................... (2,033) (2,992)
------------- -------------
Recoveries of loans previously charged off:
Commercial, financial, agricultural, municipal
and industrial development.................................. 235 34
Real estate - construction.................................... - -
Real estate - mortgage:
One- to four-family residential............................. 39 -
Multi-family and commercial................................. - -
Consumer and other............................................ 18 83
------------- -------------
Total recoveries.......................................... 292 117
------------- -------------
Net loans charged off........................................... (1,741) (2,875)
Divested subsidiary balance..................................... (756) -
Provision for loan losses....................................... 1,660 1,500
------------- -------------
Allowance for loan losses (end of period)....................... $ 18,730 $ 17,530
============= =============
Loans:
Average....................................................... $ 1,709,113 $ 1,480,520
End of period................................................. 1,664,173 1,449,321
Ratios:
Annualized net charge-offs to average loans .................. 0.41% 0.78%
Net charge-offs to provision for loans losses................. 104.88 191.67
Annualized provision for loan losses to average loans......... 0.39 0.41
Allowance for loan loss to total loans........................ 1.13 1.21
21
Deposits. Total deposits increased to $1.7 billion at March 31,
2003, an increase of 5.3% from March 31, 2002 and a decrease of 2.6% from
December 31, 2002. Adjusted for the March 31, 2003 sale of Bank of Ste.
Genevieve, deposits increased 2.7% from December 31, 2002. The increase in
deposits from March 31, 2002 was primarily the result of internal growth
from deposit promotions as we offered several certificate of deposit
promotions which were utilized to fund a portion of our loan growth. In
addition, we also issued approximately $60 million of brokered certificates
of deposit in the second half of 2002 with maturity dates ranging from one
to two years as another means to fund loan growth. Non-interest bearing
demand accounts increased $20.4 million, or 11.5% from March 31, 2002, as a
result of efforts to grow commercial demand deposit balances.
The following table summarizes deposits as of the dates indicated:
DEPOSIT LIABILITY COMPOSITION
March 31, December 31, March 31,
2003 2002 2002
-------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Demand deposits..................... $ 197,306 11.5% $ 215,529 12.2% $ 176,935 10.8%
NOW accounts........................ 140,484 8.2 132,883 7.5 124,364 7.6
Money market accounts............... 270,021 15.7 275,378 15.6 295,642 18.1
Savings deposits.................... 218,059 12.7 228,397 12.9 220,424 13.5
Certificates of deposit............. 551,398 32.0 570,915 32.3 566,421 34.6
Certificates of deposit
over $100,000..................... 208,797 12.1 202,086 11.4 165,511 10.1
IRA certificates.................... 74,738 4.3 82,600 4.7 86,015 5.3
Brokered deposits over
$100,000.......................... 60,960 3.5 60,244 3.4 - -
------------ ------- ------------ ------- ------------ -------
Total deposits.................. $ 1,721,763 100.0% $ 1,768,032 100.0% $ 1,635,312 100.0%
============ ======= ============ ======= ============ =======
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, in addition to deposits
assumed in acquisitions in recent years, 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.
Net cash flows provided by (used in) operating activities totaled
$11.9 million in the first quarter of 2003, and ($0.8) million in the first
quarter of 2002. The critical elements of our net operating cash flows
include net income, provision for loan losses, and depreciation and
amortization.
Net cash used in investing activities totaled $3.5 million in the
first quarter of 2003 and $10.8 million in the first quarter of 2002.
Critical elements of these activities are loans and investment securities.
Our loan portfolio growth in 2003 was primarily due to internal growth. Our
securities portfolio, as a percentage of average earning assets, was 21.7%
for the three months ended March 31, 2003 compared to 23.6% for the three
months ended March 31, 2002.
Net cash flows provided by (used in) financing activities totaled
$30.8 million in the first quarter of 2003 and ($11.9) million in the first
quarter of 2002. The critical elements of our financing activities are
Federal Home Loan Bank borrowings, deposits, short-term borrowings and
guaranteed preferred beneficial interest in subordinated debentures (trust
preferred securities).
We anticipate continued loan demand in our market area as the
banking industry continues to consolidate. 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 $319.0 million secured credit facility with
the Federal Home Loan Bank, under which $302.9 million and $304.9 million
was outstanding at March 31, 2003 and December 31, 2002, respectively. We
continue to utilize Federal Home Loan Bank borrowings to fund loan growth
while systematically building our deposit base. We anticipate similar use of
the Federal Home Loan Bank credit facility in the foreseeable future.
Average short-term borrowings increased to $218.1 million in the
first quarter of 2003 from $86.6 million in the first quarter of 2002. This
increase reflected our strategy of utilizing Federal Home Loan Bank
borrowings, as well as federal funds purchased for short periods of time, to
fund loan growth while continuing to systematically build our deposit base.
We experienced strong loan demand in 2002 and anticipate the continuation of
this demand during 2003.
23
The levels of our assets and deposits remained relatively the same
from December 31, 2002 to March 31, 2003. We strive to grow our core
deposits while utilizing the 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 $154.1 million at
March 31, 2003, compared to $144.1 million at March 31, 2002. The increase
in total equity was primarily the result of earnings retention and stock
options exercised to purchase our common stock. On March 31, 2003, we sold
Bank of Ste. Genevieve in exchange for approximately 974,150 shares of our
common stock pursuant to a sale agreement with First Banks, Inc. As a
result, we held treasury stock totaling $17.9 million at March 31, 2003. On
April 14, 2003, we completed a secondary public offering and issued 2.1
million shares of common stock at a public offering price of $16.50 per
share. Net proceeds from the offering totaled $31.9 million. We contributed
substantially all of the net proceeds to our wholly-owned subsidiary bank,
Allegiant Bank, to strengthen the bank's capital position, to support the
bank's anticipated loan growth and for other general corporate purposes. The
bank has used a portion of the capital contributed to temporarily reduce
short-term indebtedness, which may be reborrowed, if necessary, to fund loan
growth. We will use the remaining proceeds that are not contributed to the
bank for general corporate and working capital purposes.
Our capital requirements historically have been financed through
offerings of debt and equity securities, retained earnings and borrowings
from a commercial bank. Our subsidiary bank also utilizes their borrowing
capacity with the Federal Home Loan Bank. The principal amount of our term
loan was $35.0 million as of March 31, 2003, and matures on September 26,
2003 at which time we expect to renew the balance of the loan.
From time to time, we have issued brokered certificates of deposit
in order to fund loan growth and meet other liquidity needs. At March 31,
2003, we had brokered certificates of deposit totaling $61.0 million. We may
use brokered deposits in the future as a source of liquidity.
Dividends paid during the first quarter of 2003 were $0.07 per
share, an increase of 8% compared to the $0.065 per share paid in April 2002
for the first quarter of 2002. Our dividend payout ratio was 17.1% in the
first quarter of 2003. On May 13, 2003, the Company announced that the Board
of Directors voted to increase the quarterly dividend on its common stock by
$0.02 per share to $0.09 per share. The increased dividend is payable July
15, 2003 to stockholders of record on July 1, 2003. We generally declare and
pay cash dividends quarterly. Because substantially all of the funds
available for the payment of cash dividends are derived from Allegiant Bank,
future cash dividends will depend primarily upon the bank's earnings,
financial condition and need for funds, as well as government policies and
regulations applicable to the bank and us.
24
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 March
31, 2003, 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 March 31, 2003, December 31, 2002 and March 31, 2002,
Allegiant's and Allegiant Bank's capital ratios were as follows:
March 31, 2003 December 31, 2002 March 31, 2002
--------------------- ---------------------- -----------------------
Allegiant Allegiant Allegiant
Allegiant Bank Allegiant Bank Allegiant Bank
--------- --------- --------- --------- --------- ---------
Total capital
(to risk-weighted assets)... 9.66% 10.64% 9.97% 10.63% 10.16% 10.50%
Tier 1 capital
(to risk-weighted assets)... 8.26 9.59 8.75 9.56 8.51 9.40
Tier 1 capital
(to average assets)......... 6.34 7.70 7.07 7.78 6.52 7.30
CRITICAL ACCOUNTING POLICIES
There have been no material changes to our critical accounting
policies for the three months ended March 31, 2003.
25
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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2003, an evaluation was performed under the
supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, 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 Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective as of
March 31, 2003. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect
internal controls subsequent to March 31, 2003.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: See Exhibit Index attached hereto.
b) Reports on Form 8-K:
We filed a current report on Form 8-K, dated
March 28, 2003, to report our execution of a Purchase and
Assumption Agreement to acquire Heartland Bank's branch at
4435 Chippewa, Saint Louis, Missouri.
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.
May 15, 2003 By: /s/ Jeffrey S. Schatz
---------------------------------------------
Jeffrey S. Schatz, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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 a 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 registrant and
we have:
(a) designed 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 date 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;
27
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 the registrant's board of directors (or persons
performing the equivalent function):
(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 or not 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.
May 15, 2003 By: /s/ Shaun R. Hayes
---------------------------------
Shaun R. Hayes, President and
Chief Executive Officer
I, Jeffrey S. Schatz, 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 a 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 registrant and
we have:
(a) designed 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 date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
28
(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 the registrant's board of directors (or persons
performing the equivalent function):
(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 or not 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.
May 15, 2003 By: /s/ Jeffrey S. Schatz
----------------------------------------
Jeffrey S. Schatz, 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