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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares Outstanding
Class at April 30, 2003
----- -----------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - (UNAUDITED):
CONSOLIDATED BALANCE SHEETS.......................................... 1
CONSOLIDATED STATEMENTS OF INCOME.................................... 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME......................................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS................................ 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........... 26
ITEM 4. CONTROLS AND PROCEDURES.............................................. 27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................... 28
SIGNATURES...................................................................... 29
CERTIFICATIONS.................................................................. 30
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
March 31, December 31,
2003 2002
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks....................................................... $ 162,948 194,519
Interest-bearing deposits with other financial institutions
with maturities of three months or less..................................... 28,206 832
Federal funds sold............................................................ 134,838 7,900
------------ -----------
Total cash and cash equivalents.......................................... 325,992 203,251
------------ -----------
Investment securities:
Available for sale, at fair value............................................. 955,190 1,120,894
Held to maturity, at amortized cost (fair value of $15,987 and $16,978
at March 31, 2003 and December 31, 2002, respectively)...................... 15,436 16,426
------------ -----------
Total investment securities.............................................. 970,626 1,137,320
------------ -----------
Loans:
Commercial, financial and agricultural........................................ 1,408,655 1,443,016
Real estate construction and development...................................... 1,030,052 989,650
Real estate mortgage.......................................................... 2,453,660 2,444,122
Lease financing............................................................... 119,280 126,738
Consumer and installment...................................................... 81,062 86,763
Loans held for sale........................................................... 286,005 349,965
------------ -----------
Total loans.............................................................. 5,378,714 5,440,254
Unearned discount............................................................. (7,256) (7,666)
Allowance for loan losses..................................................... (108,696) (99,439)
------------ -----------
Net loans................................................................ 5,262,762 5,333,149
------------ -----------
Derivative instruments............................................................. 91,458 97,887
Bank premises and equipment, net of accumulated
depreciation and amortization.................................................. 153,404 152,418
Goodwill........................................................................... 141,102 140,112
Bank-owned life insurance.......................................................... 93,804 92,616
Accrued interest receivable........................................................ 31,647 35,638
Deferred income taxes.............................................................. 88,853 92,157
Other assets....................................................................... 69,482 58,252
------------ -----------
Total assets............................................................. $ 7,229,130 7,342,800
============ ===========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(dollars expressed in thousands, except share and per share data)
March 31, December 31,
2003 2002
---- ----
(unaudited)
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing........................................................ $ 984,903 986,674
Interest-bearing............................................................ 849,399 819,429
Savings....................................................................... 2,134,673 2,176,616
Time:
Time deposits of $100 or more............................................... 438,980 469,904
Other time deposits......................................................... 1,695,639 1,720,197
------------ -----------
Total deposits........................................................... 6,103,594 6,172,820
Short-term borrowings.............................................................. 182,891 265,644
Note payable....................................................................... -- 7,000
Guaranteed preferred beneficial interests in
subordinated debentures....................................................... 294,624 270,039
Accrued interest payable........................................................... 10,937 11,751
Deferred income taxes.............................................................. 55,366 61,204
Accrued expenses and other liabilities............................................. 53,124 35,301
------------ -----------
Total liabilities........................................................ 6,700,536 6,823,759
------------ -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding............................................................. -- --
Class A convertible, adjustable rate, $20.00 par value, 750,000
shares authorized, 641,082 shares issued and outstanding.................... 12,822 12,822
Class B adjustable rate, $1.50 par value, 200,000 shares authorized,
160,505 shares issued and outstanding....................................... 241 241
Common stock, $250.00 par value, 25,000 shares authorized,
23,661 shares issued and outstanding.......................................... 5,915 5,915
Additional paid-in capital......................................................... 5,910 5,910
Retained earnings.................................................................. 452,524 433,689
Accumulated other comprehensive income............................................. 51,182 60,464
------------ -----------
Total stockholders' equity............................................... 528,594 519,041
------------ -----------
Total liabilities and stockholders' equity............................... $ 7,229,130 7,342,800
============ ===========
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three Months Ended
March 31,
---------------------
2003 2002
---- ----
Interest income:
Interest and fees on loans......................................................... $ 90,612 99,042
Investment securities.............................................................. 8,553 7,281
Federal funds sold and other....................................................... 442 289
-------- --------
Total interest income......................................................... 99,607 106,612
-------- --------
Interest expense:
Deposits:
Interest-bearing demand.......................................................... 1,673 1,672
Savings.......................................................................... 6,786 9,169
Time deposits of $100 or more.................................................... 3,685 5,290
Other time deposits.............................................................. 12,194 18,881
Short-term borrowings.............................................................. 602 917
Note payable....................................................................... 136 349
Guaranteed preferred debentures.................................................... 5,368 6,212
-------- --------
Total interest expense........................................................ 30,444 42,490
-------- --------
Net interest income........................................................... 69,163 64,122
Provision for loan losses............................................................... 11,000 13,000
-------- --------
Net interest income after provision for loan losses........................... 58,163 51,122
-------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees...................... 8,644 6,480
Gain on mortgage loans sold and held for sale...................................... 10,678 5,167
Net gain on sales of available-for-sale investment securities...................... 6,259 92
Bank-owned life insurance investment income........................................ 1,271 1,287
Net gain (loss) on derivative instruments.......................................... 7 (339)
Other.............................................................................. 4,786 6,148
-------- --------
Total noninterest income...................................................... 31,645 18,835
-------- --------
Noninterest expense:
Salaries and employee benefits..................................................... 29,359 27,261
Occupancy, net of rental income.................................................... 4,934 4,672
Furniture and equipment............................................................ 4,569 4,143
Postage, printing and supplies..................................................... 1,306 1,542
Information technology fees........................................................ 8,033 8,100
Legal, examination and professional fees........................................... 1,606 1,491
Amortization of intangibles associated with the purchase of subsidiaries........... 532 482
Communications..................................................................... 605 796
Advertising and business development............................................... 1,309 1,444
Other.............................................................................. 7,432 6,927
-------- --------
Total noninterest expense..................................................... 59,685 56,858
-------- --------
Income before provision for income taxes and
minority interest in income of subsidiary................................. 30,123 13,099
Provision for income taxes.............................................................. 11,092 4,771
-------- --------
Income before minority interest in income of subsidiary....................... 19,031 8,328
Minority interest in income of subsidiary............................................... -- 328
-------- --------
Net income.................................................................... 19,031 8,000
Preferred stock dividends............................................................... 196 196
-------- --------
Net income available to common stockholders................................... $ 18,835 7,804
======== ========
Basic earnings per common share......................................................... $ 796.04 329.84
======== ========
Diluted earnings per common share....................................................... $ 784.29 328.30
======== ========
Weighted average common stock outstanding............................................... 23,661 23,661
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Three Months Ended March 31, 2003 and 2002 and Nine Months Ended December 31, 2002
(dollars expressed in thousands, except per share data)
Adjustable Rate Accu-
Preferred Stock mulated
------------------ Other Total
Class A Additional Compre- Compre- Stock-
Conver- Common Paid-in hensive Retained hensive holders'
tible Class B Stock Capital Income Earnings Income Equity
----- ------- ----- ------- ------ -------- ------ ------
Consolidated balances, December 31, 2001......... $12,822 241 5,915 6,074 389,308 34,297 448,657
Three months ended March 31, 2002:
Comprehensive income:
Net income................................. -- -- -- -- 8,000 8,000 -- 8,000
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 534 -- 534 534
Derivative instruments:
Current period transactions............ -- -- -- -- (7,148) -- (7,148) (7,148)
------
Comprehensive income....................... 1,386
======
Class A preferred stock dividends,
$0.30 per share.......................... -- -- -- -- (192) -- (192)
Class B preferred stock dividends,
$0.03 per share.......................... -- -- -- -- (4) -- (4)
------- ---- ----- ----- ------- ------ --------
Consolidated balances, March 31, 2002............ 12,822 241 5,915 6,074 397,112 27,683 449,847
Nine months ended December 31, 2002:
Comprehensive income:
Net income................................. -- -- -- -- 37,167 37,167 -- 37,167
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 8,375 -- 8,375 8,375
Derivative instruments:
Current period transactions............ -- -- -- -- 24,406 -- 24,406 24,406
------
Comprehensive income....................... 69,948
======
Class A preferred stock dividends,
$0.90 per share.......................... -- -- -- -- (577) -- (577)
Class B preferred stock dividends,
$0.08 per share.......................... -- -- -- -- (13) -- (13)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- (164) -- -- (164)
------- ---- ----- ----- ------- ------ -------
Consolidated balances, December 31, 2002......... 12,822 241 5,915 5,910 433,689 60,464 519,041
Three months ended March 31, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 19,031 19,031 -- 19,031
Other comprehensive income, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (5,658) -- (5,658) (5,658)
Derivative instruments:
Current period transactions............ -- -- -- -- (3,624) -- (3,624) (3,624)
------
Comprehensive income....................... 9,749
======
Class A preferred stock dividends,
$0.30 per share.......................... -- -- -- -- (192) -- (192)
Class B preferred stock dividends,
$0.03 per share.......................... -- -- -- -- (4) -- (4)
------- ---- ----- ----- ------- ------ -------
Consolidated balances March 31, 2003............. $12,822 241 5,915 5,910 452,524 51,182 528,594
======= ==== ===== ===== ======= ====== =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Nine Months Ended
March 31, December 31,
------------------ -----------------
2003 2002 2002
---- ---- ----
Unrealized (losses) gains on investment securities
arising during the period..................................... $(1,590) 594 8,374
Less reclassification adjustment for gains (losses)
included in net income........................................ 4,068 60 (1)
------- ------ ------
Unrealized (losses) gains on investment securities................ $(5,658) 534 8,375
======= ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Three Months Ended
March 31,
-----------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income........................................................................... $ 19,031 8,000
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of bank premises and equipment....................... 4,781 4,341
Amortization, net of accretion..................................................... 5,350 3,013
Originations and purchases of loans held for sale.................................. (555,529) (449,574)
Proceeds from the sale of loans held for sale...................................... 563,324 403,130
Provision for loan losses.......................................................... 11,000 13,000
Provision for income taxes......................................................... 11,092 4,771
Payments of income taxes........................................................... (57) (16,038)
Decrease in accrued interest receivable............................................ 4,678 2,648
Interest accrued on liabilities.................................................... 30,444 42,490
Payments of interest on liabilities................................................ (31,402) (38,987)
Gain on mortgage loans sold and held for sale...................................... (10,678) (5,167)
Net gain on sales of available-for-sale investment securities...................... (6,259) (92)
Net (gain) loss on derivative instruments.......................................... (7) 339
Other operating activities, net.................................................... 12,413 (452)
Minority interest in income of subsidiary.......................................... -- 328
--------- --------
Net cash provided by (used in) operating activities............................. 58,181 (28,250)
--------- --------
Cash flows from investing activities:
Cash received (paid) for acquired entities, net of cash
and cash equivalents received (paid)............................................... 14,870 (18,303)
Proceeds from sales of investment securities available for sale...................... 53,777 192
Maturities of investment securities available for sale............................... 388,622 194,948
Maturities of investment securities held to maturity................................. 1,082 1,067
Purchases of investment securities available for sale................................ (193,183) (72,585)
Purchases of investment securities held to maturity.................................. (102) (2,195)
Net decrease in loans................................................................ 22,848 86,897
Recoveries of loans previously charged-off........................................... 6,237 4,561
Purchases of bank premises and equipment............................................. (2,633) (2,554)
Other investing activities, net...................................................... 2,604 2,933
--------- --------
Net cash provided by investing activities....................................... 294,122 194,961
--------- --------
Cash flows from financing activities:
(Decrease) increase in demand and savings deposits................................... (64,477) 31,976
Decrease in time deposits............................................................ (98,022) (88,481)
Decrease in federal funds purchased.................................................. (55,000) (81,000)
Decrease in Federal Home Loan Bank advances.......................................... -- (4,000)
(Decrease) increase in securities sold under agreements to repurchase................ (29,301) 13,471
Advances drawn on note payable....................................................... -- 36,500
Repayments of note payable........................................................... (7,000) (21,000)
Proceeds from issuance of guaranteed preferred beneficial interests
in subordinated debentures......................................................... 24,434 --
Payment of preferred stock dividends................................................. (196) (196)
Other financing activities, net...................................................... -- (12)
--------- --------
Net cash used in financing activities........................................... (229,562) (112,742)
--------- --------
Net increase in cash and cash equivalents....................................... 122,741 53,969
Cash and cash equivalents, beginning of period............................................ 203,251 241,874
--------- --------
Cash and cash equivalents, end of period.................................................. $ 325,992 295,843
========= ========
Noncash investing and financing activities:
Loans transferred to other real estate............................................... $ 10,351 1,245
Loans held for sale transferred to loans............................................. 880 1,586
========= ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of First Banks, Inc. and
subsidiaries (First Banks or the Company) are unaudited and should be read in
conjunction with the consolidated financial statements contained in the 2002
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and conform to predominant practices within the banking
industry. Management of First Banks has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from those
estimates. In the opinion of management, all adjustments, consisting of normal
recurring accruals considered necessary for a fair presentation of the results
of operations for the interim periods presented herein, have been included.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.
The consolidated financial statements include the accounts of First
Banks, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications of 2002 amounts
have been made to conform to the 2003 presentation
First Banks operates through its wholly owned subsidiary bank holding
company, The San Francisco Company (SFC), headquartered in San Francisco,
California, and its wholly owned subsidiary bank, First Bank, headquartered in
St. Louis County, Missouri.
(2) ACQUISITIONS, ACQUISITION AND INTEGRATION COSTS AND OTHER CORPORATE
TRANSACTIONS
On March 31, 2003, First Banks completed its acquisition of Bank of
Ste. Genevieve, Ste. Genevieve, Missouri, from Allegiant Bancorp, Inc.
(Allegiant) in exchange for approximately 974,150 shares of Allegiant common
stock that were previously held by First Banks. The purpose of the acquisition
was to further expand our Midwest banking franchise. First Banks continues to
own approximately 232,000 shares, or approximately 1.52% of the issued and
outstanding shares of Allegiant common stock. At the time of the transaction,
Bank of Ste. Genevieve had $115.1 million in total assets, $42.9 million in
loans, net of unearned discount, $797,000 in investment securities, $93.7
million in deposits and operated two banking locations. The transaction was
accounted for using the purchase method of accounting. Goodwill of approximately
$1.0 million is not expected to be deductible for tax purposes. The core deposit
intangibles were approximately $3.5 million and will be amortized over seven
years utilizing the straight line method. Bank of Ste. Genevieve was merged with
and into First Bank. In addition, on March 31, 2003, First Banks completed the
merger of its two wholly-owned bank subsidiaries, First Bank and First Bank &
Trust, to allow certain administrative and operational economies not available
while the two banks maintained separate charters. Due to the immaterial effect
on previously reported financial information, pro forma disclosures have not
been prepared for the aforementioned transactions.
We accrue certain costs associated with our acquisitions as of the
respective consummation dates. Essentially all of these accrued costs relate
either to adjustments to the staffing levels of the acquired entities or to the
anticipated termination of information technology or item processing contracts
of the acquired entities prior to their stated contractual expiration dates. The
most significant costs that we incur relate to salary continuation agreements,
or other similar agreements, of executive management and certain other employees
of the acquired entities that were in place prior to the acquisition dates.
These agreements provide for payments over periods ranging from one to 14 years
and are triggered as a result of the change in control of the acquired entity.
Other severance benefits for employees that are terminated in conjunction with
the integration of the acquired entities into our existing operations are
normally paid to the recipients within 90 days of the respective consummation
date. The balance of our accrued severance of $2.2 million identified in the
following table is comprised of contractual obligations under salary
continuation agreements to 13 individuals and have remaining terms ranging from
five months to approximately 14 years. Payments made under these agreements are
paid from accrued liabilities and consequently, do not have any impact on our
consolidated statements of income.
A summary of the cumulative acquisition and integration costs
attributable to our acquisitions, which were accrued as of the consummation
dates of the respective acquisitions, is listed below. These acquisition and
integration costs are reflected in accrued and other liabilities in our
consolidated financial statements.
Information
Severance Technology Fees Total
--------- --------------- -----
(dollars expressed in thousands)
Balance at December 31, 2002........................... $ 2,351 28 2,379
Three Months Ended March 31, 2003:
Amounts accrued at acquisition date................. 100 350 450
Payments............................................ (256) -- (256)
------- ------ -------
Balance at March 31, 2003.............................. $ 2,195 378 2,573
======= ====== =======
We also incur costs associated with our acquisitions that are expensed
in our consolidated statements of income. These costs relate exclusively to
additional costs incurred in conjunction with the data processing conversions of
the respective entities.
(3) INTANGIBLE ASSETS ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES,
NET OF AMORTIZATION
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at March 31, 2003 and December 31,
2002:
March 31, 2003 December 31, 2002
---------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles.............. $ 17,391 (2,366) 13,871 (1,869)
Goodwill associated with
purchases of branch offices......... 2,210 (754) 2,210 (718)
--------- ------- ------- -------
Total............................ $ 19,601 (3,120) 16,081 (2,587)
========= ======= ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 139,646 138,620
========= =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $532,000 for the three months ended March
31, 2003, and $482,000 for the comparable period in 2002. Amortization of
intangibles associated with the purchase of subsidiaries, including amortization
of core deposit intangibles and branch purchases, has been estimated through
2008 in the following table, and does not take into consideration any potential
future acquisitions or branch purchases.
(dollars expressed in thousands)
Year ending December 31:
2003 (1)........................................... $ 2,506
2004............................................... 2,632
2005............................................... 2,632
2006............................................... 2,632
2007............................................... 2,632
2008............................................... 2,632
---------
Total........................................... $ 15,666
=========
--------------------------
(1) Includes $532,000 of amortization for the three months ended March 31, 2003.
Changes in the carrying amount of goodwill for the three months ended March 31, 2003 were as follows:
(dollars expressed in thousands)
Balance, beginning of period.......................................... $ 140,112
Goodwill acquired during period....................................... 1,026
Amortization - purchases of branch offices............................ (36)
---------
Balance, end of period................................................ $ 141,102
=========
(4) MORTGAGE BANKING ACTIVITIES
At March 31, 2003 and December 31, 2002, First Banks serviced loans for
others amounting to $1.34 billion and $1.29 billion, respectively. Borrowers'
escrow balances held by First Banks on such loans were $1.8 million and $517,000
at March 31, 2003 and December 31, 2002, respectively. Mortgage servicing rights
are amortized in proportion to the related estimated net servicing income on a
disaggregated, discounted basis over the estimated lives of the related
mortgages considering the level of current and anticipated repayments, which
range from five to ten years. The weighted average amortization period of the
mortgage servicing rights is approximately seven years.
Changes in mortgage servicing rights, net of amortization, for the
periods indicated were as follows:
Three Months Ended
March 31,
--------------------------
2003 2002
---- ----
(dollars expressed in thousands)
Balance, beginning of period......................................... $ 14,882 10,125
Originated mortgage servicing rights................................. 1,973 2,438
Amortization......................................................... (1,177) (817)
--------- ------
Balance, end of period............................................... $ 15,678 11,746
========= ======
The fair value of mortgage servicing rights was $17.1 million and $16.5
million at March 31, 2003 and 2002, respectively, and $17.2 million at December
31, 2002. The predominant risk characteristics of the underlying mortgage loans
used to stratify mortgage servicing rights for purposes of measuring impairment
include size, interest rate, weighted average original term, weighted average
remaining term and estimated prepayment speeds.
The excess of the fair value of mortgage servicing rights over the
carrying value was $1.4 million and $4.8 million at March 31, 2003 and 2002,
respectively, and $2.3 million at December 31, 2002. The decline in the fair
value represents the declining mortgage interest rate environment in 2002 that
resulted in a significant increase in the number of mortgages being prepaid or
refinanced. In addition, the increased prepayment experience that occurred as a
result of the reduced mortgage interest rate environment during 2002 resulted in
a decline in the fair value of the remaining mortgage servicing rights. However,
the decline in the fair value of the mortgage servicing rights did not result in
the fair value being reduced below the carrying value at March 31, 2003.
Amortization of mortgage servicing rights, as it relates to the balance
at March 31, 2003 of $15.7 million, has been estimated through 2007 in the
following table:
(dollars expressed in thousands)
Year ending December 31:
2003 (1)........................................... $ 3,875
2004............................................... 3,742
2005............................................... 3,649
2006............................................... 3,608
2007............................................... 804
---------
Total........................................... $ 15,678
=========
-------------------------
(1) Includes $1.2 million of amortization for the three months
ended March 31, 2003.
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share (EPS) computations for the periods
indicated:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except per share data)
Three Months Ended March 31, 2003:
Basic EPS - income available to common stockholders............. $ 18,835 23,661 $ 796.04
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 599 (11.75)
-------- ------- --------
Diluted EPS - income available to common stockholders........... $ 19,027 24,260 $ 784.29
======== ======= ========
Three Months Ended March 31, 2002:
Basic EPS - income available to common stockholders............. $ 7,804 23,661 $ 329.84
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 696 (1.54)
-------- ------- --------
Diluted EPS - income available to common stockholders........... $ 7,996 24,357 $ 328.30
======== ======= ========
(6) TRANSACTIONS WITH RELATED PARTIES
First Title Guarantee LLC (First Title), a corporation established and
administered by and for the benefit of First Banks' Chairman and members of his
immediate family, received approximately $113,000 and $84,000 for the three
months ended March 31, 2003 and 2002, respectively, in commissions for policies
purchased by First Banks or customers of the subsidiary bank from unaffiliated,
third-party insurors. The insurance premiums on which the aforementioned
commissions were earned were competitively bid, and First Banks deems the
commissions First Title earned from unaffiliated third-party companies to be
comparable to those that would have been earned by an unaffiliated third-party
agent.
First Brokerage America, L.L.C., a limited liability corporation which
is indirectly owned by First Banks' Chairman and members of his immediate
family, received approximately $868,000 and $757,000 for the three months ended
March 31, 2003 and 2002, respectively, in commissions paid by unaffiliated
third-party companies. The commissions received were primarily in connection
with the sales of annuities, securities and other insurance products to
customers of the subsidiary bank.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and members of his immediate family, provides information
technology and various related services to First Banks, Inc. and its subsidiary
bank. Fees paid under agreements with First Services, L.P. were $6.7 million for
the three months ended March 31, 2003 and 2002. During the three months ended
March 31, 2003 and 2002, First Services, L.P. paid First Banks $1.2 million and
$898,000, respectively, in rental fees for the use of data processing and other
equipment owned by First Banks.
During 2002, First Capital America, Inc., a corporation owned by First
Banks' Chairman and members of his immediate family, received approximately $1.0
million of origination and servicing fees associated with commercial leases
originated and serviced for the subsidiary bank by the employees of First
Capital America, Inc. Effective January 1, 2003, this relationship was
discontinued.
First Banks' subsidiary bank has had in the past, and may have in the
future, loan transactions in the ordinary course of business with its directors
or their affiliates. These loan transactions have been and will be on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unaffiliated persons and did not involve more
than the normal risk of collectibility or present other unfavorable features.
Loans to directors, their affiliates and executive officers of First Banks, Inc.
were approximately $12.6 million and $12.8 million at March 31, 2003 and
December 31, 2002, respectively. First Banks' subsidiary bank does not extend
credit to its officers or to officers of First Banks, Inc., except extensions of
credit secured by mortgages on personal residences, loans to purchase
automobiles and personal credit card accounts.
(7) REGULATORY CAPITAL
First Banks and its subsidiary bank are subject to various regulatory
capital requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on First Banks' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, First Banks and its subsidiary bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and its subsidiary bank to maintain minimum amounts
and ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of March 31, 2003, First Banks and its subsidiary bank were each
well capitalized under the applicable regulations.
As of March 31, 2003, the most recent notification from First Banks'
primary regulator categorized First Banks and its subsidiary bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, First Banks and its subsidiary bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table below. At March 31, 2003 and December 31, 2002, First
Banks' and its subsidiary bank's required and actual capital ratios were as
follows:
Actual To Be Well
------------------------ Capitalized Under
March 31, December 31, For Capital Prompt Corrective
2003 2002 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 11.31% 10.68% 8.0% 10.0%
First Bank.............................. 10.65 10.75 8.0 10.0
First Bank & Trust (1).................. -- 10.18 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 7.83 7.47 4.0 6.0
First Bank.............................. 9.39 9.49 4.0 6.0
First Bank & Trust (1).................. -- 8.93 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 6.83 6.45 3.0 5.0
First Bank.............................. 8.20 7.79 3.0 5.0
First Bank & Trust (1) ................. -- 8.26 3.0 5.0
- ---------------------------
(1) First Bank & Trust was merged with and into First Bank on March 31, 2003.
(8) BUSINESS SEGMENT RESULTS
First Banks' business segment is its subsidiary bank. The reportable
business segment is consistent with the management structure of First Banks, the
subsidiary bank and the internal reporting system that monitors performance.
Through its branch network, the subsidiary bank provides similar
products and services in its defined geographic areas. The products and services
offered include a broad range of commercial and personal deposit products,
including demand, savings, money market and time deposit accounts. In addition,
the subsidiary bank markets combined basic services for various customer groups,
including packaged accounts for more affluent customers, and sweep accounts,
lock-box deposits and cash management products for commercial customers. The
subsidiary bank also offers both consumer and commercial loans. Consumer lending
includes residential real estate, home equity and installment lending.
Commercial lending includes commercial, financial and agricultural loans, real
estate construction and development loans, commercial real estate loans,
asset-based loans, commercial leasing and trade financing. Other financial
services include mortgage banking, debit cards, brokerage services,
credit-related insurance, internet banking, automated teller machines, telephone
banking, safe deposit boxes and trust, private banking and institutional money
management services. The revenues generated by the business segment consist
primarily of interest income, generated from the loan and investment security
portfolios, and service charges and fees, generated from the deposit products
and services. The geographic areas include eastern Missouri, Illinois, southern
and northern California and Houston, Dallas, Irving, McKinney and Denton, Texas.
The products and services are offered to customers primarily within the bank's
respective geographic areas.
The business segment results are consistent with First Banks' internal
reporting system and, in all material respects, with accounting principles
generally accepted in the United States of America and practices predominant in
the banking industry.
The business segment results are summarized as follows:
Corporate,
Other and
Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------- ----------------------- ------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2003 2002 (2) 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $ 965,524 1,114,479 5,102 22,841 970,626 1,137,320
Loans, net of unearned discount......... 5,371,458 5,432,589 -- (1) 5,371,458 5,432,588
Goodwill................................ 141,102 140,112 -- -- 141,102 140,112
Total assets............................ 7,223,079 7,357,155 6,051 (14,355) 7,229,130 7,342,800
Deposits................................ 6,148,292 6,189,928 (44,698) (17,108) 6,103,594 6,172,820
Note payable............................ -- -- -- 7,000 -- 7,000
Stockholders' equity.................... 785,773 777,548 (257,179) (258,507) 528,594 519,041
========== ========= ========= ========= ========= =========
Corporate,
Other and
Intercompany
First Bank Reclassifications (1) Consolidated Totals
---------------------- ----------------------- ------------------------
Three Months Ended Three Months Ended Three Months Ended
March 31, March 31, March 31,
---------------------- ----------------------- ------------------------
2003 2002 (2) 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Income statement information:
Interest income.......................... $ 99,528 106,608 79 4 99,607 106,612
Interest expense......................... 25,004 36,091 5,440 6,399 30,444 42,490
-------- ------- ------- --------- -------- -------
Net interest income................. 74,524 70,517 (5,361) (6,395) 69,163 64,122
Provision for loan losses................ 11,000 13,000 -- -- 11,000 13,000
-------- ------- ------- --------- -------- -------
Net interest income
after provision
for loan losses................... 63,524 57,517 (5,361) (6,395) 58,163 51,122
Noninterest income....................... 25,627 19,407 6,018 (572) 31,645 18,835
Noninterest expense...................... 59,313 55,681 372 1,177 59,685 56,858
-------- ------- ------- --------- -------- -------
Income before provision
for income taxes
and minority interest
in income of subsidiary........... 29,838 21,243 285 (8,144) 30,123 13,099
Provision for income taxes............... 10,483 7,468 609 (2,697) 11,092 4,771
-------- ------- ------- --------- -------- -------
Income before minority
interest in income of
subsidiary........................ 19,355 13,775 (324) (5,447) 19,031 8,328
Minority interest in income
of subsidiary......................... -- -- -- 328 -- 328
-------- ------- ------- --------- -------- -------
Net income.......................... $ 19,355 13,775 (324) (5,775) 19,031 8,000
======== ======= ======= ========= ======== =======
- ---------------------------
(1) Corporate and other includes $5.4 million and $6.2 million of guaranteed preferred debentures expense for the three months
ended March 31, 2003 and 2002, respectively. The applicable income tax benefit associated with the guaranteed preferred
debentures expense was $1.9 million and $2.2 million for the three months ended March 31, 2003 and 2002, respectively.
(2) First Bank & Trust was merged with and into First Bank on March 31, 2003 as further described in Note 2 to our accompanying
consolidated financial statements. Accordingly, the 2002 amounts have been restated to reflect this combination of entities
under common control.
(9) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBENTURES
On March 20, 2003, First Bank Statutory Trust (FBST), a newly formed
Connecticut statutory trust subsidiary of First Banks, issued 25,000 shares of
8.10% cumulative trust preferred securities at $1,000 per share in a private
placement, and issued 774 shares of common securities to First Banks at $1,000
per share. First Banks owns all of the common securities of FBST. The gross
proceeds of the offering were used by FBST to purchase $25.0 million of 8.10%
junior subordinated debentures from First Banks, maturing on March 20, 2033. The
maturity date of the subordinated debentures may be shortened to a date not
earlier than March 20, 2008, if certain conditions are met. The subordinated
debentures are the sole asset of FBST. In connection with the issuance of the
FBST preferred securities, First Banks made certain guarantees and commitments
that, in the aggregate, constitute a full and unconditional guarantee by First
Banks of the obligations of FBST under the FBST preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to FBST, net of
offering expenses, were $24.5 million. Distributions on FBST's preferred
securities are payable quarterly in arrears, beginning March 31, 2003, and are
included in interest expense in the consolidated statements of income.
Distributions on FBST's preferred securities were $64,000 for the three months
ended March 31, 2003.
(10) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty
contracts. For value received, and for the purpose of inducing a pension fund
and its trustees and a welfare fund and its trustees (the Funds) to conduct
business with Missouri Valley Partners, Inc. (MVP), First Bank's institutional
investment management subsidiary, First Banks irrevocably and unconditionally
guaranteed payment of and promised to pay to each of the Funds any amounts up to
the sum of $5,000,000 to the extent MVP is liable to the Funds for a breach of
the Investment Management Agreements (including the Investment Policy Statement
and Investment Guidelines), by and between MVP and the Funds and/or any
violation of the Employee Retirement Income Security Act by MVP resulting in
liability to the Funds. The guaranties are continuing guaranties of all
obligations that may arise for transactions occurring prior to termination of
the Investment Management Agreements and are co-existent with the term of the
Investment Management Agreements. The Investment Management Agreements have no
specified term but may be terminated at any time upon written notice by the
Trustees or, at First Banks' option, upon thirty days written notice to the
Trustees. In the event of termination of the Investment Management Agreements,
such termination shall have no effect on the liability of First Banks with
respect to obligations incurred before such termination. The obligations of
First Banks are joint and several with those of MVP. First Banks does not have
any recourse provisions that would enable it to recover from third parties any
amounts paid under the contracts nor does First Banks hold any assets as
collateral that, upon occurrence of a required payment under the contract, could
be liquidated to recover all or a portion of the amount(s) paid. At March 31,
2003 and December 31, 2002, First Banks had not recorded a liability for the
obligations associated with these guaranty contracts, as the likelihood that
First Banks will be required to make payments under the contracts is remote.
(11) SUBSEQUENT EVENT
On April 1, 2003, First Preferred Capital Trust IV (First Preferred
IV), a newly formed Delaware business trust subsidiary of First Banks, issued
1.84 million shares of 8.15% cumulative trust preferred securities at $25 per
share in an underwritten public offering, and issued 56,908 shares of common
securities to First Banks at $25 per share. First Banks owns all of First
Preferred IV's common securities. The gross proceeds of the offering were used
by First Preferred IV to purchase approximately $47.4 million of 8.15%
subordinated debentures from First Banks, maturing on June 30, 2033. The
maturity date may be shortened to a date not earlier than June 30, 2008, if
certain conditions are met. The subordinated debentures are the sole asset of
First Preferred IV. In connection with the issuance of the preferred securities,
First Banks made certain guarantees and commitments that, in the aggregate,
constitute a full and unconditional guarantee by First Banks of the obligations
of First Preferred IV under the First Preferred IV preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to First
Preferred IV, net of underwriting fees and offering expenses, were approximately
$44.2 million. Distributions on First Preferred IV's preferred securities are
payable quarterly in arrears, beginning on June 30, 2003, and will be included
in interest expense in the consolidated statements of income. First Banks
utilized the entire net proceeds of the offering to redeem $88.9 million of
9.25% trust preferred securities issued by First Preferred Capital Trust in
1997. The remaining funds necessary were provided from available cash of
approximately $20.2 million and the net proceeds of $24.5 million from FBST's
issuance of additional trust preferred securities as described in Note 9 to our
accompanying consolidated financial statements.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and in the economy, including the negative impact on the economy resulting
from the events of September 11, 2001 in New York City and Washington D.C. and
the national response to those events as well as the threat of future terrorist
activities, existing and potential wars and/or military actions related thereto,
and domestic responses to terrorism or threats of terrorism; the impact of laws
and regulations applicable to us and changes therein; the impact of accounting
pronouncements applicable to us and changes therein; competitive conditions in
the markets in which we conduct our operations, including competition from
banking and non-banking companies with substantially greater resources than us,
some of which may offer and develop products and services not offered by us; our
ability to control the composition of our loan portfolio without adversely
affecting interest income; the credit risk associated with consumers who may not
repay loans; the geographic dispersion of our offices; the impact our hedging
activities may have on our operating results; the highly regulated environment
in which we operate; and our ability to respond to changes in technology. With
regard to our efforts to grow through acquisitions, factors that could affect
the accuracy or completeness of forward-looking statements contained herein
include the competition of larger acquirers with greater resources; fluctuations
in the prices at which acquisition targets may be available for sale; the impact
of making acquisitions without using our common stock; and possible asset
quality issues, unknown liabilities or integration issues with the businesses
that we have acquired. We do not have a duty to and will not update these
forward-looking statements. Readers of our Form 10-Q should therefore not place
undue reliance on forward-looking statements.
General
We are a registered bank holding company incorporated in Missouri and
headquartered in St. Louis County, Missouri. Through the operation of our
subsidiaries, we offer a broad array of financial services to consumer and
commercial customers. We currently operate a banking subsidiary with 152 branch
offices throughout California, Illinois, Missouri and Texas. At March 31, 2003,
we had total assets of $7.23 billion, loans, net of unearned discount, of $5.37
billion, total deposits of $6.10 billion and total stockholders' equity of
$528.6 million.
Through our subsidiary bank, we offer a broad range of commercial and
personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, we market combined basic services for various
customer groups, including packaged accounts for more affluent customers, and
sweep accounts, lock-box deposits and cash management products for commercial
customers. We also offer both consumer and commercial loans. Consumer lending
includes residential real estate, home equity and installment lending.
Commercial lending includes commercial, financial and agricultural loans, real
estate construction and development loans, commercial real estate loans,
asset-based loans, commercial leasing and trade financing. Other financial
services include mortgage banking, debit cards, brokerage services,
credit-related insurance, internet banking, automated teller machines, telephone
banking, safe deposit boxes and trust, private banking and institutional money
management services.
We operate through our wholly owned subsidiary bank holding company,
The San Francisco Company, or SFC, headquartered in San Francisco, California,
and its wholly owned subsidiary bank, First Bank, headquartered in St. Louis
County, Missouri.
Primary responsibility for managing our subsidiary banking unit rests
with its officers and directors. However, in keeping with our policy, we
centralize overall corporate policies, procedures and administrative functions
and provide operational support functions for our subsidiary bank. This practice
allows us to achieve various operating efficiencies while allowing our
subsidiary bank to focus on customer service.
Financial Condition
Our total assets were $7.23 billion and $7.34 billion at March 31, 2003
and December 31, 2002, respectively. The decrease in total assets is primarily
attributable to reduced loan demand and an anticipated level of attrition
associated with low deposit rates offset by the acquisition of Bank of Ste.
Genevieve on March 31, 2003, which provided assets of $115.1 million. Federal
funds sold increased by $126.9 million due to the investment of excess funds
resulting from reduced loan demand and maturities of investment securities.
Investment securities decreased $166.7 million to $970.6 million at March 31,
2003 from $1.14 billion at December 31, 2002 primarily due to $388.6 million of
maturities of available-for-sale investment securities and $17.9 million
relating to the exchange of Allegiant Bancorp, Inc. common stock for a 100%
ownership in Bank of Ste. Genevieve, offset by purchases of available-for-sale
investment securities of $193.2 million and $797,000 in investment securities
acquired with Bank of Ste. Genevieve. The net proceeds associated with the
decline in investment securities were utilized primarily to fund our reduction
in total deposits as further discussed below. The decrease in assets was also
due to the decrease in loans, net of unearned discount, of $61.1 million, which
is further discussed under "--Loans and Allowance for Loan Losses." In addition,
other assets increased $11.2 million to $69.5 million at March 31, 2003 from
$58.3 million at December 31, 2002. This increase is primarily due to an $8.2
million increase in other real estate as further discussed under "--Loans and
Allowance for Loan Losses." Total deposits also decreased by $69.2 million to
$6.10 billion at March 31, 2003 from $6.17 billion at December 31, 2002. The
decrease primarily reflects an anticipated level of attrition associated with
low deposit rates, continued aggressive competition within our market areas and
normal cyclical trends typically experienced during the first quarter of each
calendar year offset by the $93.7 million in deposits acquired from Bank of Ste.
Genevieve. Short-term borrowings decreased $82.8 million to $182.9 million at
March 31, 2003 from $265.6 million at December 31, 2002, primarily due to a
$55.0 million reduction in federal funds purchased. Our note payable was fully
repaid during the three months ended March 31, 2003 through dividends from our
subsidiaries. Guaranteed preferred beneficial interests in subordinated
debentures increased $24.6 million due primarily to the additional trust
preferred securities issued by First Bank Statutory Trust on March 20, 2003, as
more fully described in Note 9 to our consolidated financial statements.
Furthermore, accrued expenses and other liabilities increased $17.8 million to
$53.1 million at March 31, 2003 compared to $35.3 million at December 31, 2002.
The increase primarily reflects an increase in accrued income taxes offset by
the timing of certain payments. Accumulated other comprehensive income decreased
$9.3 million to $51.2 million at March 31, 2003 from $60.5 million at December
31, 2002 due to $5.7 million associated with the change in unrealized gains on
available-for-sale investment securities as accounted for under Statement of
Financial Accounting Standards, or SFAS, No. 115, including the $6.3 million
reversal of the unrealized gain attributable to the exchange of the Allegiant
common stock, and $3.6 million associated with our derivative financial
instruments as accounted for under SFAS No. 133.
Results of Operations
Net Income
Net income was $19.0 million for the three months ended March 31, 2003,
compared to $8.0 million for the comparable period in 2002. Results for the
three months ended March 31, 2003 reflect increased net interest income and
noninterest income offset by higher operating expenses. Included in the first
quarter of 2003 was a gain of $6.3 million, before related income taxes,
relating to the partial exchange of our investment in an unaffiliated financial
institution for a 100% ownership in one of the unaffiliated financial
institutions' banking subsidiaries. The increase in earnings in 2003 reflects
our efforts to increase our net interest margin and improve our asset quality.
Throughout 2002, we experienced higher-than-normal loan charge-offs, loan
delinquencies and nonperforming loans that led to increased provisions for loan
losses, thereby reducing net income. While we believe we were successful in
addressing the asset quality problems during 2002, we are continuing to closely
monitor our operations to address the ongoing challenges posed by the current
economic environment, including reduced loan demand and lower prevailing
interest rates. We experienced continuing growth of net interest income
primarily resulting from the earnings on our interest rate swap agreements that
we entered into in conjunction with our interest rate risk management program,
which mitigate the effects of decreasing interest rates. In addition, earning
assets increased as a result of our acquisitions of Plains Financial Corporation
in January 2002 and two Texas branch purchases in June 2002, which provided
assets of $256.3 million and $63.7 million, respectively. Net interest income
was also impacted by an increase in guaranteed preferred debentures expense
resulting from the issuance of trust preferred securities by First Bank Capital
Trust in April 2002 and First Bank Statutory Trust in March 2003. However,
prevailing low interest rates, generally weaker loan demand and overall economic
conditions continue to exert pressure on our net interest income.
Noninterest income was $31.6 million and $18.8 million for the three
months ended March 31, 2003 and 2002, respectively. The increase in noninterest
income is primarily due to a $6.3 million gain on the exchange of common stock
of Allegiant, held by us for a 100% ownership interest in Bank of Ste.
Genevieve. The increase is also due to gains on mortgage loans sold, which
increased $5.5 million, or 106.7%, to $10.7 million for the three months ended
March 31, 2003 from $5.2 million for the comparable period in 2002. This
increase reflects growth of our mortgage banking activities as well as high
volumes of new originations and refinancings related to continued reductions in
mortgage loan rates. Higher noninterest income for 2003 also reflects increases
in service charges on deposit accounts and loan servicing fees.
Operating expenses increased by $2.8 million to $59.7 million from
$56.9 million for the three months ended March 31, 2003 and 2002, respectively.
The increased operating expenses primarily result from increases in salaries and
employee benefit expenses associated with acquisitions and staff realignments
surrounding our core business strategies and a $1.1 million write-down on an
operating lease associated with the commercial leasing business. These higher
operating expenses, exclusive of the operating lease, are reflective of recently
completed acquisitions and ongoing investments made in conjunction with the
execution of our overall business plan.
Net Interest Income
Net interest income (expressed on a tax equivalent basis) increased to
$69.5 million, or 4.36% of average interest-earning assets, for the three months
ended March 31, 2003, from $64.4 million, or 4.20% of average interest-earning
assets, for the comparable period in 2002. We credit the increased net interest
income primarily to the net interest-earning assets provided by our acquisitions
completed during 2002 as well as earnings on our interest rate swap agreements
that we entered into in conjunction with our interest rate risk management
program. As further discussed under "--Interest Rate Risk Management," for the
three months ended March 31, 2003, these agreements provided net interest income
of $15.0 million, in comparison to $11.2 million for the comparable period in
2002. The increase in net interest income, however, was partially offset by
lower prevailing interest rates, generally weaker loan demand and overall
economic conditions, which continue to exert pressure on our net interest
income. Guaranteed preferred debentures expense was $5.4 million for the three
months ended March 31, 2003, compared to $6.2 million for the comparable period
in 2002. The decrease for 2003 primarily reflects the earnings associated with
our interest rate swap agreements entered into in May and June of 2002 as
further discussed under "--Interest Rate Risk Management," partially offset by
the issuance of $25.0 million of additional trust preferred securities in April
2002 and on March 20, 2003.
Average loans, net of unearned discount, were $5.36 billion for the
three months ended March 31, 2003, in comparison to $5.50 billion for the
comparable period in 2002. The yield on our loan portfolio also decreased to
6.87% for the three months ended March 31, 2003, in comparison to 7.32% for the
comparable period in 2002. We attribute the decline in the average balance and
yields primarily to general economic conditions resulting in continued weak loan
demand and lower prevailing interest rates. The reduced level of interest income
earned on our loan portfolio as a result of declining interest rates and
increased competition within our market areas was partially mitigated by the
earnings associated with our interest rate swap agreements.
For the three months ended March 31, 2003, the aggregate weighted
average rate paid on our deposit portfolio decreased to 1.91% from 2.89% for the
comparable period in 2002. We attribute the decline in rates paid for the three
months ended March 31, 2003 primarily to rates paid on savings and time
deposits, which have continued to decline in conjunction with the interest rate
reductions previously discussed. The decline also reflects our continued efforts
to restructure the composition of our deposit base as the majority of our
deposit development programs are directed toward increased transaction accounts,
such as demand and savings accounts, rather than time deposits, and emphasize
attracting more than one account relationship with customers.
The aggregate weighted average rate paid on our note payable was 14.07%
for the three months ended March 31, 2003, compared to 3.07% for the comparable
period in 2002. The increase in the weighted average rate paid for the three
months ended March 31, 2003 primarily reflects increased commitment, arrangement
and other fees paid during the first quarter to amend our secured credit
agreement. Due to the small average balance outstanding on our note payable
during the three months ended March 31, 2003, the timing of the recognition of
these fees results in a disproportionate weighted average rate paid for the
period. Amounts outstanding under our $45.0 million line of credit with a group
of unaffiliated financial institutions bear interest at the lead bank's
corporate base rate or, at our option, at the Eurodollar rate plus a margin
determined by the outstanding balance and our profitability. Thus, our revolving
credit line represents a relatively high-cost funding source as increased
advances have the effect of increasing the weighted average rate of non-deposit
liabilities. The overall cost of this funding source, however, has been
significantly mitigated by the reductions in the prime lending rate and in the
outstanding balance of the note payable, which was fully repaid during the three
months ended March 31, 2003. The aggregate weighted average rate paid on our
short-term borrowings also declined for the three months ended March 31, 2003,
as compared to the comparable period in 2002, reflecting the current interest
rate environment.
The aggregate weighted average rate paid on our guaranteed preferred
debentures declined to 7.96% for the three months ended March 31, 2003, from
10.67% for the comparable period in 2002. The decreased rates primarily reflect
the earnings impact of our interest rate swap agreements into in May and June of
2002.
The following table sets forth, on a tax-equivalent basis, certain
information relating to First Banks' average balance sheets, and reflects the
average yield earned on interest-earning assets, the average cost of
interest-bearing liabilities and the resulting net interest income for the three
months ended March 31, 2003 and 2002:
Three Months Ended March 31,
-----------------------------------------------------
2003 2002
------------------------ ------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------ ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1) (2) (3) (4) ................................ $5,359,976 90,737 6.87% $5,495,047 99,122 7.32%
Investment securities (4) ............................ 960,449 8,791 3.71 657,997 7,517 4.63
Federal funds sold and other.......................... 143,470 442 1.25 74,054 289 1.58
---------- ------- ---------- --------
Total interest-earning assets.................. 6,463,895 99,970 6.27 6,227,098 106,928 6.96
------- --------
Nonearning assets......................................... 722,369 672,056
---------- ----------
Total assets................................... $7,186,264 6,899,154
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand deposits................... $ 840,434 1,673 0.81% $ 660,288 1,672 1.03%
Savings deposits................................... 2,167,440 6,786 1.27 1,913,728 9,169 1.94
Time deposits of $100 or more...................... 457,368 3,685 3.27 505,237 5,290 4.25
Other time deposits (3)............................ 1,691,225 12,194 2.92 1,829,492 18,881 4.19
---------- ------- ---------- --------
Total interest-bearing deposits................ 5,156,467 24,338 1.91 4,908,745 35,012 2.89
Short-term borrowings................................. 181,427 602 1.35 175,869 917 2.11
Notes payable......................................... 3,919 136 14.07 46,063 349 3.07
Guaranteed preferred debentures (3)................... 273,465 5,368 7.96 236,081 6,212 10.67
---------- ------- ---------- --------
Total interest-bearing liabilities............. 5,615,278 30,444 2.20 5,366,758 42,490 3.21
------- --------
Noninterest-bearing liabilities:
Demand deposits....................................... 927,147 938,796
Other liabilities..................................... 116,794 142,829
---------- ----------
Total liabilities.............................. 6,659,219 6,448,383
Stockholders' equity...................................... 527,045 450,771
---------- ----------
Total liabilities and stockholders' equity..... $7,186,264 $6,899,154
========== ==========
Net interest income....................................... 69,526 64,438
======= ========
Interest rate spread...................................... 4.07% 3.75%
Net interest margin (5)................................... 4.36 4.20
===== =====
- --------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent
adjustments were approximately $363,000 and $316,000 for the three months ended March 31, 2003 and 2002,
respectively.
(5) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average
interest-earning assets.
Provision for Loan Losses
The provision for loan losses was $11.0 million and $13.0 million for
the three months ended March 31, 2003 and 2002, respectively. During the first
quarter of 2002, we experienced an increasing level of problem loans and related
loan charge-offs and past due loans resulting from the economic conditions
within our markets, additional problems identified in two acquired loan
portfolios and continuing deterioration in the portfolio of leases to the
airline industry necessitating a higher provision for loan losses than prior
periods. While net loan charge-offs decreased to $2.5 million for the three
months ended March 31, 2003, compared to $11.8 million for the comparable period
in 2002; nonperforming assets at March 31, 2003 increased to $86.9 million from
$82.8 million at December 31, 2002 and $67.8 million at March 31, 2002. In
recognition of this, our allowance for loan losses increased to $108.7 million
at March 31, 2003, compared to $99.4 million at December 31, 2002 and $99.7
million at March 31, 2002. Management expects nonperforming assets to remain at
the higher levels experienced over the past year and considers these trends in
its overall assessment of the adequacy of the allowance for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $31.6 million and $18.8 million for the three
months ended March 31, 2003 and 2002, respectively. Noninterest income consists
primarily of service charges on deposit accounts and customer service fees,
mortgage-banking revenues, net gain on sales of available-for-sale investment
securities, net gains and losses on derivative instruments and other income.
Service charges on deposit accounts and customer service fees were $8.6
million and $6.5 million for the three months ended March 31, 2003 and 2002,
respectively. We attribute the increase in service charges and customer service
fees to:
>> our acquisitions completed during 2002;
>> additional products and services available and utilized by our
expanding base of retail and commercial customers;
>> increased fee income resulting from revisions of customer service
charge rates, effective July 1, 2002, and enhanced control of fee
waivers; and
>> increased income associated with automated teller machine
services and debit cards.
The gain on mortgage loans sold and held for sale was $10.7 million and
$5.2 million for the three months ended March 31, 2003 and 2002, respectively.
The increase reflects the growth of our mortgage banking activities as well as
continued reductions in mortgage loan rates, resulting in high volumes of new
originations and refinancings.
During the three months ended March 31, 2003, we recorded a $6.3
million gain on the exchange of 974,150 shares of our Allegiant common stock for
a 100% ownership in Bank of Ste. Genevieve as further discussed in Note 2 to our
consolidated financial statements.
The net gain on derivative instruments was $7,000 for the three months
ended March 31, 2003 compared to a net loss of $339,000 for the comparable
period in 2002, reflecting changes in the fair value of our interest rate cap
agreements and fair value hedges.
Other income was $4.8 million and $6.1 million for the three months
ended March 31, 2003 and 2002, respectively. The primary components of this
decrease were:
>> a decline of approximately $507,000 in loan servicing fees due to
increased amortization of mortgage servicing rights and a higher
level of interest shortfall;
>> a gain of approximately $448,000 recorded in March 2002 on the
sale of certain operating lease equipment associated with
equipment leasing activities that we acquired in conjunction with
our acquisition of Bank of San Francisco in December 2000;
>> a decline of approximately $156,000 in brokerage revenue
primarily associated with overall market conditions and customer
demand;
>> a decline of approximately $131,000 in rental income associated
with our commercial leasing activities; offset by
>> increased rental fees from First Services, L.P. of approximately
$272,000 for the use of data processing and other equipment owned
by First Banks;
>> increased portfolio management fee income of approximately
$165,000 associated our Institutional Money Management division;
>> an increase of approximately $147,000 in trust department fees
due to higher charges associated with management of accounts;
>> increased earnings associated with our international banking
products; and
>> our acquisitions completed during 2002.
Noninterest Expense
Noninterest expense was $59.7 million and $56.9 million for the three
months ended March 31, 2003 and 2002, respectively. The increase reflects the
noninterest expense of our acquisitions completed during 2002 as well as general
increases in salaries and employee benefit expenses, occupancy and furniture and
equipment expenses, legal, examination and professional fees and other expense
offset by a decline in information technology fees and communications expenses.
Salaries and employee benefits were $29.4 million and $27.3 million for
the three ended March 31, 2003 and 2002, respectively. We primarily associate
the increase with our 2002 acquisitions, higher commissions paid to mortgage
loan originators due to continued higher loan volumes, and staff realignments
surrounding our core business strategies. However, the increase also reflects
higher salary and employee benefit costs associated with employing and retaining
qualified personnel.
Occupancy, net of rental income, and furniture and equipment expense
totaled $9.5 million and $8.8 million for the three months ended March 31, 2003
and 2002, respectively. We primarily attribute the increase to our acquisitions,
technology expenditures for equipment, the relocation of certain branches and
operational areas, increased depreciation expense associated with capital
expenditures and the continued expansion and renovation of various corporate and
branch offices.
Information technology fees were $8.0 million and $8.1 million for the
three months ended March 31, 2003 and 2002, respectively. As more fully
described in Note 6 to our consolidated financial statements, First Services,
L.P. provides information technology and operational support services to our
subsidiaries and us. We attribute the decline in fees to expenses associated
with the data processing conversions of acquisitions completed in the first
quarter of 2002 offset by growth and technological advancements consistent with
our product and service offerings, continued expansion and upgrades to
technological equipment, networks and communication channels.
Legal, examination and professional fees were $1.6 million and $1.5
million for the three months ended March 31, 2003 and 2002, respectively. We
primarily attribute the increase in these fees to the continued expansion of
overall corporate activities, the ongoing professional services utilized by
certain of our acquired entities and increased legal fees associated with
commercial loan documentation, collection efforts, expanded corporate activities
and certain defense litigation particularly related to acquired entities.
Amortization of intangibles associated with the purchase of
subsidiaries was $532,000 and $482,000 for the three months ended March 31, 2003
and 2002, respectively. The increase is due to goodwill and core deposit
intangibles associated with our 2002 acquisitions.
Other expense was $7.4 million and $6.9 million for the three months
ended March 31, 2003 and 2002, respectively. Other expense encompasses numerous
general and administrative expenses including travel, meals and entertainment,
insurance, freight and courier services, correspondent bank charges,
miscellaneous losses and recoveries, memberships and subscriptions, transfer
agent fees and sales taxes. Included in other expense for the three months ended
March 31, 2003 and 2002 were write-downs of $1.1 million and $1.3 million,
respectively, on two operating leases associated with our commercial leasing
business. We attribute the majority of the increase in other expense for the
three months ended March 31, 2003 to:
>> increased other real estate expenditures of approximately
$832,000 primarily associated with the operation of a residential
and recreational development property transferred to other real
estate in January 2003;
>> expenses associated with our acquisitions completed during 2002;
and
>> continued growth and expansion of our banking franchise.
Provision for Income Taxes
The provision for income taxes was $11.1 million and $4.8 million for
the three months ended March 31, 2003 and 2002, representing an effective income
tax rate of 36.8% and 36.4%, respectively. The increase in the effective income
tax rate reflects an increase in the amount of our state tax liability.
Interest Rate Risk Management
We utilize derivative financial instruments to assist in our management
of interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The derivative instruments we
hold are summarized as follows:
March 31, 2003 December 31, 2002
----------------------- -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $1,050,000 2,299 1,050,000 2,179
Fair value hedges.................................... 326,200 8,976 301,200 11,449
Interest rate cap agreements......................... 450,000 27 450,000 94
Interest rate lock commitments....................... 126,000 -- 89,000 --
Forward commitments to sell
mortgage-backed securities....................... 259,000 -- 235,000 --
========== ====== ========= ======
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
our credit exposure through our use of these instruments. The credit exposure
represents the accounting loss we would incur in the event the counterparties
failed completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value.
During the three months ended March 31, 2003 and 2002, the net interest
income realized on our derivative financial instruments was $15.0 million and
$11.2 million, respectively. The increase is primarily due to interest income
associated with the additional swap agreements entered into during May and June
2002 as well as the decline in prevailing interest rates. In addition, we
realized a net gain on derivative instruments, which is included in noninterest
income, of $7,000 for the three months ended March 31, 2003, compared to a net
loss of $339,000 for the comparable period in 2002, which reflects changes in
the fair value of our interest rate cap agreements and fair value hedges.
Cash Flow Hedges
During September 2000, March 2001, April 2001 and March 2002, we
entered into $600.0 million, $200.0 million, $175.0 million and $150.0 million
notional amount, respectively, of interest rate swap agreements to effectively
lengthen the repricing characteristics of certain interest-earning assets to
correspond more closely with their funding source with the objective of
stabilizing cash flow, and accordingly, net interest income over time. The
underlying hedged assets are certain loans within our commercial loan portfolio.
The swap agreements, which have been designated as cash flow hedges, provide for
us to receive a fixed rate of interest and pay an adjustable rate of interest
equivalent to the weighted average prime lending rate minus 2.70%, 2.82%, 2.82%
and 2.80%, respectively. The terms of the swap agreements provide for us to pay
and receive interest on a quarterly basis. In November 2001, we terminated $75.0
million notional amount of the swap agreements originally entered into in April
2001, which would have expired in April 2006, in order to appropriately modify
our overall hedge position in accordance with our interest rate risk management
program. The amount receivable by us under the swap agreements was $3.2 million
and $3.1 million at March 31, 2003 and December 31, 2002, respectively, and the
amount payable by us was $860,000 at March 31, 2003 and $888,000 at December 31,
2002, respectively.
The maturity dates, notional amounts, interest rates paid and received
and fair value of our interest rate swap agreements designated as cash flow
hedges as of March 31, 2003 and December 31, 2002 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
March 31, 2003:
March 14, 2004.................................. $ 150,000 1.45% 3.93% $ 3,656
September 20, 2004.............................. 600,000 1.55 6.78 44,375
March 21, 2005.................................. 200,000 1.43 5.24 13,280
April 2, 2006................................... 100,000 1.43 5.45 9,017
---------- ---------
$1,050,000 1.50 5.95 $ 70,328
========== ===== ===== =========
December 31, 2002:
March 14, 2004.................................. $ 150,000 1.45% 3.93% $ 4,130
September 20, 2004.............................. 600,000 1.55 6.78 48,891
March 21, 2005.................................. 200,000 1.43 5.24 13,843
April 2, 2006................................... 100,000 1.43 5.45 9,040
---------- ---------
$1,050,000 1.50 5.95 $ 75,904
========== ===== ===== =========
Fair Value Hedges
We entered into the following interest rate swap agreements, designated
as fair value hedges, to effectively shorten the repricing characteristics of
certain interest-bearing liabilities to correspond more closely with their
funding source with the objective of stabilizing net interest income over time:
>> During January 2001, we entered into $50.0 million notional
amount of three-year interest rate swap agreements and $150.0
million notional amount of five-year interest rate swap
agreements that provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
three-month London Interbank Offering Rate. The underlying hedged
liabilities are a portion of our other time deposits. The terms
of the swap agreements provide for us to pay interest on a
quarterly basis and receive interest on a semiannual basis. The
amount receivable by us under the swap agreements was $2.5
million and $5.2 million at March 31, 2003 and December 31, 2002,
respectively, and the amount payable by us under the swap
agreements was $632,000 and $821,000 at March 31, 2003 and
December 31, 2002, respectively.
>> During May 2002, we entered into $55.2 million notional amount of
interest rate swap agreements that provide for us to receive a
fixed rate of interest and pay an adjustable rate of interest
equivalent to the three-month London Interbank Offering Rate plus
2.30%. During June 2002, we entered into $86.3 million and $46.0
million notional amount, respectively, of interest rate swap
agreements that provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
three-month London Interbank Offering Rate plus 2.75% and 1.97%,
respectively. In addition, on March 31, 2003, we entered into
$25.0 million notional amount of interest rate swap agreements
that provide for us to receive a fixed rate of interest and pay
an adjustable rate of interest equivalent to the three-month
London Interbank Offering Rate plus 2.55%. The underlying hedged
liabilities are a portion of our guaranteed preferred beneficial
interests in our subordinated debentures. The terms of the swap
agreements provide for us to pay and receive interest on a
quarterly basis. There were no amounts receivable or payable by
us at March 31, 2003 or December 31, 2002. The $86.3 million
notional amount interest rate swap agreement was called by its
counterparty in November 2002 resulting in final settlement of
this swap agreement in December 2002.
The maturity dates, notional amounts, interest rates paid and received
and fair value of our interest rate swap agreements designated as fair value
hedges as of March 31, 2003 and December 31, 2002 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
March 31, 2003:
January 9, 2004.................................. $ 50,000 1.39% 5.37% $ 1,587
January 9, 2006.................................. 150,000 1.39 5.51 13,476
June 30, 2028.................................... 46,000 3.77 8.50 327
December 31, 2031................................ 55,200 3.70 9.00 4,646
March 20, 2033................................... 25,000 3.84 8.10 (256)
--------- --------
$ 326,200 2.30 6.70 $ 19,780
========= ===== ===== ========
December 31, 2002:
January 9, 2004.................................. $ 50,000 1.76% 5.37% $ 1,972
January 9, 2006.................................. 150,000 1.76 5.51 13,476
June 30, 2028.................................... 46,000 3.77 8.50 495
December 31, 2031................................ 55,200 4.10 9.00 4,688
--------- --------
$ 301,200 2.49 6.58 $ 20,631
========= ===== ===== ========
Interest Rate Cap Agreements
In conjunction with the interest rate swap agreements designated as
cash flow hedges that mature on September 20, 2004, we also entered into $450.0
million notional amount of four-year interest rate cap agreements to limit the
net interest expense associated with our interest rate swap agreements in the
event of a rising rate scenario. The interest rate cap agreements provide for us
to receive a quarterly adjustable rate of interest equivalent to the
differential between the three-month London Interbank Offering Rate and the
strike price of 7.50% should the three-month London Interbank Offering Rate
exceed the strike price. At March 31, 2003 and December 31, 2002, the carrying
value of these interest rate cap agreements, which is included in derivative
instruments in the consolidated balance sheets, was $27,000 and $94,000,
respectively.
Pledged Collateral
At March 31, 2003 and December 31, 2002, we had pledged investment
securities available for sale with a carrying value of $5.8 million in
connection with our interest rate swap agreements. In addition, at March 31,
2003, and December 31, 2002, we had accepted, as collateral in connection with
our interest rate swap agreements, cash of $89.8 million and $99.1 million,
respectively. We are permitted by contract to sell or repledge the investment
securities held as collateral from our counterparties, however, at March 31,
2003 and December 31, 2001, we had not done so.
Interest Rate Lock Commitments/Forward Commitments to Sell Mortgage-Backed
Securities
Derivative financial instruments issued by us consist of interest rate
lock commitments to originate fixed-rate loans. Commitments to originate
fixed-rate loans consist primarily of residential real estate loans. These net
loan commitments and loans held for sale are hedged with forward contracts to
sell mortgage-backed securities.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source
of income for our subsidiary bank. Interest and fees on loans were 91.0% and
92.9% of total interest income for the three months ended March 31, 2003 and
2002, respectively. Total loans, net of unearned discount, decreased to $5.37
billion, or 74.3% of total assets, at March 31, 2003, compared to $5.43 billion,
or 74.0% of total assets, at December 31, 2002. Exclusive of our acquisition of
Bank of Ste. Genevieve, which provided loans, net of unearned discount, of $42.9
million, loans decreased $104.0 million at March 31, 2003 compared to December
31, 2002. The decrease primarily results from:
>> weaker loan demand from our commercial customers, which is
indicative of the current economic conditions prevalent within
most of our markets;
>> declines in our commercial, financial and agricultural portfolio
due to an anticipated amount of attrition associated with our
acquisitions completed during 2002;
>> continued declines in our lease financing portfolio consistent
with the discontinuation of the operations of First Capital
Group, Inc. during 2002, the transfer of all responsibilities for
the existing portfolio to a new leasing staff in St. Louis,
Missouri and a change in our overall business strategy focus with
respect to leasing activities;
>> continued declines in our consumer and installment portfolio
reflecting reductions in new loan volumes and the repayment of
principal on our existing portfolio; and
>> a decline of approximately $64.0 million in loans held for sale
resulting primarily from the timing of sales in the secondary
mortgage market.
Nonperforming assets include nonaccrual loans, restructured loans and
other real estate. The following table presents the categories of nonperforming
assets and certain ratios as of the dates indicated:
March 31, December 31,
2003 2002
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual..................................................... $ 19,010 15,787
Real estate construction and development:
Nonaccrual..................................................... 9,465 23,378
Real estate mortgage:
One-to-four family residential:
Nonaccrual..................................................... 19,694 14,833
Restructured terms............................................. 14 15
Multi-family residential loans:
Nonaccrual..................................................... 724 772
Commercial real estate loans:
Nonaccrual..................................................... 8,191 8,890
Restructured terms............................................. -- 1,907
Lease financing:
Nonaccrual..................................................... 13,300 8,723
Consumer and installment:
Nonaccrual..................................................... 655 860
----------- ----------
Total nonperforming loans.................................. 71,053 75,165
Other real estate................................................... 15,857 7,609
----------- ----------
Total nonperforming assets................................. $ 86,910 82,774
=========== ==========
Loans, net of unearned discount..................................... $ 5,371,458 5,432,588
=========== ==========
Loans past due 90 days or more and still accruing................... $ 6,099 4,635
=========== ==========
Ratio of:
Allowance for loan losses to loans............................. 2.02% 1.83%
Nonperforming loans to loans................................... 1.32 1.38
Allowance for loan losses to nonperforming loans............... 152.98 132.29
Nonperforming assets to loans and other real estate............ 1.61 1.52
=========== ==========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $71.1 million at March 31, 2003, in comparison
to $75.2 million at December 31, 2002. Loan charge-offs were $8.7 million for
the three months ended March 31, 2003 and $16.4 million for the comparable
period in 2002, reflecting the general slowdown in economic conditions.
Consistent with the general economic slow down experienced within our primary
markets, we anticipate that the higher trends in nonperforming and delinquent
loans and charge-offs will continue in the near future. Other real estate
increased $8.2 million to $15.9 million at March 31, 2003 compared to $7.6
million at December 31, 2002 primarily due to the addition of a $10.0 million
residential and recreational development property that had previously been on
nonaccrual status due to significant financial difficulties, inadequate project
financing, project delays and weak project management.
The allowance for loan losses is monitored on a monthly basis. Each
month, the credit administration department provides management with detailed
lists of loans on the watch list and summaries of the entire loan portfolio by
risk rating. These are coupled with analyses of changes in the risk profile of
the portfolio, changes in past-due and nonperforming loans and changes in watch
list and classified loans over time. In this manner, we continually monitor the
overall increases or decreases in the level of risk in the portfolio. Factors
are applied to the loan portfolio for each category of loan risk to determine an
acceptable level of allowance for loan losses. We derive these factors from our
actual loss experience and from published national surveys of norms in the
industry. The calculated allowance required for the portfolio is then compared
to the actual allowance balance to determine the provisions necessary to
maintain the allowance at an appropriate level. In addition, management
exercises a certain degree of judgment in its analysis of the overall adequacy
of the allowance for loan losses. In its analysis, management considers the
change in the portfolio, including growth, composition, the ratio of net loans
to total assets, and the economic conditions of the regions in which we operate.
Based on this quantitative and qualitative analysis, provisions are made to the
allowance for loan losses. Such provisions are reflected in our consolidated
statements of income.
The following table is a summary of our loan loss experience for the
periods indicated:
Three Months Ended
March 31,
---------------------
2003 2002
---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of period............................... $ 99,439 97,164
Acquired allowances for loan losses.......................................... 757 1,366
--------- -------
100,196 98,530
Loans charged-off............................................................ (8,737) (16,408)
Recoveries of loans previously charged-off................................... 6,237 4,561
--------- -------
Net loan charge-offs......................................................... (2,500) (11,847)
--------- -------
Provision for loan losses.................................................... 11,000 13,000
--------- -------
Allowance for loan losses, end of period..................................... $ 108,696 99,683
========= =======
Liquidity
Our liquidity and the liquidity of our subsidiary bank is the ability
to maintain a cash flow, which is adequate to fund operations, service debt
obligations and meet other commitments on a timely basis. Our subsidiary bank
receives funds for liquidity from customer deposits, loan payments, maturities
of loans and investments, sales of investments and earnings. In addition, we may
avail ourselves of other sources of funds by issuing certificates of deposit in
denominations of $100,000 or more, borrowing federal funds, selling securities
under agreements to repurchase and utilizing borrowings from the Federal Home
Loan Bank and other borrowings, including our revolving credit line. The
aggregate funds acquired from these sources were $621.9 million and $742.5
million at March 31, 2003 and December 31, 2002, respectively.
The following table presents the maturity structure of these other
sources of funds, which consists of certificates of deposit of $100,000 or more,
short-term borrowings and our note payable, at March 31, 2003:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less..................................... $ 143,196 169,343 312,539
Over three months through six months..................... 91,298 -- 91,298
Over six months through twelve months.................... 72,634 5,000 77,634
Over twelve months....................................... 131,852 8,548 140,400
----------- --------- ---------
Total............................................... $ 438,980 182,891 621,871
=========== ========= =========
In addition to these sources of funds, our subsidiary bank has
established a borrowing relationship with the Federal Reserve Bank. This
borrowing relationship, which is secured by commercial loans, provides an
additional liquidity facility that may be utilized for contingency purposes. At
March 31, 2003 and December 31, 2002, the borrowing capacity of our subsidiary
bank under the agreement was approximately $389.7 million and $1.22 billion,
respectively. In addition, our subsidiary bank's borrowing capacity through its
relationship with the Federal Home Loan Bank was approximately $184.7 million
and $223.6 million at March 31, 2003 and December 31, 2002, respectively. The
decline in these borrowing capacities at March 31, 2003 is attributable to the
merger of our wholly owned bank subsidiaries, First Bank and First Bank & Trust,
on March 31, 2003, which created a temporary reduction in borrowing capacity
necessitated by the movement of the pledged assets to the appropriate Federal
Reserve Bank and Federal Home Loan Bank governing the combined entity. At April
30, 2003, our subsidiary bank's borrowing capacity with the Federal Reserve Bank
was $1.42 billion, reflecting completion of the movement of the pledged assets.
Exclusive of the Federal Home Loan Bank advances outstanding of $15.5 million
and $14.0 million at March 31, 2003 and December 31, 2002, respectively, our
subsidiary bank had no amounts outstanding under either of these agreements at
March 31, 2003 and December 31, 2002.
In addition to our owned banking facilities, we have entered into
long-term leasing arrangements to support our ongoing activities. The required
payments under such commitments and other obligations at March 31, 2003 are as
follows:
Over 1 Year
Less than But Less Than Over
1 Year 5 Years 5 Years Total
------ ------- ------- -----
(dollars expressed in thousands)
Operating leases................................. $ 6,669 22,126 21,708 50,503
Certificates of deposit.......................... 1,430,295 703,864 460 2,134,619
Guaranteed preferred beneficial interest
in subordinated debentures.................. -- -- 294,624 294,624
Federal Home Loan Bank advances.................. 7,000 6,000 2,548 15,548
=========== ======== ======== ==========
Management believes the available liquidity and operating results of
our subsidiary bank will be sufficient to provide funds for growth and to permit
the distribution of dividends to us sufficient to meet our operating and debt
service requirements, both on a short-term and long-term basis, and to pay the
dividends on the trust preferred securities issued by our financing
subsidiaries, First Preferred Capital Trust, First America Capital Trust, First
Preferred Capital Trust II, First Preferred Capital Trust III, First Bank
Capital Trust and First Bank Statutory Trust.
Effects of New Accounting Standards
In June 2002, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 146-- Accounting for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 nullifies Emerging Issues Task Force, or EITF, Issue No. 94-3--
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. On
January 1, 2003, we implemented SFAS No. 146, which did not have a material
effect on our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 --
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. We have implemented the requirements of FASB Interpretation No. 45 and
determined they did not have a material effect on our consolidated financial
statements other than the additional disclosure requirements.
On April 30, 2003, the FASB issued SFAS No. 149 -- Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. All provisions of SFAS No.
149 should be applied prospectively. We are currently evaluating the
requirements of SFAS No. 149 and do not believe they will have a material effect
on our consolidated financial statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2002, our risk management program's simulation model
indicated a loss of projected net interest income in the event of a decline in
interest rates. We are "asset-sensitive," indicating that our assets would
generally reprice with changes in rates more rapidly than our liabilities. While
a decline in interest rates of less than 100 basis points was projected to have
a relatively minimal impact on our net interest income, an instantaneous,
parallel decline in the interest yield curve of 100 basis points indicated a
pre-tax projected loss of approximately 7.3% of net interest income, based on
assets and liabilities at December 31, 2002. At March 31, 2003, we remain in an
"asset-sensitive" position and thus, remain subject to a higher level of risk in
a declining interest rate environment. Although we do not anticipate that
instantaneous shifts in the yield curve as projected in our simulation model are
likely, these are indications of the effects that changes in interest rates
would have over time. Our asset-sensitive position, coupled with income
associated with our interest rate swap agreements offset by reductions in
prevailing interest rates throughout 2002, is reflected in our net interest
margin for the three months ended March 31, 2003 as compared to the comparable
period in 2002 and further discussed under "--Results of Operations." During the
three months ended March 31, 2003, our asset-sensitive position and overall
susceptibility to market risks have not changed materially.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, our
Chief Executive Officer and Chief Financial Officer evaluated the effectiveness
of our "disclosure controls and procedures" (as defined in rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934) and concluded on the basis
of the evaluation that, as of the date of such evaluation, our disclosure
controls and procedures were effective. There have been no significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of that evaluation.
Part II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
Exhibit Number Description
-------------- -----------
10.11 Indenture between First Banks, Inc., as Issuer, and U. S.
Bank National Association as Trustee, dated as of March
20, 2003 (incorporated herein by reference to Exhibit
10.6 to Amendment No. 4 to the Company's Registration
Statement on Form S-2, File No. 333-102549, dated March
24, 2003).
10.12 Amended and Restated Declaration o f Trust by and among
U.S. Bank National Association, as Institutional Trustee,
First Banks, Inc., as Sponsor, and Allen H. Blake,
Terrance M. McCarthy and Lisa K. Vansickle, as
Administrators, dated as of March 20, 2003 (incorporated
herein by reference to Exhibit 10.7 to Amendment No. 4 to
the Company's Registration Statement on Form S-2, File
No. 333-102549, dated March 24, 2003).
10.13 Guarantee Agreement by and between First Banks, Inc. and
U.S. Bank National Association, dated as of March 20,
2003 (incorporated herein by reference to Exhibit 10.8 to
Amendment No. 4 to the Company's Registration Statement on
Form S-2, File No. 333-102549, dated March 24, 2003).
10.14 Placement Agreement by and among First Banks, Inc.,
First Bank Statutory Trust and SunTrust Capital Markets,
Inc., dated as of March 20, 2003 (incorporated herein by
reference to Exhibit 10.9 to Amendment No. 4 to the
Company's Registration Statement on Form S-2, File No.
333-102549, dated March 24, 2003).
10.15 Junior Subordinated Debenture of First Banks, Inc., dated
as of March 20, 2003 (incorporated herein by reference to
Exhibit 10.10 to Amendment No. 4 to the Company's
Registration Statement on Form S-2, File No. 333-102549,
dated March 24, 2003).
10.16 Capital Securities Subscription Agreement by and among
First Bank Statutory Trust, First Banks, Inc. and STI
Investment Management, Inc., dated as of March 20, 2003
(incorporated herein by reference to Exhibit 10.11 to
Amendment No. 4 to the Company's Registration Statement on
Form S-2, File No. 333-102549, dated March 24, 2003).
10.17 Common Securities Subscription Agreement by and between
First Bank Statutory Trust and First Banks, Inc., dated
as of March 20, 2003 (incorporated herein by reference to
Exhibit 10.12 to Amendment No. 4 to the Company's
Registration Statement on Form S-2, File No. 333-102549,
dated March 24, 2003).
10.18 Debenture Subscription Agreement by and between First
Banks, Inc. and First Bank Statutory Trust, dated as of
March 20, 2003 (incorporated herein by reference to
Exhibit 10.13 to Amendment No. 4 to the Company's
Registration Statement on Form S-2, File No. 333-102549,
dated March 24, 2003).
10.19 Service Agreement by and between First Services, L.P. and
First Bank, dated December 30, 2002 - filed herewith.
99.1 Certification of Periodic Report - Chief Executive officer
and Chief Financial Officer - filed herewith.
(b) We filed a current report on Form 8-K on January 3, 2003. Item 5 of the
report references a press release announcing completion on December 31,
2002 of the buyout of the publicly held common shares of First Banks
America, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FIRST BANKS, INC.
May 14, 2003 By: /s/ Allen H. Blake
---------------------------------------------
Allen H. Blake
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and
Principal Financial and
Accounting Officer)
CERTIFICATION
REQUIRED BY RULES 13A-14 AND 15D-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Allen H. Blake, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Banks, Inc.
(the "registrant");
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.
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.
Date: May 14, 2003
FIRST BANKS, INC.
By: /s/ Allen H. Blake
--------------------------------------------
Allen H. Blake
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and
Principal Financial and Accounting
Officer)
Exhibit 99.1
CERTIFICATION OF PERIODIC REPORT
I, Allen H. Blake, President, Chief Executive Officer and Chief
Financial Officer of First Banks, Inc. (the Company), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarterly
period ended March 31, 2003 (the Report) fully complies with the requirements of
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: May 14, 2003 /s/ Allen H. Blake
----------------------------------------
Allen H. Blake
President, Chief Executive Officer
and Chief Financial Officer