UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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 Number - 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 Number)
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)
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
10.24% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust II
and guaranteed by First Banks, Inc.)
(Title of class)
9.00% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust III
and guaranteed by First Banks, Inc.)
(Title of class)
8.15% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust IV
and guaranteed by First Banks, Inc.)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ X ]
None of the voting stock of the Company is held by nonaffiliates. All
of the voting stock of the Company is owned by various trusts, which were
created by and for the benefit of Mr. James F. Dierberg, the Company's Chairman
of the Board of Directors, and members of his immediate family.
At March 25, 2004, there were 23,661 shares of the registrant's common
stock outstanding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause our actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and in the economy, including the threat of future terrorist activities,
existing and potential wars and/or military actions related thereto, and
domestic responses to terrorism or threats of terrorism; the impact of laws and
regulations applicable to us and changes therein; the impact of accounting
pronouncements applicable to us and changes therein; competitive conditions in
the markets in which we conduct our operations, including competition from
banking and non-banking companies with substantially greater resources than us,
some of which may offer and develop products and services not offered by us; our
ability to control the composition of our loan portfolio without adversely
affecting interest income; the credit risk associated with consumers who may not
repay loans; the geographic dispersion of our offices; the impact our hedging
activities may have on our operating results; the highly regulated environment
in which we operate; and our ability to respond to changes in technology. With
regard to our efforts to grow through acquisitions, factors that could affect
the accuracy or completeness of forward-looking statements contained herein
include the competition of larger acquirers with greater resources; fluctuations
in the prices at which acquisition targets may be available for sale; the impact
of making acquisitions without using our common stock; and possible asset
quality issues, unknown liabilities or integration issues with the businesses
that we have acquired. We do not have a duty to and will not update these
forward-looking statements. Readers of this Annual Report on Form 10-K should
therefore not place undue reliance on forward-looking statements.
FIRST BANKS, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 14
Item 3. Legal Proceedings...................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................... 14
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 15
Item 6. Selected Financial Data................................................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 48
Item 8. Financial Statements and Supplementary Data............................................ 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................... 48
Item 9A. Controls and Procedures................................................................ 48
Part III
Item 10. Directors and Executive Officers of the Registrant..................................... 50
Item 11. Executive Compensation................................................................. 54
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 55
Item 13. Certain Relationships and Related Transactions......................................... 56
Item 14. Principal Accountant Fees and Services................................................. 56
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 57
Signatures ....................................................................................... 99
PART I
Item 1. Business
General. We are a registered bank holding company incorporated in Missouri and
headquartered in St. Louis County, Missouri. Through the operation of our
subsidiaries, we offer a broad array of financial services to consumer and
commercial customers. We operate through our wholly owned subsidiary bank
holding company, The San Francisco Company, or SFC, headquartered in San
Francisco, California, and its wholly owned subsidiary bank, First Bank,
headquartered in St. Louis County, Missouri. First Bank currently operates 147
branch offices in California, Illinois, Missouri and Texas. Since 1994, our
organization has grown significantly, primarily as a result of our acquisition
strategy, as well as through internal growth. At December 31, 2003, we had total
assets of $7.11 billion, total loans, net of unearned discount, of $5.33
billion, total deposits of $5.96 billion and total stockholders' equity of
$549.8 million.
Through First Bank, we offer a broad range of commercial and personal
deposit products, including demand, savings, money market and time deposit
accounts. In addition, we market combined basic services for various customer
groups, including packaged accounts for more affluent customers, and sweep
accounts, lock-box deposits and cash management products for commercial
customers. We also offer both consumer and commercial loans. Consumer lending
includes residential real estate, home equity and installment lending.
Commercial lending includes commercial, financial and agricultural loans, real
estate construction and development loans, commercial real estate loans,
asset-based loans and trade financing. Other financial services include mortgage
banking, debit cards, brokerage services, credit-related insurance, internet
banking, automated teller machines, telephone banking, safe deposit boxes and
trust, private banking and institutional money management services.
Primary responsibility for managing our banking units rests with the
officers and directors of each unit, but we centralize overall corporate
policies, procedures and administrative functions and provide centralized
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our banking units to focus
on customer service.
In February 1997, our initial financing entity, First Preferred Capital
Trust, issued $86.25 million of 9.25% cumulative trust preferred securities,
and, in July 1998, our second financing entity, First America Capital Trust,
issued $46.0 million of 8.50% cumulative trust preferred securities. The
cumulative trust preferred securities issued by First Preferred Capital Trust
and First America Capital Trust were redeemed in full on May 5, 2003 and June
30, 2003, respectively, and these financing entities were dissolved. In October
2000, our third financing entity, First Preferred Capital Trust II, issued $57.5
million of 10.24% cumulative trust preferred securities, and, in November 2001,
our fourth financing entity, First Preferred Capital Trust III, issued $55.2
million of 9.00% cumulative trust preferred securities. In April 2002, our fifth
financing entity, First Bank Capital Trust, issued $25.0 million of variable
rate cumulative trust preferred securities. On March 20, 2003, our sixth
financing entity, First Bank Statutory Trust, issued $25.0 million of 8.10%
cumulative trust preferred securities, and, on April 1, 2003, our seventh
financing entity, First Preferred Capital Trust IV, issued $46.0 million of
8.15% cumulative trust preferred securities.
Each of our existing financing entities operates as a Delaware business
trust with the exception of First Bank Statutory Trust, which operates as a
Connecticut statutory trust. The trust preferred securities issued by First
Preferred Capital Trust II and First Preferred Capital Trust III are publicly
held and traded on the Nasdaq Stock Market's National Market system. The trust
preferred securities issued by First Bank Capital Trust and First Bank Statutory
Trust were issued in private placements and rank equal to the trust preferred
securities issued by First Preferred Capital Trust II and First Preferred
Capital Trust IV, and junior to the trust preferred securities issued by First
Preferred Capital Trust III. The trust preferred securities issued by First
Preferred Capital Trust IV are publicly held and traded on the New York Stock
Exchange. The trust preferred securities have no voting rights except in certain
limited circumstances.
In conjunction with the formation of our financing entities and their
issuance of the trust preferred securities, we issued subordinated debentures to
each of our financing entities in amounts equivalent to the respective trust
preferred securities plus the amount of the common securities of the individual
trusts, as more fully described in Note 12 to our Consolidated Financial
Statements. We pay interest on our subordinated debentures to our respective
financing entities. In turn, our financing entities pay distributions to the
holders of the trust preferred securities. These interest and distribution
payments are paid quarterly in arrears on March 31st, June 30th, September 30th,
and December 31st of each year, with the exception of the First Bank Capital
Trust trust preferred securities and related subordinated debentures, which are
payable semi-annually in arrears on April 22nd and October 22nd of each year.
The distributions payable on our subordinated debentures are included in
interest expense in the consolidated statements of income.
Various trusts, which were created by and are administered by and for
the benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of
his immediate family, own all of our voting stock. Mr. Dierberg and his family,
therefore, control our management and policies.
Strategy. In the development of our banking franchise, we acquire other
financial institutions as one means of achieving our growth objectives.
Acquisitions may serve to enhance our presence in a given market, to expand the
extent of our market area or to enable us to enter new or noncontiguous markets.
Due to the nature of our ownership, we have elected to only engage in those
acquisitions that can be accomplished for cash. However, by using cash in our
acquisitions, the characteristics of the acquisition arena may, at times, place
us at a competitive disadvantage relative to other acquirers offering stock
transactions. This results from the market attractiveness of other financial
institutions' stock and the advantages of tax-free exchanges to the selling
shareholders. Our acquisition activities are generally somewhat sporadic because
we may consummate multiple transactions in a particular period, followed by a
substantially less active acquisition period. Furthermore, the intangible assets
recorded in conjunction with these acquisitions create an immediate reduction in
regulatory capital. This reduction, as required by regulatory policy, provides
further financial disincentives to paying large premiums in cash acquisitions.
Recognizing these facts, we follow certain patterns in our
acquisitions. First, we typically acquire several smaller institutions,
sometimes over an extended period of time, rather than a single larger one. We
attribute this approach to the constraints imposed by the amount of funds
required for a larger transaction, as well as the opportunity to minimize the
aggregate premium required through smaller individual transactions. Secondly, in
some acquisitions, we may acquire institutions having significant asset-quality,
ownership, regulatory or other problems. We seek to address the risks of these
issues by adjusting the acquisition pricing, accompanied by appropriate remedial
attention after consummation of the transaction. In these institutions, these
issues may diminish their attractiveness to other potential acquirers, and
therefore may reduce the amount of acquisition premium required. Finally, we may
pursue our acquisition strategy in other geographic areas, or pursue internal
growth more aggressively because cash transactions may not be economically
viable in extremely competitive acquisition markets.
During the five years ended December 31, 2003, we primarily
concentrated our acquisitions in California, completing 12 acquisitions of banks
and three purchases of branch offices, which provided us with an aggregate of
$2.15 billion in total assets and 45 banking locations as of the dates of the
acquisitions. More recent acquisitions have occurred in our other geographic
markets of Missouri, Illinois and Texas. In 2002, we completed our acquisition
of a bank holding company in Des Plaines, Illinois, as well as the purchase of
two branch offices in Denton and Garland, Texas. On March 31, 2003, we further
expanded our Midwest banking franchise with our acquisition of Bank of Ste.
Genevieve in Ste. Genevieve, Missouri. These acquisitions have allowed us to
significantly expand our presence throughout our geographic areas, improve
operational efficiencies, convey a more consistent image and quality of service
and more cohesively market and deliver our products and services.
Following our acquisitions, various tasks are necessary to effectively
integrate the acquired entities into our business systems and culture. While the
activities required are specifically dependent upon the individual circumstances
surrounding each acquisition, the majority of our efforts have been concentrated
in various areas including, but not limited to:
>> improving asset quality;
>> reducing unnecessary, duplicative and/or excessive expenses
including personnel, information technology and certain other
operational and administrative expenses;
>> maintaining, repairing and, in some cases, refurbishing bank
premises necessitated by the deferral of such projects by some of
the acquired entities;
>> renegotiating long-term leases which provide space in excess of
that necessary for banking activities and/or rates in excess of
current market rates, or subleasing excess space to third
parties;
>> relocating branch offices which are not adequate, conducive or
convenient for banking operations; and
>> managing actual or potential litigation that existed with respect
to acquired entities to minimize the overall costs of
negotiation, settlement or litigation.
The post-acquisition process also included the combining of separate
and distinct entities together to form a cohesive organization with common
objectives and focus. We invested significant resources to reorganize staff,
recruit personnel where needed, and establish the direction and focus necessary
for the combined entity to take advantage of the opportunities available to it.
This investment contributed to the increases in noninterest expense, and
resulted in the creation of new banking entities, which conveyed a more
consistent image and quality of service. The new banking entities provided a
broad array of banking products to their customers and compete effectively in
their marketplaces, even in the presence of other financial institutions with
much greater resources. While some of these modifications did not contribute to
reductions of noninterest expense, they contributed to the commercial and retail
business development efforts of the banks, and ultimately to their prospects for
improving future profitability.
Recently, our acquisition prospects have been somewhat limited
primarily due to the current market environment requiring significantly higher
premiums in order to transact financial institution acquisitions. As a result,
we have expanded our business strategy to include the opening of de novo branch
offices as another means of further achieving our growth objectives. Our de novo
branch strategy also provides similar opportunities to our acquisition strategy
by allowing us to enhance our presence in our existing markets and enter new
markets. Additionally, we generally have more flexibility in selecting the most
opportunistic sites for our de novo branches, constructing the branch offices in
accordance with our standard business model and marketing and promoting our
customized products and services under our long-established trade name. In
February 2004, we opened two new de novo branches, one in Houston, Texas and one
in West St. Louis County, Missouri. We currently have plans to open additional
de novo branches throughout 2004 in McKinney, Texas, San Diego, California and
Farmington, Missouri. We also expect to further concentrate our efforts on this
portion of our business strategy while continuing to identify viable acquisition
candidates at more reasonable acquisition premiums that are commensurate with
our established acquisition strategy.
In conjunction with our de novo and acquisition strategy, we have also
focused on building and reorganizing the infrastructure necessary to accomplish
our objectives for internal growth. This process has required significant
increases in the resources dedicated to commercial and consumer business
development, financial service product line and delivery systems, branch
development and training, advertising and marketing programs, and administrative
and operational support. In addition, during 1999, we began an internal
restructuring process designed to better position us for future growth and
opportunities expected to become available as consolidation and changes continue
in the delivery of financial services. The magnitude of this project was
extensive and covered almost every area of our organization. We continue to
focus on modifying and effectively repositioning our internal and external
resources to better serve the markets in which we operate. Although these
efforts have led to certain increased capital expenditures and noninterest
expenses, we expect they will lead to additional internal growth, more efficient
operations and improved profitability over the long term.
Lending Activities. Our enhanced business development resources assisted in the
realignment of certain acquired loan portfolios, which were skewed toward loan
types that reflected the abilities and experiences of the management of the
acquired entities. In order to achieve a more diversified portfolio, to address
asset-quality issues in the portfolios and to achieve a higher interest yield on
our loan portfolio, we reduced a substantial portion of the loans which were
acquired during this time through payments, refinancing with other financial
institutions, charge-offs, and, in certain instances, sales of loans. As a
result, our portfolio of one-to-four family residential real estate loans, after
reaching a high of $1.20 billion or 44.4% of total loans, excluding loans held
for sale, at December 31, 1995, has decreased to $811.7 million or 15.7% of
total loans, excluding loans held for sale, at December 31, 2003. Similarly, our
portfolio of consumer and installment loans, net of unearned discount, decreased
significantly from $274.4 million or 8.0% of total loans, excluding loans held
for sale, at December 31, 1998 to $61.3 million or 1.2% of total loans,
excluding loans held for sale, at December 31, 2003. The decrease reflects the
reduction in new consumer and installment loan volumes and the repayment of
principal on our existing consumer and installment loan portfolio, all of which
are consistent with our objectives of expanding commercial lending and reducing
the amount of less profitable loan types. The decline also reflects the sale of
our student loan and credit card portfolios in 2001, which totaled approximately
$16.9 million and $13.5 million, respectively, at the time of sale. We recorded
gains of $1.9 million and $229,000 on the sale of our credit card and student
loan portfolios, respectively, and we do not have any continuing involvement in
the transferred assets.
As these components of our loan portfolio decreased, we replaced them
with higher yielding loans that were internally generated by our business
development function. With our acquisitions, we expanded our business
development function into the new market areas in which we were then operating.
Consequently, in spite of relatively large reductions in acquired portfolios,
our aggregate loan portfolio, net of unearned discount, increased 48.8% from
$3.58 billion at December 31, 1998 to $5.33 billion at December 31, 2003.
Our business development efforts are focused on the origination of
loans in three general types: commercial, financial and agricultural loans,
which totaled $1.41 billion at December 31, 2003; commercial real estate
mortgage loans, which totaled $1.66 billion at December 31, 2003; and
construction and land development loans, which totaled $1.06 billion at December
31, 2003.
The primary component of commercial, financial and agricultural loans
is commercial loans which are made based on the borrowers' general credit
strength and ability to generate cash flows for repayment from income sources.
Most of these loans are made on a secured basis, generally involving the use of
company equipment, inventory and/or accounts receivable as collateral.
Regardless of collateral, substantial emphasis is placed on the borrowers'
ability to generate cash flow sufficient to operate the business and provide
coverage of debt servicing requirements. Commercial loans are frequently
renewable annually, although some terms may be as long as five years. These
loans typically require the borrower to maintain certain operating covenants
appropriate for the specific business, such as profitability, debt service
coverage and current asset and leverage ratios, which are generally reported and
monitored on a quarterly basis and subject to more detailed annual reviews.
Commercial loans are made to customers primarily located in First Bank's
geographic trade areas of Missouri, Illinois, California and Texas who are
engaged in manufacturing, retailing, wholesaling and service businesses. This
portfolio is not concentrated in large specific industry segments that are
characterized by sufficient homogeneity that would result in significant
concentrations of credit exposure. Rather, it is a highly diversified portfolio
that encompasses many industry segments. The largest general concentration in
this portfolio, which is not homogeneous in nature, is agricultural which totals
approximately $34.0 million, representing approximately 2% of the commercial,
financial and agricultural portfolio. This portfolio, however, is diverse in
geography and collateral, secured by a mixture of agricultural equipment,
livestock and crop production. The largest homogeneous industry segment included
within this portfolio is the fast-food restaurant segment, in which we had total
loans outstanding of approximately $48.3 million, representing 3.4% of this
portfolio, at December 31, 2003. Diversity in this segment of our portfolio is
represented by both geography and a mixture of loans to both franchisees and
franchisors, with approximately 77.0% of the portfolio involving loans to
franchisees and 23.0% to franchisors. Within both real estate and commercial
lending portfolios, we strive for the highest degree of diversity that is
practicable. We also emphasize the development of other service relationships
with our commercial borrowers, particularly deposit accounts.
Commercial real estate loans include loans for which the intended
source of repayment is the rental and other income from the real estate,
including both commercial real estate developed for lease and owner occupied
commercial real estate. The underwriting of owner occupied commercial real
estate loans generally follows the procedures for commercial lending described
above, except that the collateral is real estate, and the loan term may be
longer. The primary emphasis in underwriting loans for which the source of
repayment is the performance of the collateral is the projected cash flow from
the real estate and its adequacy to cover the operating costs of the project and
the debt service requirements. Secondary emphasis is placed on the appraised
value of the real estate, although the appraised liquidation value of the
collateral must be adequate to repay the debt and related interest in the event
the cash flow becomes insufficient to service the debt. Generally, underwriting
terms require the loan principal not to exceed 80% of the appraised value of the
collateral and the loan maturity not to exceed seven years. Commercial real
estate loans are made for commercial office space, retail properties,
hospitality, industrial and warehouse facilities and recreational properties. We
rarely finance commercial real estate or rental properties that do not have
lease commitments from a majority of tenants.
Construction and land development loans include commitments for
construction of both residential and commercial properties. Commercial real
estate projects require commitments for permanent financing from other lenders
upon completion of the project and, more typically, may include a short-term
amortizing component of the financing from the bank. Commitments for
construction of multi-tenant commercial and retail projects require lease
commitments from a substantial primary tenant or tenants prior to commencement
of construction. We finance some projects for borrowers whose home office is
within our trade area for which the particular project may be outside our normal
trade area. However, we generally do not engage in developing commercial and
residential construction lending business outside of our trade area. Residential
real estate construction and development loans are made based on the cost of
land acquisition and development, as well as the construction of the residential
units. Although we finance the cost of display units and units held for sale, a
substantial portion of the loans for individual residential units have purchase
commitments prior to funding. Residential condominium projects are funded as the
building construction progresses, but funding of unit finishing is generally
based on firm sales contracts.
In addition to underwriting based on estimates and projection of
financial strength, collateral values and future cash flows, many loans to
borrowing entities other than individuals require the personal guarantees of the
principals of the borrowing entity.
Our commercial leasing portfolio totaled $67.3 million and $126.7
million at December 31, 2003 and 2002, respectively. This portfolio consists of
leases originated by our former subsidiary, First Capital Group, Inc.,
Albuquerque, New Mexico, primarily through third parties, on commercial
equipment including aircraft parts and equipment. During 2002, we changed the
nature of this business, ultimately deciding to discontinue the operations of
First Capital Group, Inc. and the transfer of all responsibilities for the
existing portfolio to a new leasing staff in St. Louis, Missouri.
At December 31, 2001, within our commercial leasing portfolio, there
were approximately $60.1 million of leases of parts and equipment to the
commercial airline industry and related aircraft service providers. This
equipment consisted primarily of engines, landing gear and replacement parts,
most of which was used in maintenance operations by commercial airlines or by
third party vendors performing maintenance for the airlines. In addition, there
were several leases for smaller aircraft used by charter services. Earlier in
2001, it became apparent that the airline industry in general was experiencing
problems with overcapacity, and as a result, had begun reducing its requirements
for new and replacement aircraft. This was evidenced by airlines taking portions
of their fleets, particularly older less efficient aircraft, out of service and
reducing orders for new equipment. This affected maintenance operations because
as the usage of aircraft decreased, the maintenance requirements were also
reduced. Consequently, by late 2001, we discontinued new leases of equipment
related to the airline industry.
While some of the leases in our portfolio had evidenced problems by
early 2001, overcapacity problems and resulting financial distress in the
commercial airline industry became more critical after the terrorist attacks.
Following these events, we re-evaluated our aviation related lease portfolio to
examine our overall exposure to the industry, the effects of recent trends on
valuations of equipment and the financial strength of our lessees. As a result
of our review, for the year ended December 31, 2001, we incurred $4.5 million of
charge-offs in connection with the aircraft leasing portfolio and had $2.6
million of nonperforming aviation related leases at December 31, 2001. The
evaluation process has evolved into an ongoing monitoring of this portfolio
through continuous communication with lessees to establish information
concerning their use of equipment under lease, monitoring the use of that
equipment, and tracking of changes in equipment and related residual valuations.
When problems are detected, we obtain new valuations of the equipment, and
recognize any impairment in valuation by adjustments to reserves or income as
appropriate depending upon the type of lease. Sources of information for valuing
our leased assets include the Aircraft Bluebook, other public information from a
variety of sources, consultation with other lessors and brokers of aviation
equipment and specific engagement of an independent asset management company for
equipment valuation as well as management of repossessed assets. Specifically
with respect to residual values, and to establish formality in our process, we
obtained an appraisal of leased assets that involve residual risk by an
International Society of Transport Aircraft Trading certified appraiser of
aviation assets. The information received from these various specialized sources
assists us in valuing our lease portfolio and recognizing any impairment on
these assets. By December 31, 2002, the portfolio of leases on commercial
aircraft and parts and equipment had been reduced to $46.5 million, with $8.6
million of nonperforming aviation related leases, and $619,000 of charge-offs in
connection with this aircraft leasing portfolio for the year ended December 31,
2002. At December 31, 2003, this portfolio has been further reduced to $19.6
million, with $4.4 million of nonperforming aviation related leases, and $4.2
million of charge-offs in connection with the aircraft leasing portfolio for the
year ended December 31, 2003. Furthermore, we recorded $5.5 million in net lease
charge-offs related to three equipment leases that were unrelated to the airline
industry in 2003 as further discussed under "--Loans and Allowance for Loan
Losses."
Our expanded level of commercial lending carries with it greater credit
risk, which we manage through uniform loan policies, procedures, underwriting
and credit administration. As a consequence of such greater risk, the growth of
our loan portfolio must also be accompanied by adequate allowances for loan
losses. We associate the increased level of commercial lending activities and
our acquisitions with the increases of $7.9 million and $14.1 million in
nonperforming loans for the years ended December 31, 2002 and 2001,
respectively. Nonperforming loans remained relatively constant in 2003, with a
$199,000 increase from December 31, 2002. In addition, the loan portfolios of
Millennium Bank and Union Financial Group, Ltd., or Union, which we acquired in
2000 and 2001, respectively, exhibited significant distress, which further
contributed to the overall increase in nonperforming loans.
Millennium Bank, which we acquired on December 29, 2000, operated a
factoring business for doctors, hospitals and other health care professionals.
This business had been started by Millennium Bank the year before our
acquisition, and had approximately $11.0 million of receivables at the time of
our acquisition. Due to the relatively short life of this operation, the
portfolio did not exhibit signs of problems at that time. Consequently, we
allowed the business to continue after the acquisition to determine whether it
would be an appropriate line of business in the future. However, in late 2001,
the factoring receivables began to exhibit signs of distress, and in early 2002,
we determined one of the larger borrowers was incorrectly accounting for its
receivables, causing the factored balance to be substantially overfunded. During
2002, other asset quality issues arose and we charged off approximately $2.6
million, or 24.8%, of the health care factoring portfolio. At December 31, 2002,
we had $10.2 million of factoring business receivables, which further declined
to $2.1 million at December 31, 2003, reflecting our decision to discontinue
this line of business. Since no value was assigned to goodwill or other
intangible assets of this line of business in the acquisition, and the problems
arose subsequent to the acquisition, we determined that this did not create an
impairment of the goodwill that we recorded in connection with the acquisition.
In evaluating the loan portfolios of Union's two subsidiary banks prior
to its acquisition, it was clear that substantial problems existed in those
portfolios. Generally, credit documentation was poor, underwriting standards
were lax and loan terms were aggressive. As we conducted our due diligence
review, we applied the same asset quality standards, risk rating system and
allowance methodology that we apply to our own loan portfolio. Based on this
review, and to address concerns we had regarding Union's loan portfolios and the
level of its allowance for loan and lease losses, an escrow account of
approximately $1.6 million was established by withholding that amount from the
purchase price. This escrow account was available to absorb losses during the
two-year period following the acquisition from Union Bank's loan portfolio that
were in excess of Union Bank's allowance for loan and lease losses at the time
of the due diligence review. Union's consolidated allowance for loan and lease
losses was $8.6 million relative to an aggregate loan portfolio of $262.3
million at December 31, 2001, the date of acquisition.
While we believed there were substantial problems with the Union
portfolios, few of these had been identified or addressed by Union as of
December 31, 2001. Consequently, when we assimilated these loans into our
systems and procedures, the problems in the portfolio surfaced, causing an
increase in the amount of problem assets, as well as contributing to the level
of loans charged-off during 2002. Loan charge-offs from the Union portfolios
were $1.4 million for the year ended December 31, 2003 and $5.2 million for the
year ended December 31, 2002, including an amount within the Union Bank
portfolio that was in excess of the allowance at the date of our due diligence
review and the entire $1.6 million escrow account. Furthermore, nonperforming
loans in the Union portfolios increased from $6.9 million at December 31, 2002
to $7.5 million at December 31, 2003. Because these problems had been
anticipated in negotiating the acquisition price, they did not affect the amount
of goodwill recorded in connection with this acquisition.
For the years ended December 31, 2003 and 2002, our nonperforming
assets increased $3.7 million and $11.2 million, respectively. Nonperforming
loans were $75.4 million and $75.2 million at December 31, 2003 and 2002,
respectively, as compared to $67.3 million at December 31, 2001. The increase in
nonperforming loans in 2002 and 2003 is primarily attributable to general
economic conditions, additional problems identified in the acquired loan
portfolios and the continued deterioration of the portfolio of leases in our
commercial leasing portfolio, particularly the segment related to the airline
industry. In addition, in January 2003, we foreclosed on a residential and
recreational development property that had been placed on nonaccrual status
during the second quarter of 2002. The relationship relates to a residential and
recreational development project that had significant financial difficulties and
experienced inadequate project financing, project delays and weak project
management. As more fully described in Note 25 to our Consolidated Financial
Statements, we sold this property in February 2004, thereby reducing our
nonperforming assets by $9.2 million. Loan charge-offs, net of recoveries,
although still at higher-than-historical levels, decreased to $32.7 million for
2003, compared to $54.6 million for 2002 and $22.0 million for 2001 as further
discussed under "--Loans and Allowance for Loan Losses." We believe these
increases, while partially attributable to the overall risk in our loan
portfolio, are reflective of cyclical trends experienced within the banking
industry as a result of weak economic conditions within our market areas.
During 2001 and 2002, the nation generally experienced a relatively
mild, but prolonged economic slow down that has affected much of the banking
industry, including us. This was exacerbated by the terrorist attacks in late
2001 and the effects the attacks and related governmental responses had on
economic activity. In 2003, we continued to experience weak economic conditions
in our market areas, despite some slight economic improvements in certain
sectors. The overall effects of the economic downturn have been inconsistent
between various geographic areas of the country, as well as different segments
of the economy. To us, the effects of the downturn can be observed in generally
lower interest rates, which have a negative impact on our net interest income,
and on the performance of our loan portfolio, which is reflected in higher
delinquencies, nonperforming assets, charge-offs and provisions for loan losses,
as well as reduced loan demand from customers. The impact of lower interest
rates has been significantly reduced through the use of various derivative
financial instruments that provide hedges of this interest rate risk, as further
discussed under "--Interest Rate Risk Management." However, during 2002 and
2003, we incurred continued asset quality issues that were at least partially
attributable to economic conditions.
Within our market areas, the impact of the economy has become evident
at different times. In our midwestern markets, a perceptible increase in loan
delinquencies began in late 2000 and continued throughout 2001, with some modest
improvement in 2002 and 2003. The increase in delinquencies was primarily
focused in commercial, financial and agricultural loans, lease financing loans
and, to a lesser extent, commercial real estate loans, and initially involved
borrowers that had already encountered some operating problems that continued to
deteriorate as the economy became weaker. Included in this were loans on hotels
and leases to the commercial airline industry. In both instances, the industry
had been suffering from overcapacity prior to 2001, which then became much worse
with the economic downturn and the events of terrorist attacks. As the recession
continued, the effects expanded to companies that had been stronger, but
succumbed to the ongoing effects of slowed economic activity. Net loan
charge-offs for our Midwest banking region were $25.7 million and $22.1 million
for the years ended December 31, 2003 and 2002, respectively, compared to $16.3
million for the year ended December 31, 2001. Nonperforming loans and leases for
this region were $56.2 million and $50.5 million at December 31, 2003 and 2002,
respectively, compared to $47.7 million at December 31, 2001.
Generally, the effects on us of the economic downturn in California
have been limited to the San Francisco Bay area, including the area known as
"Silicon Valley." Although we have a substantial banking presence in the San
Francisco Bay area, we have relatively little direct exposure to the high
technology companies. Consequently, the decline in that industry beginning in
2000 had little direct effect on our California operations. However, as the
magnitude of the problems in the high technology sector increased, the effects
spread to companies that were suppliers and servicers of the high technology
sector, and to commercial real estate in the area. As a result, our asset
quality issues in California have been concentrated within the San Francisco Bay
area, and generally do not involve Southern California or the
Sacramento-Roseville area in Northern California. Furthermore, these issues
primarily arose during 2002. Consequently, our California banking region
incurred net loan charge-offs of $27.6 million and $5.4 million for the years
ended December 31, 2002 and 2001, respectively, in comparison to net loan
recoveries of $680,000 in 2003. Nonperforming loans for our California banking
region were $13.0 million, $17.2 million and $14.1 million at December 31, 2003,
2002 and 2001, respectively.
Our Texas banking operation represents a somewhat smaller portion of
our overall lending function. However, the Texas economy has generally continued
to be fairly strong, resulting in relatively few asset quality issues. We
recorded net loan charge-offs of $7.7 million for the year ended December 31,
2003, which included $6.6 million on three credit relationships. Net loan
charge-offs were $4.9 million for the year ended December 31, 2002, which
included a charge-off of $5.3 million on a single loan to a company engaged in
leasing equipment, primarily to manufacturers. This company encountered
significant operating problems from rapid expansion, principally through
acquisition, accompanied by the economic downturn, which particularly affected
the manufacturing sector. Total nonperforming loans for this region were $6.2
million, $5.5 million and $3.5 million at December 31, 2003, 2002 and 2001,
respectively.
In addition to restructuring our loan portfolio, we also have changed
the composition of our deposit base. The deposit mix of 2003 reflects our
continued efforts in this regard as a majority of our deposit development
programs are directed toward increased transaction accounts, such as demand and
savings accounts, rather than time deposits. We have also expanded our
development of multiple account relationships with individual customers. This
growth is accomplished by cross-selling various products and services, packaging
account types and offering incentives to deposit customers on other deposit or
non-deposit services. In addition, commercial borrowers are encouraged to
maintain their operating deposit accounts with us. At December 31, 1998, total
time deposits were $1.80 billion, or 45.8% of total deposits. Although time
deposits have increased to $1.96 billion at December 31, 2003, they represented
only 32.8% of total deposits, reflecting our continued focus on transactional
accounts and full service deposit relationships with our customers.
Despite the significant expenses we incurred in the amalgamation of the
acquired entities into our corporate culture and systems, and in the expansion
of our organizational capabilities, the earnings of the acquired entities and
the increased net interest income resulting from the transition in the
composition of our loan and deposit portfolios have contributed to improving net
income. For the years ended December 31, 2003 and 2002, net income was $62.8
million and $45.2 million, respectively, compared to $64.5 million, $56.1
million and $44.2 million in 2001, 2000 and 1999, respectively. The factors that
led to the decline in our earnings for 2002 include the current interest rate
environment, asset quality issues requiring additional provisions for loan
losses, and increased operating expenses. The higher-than-historical provisions
for loan losses in 2003 and 2002 reflect the current economic environment and
significantly increased loan charge-off, delinquency and nonperforming trends as
further discussed under "--Comparison of Results of Operations for 2003 and 2002
- - Provision for Loan Losses." Although we anticipate certain short-term adverse
effects on our operating results associated with acquisitions, we believe the
long-term benefits of our acquisition program will exceed the short-term issues
encountered with some acquisitions. As such, in addition to concentrating on
internal growth through continued efforts to further develop our corporate
infrastructure and product and service offerings, we expect to continue to
identify and pursue opportunities for growth through acquisitions and
expansionary de novo branch activities.
Acquisitions. In the development of our banking franchise, we emphasize
acquiring other financial institutions as one means of achieving our growth
objectives. Acquisitions may serve to enhance our presence in a given market, to
expand the extent of our market area or to enable us to enter new or
noncontiguous market areas. After we consummate an acquisition, we expect to
enhance the franchise of the acquired entity by supplementing the marketing and
business development efforts to broaden the customer bases, strengthening
particular segments of the business or filling voids in the overall market
coverage. We have primarily utilized cash, borrowings and the issuance of
subordinated debentures through our various statutory and business trusts, which
serve as financing entities, to meet our growth objectives under our acquisition
program.
During the three years ended December 31, 2003, we completed five
acquisitions of banks and two branch office purchases. As demonstrated in the
following table, our acquisitions during the three years ended December 31, 2003
have primarily served to increase our presence in the California markets that we
originally entered during 1995 and to further augment our existing markets and
our Midwest banking franchise. These transactions are summarized as follows:
Number
Loans, Net of of
Total Unearned Investment Banking
Entity Closing Date Assets Discount Securities Deposits Locations
------ ------------ ------ -------- ---------- --------- ---------
(dollars expressed in thousands)
2003
----
Bank of Ste. Genevieve
Ste. Genevieve, Missouri March 31, 2003 $ 115,100 43,700 47,800 93,700 2
========= ======== ======= ======== ====
2002
----
Union Planters Bank, N.A.
Denton and Garland, Texas
branch offices June 22, 2002 $ 63,700 600 -- 64,900 2
Plains Financial Corporation
Des Plaines, Illinois January 15, 2002 256,300 150,400 81,000 213,400 4
--------- -------- ------- -------- ----
$ 320,000 151,000 81,000 278,300 6
========= ======== ======= ======== ====
2001
----
Union Financial Group, Ltd.
Swansea, Illinois December 31, 2001 $ 360,000 263,500 1,150 283,300 9
BYL Bancorp
Orange, California October 31, 2001 281,500 175,000 12,600 251,800 7
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 70,200 7,500 89,000 2
--------- -------- ------- -------- ----
$ 743,000 508,700 21,250 624,100 18
========= ======== ======= ======== ====
We funded the completed acquisitions from available cash reserves,
proceeds from the exchange, sales and maturities of available-for-sale
investment securities, borrowings under our revolving credit line with a group
of unaffiliated banks and proceeds from the issuance of subordinated debentures.
Completed Acquisitions and Other Corporate Transactions
On January 15, 2002, we completed our acquisition of Plains Financial
Corporation, or Plains, and its wholly owned banking subsidiary, PlainsBank of
Illinois, National Association, Des Plaines, Illinois, in exchange for $36.5
million in cash. Plains operated a total of three banking facilities in Des
Plaines, Illinois, and one banking facility in Elk Grove Village, Illinois. At
the time of the transaction, Plains had $256.3 million in total assets, $150.4
million in loans, net of unearned discount, $81.0 million in investment
securities and $213.4 million in deposits. This transaction was accounted for
using the purchase method of accounting. Goodwill was approximately $12.6
million, and the core deposit intangibles, which are being amortized over seven
years utilizing the straight-line method, were approximately $2.9 million.
Plains was merged with and into Union and PlainsBank of Illinois was merged with
and into First Bank.
On June 22, 2002, First Bank & Trust completed its assumption of the
deposits and certain liabilities and the purchase of certain assets of the
Garland and Denton, Texas branch offices of Union Planters Bank, National
Association, or UP branches. The transaction resulted in the acquisition of
$15.3 million in deposits and one branch office in Garland and $49.6 million in
deposits and one branch office and a detached drive-thru facility, in Denton.
The core deposit intangibles associated with the branch purchases were $1.4
million and are being amortized over seven years utilizing the straight-line
method.
On December 31, 2002, we completed our acquisition of all of the
outstanding capital stock of First Banks America, Inc., or FBA, San Francisco,
California, that we did not already own for a price of $40.54 per share, or
approximately $32.4 million. Prior to this transaction, there were 798,753
shares, or approximately 6.22% of our former majority-owned subsidiary's
outstanding stock, held publicly. We owned the other 93.78%. In conjunction with
this transaction, FBA became a wholly owned subsidiary of First Banks, and was
merged with and into First Banks. This transaction was accounted for using the
purchase method of accounting. Goodwill was approximately $14.6 million.
On March 31, 2003, we completed our acquisition of Bank of Ste.
Genevieve, or BSG, Ste. Genevieve, Missouri, from Allegiant Bancorp, Inc., or
Allegiant, in exchange for approximately 974,150 shares of Allegiant common
stock that we previously held. The purpose of the transaction was to further
expand our Midwest banking franchise. At the time of the acquisition, BSG had
$115.1 million in total assets, $43.7 million in loans, net of unearned
discount, $47.8 million in investment securities, and $93.7 million in deposits
and operated two locations in Ste. Genevieve, Missouri. The transaction was
accounted for using the purchase method of accounting. We recorded a gain of
$6.3 million on the exchange of the Allegiant common stock and goodwill of
approximately $3.4 million. The core deposit intangibles were approximately $3.5
million and are being amortized over seven years utilizing the straight-line
method. BSG was merged with and into First Bank. Subsequent to the acquisition,
we continued to own 231,779 shares, or approximately 1.52% of the issued and
outstanding shares of Allegiant common stock. On October 27, 2003, we
contributed our remaining shares of Allegiant common stock to a previously
established charitable foundation. In conjunction with this transaction, we
recorded charitable contribution expense of $5.1 million, which was partially
offset by a gain on the contribution of these available-for-sale investment
securities of $2.3 million, representing the difference between the cost basis
and the fair value of the common stock on the date of the contribution. In
addition, we recorded a tax benefit of $2.5 million associated with this
transaction. The contribution of this stock eliminated our investment in
Allegiant.
On March 31, 2003, we completed the merger of our 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.
On October 17, 2003, First Bank completed its divestiture of three
branch offices in the northern and central Illinois market area, and on December
5, 2003, First Bank completed its divestiture of one branch office in eastern
Missouri. These branch divestitures resulted in a reduction of First Bank's
deposit base of approximately $88.3 million, and a pre-tax gain of approximately
$4.0 million.
Acquisition and Integration Costs
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 two to 15 years
and are triggered as a result of the change in control of the acquired entity.
Other severance benefits for employees that are terminated in conjunction with
the integration of the acquired entities into our existing operations are
normally paid to the recipients within 90 days of the respective consummation
date. Our accrued severance balance of $1.4 million, as further described in
Note 2 to our Consolidated Financial Statements, is comprised of contractual
obligations under salary continuation agreements to ten individuals that have
remaining terms ranging from four months to approximately 13 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 acquisition and integration costs attributable to the
acquisitions included in the foregoing table, which were accrued as of the
consummation dates of the respective acquisition, is included in Note 2 to our
Consolidated Financial Statements. Acquisition and integration costs are
reflected in accrued expenses and other liabilities in our consolidated
financial statements.
As further discussed and quantified under "--Comparison of Results of
Operations for 2003 and 2002," and "--Comparison of Results of Operations for
2002 and 2001," 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.
Market Area. As of December 31, 2003, First Bank's 147 banking facilities were
located in California, eastern Missouri, Illinois and Texas. Our primary market
area is the St. Louis, Missouri metropolitan area. Our second and third largest
market areas are southern and northern California, respectively. We also have
locations throughout Illinois, in the Houston, Dallas, Irving, McKinney and
Denton, Texas metropolitan areas and rural eastern Missouri.
The following table lists the market areas in which First Bank
operates, total deposits, deposits as a percentage of total deposits and the
number of locations as of December 31, 2003:
Total Deposits Number
Deposits as a Percentage of
Geographic Area (in millions) of Total Deposits Locations
--------------- ------------- ----------------- ---------
St. Louis, Missouri metropolitan area................................ $ 1,391.8 23.3% 29
Southern California.................................................. 1,302.9 21.9 31
Northern California.................................................. 1,033.1 17.3 16
Central and southern Illinois........................................ 1,010.2 16.9 34
Eastern Missouri..................................................... 480.4 8.1 15
Northern Illinois.................................................... 428.6 7.2 14
Texas................................................................ 314.6 5.3 8
--------- ----- ---
Total deposits.................................................. $ 5,961.6 100.0% 147
========= ===== ===
First Bank operates in the St. Louis metropolitan area, in eastern
Missouri and throughout Illinois, including Chicago. First Bank also operates in
southern California, including the greater Los Angeles metropolitan area,
including Ventura County, Riverside County and Orange County; in Santa Barbara
County; in northern California, including the greater San Francisco, San Jose
and Sacramento metropolitan areas; and in Texas in the Houston, Dallas, Irving,
McKinney and Denton metropolitan areas.
Competition and Branch Banking. First Bank engages in highly competitive
activities. Those activities and the geographic markets served primarily involve
competition with other banks, some of which are affiliated with large regional
or national holding companies. Financial institutions compete based upon
interest rates offered on deposit accounts, interest rates charged on loans and
other credit and service charges, the quality of services rendered, the
convenience of banking facilities and, in the case of loans to large commercial
borrowers, relative lending limits.
Our principal competitors include other commercial banks, savings
banks, savings and loan associations, mutual funds, finance companies, trust
companies, insurance companies, leasing companies, credit unions, mortgage
companies, private issuers of debt obligations and suppliers of other investment
alternatives, such as securities firms and financial holding companies. Many of
our non-bank competitors are not subject to the same degree of regulation as
that imposed on bank holding companies, federally insured banks and national or
state chartered banks. As a result, such non-bank competitors have advantages
over us in providing certain services. We also compete with major multi-bank
holding companies, which are significantly larger than us and have greater
access to capital and other resources.
We believe we will continue to face competition in the acquisition of
independent banks and savings banks from banks and financial holding companies.
We often compete with larger financial institutions that have substantially
greater resources available for making acquisitions.
Subject to regulatory approval, commercial banks operating in
California, Illinois, Missouri and Texas are permitted to establish branches
throughout their respective states, thereby creating the potential for
additional competition in our service areas.
Supervision and Regulation
General. Federal and state laws extensively regulate First Bank and us primarily
to protect depositors and customers of First Bank. To the extent this discussion
refers to statutory or regulatory provisions, it is not intended to summarize
all such provisions and is qualified in its entirety by reference to the
relevant statutory and regulatory provisions. Changes in applicable laws,
regulations or regulatory policies may have a material effect on our business
and prospects. We are unable to predict the nature or extent of the effects on
our business and earnings that new federal and state legislation or regulation
may have. The enactment of the legislation described below has significantly
affected the banking industry generally and is likely to have ongoing effects on
First Bank and us in the future.
We are a registered bank holding company under the Bank Holding Company
Act of 1956. Consequently, the Board of Governors of the Federal Reserve System,
or Federal Reserve, regulates, supervises and examines us. We file annual
reports with the Federal Reserve and provide to the Federal Reserve additional
information as it may require.
Since First Bank is an institution chartered by the State of Missouri
and a member of the Federal Reserve, both the State of Missouri Division of
Finance and the Federal Reserve supervise, regulate and examine First Bank.
First Bank is also regulated by the Federal Deposit Insurance Corporation, or
FDIC, which provides deposit insurance of up to $100,000 for each insured
depositor.
Bank Holding Company Regulation. Our activities and those of First Bank have in
the past been limited to the business of banking and activities "closely
related" or "incidental" to banking. Under the Gramm-Leach-Bliley Act, or GLB
Act, which was enacted in November 1999 and is discussed below, bank holding
companies now have the opportunity to seek broadened authority, subject to
limitations on investment, to engage in activities that are "financial in
nature" if all of their subsidiary depository institutions are well capitalized,
well managed and have at least a satisfactory rating under the Community
Reinvestment Act (discussed briefly below).
We are also subject to capital requirements applied on a consolidated
basis, which are substantially similar to those required of First Bank (briefly
summarized below). The Bank Holding Company Act also requires a bank holding
company to obtain approval from the Federal Reserve before:
>> acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls a majority of such
shares);
>> acquiring all or substantially all of the assets of another bank
or bank holding company; or
>> merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anti-competitive result, unless
the anti-competitive effects of the proposed transaction are clearly outweighed
by a greater public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve also considers capital adequacy and
other financial and managerial factors in reviewing acquisitions and mergers.
Safety and Soundness and Similar Regulations. We are subject to various
regulations and regulatory policies directed at the financial soundness of First
Bank. These include, but are not limited to, the Federal Reserve's source of
strength policy, which obligates a bank holding company such as us to provide
financial and managerial strength to its subsidiary banks; restrictions on the
nature and size of certain affiliate transactions between a bank holding company
and its subsidiary depository institutions and restrictions on extensions of
credit by its subsidiary banks to executive officers, directors, principal
stockholders and the related interests of such persons.
Regulatory Capital Standards. The federal bank regulatory agencies have adopted
substantially similar risk-based and leverage capital guidelines for banking
organizations. Risk-based capital ratios are determined by classifying assets
and specified off-balance-sheet obligations and financial instruments into
weighted categories, with higher levels of capital being required for categories
deemed to represent greater risk. Federal Reserve policy also provides that
banking organizations generally, and in particular those that are experiencing
internal growth or actively making acquisitions, are expected to maintain
capital positions that are substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Under the risk-based capital standard, the minimum consolidated ratio
of total capital to risk-adjusted assets required for bank holding companies is
8%. At least one-half of the total capital must be composed of common equity,
retained earnings, qualifying noncumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual preferred stock and minority interests
in the equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets, which amount is referred to as
"Tier I capital." The remainder may consist of qualifying hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier I
capital and a limited amount of loan and lease loss reserves, which amount,
together with Tier I capital, is referred to as "Total Risk-Based Capital."
In addition to the risk-based standard, we are subject to minimum
requirements with respect to the ratio of our Tier I capital to our average
assets less goodwill and certain other intangible assets, or the Leverage Ratio.
Applicable requirements provide for a minimum Leverage Ratio of 3% for bank
holding companies that have the highest supervisory rating, while all other bank
holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%.
The Office of the Comptroller of the Currency, or OCC, and the FDIC have
established capital requirements for banks under their respective jurisdictions
that are consistent with those imposed by the Federal Reserve on bank holding
companies. Information regarding our capital levels and First Bank's capital
levels under the federal capital requirements is contained in Note 21 to our
Consolidated Financial Statements appearing elsewhere in this report.
Prompt Corrective Action. The FDIC Improvement Act requires the federal bank
regulatory agencies to take prompt corrective action in respect to depository
institutions that do not meet minimum capital requirements. A depository
institution's status under the prompt corrective action provisions depends upon
how its capital levels compare to various relevant capital measures and other
factors as established by regulation.
The federal regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. Under the regulations, a
bank will be:
>> "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier I capital ratio of 6% or greater and a
Leverage Ratio of 5% or greater and is not subject to any order
or written directive by any such regulatory authority to meet and
maintain a specific capital level for any capital measure;
>> "adequately capitalized" if it has a total risk-based capital
ratio of 8% or greater, a Tier I capital ratio of 4% or greater
and a Leverage Ratio of 4% or greater (3% in certain
circumstances);
>> "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I capital ratio of less than 4% or a
Leverage Ratio of less than 4% (3% in certain circumstances);
>> "significantly undercapitalized" if it has a total risk-based
capital ratio of less than 6%, a Tier I capital ratio of less
than 3% or a Leverage Ratio of less than 3%; and
>> "critically undercapitalized" if its tangible equity is equal to
or less than 2% of its average quarterly tangible assets.
Under certain circumstances, a depository institution's primary federal
regulatory agency may use its authority to lower the institution's capital
category. The banking agencies are permitted to establish individual minimum
capital requirements exceeding the general requirements described above.
Generally, failing to maintain the status of "well capitalized" or "adequately
capitalized" subjects a bank to restrictions and limitations on its business
that become progressively more severe as the capital levels decrease.
A bank is prohibited from making any capital distribution (including
payment of a dividend) or paying any management fee to its holding company if
the bank would thereafter be "undercapitalized." Limitations exist for
"undercapitalized" depository institutions regarding, among other things, asset
growth, acquisitions, branching, new lines of business, acceptance of brokered
deposits and borrowings from the Federal Reserve System. These institutions are
also required to submit a capital restoration plan that includes a guarantee
from the institution's holding company. "Significantly undercapitalized"
depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
"adequately capitalized," requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. The appointment of a receiver or
conservator may be required for "critically undercapitalized" institutions.
Dividends. Our primary source of funds in the future is the dividends, if any,
paid by First Bank. The ability of First Bank to pay dividends is limited by
federal laws, by regulations promulgated by the bank regulatory agencies and by
principles of prudent bank management.
Customer Protection. First Bank is also subject to consumer laws and regulations
intended to protect consumers in transactions with depository institutions, as
well as other laws or regulations affecting customers of financial institutions
generally. These laws and regulations mandate various disclosure requirements
and substantively regulate the manner in which financial institutions must deal
with their customers. First Bank must comply with numerous regulations in this
regard and is subject to periodic examinations with respect to its compliance
with the requirements.
Community Reinvestment Act. The Community Reinvestment Act of 1977 requires
that, in connection with examinations of financial institutions within their
jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered in evaluating
mergers, acquisitions and other applications to expand.
The Gramm-Leach-Bliley Act. The GLB Act, enacted in 1999, amended and repealed
portions of the Glass-Steagall Act and other federal laws restricting the
ability of bank holding companies, securities firms and insurance companies to
affiliate with each other and to enter new lines of business. The GLB Act
established a comprehensive framework to permit financial companies to expand
their activities, including through such affiliations, and to modify the federal
regulatory structure governing some financial services activities. This
authority of financial firms to broaden the types of financial services offered
to customers and to affiliates with other types of financial services companies
may lead to further consolidation in the financial services industry. However,
it may lead to additional competition in the markets in which we operate by
allowing new entrants into various segments of those markets that are not the
traditional competitors in those segments. Furthermore, the authority granted by
the GLB Act may encourage the growth of larger competitors.
The GLB Act also adopted consumer privacy safeguards requiring
financial services providers to disclose their policies regarding the privacy of
customer information to their customers and, subject to some exceptions,
allowing customers to "opt out" of policies permitting such companies to
disclose confidential financial information to non-affiliated third parties.
Final regulations implementing the new privacy standards became effective in
2001.
The Sarbanes-Oxley Act. In July 2002, the Sarbanes-Oxley Act of 2002 was signed
into law. The Sarbanes-Oxley Act imposes a myriad of corporate governance and
accounting measures designed to ensure that the shareholders of corporate
America are treated fairly and have full and accurate information about the
public companies in which they invest. All public companies, including companies
that file periodic reports with the Securities and Exchange Commission, or SEC,
such as First Banks, are affected by the Sarbanes-Oxley Act.
Certain provisions of the Sarbanes-Oxley Act became effective
immediately, while other provisions will become effective as the SEC adopts
rules to implement those provisions. Some of the principal provisions of the
Sarbanes-Oxley Act which may affect us include:
>> the creation of an independent accounting oversight board to
oversee the audit of public companies and auditors who perform
such audits;
>> auditor independence provisions which restrict non-audit services
that independent accountants may provide to their audit clients;
>> additional corporate governance and responsibility measures which
(i) require the chief executive officer and chief financial
officer to certify financial statements and to forfeit salary and
bonuses in certain situations, and (ii) protect whistleblowers
and informants;
>> expansion of the audit committee's authority and responsibility
by requiring that the audit committee (i) have direct control of
the outside auditor, (ii) be able to hire and fire the auditor,
and (iii) approve all non-audit services;
>> mandatory disclosure by analysts of potential conflicts of
interest; and
>> enhanced penalties for fraud and other violations.
The Sarbanes-Oxley Act is expected to increase the administrative costs
and burden of doing business for public companies; however, we cannot predict
the significance of such increase at this time.
The USA Patriot Act. In October 2001, the Patriot Act was enacted in response to
the terrorist attacks in New York, Pennsylvania and Washington, D.C. that
occurred on September 11, 2001. The Patriot Act is intended to strengthen the
ability of U.S. law enforcement agencies and the intelligence communities to
work cohesively to combat terrorism on a variety of fronts. The potential impact
of the Patriot Act on financial institutions of all kinds is significant and
wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and imposes various regulations, including standards
for verifying client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering. The Patriot Act is expected to increase the administrative costs and
burden of doing business for financial institutions; however, while we cannot
predict the full impact of such an increase at this time, we do not expect it to
differ from that of other financial institutions.
Reserve Requirements: Federal Reserve System and Federal Home Loan Bank System.
The Federal Reserve requires all depository institutions to maintain reserves
against their transaction accounts and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements. Institutions are authorized to borrow
from the Federal Reserve Bank "discount window," but Federal Reserve regulations
require institutions to exhaust other reasonable alternative sources of funds,
including advances from Federal Home Loan Banks, before borrowing from the
Federal Reserve Bank.
First Bank is a member of the Federal Reserve System and the Federal
Home Loan Bank System. As members, First Bank is required to hold investments in
regional banks within those systems. First Bank was in compliance with these
requirements at December 31, 2003, with investments of $5.4 million in stock of
the Federal Home Loan Bank of Des Moines, $350,000 in stock of the Federal Home
Loan Bank of Chicago (associated with the acquisition of Union completed on
December 31, 2001), $285,000 in stock of the Federal Home Loan Bank of San
Francisco, and $18.1 million in stock of the Federal Reserve Bank of St. Louis.
Monetary Policy and Economic Control. The commercial banking business is
affected by legislation, regulatory policies and general economic conditions as
well as the monetary policies of the Federal Reserve. The instruments of
monetary policy available to the Federal Reserve include the following:
>> changes in the discount rate on member bank borrowings and the
targeted federal funds rate;
>> the availability of credit at the "discount window;"
>> open market operations;
>> the imposition of changes in reserve requirements against
deposits of domestic banks;
>> the imposition of changes in reserve requirements against
deposits and assets of foreign branches; and
>> the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates.
These monetary policies are used in varying combinations to influence
overall growth and distributions of bank loans, investments and deposits, and
this use may affect interest rates charged on loans or paid on liabilities. The
monetary policies of the Federal Reserve have had a significant effect on the
operating results of commercial banks and are expected to do so in the future.
Such policies are influenced by various factors, including inflation,
unemployment, and short-term and long-term changes in the international trade
balance and in the fiscal policies of the U.S. Government. We cannot predict the
effect that changes in monetary policy or in the discount rate on member bank
borrowings will have on our future business and earnings or those of First Bank.
Employees
As of March 25, 2004, we employed approximately 2,160 employees. None
of the employees are subject to a collective bargaining agreement. We consider
our relationships with our employees to be good.
Executive Officers of the Registrant
Information regarding executive officers is contained in Item 10 of
Part III hereof (pursuant to General Instruction G) and is incorporated herein
by this reference.
Item 2. Properties
We own our office building, which houses our principal place of
business, located at 135 North Meramec, Clayton, Missouri 63105. The property is
in good condition and consists of approximately 60,353 square feet, of which
approximately 981 square feet is currently leased to others. Of our other 146
offices and two operations and administrative facilities, 88 are located in
buildings that we own and 60 are located in buildings that we lease.
We consider the properties at which we do business to be in good
condition generally and suitable for our business conducted at each location. To
the extent our properties or those acquired in connection with our acquisition
of other entities provide space in excess of that effectively utilized in the
operations of First Bank, we seek to lease or sub-lease any excess space to
third parties. Additional information regarding the premises and equipment
utilized by First Bank appears in Note 7 to our Consolidated Financial
Statements appearing elsewhere in this report.
Item 3. Legal Proceedings
In the ordinary course of business, we and our subsidiaries become
involved in legal proceedings. Our management, in consultation with legal
counsel, believes the ultimate resolution of existing proceedings will not have
a material adverse effect on our business, financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information. There is no established public trading market for our common
stock. Various trusts, which were created by and are administered by and for the
benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of his
immediate family, own all of our voting stock.
Dividends. In recent years, we have paid minimal dividends on our Class A
Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible
Adjustable Rate Preferred Stock, and have paid no dividends on our Common Stock.
Our ability to pay dividends is limited by regulatory requirements and by the
receipt of dividend payments from First Bank, which is also subject to
regulatory requirements. The dividend limitations are included in Note 22 to our
Consolidated Financial Statements appearing elsewhere in this report.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below are derived
from our consolidated financial statements, which have been audited by KPMG LLP.
This information is qualified by reference to our consolidated financial
statements appearing elsewhere in this report. This information should be read
in conjunction with such consolidated financial statements, the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
As of or For the Year Ended December 31, (1)
-----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(dollars expressed in thousands, except share and per share data)
Income Statement Data:
Interest income................................... $ 391,153 425,721 445,385 423,294 353,456
Interest expense.................................. 104,026 157,551 210,246 201,320 171,125
---------- --------- --------- --------- ---------
Net interest income............................... 287,127 268,170 235,139 221,974 182,331
Provision for loan losses......................... 49,000 55,500 23,510 14,127 13,073
---------- --------- --------- --------- ---------
Net interest income after
provision for loan losses....................... 238,127 212,670 211,629 207,847 169,258
Noninterest income................................ 87,708 67,511 89,095 37,414 36,708
Noninterest expense............................... 227,069 210,812 202,157 152,626 133,815
---------- --------- --------- --------- ---------
Income before provision for income taxes,
minority interest in income of
subsidiary and cumulative effect of
change in accounting principle.................. 98,766 69,369 98,567 92,635 72,151
Provision for income taxes........................ 35,955 22,771 30,048 34,482 26,313
---------- --------- --------- --------- ---------
Income before minority interest in
income of subsidiary and cumulative effect
of change in accounting principle............... 62,811 46,598 68,519 58,153 45,838
Minority interest in income of subsidiary......... -- 1,431 2,629 2,046 1,660
---------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle............................ 62,811 45,167 65,890 56,107 44,178
Cumulative effect of change in
accounting principle, net of tax ............... -- -- (1,376) -- --
---------- --------- --------- --------- ---------
Net income........................................ $ 62,811 45,167 64,514 56,107 44,178
========== ========= ========= ========= =========
Dividends:
Preferred stock................................... $ 786 786 786 786 786
Common stock...................................... -- -- -- -- --
Ratio of total dividends declared to net income... 1.25% 1.74% 1.22% 1.40% 1.78%
Per Share Data:
Earnings per common share:
Basic:
Income before cumulative effect of change
in accounting principle...................... $ 2,621.39 1,875.69 2,751.54 2,338.04 1,833.91
Cumulative effect of change in
accounting principle, net of tax............. -- -- (58.16) -- --
---------- --------- --------- --------- ---------
Basic.......................................... $ 2,621.39 1,875.69 2,693.38 2,338.04 1,833.91
========== ========= ========= ========= =========
Diluted:
Income before cumulative effect of
change in accounting principle............... $ 2,588.31 1,853.64 2,684.93 2,267.41 1,775.47
Cumulative effect of change in
accounting principle, net of tax............. -- -- (58.16) -- --
---------- --------- --------- --------- ---------
Diluted........................................ $ 2,588.31 1,853.64 2,626.77 2,267.41 1,775.47
========== ========= ========= ========= =========
Weighted average common stock outstanding....... 23,661 23,661 23,661 23,661 23,661
Balance Sheet Data:
Investment securities............................. $1,049,714 1,145,670 638,644 569,403 455,737
Loans, net of unearned discount................... 5,328,075 5,432,588 5,408,869 4,752,265 3,996,324
Total assets...................................... 7,106,940 7,351,177 6,786,045 5,882,706 4,871,837
Total deposits.................................... 5,961,615 6,172,820 5,683,904 5,012,415 4,251,814
Notes payable..................................... 17,000 7,000 27,500 83,000 64,000
Subordinated debentures........................... 209,320 278,389 243,457 188,718 131,701
Common stockholders' equity....................... 536,752 505,978 435,594 339,783 281,842
Total stockholders' equity........................ 549,815 519,041 448,657 352,846 294,905
Earnings Ratios:
Return on average total assets.................... 0.87% 0.64% 1.08% 1.09% 0.95%
Return on average total stockholders' equity...... 11.68 9.44 15.96 17.43 15.79
Efficiency ratio (2).............................. 60.58 62.80 62.35 58.84 61.09
Net interest margin (3)........................... 4.45 4.23 4.34 4.65 4.24
Asset Quality Ratios:
Allowance for loan losses to loans................ 2.19 1.83 1.80 1.72 1.72
Nonperforming loans to loans (4).................. 1.41 1.38 1.24 1.12 0.99
Allowance for loan losses
to nonperforming loans (4)...................... 154.52 132.29 144.36 153.47 172.66
Nonperforming assets to loans
and other real estate (5)....................... 1.62 1.52 1.32 1.17 1.05
Net loan charge-offs to average loans............. 0.61 1.01 0.45 0.17 0.22
Capital Ratios:
Average total stockholders' equity
to average total assets......................... 7.48 6.78 6.74 6.25 6.00
Total risk-based capital ratio.................... 10.27 10.68 10.53 10.21 10.05
Leverage ratio.................................... 7.62 6.45 7.24 7.46 7.15
- ---------------------------------
(1) The comparability of the selected data presented is affected by the acquisitions of 12 banks and three branch
offices during the five-year period ended December 31, 2003. These acquisitions were accounted for as purchases
and, accordingly, the selected data includes the financial position and results of operations of each acquired
entity only for the periods subsequent to its respective date of acquisition.
(2) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income.
(3) Net interest rate margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average
interest-earning assets.
(4) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms.
(5) Nonperforming assets consist of nonperforming loans and other real estate.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following presents management's discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. You should read this discussion in conjunction with our
"Selected Financial Data," our consolidated financial statements and the related
notes thereto, and the other financial data contained elsewhere in this report.
This discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains 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. Various factors
may cause our actual results to differ materially from those contemplated by the
forward-looking statements herein. We do not have a duty to and will not update
these forward-looking statements. Readers of our Annual Report on Form 10-K
should therefore not place undue reliance on forward-looking statements. See
"Special Note Regarding Forward-Looking Statements" appearing elsewhere in this
report.
RESULTS OF OPERATIONS
Overview
Net income was $62.8 million, $45.2 million and $64.5 million for the
years ended December 31, 2003, 2002 and 2001, respectively. Our return on
average assets and our return on average stockholders' equity increased to 0.87%
and 11.68%, respectively, for the year ended December 31, 2003, compared to
0.64% and 9.44%, respectively, for 2002 and 1.08% and 15.96%, respectively, for
2001. Results for 2003 reflect increased net interest income and noninterest
income and decreased provisions for loan losses, which were partially offset by
higher operating expenses, primarily attributable to our acquisitions completed
in 2003 and 2002, and increased provisions for income taxes. For the three
months ended December 31, 2003 and 2002, our net income was $15.4 million and
$14.8 million, respectively.
The increase in net income for 2003 was primarily attributable to
increased net interest income resulting from reduced deposit rates and earnings
on our interest rate swap agreements associated with our interest rate risk
management program in addition to increased gains on mortgage loans sold and
held for sale. Results for 2003 also included a nonrecurring gain relating to
the partial exchange of our investment in the common stock of Allegiant, for a
100% ownership interest in BSG, Ste. Genevieve, Missouri. Our remaining
investment in the common stock of Allegiant was contributed in full to a
previously established charitable foundation in late 2003. This nonrecurring
charitable contribution expense was partially offset by the gain realized on the
increase in the market value of the Allegiant common stock and the related
income tax effects of the transaction. Throughout 2003, we continued to address
residual problems in our loan and lease portfolio stemming from the 2002 decline
in asset quality that was primarily a result of weak economic conditions within
our markets. Our provisions for loan losses, which declined from 2002 levels,
remained at higher-than-historical levels. We continue to closely monitor asset
quality and address ongoing challenges posed by the current economic environment
and expect nonperforming assets to remain at elevated levels during most of
2004. We have also focused our efforts on strengthening our net interest margin
and growing noninterest income while managing operating expenses. Our net
interest margin increased to 4.45% for the year ended December 31, 2003 compared
to 4.23% for 2002. Noninterest income increased 29.9% in 2003, and our
efficiency ratio improved to 60.58% in 2003 from 62.80% in 2002. This has placed
us in a position to benefit from improved economic conditions as they occur. The
decline in our earnings in 2002 primarily resulted from the reduced interest
rate environment and weak economic conditions within our market areas, as well
as the related decline in asset quality. Throughout 2002, we experienced higher
than normal loan charge-offs, loan delinquencies and nonperforming loans that
led to significant increases in the provision for loan losses, thereby reducing
net income.
The implementation of Statement of Financial Accounting Standards, or
SFAS, No. 142, Goodwill and Other Intangible Assets, on January 1, 2002,
resulted in the discontinuation of amortization of certain intangibles
associated with the purchase of subsidiaries. If we had implemented SFAS No. 142
at the beginning of 2001, net income for the year ended December 31, 2001 would
have increased $8.1 million. In addition, the implementation of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, on January 1,
2001, resulted in the recognition of a cumulative effect of change in accounting
principle of $1.4 million, net of tax, which reduced net income. Excluding this
item, net income would have been $65.9 million for the year ended December 31,
2001. Furthermore, on December 31, 2003, we implemented FASB Interpretation No.
46, Consolidation of Variable Interest Entities, an interpretation of ARB No.
51, which resulted in the deconsolidation of our five statutory and business
trusts that were created for the sole purpose of issuing trust preferred
securities. The implementation of this Interpretation had no material effect on
our financial position or results of operations.
Financial Condition and Average Balances
Our average total assets were $7.18 billion for the year ended December
31, 2003, compared to $7.06 billion and $6.00 billion for the years ended
December 31, 2002 and 2001, respectively. Total assets were $7.11 billion, $7.35
billion and $6.79 billion at December 31, 2003, 2002 and 2001, respectively. We
attribute the $244.2 million decrease in total assets for 2003 to weak loan
demand from our commercial customers, a reduction in loans and bank premises and
equipment related to the divestiture of four branch offices, an anticipated
level of deposit attrition associated with lower deposit rates, maturities and
exchanges of investment securities and a decline in derivative financial
instruments, partially offset by our acquisition of BSG on March 31, 2003, which
provided assets of $115.1 million. We attribute the increase of $1.06 billion in
total average assets for 2002 primarily to our 2002 acquisitions of Plains and
the UP branches, which provided assets of $256.3 million and $63.7 million,
respectively, and our acquisitions of Charter Pacific Bank, BYL Bancorp and
Union, completed during the fourth quarter of 2001. The increase in total assets
was partially offset by lower loan demand and an anticipated level of attrition
associated with these acquisitions.
The increase in average assets for 2003 was primarily funded by an
increase in average deposits of $98.1 million to $6.05 billion for the year
ended December 31, 2003, and an increase of $25.2 million in average other
borrowings to $219.3 million for the year ended December 31, 2003. We utilized
the majority of the funds generated from our deposit growth to invest in
available-for-sale investment securities, reduce our subordinated debenture
obligations and temporarily invest the remaining funds in federal funds sold,
resulting in increases in average investment securities and average federal
funds sold of $135.5 million and $19.8 million, respectively, to $957.4 million
and $143.0 million, respectively, for the year ended December 31, 2003. The
increase in average assets for 2002 was primarily funded by an increase in
average deposits of $867.3 million to $5.96 billion for the year ended December
31, 2002, and an increase of $36.0 million in average other borrowings to $194.1
million for the year ended December 31, 2002. We utilized the majority of the
funds generated from our deposit growth to invest in available-for-sale
investment securities and the remaining funds were temporarily invested in
federal funds sold, resulting in increases in average federal funds sold and
average investment securities of $29.7 million and $364.5 million, respectively,
to $123.3 million and $821.9 million, respectively, for the year ended December
31, 2002.
Loans, net of unearned discount, averaged $5.39 billion, $5.42 billion
and $4.88 billion for the years ended December 31, 2003, 2002 and 2001,
respectively. The acquisitions we completed during 2003 and 2002 provided loans,
net of unearned discount, of $43.7 million and $151.0 million, respectively. We
attribute the decrease in average loans in 2003 to general economic conditions
resulting in continued weak loan demand and lower prevailing interest rates as
well as increased competition within our markets areas. In addition to growth
provided by acquisitions, for 2003, internal loan growth was provided by a $73.6
million increase in our real estate construction and development portfolio and a
$100.6 million increase in our residential real estate mortgage portfolio due to
increased volumes resulting from the current interest rate environment and our
business strategy decision to retain a portion of our residential mortgage loan
production that would have previously been sold in the secondary mortgage
market. These increases were offset by a $204.2 million decline in our loans
held for sale resulting from the timing of loans sales in the secondary mortgage
market and reduced loan volumes in the fourth quarter of 2003, a continued
decline in our lease financing portfolio of $59.5 million that is consistent
with our overall business strategy to de-emphasize our commercial leasing
activities, a $56.1 million decline in commercial, financial and agricultural
loans and a $22.4 million decline in consumer and installment loans, net of
unearned discount. The increase in average loans for 2002 was primarily due to
loans provided by our acquisitions as well as a $36.1 million increase in
residential real estate lending, offset by a $119.3 million decline in
commercial lending as a result of reduced loan demand stemming from the then
current economic conditions prevalent within our markets. We also experienced
continued reductions in consumer and installment loans, net of unearned
discount, which decreased $44.1 million to $79.1 million at December 31, 2002.
This decrease reflects reductions in new loan volumes and the repayment of
principal on our existing portfolio, and is also consistent with our objectives
of de-emphasizing consumer lending and expanding commercial lending. These
changes result from the focus we have placed on our business development efforts
and the portfolio repositioning that originally began in the mid-1990's. This
repositioning provided for substantially all of our residential mortgage loan
production to be sold in the secondary mortgage market and the origination of
indirect automobile loans to be substantially reduced.
Investment securities averaged $957.4 million, $821.9 million and
$457.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively, reflecting increases of $135.5 million and $364.5 million for the
years ended December 31, 2003 and 2002, respectively. The increases in 2003 and
2002 are primarily attributable to increased purchases of available-for-sale
investment securities due to reduced loan demand and deposit growth as well as
our acquisitions of BSG and Plains, which provided us with $47.8 million and
$81.0 million of investment securities in 2003 and 2002, respectively. The
overall increase in 2003 was partially offset by the exchange of our Allegiant
common stock for our ownership in BSG and the subsequent charitable contribution
of our remaining Allegiant shares.
Nonearning assets averaged $698.7 million for the year ended December
31, 2003, compared to $687.8 million and $563.0 million for the years ended
December 31, 2002 and 2001, respectively. Derivative financial instruments
averaged $78.7 million for the year ended December 31, 2003, compared to $72.8
million and $45.7 million for the years ended December 31, 2002 and 2001,
respectively. However, our derivative financial instruments declined to $49.3
million at December 31, 2003 from $97.9 million at December 31, 2002, consistent
with a decline in the fair value of certain derivative financial instruments.
The increase for 2002 was primarily attributable to additional interest rate
swap agreements entered into in 2002. Bank premises and equipment, net of
depreciation and amortization, was $136.7 million at December 31, 2003, compared
to $152.4 million and $149.6 million at December 31, 2002 and 2001,
respectively. Our acquisitions, the purchase and remodeling of a new operations
center and corporate administrative building during 2001 and the construction
and/or renovation of various branch offices contributed to the increases in 2002
and 2001. In 2003, lower capital expenditures, continued depreciation and
amortization, and the divestiture of four branch offices contributed to the
overall decrease in bank premises and equipment. Intangible assets increased
$6.6 million in 2003 and $26.7 million in 2002 and are primarily attributable to
goodwill from our acquisitions of BSG, Plains and the purchase of the public
shares of FBA of $3.4 million, $12.6 million and $14.6 million, respectively. In
addition, we recorded core deposit intangibles of $3.5 million and $2.9 million,
respectively, on our BSG and Plains acquisitions, further contributing to the
overall increase.
We use deposits as our primary funding source and acquire them from a
broad base of local markets, including both individual and corporate customers.
Deposits averaged $6.05 billion, $5.96 billion and $5.09 billion for the years
ended December 31, 2003, 2002 and 2001, respectively. Total deposits decreased
by $211.2 million to $5.96 billion at December 31, 2003 and primarily reflects
an anticipated level of attrition associated with ongoing low deposit rates and
continued aggressive competition within our market areas as well as an $88.3
million reduction in our deposit base associated with our divestiture of four
branch offices in late 2003. The overall decline in deposits was partially
offset by $93.7 million of deposits acquired from BSG. The deposit mix for 2003
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 to further develop multiple account relationships with our
customers. In 2002, total deposits increased by $488.9 million to $6.17 billion
at December 31, 2002. We credit this increase primarily to our acquisitions and
the expansion of our deposit product and service offerings available to our
customer base. The increase for 2002 also reflects an increase in savings
accounts offset by a decline in certain large commercial accounts due primarily
to general economic conditions resulting from the fact that consumers are
generally more inclined to retain a higher level of liquid assets during times
of economic uncertainty.
Other borrowings averaged $219.3 million, $194.1 million and $158.0
million for the years ended December 31, 2003, 2002 and 2001, respectively. The
increase in the average balance for 2003 reflects $100.0 million of term
securities sold under agreements to repurchase that we entered into during the
third quarter of 2003, offset by a $55.0 million reduction in federal funds
purchased, a $30.2 million decrease in daily securities sold under agreements to
repurchase principally in connection with the cash management activities of our
commercial deposit customers as well as a $7.0 million reduction in Federal Home
Loan Bank advances. The increase in the average balance for 2002 reflects a
$54.1 million increase in daily securities sold under agreements to repurchase
as well as a $15.0 million increase in federal funds purchased, offset by a
$17.0 million decline in FHLB advances.
Our note payable averaged $15.4 million, $17.9 million and $41.6
million for the years ended December 31, 2003, 2002 and 2001, respectively. Our
note payable increased $10.0 million to $17.0 million at December 31, 2003. The
balance of our note payable at December 31, 2003 resulted from a $34.5 million
advance in June 2003 to partially fund the redemption of $47.4 million of our
subordinated debentures, and has subsequently been reduced by internally funded
repayments. Our note payable decreased by $20.5 million to $7.0 million at
December 31, 2002 due to repayments funded primarily through dividends from
First Bank and the issuance of additional subordinated debentures in April 2002,
offset by a $36.5 million advance utilized to fund our acquisition of Plains in
January 2002. The $7.0 million advance drawn in December 2002 to partially fund
our purchase of the public shares of FBA was repaid in February 2003.
Subordinated debentures issued to our statutory and business trusts
averaged $249.1 million, $265.5 million and $195.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively. In November 2001, we issued
$56.9 million of 9.00% subordinated debentures to First Preferred Capital Trust
III. Proceeds from this offering, net of underwriting fees and offering
expenses, were $54.6 million and were used to reduce borrowings. Distributions
paid on these subordinated debentures were $5.1 million for the years ended
December 31, 2003 and 2002, and $640,000 for the year ended December 31, 2001.
In April 2002, we issued $25.8 million of variable rate subordinated debentures
to First Bank Capital Trust in a private placement. Proceeds from this offering,
net of underwriting fees and offering expenses, were $25.0 million and were used
to reduce borrowings. Distributions paid on these subordinated debentures were
$1.4 million and $1.1 million for the years ended December 31, 2003 and 2002,
respectively. On March 20, 2003, we issued $25.8 million of 8.10% subordinated
debentures to First Bank Statutory Trust in a private placement. Proceeds from
this offering, net of underwriting fees and offering expenses, were $25.3
million. Distributions paid on these subordinated debentures were $1.7 million
for the year ended December 31, 2003. On April 1, 2003, we issued $47.4 million
of 8.15% subordinated debentures to First Preferred Capital Trust IV. Proceeds
from this offering, net of underwriting fees and offering expenses, were $45.6
million. Distributions paid on these subordinated debentures were $2.9 million
for the year ended December 31, 2003. Proceeds from the 2003 issuances of
subordinated debentures, in addition to approximately $30.9 million in available
cash and a $34.5 million advance on our note payable, were used for the May 5,
2003 redemption of the $88.9 million of 9.25% subordinated debentures that were
issued to First Preferred Capital Trust in 1997, and the June 30, 2003
redemption of $47.4 million of 8.50% subordinated debentures that were issued to
First America Capital Trust in 1998.
Stockholders' equity averaged $537.6 million, $478.6 million and $404.1
million for the years ended December 31, 2003, 2002 and 2001, respectively. We
primarily attribute the increase for 2003 to net income of $62.8 million, offset
by dividends paid on our Class A and Class B preferred stock, and a $31.3
million decrease in accumulated other comprehensive income which was comprised
of $21.3 million associated with the change in our derivative financial
instruments and $10.0 million associated with the change in our unrealized gains
and losses on available-for-sale investment securities. The increase for 2002 is
attributable to net income of $45.2 million and an increase in accumulated other
comprehensive income of $26.2 million, offset by dividends paid on our Class A
and Class B preferred stock. The $26.2 million increase in accumulated other
comprehensive income reflects $17.3 million associated with our derivative
financial instruments and $8.9 million associated with the change in unrealized
gains and losses on our available-for-sale investment securities.
The following table sets forth, on a tax-equivalent basis, certain
information relating to our average balance sheets, and reflects the average
yield earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting net interest income for the periods indicated.
Years Ended December 31,
--------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- --------------------------- --------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans: (1) (2) (3)
Taxable........................ $5,369,046 354,649 6.61% $5,408,018 389,090 7.19% $4,876,615 411,663 8.44%
Tax-exempt (4)................. 16,317 1,266 7.76 16,490 1,495 9.07 7,684 754 9.81
Investment securities:
Taxable........................ 914,357 32,442 3.55 773,871 31,845 4.12 439,537 26,886 6.12
Tax-exempt (4)................. 43,074 2,672 6.20 48,078 2,869 5.97 17,910 1,366 7.63
Federal funds sold and other...... 143,046 1,502 1.05 123,285 1,949 1.58 93,561 5,458 5.83
---------- ------- ---------- ------- ---------- -------
Total interest-
earning assets............. 6,485,840 392,531 6.05 6,369,742 427,248 6.71 5,435,307 446,127 8.21
------- ------- -------
Nonearning assets..................... 698,740 687,843 562,991
---------- ---------- ----------
Total assets................. $7,184,580 $7,057,585 $5,998,298
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing
demand deposits.............. $ 852,104 5,470 0.64% $ 755,879 7,551 1.00% $ 507,011 7,019 1.38%
Savings deposits............... 2,147,573 23,373 1.09 1,991,510 35,668 1.79 1,548,441 50,388 3.25
Time deposits (3).............. 2,046,741 54,276 2.65 2,295,431 85,049 3.71 2,278,263 125,131 5.49
---------- ------- ---------- ------- ---------- -------
Total interest-
bearing deposits........... 5,046,418 83,119 1.65 5,042,820 128,268 2.54 4,333,715 182,538 4.21
Other borrowings.................. 219,264 2,243 1.02 194,077 3,450 1.78 158,047 5,847 3.70
Note payable (5).................. 15,418 785 5.09 17,947 1,032 5.75 41,590 2,629 6.32
Subordinated debentures (3)....... 249,146 17,879 7.18 265,503 24,801 9.34 195,523 19,232 9.84
---------- ------- ---------- ------- ---------- -------
Total interest-
bearing liabilities........ 5,530,246 104,026 1.88 5,520,347 157,551 2.85 4,728,875 210,246 4.45
------- ------- -------
Noninterest-bearing liabilities:
Demand deposits................... 1,007,400 912,915 754,763
Other liabilities................. 109,357 145,731 110,553
---------- ---------- ----------
Total liabilities............ 6,647,003 6,578,993 5,594,191
Stockholders' equity.................. 537,577 478,592 404,107
---------- ---------- ----------
Total liabilities and
stockholders' equity....... $7,184,580 $7,057,585 $5,998,298
========== ========== ==========
Net interest income................... 288,505 269,697 235,881
======= ======= =======
Interest rate spread.................. 4.17 3.86 3.76
Net interest margin (6)............... 4.45% 4.23% 4.34%
==== ==== ====
- -----------------------------
(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 includes 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 $1.4 million, $1.5 million and $742,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
(5) Interest expense on our note payable includes commitment, arrangement and renewal fees.
(6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning
assets.
The following table indicates, on a tax-equivalent basis, the changes
in interest income and interest expense, which are attributable to changes in
average volume, and changes in average rates, in comparison with the preceding
year. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the dollar amounts of the
change in each.
Increase (Decrease) Attributable to Change in:
----------------------------------------------------------------
December 31, 2003 Compared December 31, 2002 Compared
to December 31, 2002 to December 31, 2001
------------------------------- ------------------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Interest earned on:
Loans: (1)(2)(3)
Taxable............................. $ (2,824) (31,617) (34,441) 42,110 (64,683) (22,573)
Tax-exempt (4)...................... (16) (213) (229) 802 (61) 741
Investment securities:
Taxable............................. 5,345 (4,748) 597 15,767 (10,808) 4,959
Tax-exempt (4)...................... (305) 108 (197) 1,858 (355) 1,503
Federal funds sold and other........... 278 (725) (447) 1,349 (4,858) (3,509)
-------- ------- ------- ------- ------- -------
Total interest income........... 2,478 (37,195) (34,717) 61,886 (80,765) (18,879)
-------- ------- ------- ------- ------- -------
Interest paid on:
Interest-bearing demand deposits....... 878 (2,959) (2,081) 2,809 (2,277) 532
Savings deposits....................... 2,602 (14,897) (12,295) 11,866 (26,586) (14,720)
Time deposits (3) ..................... (8,461) (22,312) (30,773) 932 (41,014) (40,082)
Other borrowings....................... 406 (1,613) (1,207) 1,121 (3,518) (2,397)
Note payable (5)....................... (136) (111) (247) (1,378) (219) (1,597)
Subordinated debentures (3)............ (1,456) (5,466) (6,922) 6,589 (1,020) 5,569
-------- ------- ------- ------- ------- -------
Total interest expense.......... (6,167) (47,358) (53,525) 21,939 (74,634) (52,695)
-------- ------- ------- ------- ------- -------
Net interest income............. $ 8,645 10,163 18,808 39,947 (6,131) 33,816
======== ======= ======= ======= ======= =======
- -----------------------------
(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 includes the effect of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%.
(5) Interest expense on our note payable includes commitment, arrangement and renewal fees.
Net Interest Income
The primary source of our income is net interest income, which is the
difference between the interest earned on our interest-earning assets and the
interest paid on our interest-bearing liabilities. Net interest income
(expressed on a tax-equivalent basis) increased to $288.5 million, or 4.45% of
average interest-earning assets, for the year ended December 31, 2003, from
$269.7 million, or 4.23% of interest-earning assets, and $235.9 million, or
4.34% of interest-earning assets, for the years ended December 31, 2002 and
2001, respectively. We credit the increased net interest income primarily to the
net interest-earning assets provided by our acquisitions completed in 2002 and
2003, reduced deposit rates and 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. These
derivative financial instruments used to hedge our interest rate risk
contributed $64.6 million, $53.0 million and $23.4 million, respectively, to net
interest income for the years ended December 31, 2003, 2002 and 2001. The
improved net interest income is also attributable to a $63.1 million net
reduction in our outstanding subordinated debentures. As more fully described in
Note 12 to our Consolidated Financial Statements, in 2003, we redeemed $136.3
million of subordinated debentures that were issued during 1997 and 1998, and we
issued $25.8 million of subordinated debentures to First Bank Statutory Trust
and $47.4 million of subordinated debentures to First Preferred Capital Trust
IV. These transactions, coupled with the use of additional derivative financial
instruments, have allowed us to reduce our overall interest expense associated
with our subordinated debentures. In addition, earning assets increased as a
result of our acquisitions of BSG in 2003, which provided assets of $115.1
million, and Plains and two Texas branch purchases in 2002, which provided
assets of $256.3 million and $63.7 million, respectively. The increase in net
interest income, however, was partially offset by prevailing lower interest
rates, generally weak loan demand and overall economic conditions that continue
to exert pressure on our net interest margin. The increase in net interest
income for 2002 was primarily attributable to the net interest-earning assets
provided by our acquisitions and earnings on our interest rate swap agreements,
including additional swap agreements entered into in May and June 2002,
partially offset by reductions in prevailing interest rates, the issuance of
additional subordinated debentures, generally weaker loan demand and overall
economic conditions, which resulted in a reduction in our net interest margin.
In 2002, we issued $25.8 million of variable rate subordinated debentures to
First Bank Capital Trust. The overall increase in interest expense on
subordinated debentures in 2002 also reflects a change in estimate reducing the
period over which our deferred issuance costs are being amortized from maturity
date to call date. This change in estimate was deemed necessary as a result of
the significant decline in prevailing interest rates during 2001, which
increased the likelihood that we would redeem certain of our subordinated
debentures prior to maturity. Subsequently, the decline in prevailing interest
rates lead to the 2003 redemption of certain of our subordinated debentures
prior to maturity and the issuance of additional subordinated debentures at
lower interest rates, as discussed above, while providing replacement regulatory
capital through the associated trust preferred securities issued by our
financing trusts.
Average total loans, net of unearned discount, were $5.39 billion for
the year ended December 31, 2003, in comparison to $5.42 billion and $4.88
billion for the years ended December 31, 2002 and 2001, respectively. The yield
on our loan portfolio decreased to 6.61% for the year ended December 31, 2003,
in comparison to 7.20% for 2002 and 8.44% for 2001. We attribute the overall
decline in yields and the decline in our net interest rate margin in 2002
primarily to the decreases in prevailing interest rates. During the period from
January 1, 2001 through December 31, 2003, the Board of Governors of the Federal
Reserve System decreased the targeted federal funds rate 13 times, resulting in
13 decreases in the prime rate of interest from 9.50% to 4.00%. This is
reflected not only in the rate of interest earned on loans that are indexed to
the prime rate, but also in other assets and liabilities which either have
variable or adjustable rates, or which matured or repriced during this period.
As discussed above and under "--Interest Rate Risk Management," 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 and
the net reduction of our outstanding subordinated debentures.
For the years ended December 31, 2003, 2002 and 2001, the aggregate
weighted average rate paid on our interest-bearing deposit portfolio was 1.65%,
2.54% and 4.21%, respectively. We attribute the decline primarily to
significantly decreased rates paid on our savings and time deposits, which have
continued to decline in conjunction with the interest rate reductions previously
discussed. However, the continued competitive pressures on deposits within our
market areas precluded us from fully reflecting the general interest rate
decreases in our deposit pricing while still providing an adequate funding
source for our loan portfolio. The earnings associated with certain of our
interest rate swap agreements designated as fair value hedges further
contributed to the overall reduction in deposit rates paid on time deposits.
The aggregate weighted average rate on our note payable decreased to
5.09% for the year ended December 31, 2003, from 5.75% and 6.32% for the years
ended December 31, 2002 and 2001, respectively. The overall changes in the
weighted average rates paid reflect changing market interest rates during these
periods. Amounts outstanding under our $60.0 million revolving line of credit
with a group of unaffiliated financial institutions bear interest at the lead
bank's corporate base rate or, at our option, at the London Interbank Offering
Rate plus a margin determined by the outstanding balance and our profitability
for the preceding four calendar quarters. Thus, our revolving credit line
represents a relatively high-cost funding source as increased advances have the
effect of increasing the weighted average rate of non-deposit liabilities. The
overall cost of this funding source, however, has been mitigated by the
reductions in the prime lending rate and in the average outstanding balance of
our note payable in 2002 and 2003 as compared to 2001. During 2001, our note
payable was fully repaid from the proceeds of our issuance of subordinated
debentures to First Preferred Capital Trust III. In December 2001, we obtained a
$27.5 million advance to fund our acquisition of Union and in January and
December 2002, we utilized the note payable to fund our acquisitions of Plains
and the public shares of FBA, respectively. The $7.0 million balance of our note
payable at December 31, 2002 was fully repaid in February 2003. The balance of
our note payable at December 31, 2003 resulted from a $34.5 million advance
drawn in June 2003 to partially fund our redemption of $47.4 million of
subordinated debentures, and has been subsequently reduced by $17.5 million of
internally funded repayments. The aggregate weighted average rate paid on our
other borrowings also declined to 1.02% for the year ended December 31, 2003, as
compared to 1.78% and 3.70% for 2002 and 2001, respectively, reflecting
reductions in the current interest rate environment.
The aggregate weighted average rate paid on our subordinated debentures
was 7.18%, 9.34% and 9.84% for the years ended December 31, 2003, 2002 and 2001,
respectively. The decreased rate for 2003 primarily reflects the redemption of
$136.3 million of subordinated debentures and the issuance of $73.2 million of
subordinated debentures at lower interest rates as well as the earnings impact
of our interest rate swap agreements entered into in 2002 and in March and April
2003. The decreased rate for 2002 reflects the net interest differential
earnings impact of $4.5 million associated with our interest rate swap
agreements entered into in May and June 2002. The decline was partially offset
by the additional expense of our subordinated debentures issued in November 2001
and April 2002 as well as a change in estimate regarding the period over which
the deferred issuance costs associated with these obligations are being
amortized. As further discussed in Note 12 to our Consolidated Financial
Statements, this change in estimate resulted in a reduction of net income in the
amount of approximately $2.8 million for the year ended December 31, 2002, as
compared to what results would have been without the change.
Comparison of Results of Operations for 2003 and 2002
Net Income. Net income was $62.8 million for the year ended December
31, 2003, compared to $45.2 million for 2002. Our return on average assets and
our return on average stockholders' equity were 0.87% and 11.68%, respectively,
for the year ended December 31, 2003, compared to 0.64% and 9.44%, respectively,
for 2002. Results for 2003 reflect increased net interest income and noninterest
income and decreased provisions for loan losses, partially offset by higher
operating expenses and increased provisions for income taxes. The provision for
loan losses, although higher than historical averages, is indicative of the
current economic environment, reflected in continued higher loan charge-off,
past due and nonperforming trends as further discussed under "--Provision for
Loan Losses." Increased net interest income is primarily attributable to reduced
deposit rates and earnings on our interest rate swap agreements, as further
discussed under "--Net Interest Income." We attribute the increased noninterest
income to gains on mortgage loans sold and held for sale, net gain on sales of
available-for-sale investment securities and net gains on the divestiture of
four branch offices as further discussed under "--Noninterest Income," partially
offset by reduced other income and net gain on derivative instruments as further
discussed under "--Interest Rate Risk Management." The overall increase in
operating expenses for 2003, as further discussed under "--Noninterest Expense,"
was primarily due to general increases in salaries and employee benefit
expenses, write-downs on operating leases associated with our commercial leasing
business and charitable contribution expense related to the contribution of our
shares of Allegiant common stock in late 2003.
Provision for Loan Losses. The provision for loan losses was $49.0
million and $55.5 million for the years ended December 31, 2003 and 2002,
respectively. We experienced a higher level of problem loans, related
charge-offs and past due loans during 2002 due to overall economic conditions
within our market areas, problems identified in two acquired loan portfolios and
deterioration in our commercial leasing portfolio, particularly the segment of
the portfolio relating to the airline industry. We experienced further
deterioration in our commercial leasing portfolio in 2003, contributing to
continued higher-than-historical provisions for loan losses as further discussed
under "--Lending Activities" and "--Loans and Allowance for Loan Losses." Net
loan charge-offs were $32.7 million and $54.6 million for the years ended
December 31, 2003 and 2002, respectively. Net loan charge-offs, unrelated to our
commercial leasing portfolio, included a $6.1 million net charge-off on one
significant credit relationship in 2003 and $38.6 million on ten significant
credit relationships in 2002. Our nonperforming loans increased to $75.4 million
at December 31, 2003 from $75.2 million at December 31, 2002, further
contributing to the need for higher-than-historical provisions for loan losses
in 2003. Our loan policy requires all loans to be placed on a nonaccrual status
once principal or interest payments become 90 days past due. Our general
procedures for monitoring these loans allow individual loan officers to submit a
written request for approval to continue the accrual of interest on loans that
become 90 days past due. These requests must be submitted for approval
consistent with the authority levels provided in our credit approval policies,
and they are only granted if an expected near term future event, such as a
pending renewal or expected payoff, exists at the time the loan becomes 90 days
past due. If the expected near term future event does not occur as anticipated,
the loan is placed on nonaccrual status. Management expects nonperforming assets
to remain at the higher levels recently experienced and considered 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 and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31, 2003
and 2002:
December 31, Increase (Decrease)
-------------------- -------------------
2003 2002 Amount %
---- ---- ------ ---
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees..... $ 36,113 30,978 5,135 16.58%
Gain on mortgage loans sold and held for sale..................... 15,645 6,471 9,174 141.77
Net gain on sales of available-for-sale investment securities..... 8,761 90 8,671 9,634.44
Gain on sales of branches, net of expenses........................ 3,992 -- 3,992 100.00
Bank-owned life insurance investment income....................... 5,469 5,928 (459) (7.74)
Net gain on derivative instruments................................ 496 2,181 (1,685) (77.26)
Other............................................................. 17,232 21,863 (4,631) (21.18)
--------- ------- -------
Total noninterest income.................................... $ 87,708 67,511 20,197 29.92
========= ======= ======= ========
December 31, Increase (Decrease)
--------------------- -------------------
2003 2002 Amount %
---- ---- ------ ---
(dollars expressed in thousands)
Noninterest expense:
Salaries and employee benefits.................................... $ 95,441 89,569 5,872 6.56%
Occupancy, net of rental income................................... 20,940 21,030 (90) (0.43)
Furniture and equipment........................................... 18,286 17,495 791 4.52
Postage, printing and supplies.................................... 5,100 5,556 (456) (8.21)
Information technology fees....................................... 32,136 32,135 1 --
Legal, examination and professional fees.......................... 8,131 9,284 (1,153) (12.42)
Amortization of intangibles associated with
the purchase of subsidiaries................................... 2,506 2,012 494 24.55
Communications.................................................... 2,667 3,166 (499) (15.76)
Advertising and business development.............................. 4,271 5,023 (752) (14.97)
Charitable contributions.......................................... 5,334 204 5,130 2,514.71
Other............................................................. 32,257 25,338 6,919 27.31
--------- -------- -------
Total noninterest expense................................... $ 227,069 210,812 16,257 7.71
========= ======== ======= ========
Noninterest Income. Noninterest income was $87.7 million for the year
ended December 31, 2003, compared to $67.5 million for 2002. 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, bank-owned life insurance investment income and other
income.
Service charges on deposit accounts and customer service fees increased
to $36.1 million for 2003, from $31.0 million for 2002. We attribute the
increase in service charges and customer service fees to:
>> our acquisitions completed during 2002 and 2003;
>> additional products and services available and utilized by our
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 increased to $15.6
million from $6.5 million for the years ended December 31, 2003 and 2002,
respectively. The increase reflects the continued growth of our mortgage banking
activities in addition to overall reductions in mortgage loan rates that
contributed to higher volumes of new originations and refinancings, partially
offset by increased commissions paid to mortgage loan originators associated
with the higher loan volumes. We experienced a slowdown in overall loan volumes
in the fourth quarter of 2003 resulting in a decline in gains on mortgage loans
sold and held for sale, and we expect this trend to continue in 2004.
Noninterest income for the years ended December 31, 2003 and 2002
includes net gains on sales of available-for-sale investment securities of $8.8
million and $90,000, respectively. The net gain for 2003 includes a $6.3 million
gain on the exchange of our Allegiant common stock for a 100% ownership interest
in BSG in the first quarter of 2003 and a $2.3 million gain realized on the
subsequent contribution of our remaining shares of Allegiant common stock to a
previously established charitable foundation in the fourth quarter of 2003,
partially offset by a $431,000 impairment loss resulting from a permanent
decline in the fair value of an equity fund investment. The net gain for 2002
resulted primarily from the sales of certain investment securities held by
acquired institutions that did not meet our overall investment objectives.
During the fourth quarter of 2003, we recorded a $4.0 million gain, net
of expenses, on the sale of four branch offices in eastern Missouri and central
and northern Illinois, as further discussed in Note 2 to our Consolidated
Financial Statements.
Bank-owned life insurance income was $5.5 million for the year ended
December 31, 2003, in comparison to $5.9 million in 2002. The decrease for 2003
reflects a reduced return on this product primarily associated with the reduced
interest rate environment and overall market conditions.
The net gain on derivative instruments was $496,000 for the year ended
December 31, 2003, in comparison to $2.2 million in 2002. The decrease in the
net gain on derivative instruments reflects changes in the fair value of our
interest rate cap agreements, fair value hedges and underlying hedged
liabilities. The lower 2003 net gain also reflects the discontinuation of hedge
accounting treatment on two interest rate swap agreements that mature in January
2004, resulting from the loss of our highly correlated hedge positions between
the swap agreements and the underlying hedged liabilities as further discussed
under "--Interest Rate Risk Management."
Other income was $17.2 million and $21.9 million for the years ended
December 31, 2003 and 2002, respectively. We attribute the primary components of
the decrease in other income to:
>> decreased loan servicing fees of $4.2 million primarily
attributable to increased amortization of mortgage servicing
rights and a higher level of interest shortfall. This decline
partially offsets the continued growth of our mortgage banking
activities due to overall reductions in mortgage loan rates and
higher origination and refinancing volumes;
>> a decline of $419,000 in brokerage revenue primarily associated
with overall market conditions and reduced customer demand;
>> a decrease of $830,000 in rental income associated with our
reduced commercial leasing activities;
>> a gain of approximately $448,000 in 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; and
>> a loss of $386,000 on the sale of a vacant branch office building
in 2003; partially offset by
>> a decrease in net losses of approximately $393,000 associated
with the sale or write-down of repossessed assets, primarily
related to leasing equipment associated with our commercial
leasing business. Leasing equipment write-downs related solely to
certain aircraft and aircraft equipment and parts were $855,000
and $1.2 million in 2003 and 2002, respectively;
>> increased portfolio management fee income of $605,000 associated
with our Institutional Money Management Division;
>> increased income of $569,000 from standby letters of credit;
>> higher earnings associated with our international banking
products;
>> increased rental fees from First Services, L.P. of approximately
$385,000 for the use of data processing and other equipment owned
by First Bank; and
>> our acquisitions completed during 2002 and 2003.
Noninterest Expense. Noninterest expense was $227.1 million for the
year ended December 31, 2003, in comparison to $210.8 million for 2002. The
increase for 2003 reflects the noninterest expense of our acquisitions completed
during 2002 and 2003, as well as general increases in salaries and employee
benefit expenses, occupancy and furniture and equipment expenses, write-downs on
operating leases associated with our commercial leasing business and charitable
contributions expense.
We record the majority of integration costs attributable to our
acquisitions as of the consummation date of our purchase business combinations.
These costs include, but are not limited to, items such as:
>> write-downs and impairment of assets of the acquired entities
that will no longer be usable subsequent to the consummation
date, primarily data processing equipment, incompatible hardware
and software, bank signage, etc. These adjustments are generally
recorded as of the consummation date as an allocation of the
purchase price with the offsetting adjustment recorded as an
increase to goodwill. In addition, for all periods presented,
these adjustments are not material to our operations;
>> costs associated with a planned exit of an activity of the
acquired entity that is not associated with or is not expected to
generate revenues after the consummation date (e.g. credit card
lending). These costs are generally recorded as of the
consummation date through the establishment of an accrued
liability with the offsetting adjustment recorded as an increase
to goodwill. These costs are infrequently encountered and, for
all periods presented, are not material to our operations;
>> planned involuntary employee termination benefits (severance
costs) as further discussed under "--Acquisitions - Acquisition
and Integration Costs" and Note 2 to our Consolidated Financial
Statements; and
>> contractual obligations of the acquired entities that existed
prior to the consummation date that either have no economic
benefit to the combined entity or have a penalty that we will
incur to cancel the contractual obligation. These contractual
obligations generally relate to existing data processing
contracts of the acquired entities that include penalties for
early termination. In conjunction with the merger and integration
of our acquisitions, the acquired entities are converted to our
existing data processing and information technology systems.
Consequently, the costs associated with terminating the existing
contracts of the acquired entities are generally recorded as of
the consummation date through the establishment of an accrued
liability with the offsetting adjustment recorded as an increase
to goodwill as further discussed under "--Acquisitions -
Acquisition and Integration Costs" and Note 2 to our Consolidated
Financial Statements.
We make adjustments to the fair value of the acquired entities' assets
and liabilities for these items as of the consummation date and include them in
the allocation of the overall acquisition cost. We also incur costs associated
with our acquisitions that are expensed in our consolidated statements of
income. These costs relate specifically to additional costs incurred in
conjunction with the data processing conversions of the acquired entities as
further described and quantified below.
Salaries and employee benefits increased by $5.9 million to $95.4
million from $89.6 million for the years ended December 31, 2003 and 2002,
respectively. We primarily associate the increase with our 2002 and 2003
acquisitions; overall higher salary and employee benefit costs associated with
employing and retaining qualified personnel; additions to staff to enhance
senior management expertise and expand our product lines, partially offset by
staff realignments surrounding our core business strategies; and increased
medical benefit costs associated with an overall increase in medical claims and
increasing costs.
Occupancy, net of rental income, and furniture and equipment expense
totaled $39.2 million and $38.5 million for the years ended December 31, 2003
and 2002, respectively. We primarily attribute the continued higher levels of
expense to acquisitions, technology equipment expenditures, continued expansion
and renovation of various corporate and branch offices, the relocation of
certain branches and operational areas and increased depreciation expense
associated with capital expenditures. Included in these expenses are a $1.0
million lease termination obligation incurred in 2003 associated with the
relocation of our San Francisco-based loan administration department to southern
California and a $1.4 million lease buyout obligation in 2002 on a California
facility acquired through a previous acquisition.
Information technology fees were $32.1 million for the years ended
December 31, 2003 and 2002. As discussed in Note 19 to our Consolidated
Financial Statements, First Services, L.P., a limited partnership indirectly
owned by our Chairman and members of his immediate family, provides information
technology and various operational support services to our subsidiaries and us.
We attribute the consistently higher level of fees to growth and technological
advancements consistent with our product and service offerings, and continued
expansion and upgrades to technological equipment, networks and communication
channels. These increases were partially offset by expense reductions of
$554,000 associated with the data processing conversions of Union, Plains and
the Denton and Garland, Texas branch purchases in 2002.
Legal, examination and professional fees were $8.1 million and $9.3
million for the years ended December 31, 2003 and 2002, respectively. The
decrease is primarily attributable to various fees paid in 2002 related to our
commercial leasing portfolio. This decrease was partially offset by a slight
increase in other legal, examination and professional fees associated with our
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 related to acquired
entities.
Amortization of intangibles associated with the purchase of
subsidiaries was $2.5 million and $2.0 million for the years ended December 31,
2003 and 2002, respectively. The increase is due to the core deposit intangibles
associated with our 2002 and 2003 acquisitions.
Communications and advertising and business development expenses
decreased $1.3 million to $6.9 million from $8.2 million for the years ended
December 31, 2003 and 2002, respectively, primarily as a result of our continued
efforts to reduce these expenses through renegotiation of contracts, reductions
in the level of advertising and promotional activities and ongoing cost
containment efforts.
Charitable contribution expense was $5.3 million and $204,000 for the
years ended December 31, 2003 and 2002, respectively. We recorded contribution
expense of $5.1 million in the fourth quarter of 2003 related to the
contribution of our remaining shares of Allegiant common stock as further
discussed under "--Overview" and "--Acquisitions - Closed Acquisitions and Other
Corporate Transactions."
Other expense was $32.3 million and $25.3 million for the years ended
December 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. We attribute the majority of the increase in other
expense for 2003, as compared to 2002, to:
>> increased write-downs of $4.2 million on various operating leases
associated with our commercial leasing business, which were
primarily a result of reductions in estimated residual values.
These write-downs were $6.8 million for the year ended December
31, 2003, compared to $2.6 million in 2002;
>> increased expenses on other real estate of $1.6 million,
including gains and losses on sales of other real estate
properties. The majority of these increased expenditures were
associated with the operation of the residential and recreational
development property transferred to other real estate in January
2003 and further discussed under "--Loans and Allowance for Loan
Losses" and in Note 25 to our Consolidated Financial Statements;
>> a $1.0 million specific reserve established in December 2003 for
the estimated loss associated with a $5.3 million unfunded letter
of credit that we subsequently funded as a loan in January 2004;
>> expenses associated with our acquisitions completed during 2002
and 2003; and
>> continued growth and expansion of our banking franchise;
partially offset by
>> reductions in various expenses, primarily including travel, meals
and entertainment, director's fees and transfer agent fees
associated with economies achieved from completion of our
purchase of the minority interest in FBA on December 31, 2002,
resulting in the elimination of the requirements for separate
public financial reporting of this subsidiary.
Provision for Income Taxes. The provision for income taxes was $36.0
million for the year ended December 31, 2003, representing an effective income
tax rate of 36.4%, in comparison to $22.8 million, representing an effective
income tax rate of 32.8%, for the year ended December 31, 2002. The increase in
the effective income tax rate is primarily attributable to higher taxable income
and the merger of our two bank charters, which has resulted in higher taxable
income allocations in states where we file separate state tax returns.
Comparison of Results of Operations for 2002 and 2001
Net Income. Net income was $45.2 million for the year ended December
31, 2002, compared to $64.5 million for 2001. Results for 2002 reflect increased
net interest income offset by higher operating expenses primarily resulting from
our acquisitions completed in 2001 and 2002. We also experienced increased
provisions for loan losses, indicative of the current economic environment,
reflected in increased loan charge-off, past due and nonperforming trends as
further discussed under "--Provision for Loan Losses." The implementation of
SFAS No. 142 on January 1, 2002, resulted in the discontinuation of amortization
of certain intangibles associated with the purchase of subsidiaries. If we had
implemented SFAS No. 142 at the beginning of 2001, net income for the year ended
December 31, 2001 would have increased $8.1 million. In addition, the
implementation of SFAS No. 133 on January 1, 2001, resulted in the recognition
of a cumulative effect of change in accounting principle of $1.4 million, net of
tax, which reduced net income in 2001. Excluding this item, net income would
have been $65.9 million for the year ended December 31, 2001. The accounting for
derivatives under the requirements of SFAS No. 133 will continue to have an
impact on future financial results as further discussed under "--Noninterest
Income."
The overall increase in operating expenses for 2002, as further
discussed under "--Noninterest Expense," was partially offset by the
discontinuation of amortization of certain intangibles associated with the
purchase of subsidiaries in accordance with the implementation of SFAS No. 142.
Amortization of intangibles for the year ended December 31, 2002 was $2.0
million compared to $8.2 million for 2001. The higher operating expenses and
increased provisions for loan losses were partially offset by increased net
interest income as further discussed under "--Net Interest Income."
Provision for Loan Losses. The provision for loan losses was $55.5
million and $23.5 million for the years ended December 31, 2002 and 2001,
respectively. The significant increase in the provision for loan losses during
2002 reflects the higher level of problem loans and related loan charge-offs and
past due loans experienced during the period. The increase in problem assets is
a result of the economic conditions within our markets, additional problems
identified in acquired loan portfolios and continuing deterioration in the
portfolio of leases to the airline industry as further discussed under
"--Lending Activities" and "Loans and Allowance for Loan Losses." Loan
charge-offs were $70.5 million for the year ended December 31, 2002, in
comparison to $31.5 million for 2001. Included in this were charge-offs
aggregating $38.6 million on ten large credit relationships, representing nearly
55% of loan charge-offs in 2002. Additionally, nonperforming assets increased
$11.2 million to $82.8 million at December 31, 2002 from $71.6 million at
December 31, 2001, further contributing to the need for increased provisions for
loan losses in 2002. Management considered these trends in its overall
assessment of the adequacy of the allowance for loan losses. In addition, our
acquisition of Plains in January 2002 provided $1.4 million in additional
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 and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31, 2002
and 2001:
December 31, Increase (Decrease)
--------------------- -------------------
2002 2001 Amount %
---- ---- ------ ---
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees..... $ 30,978 22,865 8,113 35.48%
Gain on mortgage loans sold and held for sale..................... 6,471 5,469 1,002 18.32
Net gain on sales of available-for-sale investment securities..... 90 18,722 (18,632) (99.52)
Bank-owned life insurance investment income....................... 5,928 4,415 1,513 34.27
Net gain on derivative instruments................................ 2,181 18,583 (16,402) (88.26)
Other............................................................. 21,863 19,041 2,822 14.82
--------- ------- -------
Total noninterest income.................................... $ 67,511 89,095 (21,584) (24.23)
========= ======= ======= ======
Noninterest expense:
Salaries and employee benefits.................................... $ 89,569 83,938 5,631 6.71%
Occupancy, net of rental income................................... 21,030 17,432 3,598 20.64
Furniture and equipment........................................... 17,495 12,612 4,883 38.72
Postage, printing and supplies.................................... 5,556 4,869 687 14.11
Information technology fees....................................... 32,135 26,981 5,154 19.10
Legal, examination and professional fees.......................... 9,284 6,988 2,296 32.86
Amortization of intangibles associated with
the purchase of subsidiaries................................... 2,012 8,248 (6,236) (75.61)
Communications.................................................... 3,166 3,247 (81) (2.49)
Advertising and business development.............................. 5,023 5,237 (214) (4.09)
Charitable contributions.......................................... 204 125 79 63.20
Other............................................................. 25,338 32,480 (7,142) (21.99)
--------- ------- -------
Total noninterest expense................................... $ 210,812 202,157 8,655 4.28
========= ======= ======= ======
Noninterest Income. Noninterest income was $67.5 million for the year
ended December 31, 2002, compared to $89.1 million for 2001. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, bank-owned life insurance investment income,
net gains on derivative instruments and other income.
Service charges on deposit accounts and customer service fees increased
to $31.0 million for 2002, from $22.9 million for 2001. We attribute the
increase in service charges and customer service fees to:
>> our acquisitions completed during 2001 and 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 increased to $6.5
million from $5.5 million for the years ended December 31, 2002 and 2001,
respectively. The increase is primarily attributable to a significant increase
in the volume of loans originated and sold commensurate with the reductions in
mortgage loan rates experienced in 2001 and 2002 as well as the continued
expansion of our mortgage banking activities. This increase is partially offset
by higher commissions paid to our mortgage loan originators due to increased
loan volumes.
Noninterest income for the years ended December 31, 2002 and 2001
includes net gains on the sale of available-for-sale investment securities of
$90,000 and $18.7 million, respectively. The net gain for 2002 resulted
primarily from the sales of certain investment securities held by acquired
institutions that did not meet our overall investment objectives. The net gain
in 2001 results from a $19.1 million gain recognized in conjunction with the
exchange of an equity investment in the common stock of an unaffiliated
publicly-traded financial institution for $10.0 million in cash and a $14.4
million equity investment in Allegiant common stock. We owned 7.47% and 7.93% of
the outstanding shares of Allegiant common stock at December 31, 2002 and 2001,
respectively. This gain was partially offset by a net loss that resulted from
the liquidation of certain equity investment securities.
Bank-owned life insurance income was $5.9 million for the year ended
December 31, 2002, in comparison to $4.4 million for the comparable period in
2001. The increase for 2002 reflects changes in the portfolio mix of the
underlying investments, which improved our return on this product, as well as
the reinvestment of earnings.
The net gain on derivative instruments was $2.2 million for the year
ended December 31, 2002, in comparison to $18.6 million in 2001. The decrease in
income from derivative instruments reflects $4.1 million of gains resulting from
the terminations of certain interest rate swap agreements in 2001, the sale of
our interest rate floor agreements in 2001 and ongoing changes in the fair value
of our interest rate cap agreements, fair value hedges and the underlying hedged
liabilities.
Other income was $21.9 million and $19.0 million for the years ended
December 31, 2002 and 2001, respectively. We attribute the primary components of
the increase in other income to:
>> our acquisitions completed during 2001 and 2002;
>> increased portfolio management fee income of $789,000 associated
with our Institutional Money Management Division;
>> increased earnings associated with our international banking
products;
>> increased rental income associated with our commercial leasing
activities;
>> increased rental fees from First Services, L.P. for the use of
data processing and other equipment owned by First Bank; and
>> a gain of approximately $448,000 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; partially
offset by
>> a $1.9 million gain on the sale, net of expenses, of our credit
card portfolio in 2001. The sale of this portfolio was consistent
with our strategic decision to exit this product line and enter
into an agent relationship with a larger credit card provider;
and
>> the write-down of approximately $943,000 on certain aircraft and
aircraft parts equipment associated with our commercial leasing
operation to its estimable recoverable value in June 2002. The
write-down of these assets became necessary as a result of the
continued decline in the airline industry, primarily associated
with the terrorist attacks on September 11, 2001, and the
oversupply in the market for liquidating this type of equipment.
Noninterest Expense. Noninterest expense was $210.8 million for the
year ended December 31, 2002, in comparison to $202.2 million for 2001. The
increase for 2002 reflects the noninterest expense of our acquisitions completed
during 2001 and 2002, particularly information technology fees associated with
integrating the acquired entities' systems, as well as general increases in
salaries and employee benefit expenses, occupancy and furniture and equipment
expenses and information technology fees, offset by a decline in amortization of
intangibles associated with the purchase of subsidiaries and other expense.
Salaries and employee benefits increased by $5.6 million to $89.6
million from $83.9 million for the years ended December 31, 2002 and 2001,
respectively. We primarily associate the increase with our 2001 and 2002
acquisitions. However, the increase also reflects higher salary and employee
benefit costs associated with employing and retaining qualified personnel. In
addition, the increase includes various additions to staff throughout 2001 to
enhance senior management expertise and expand our product lines.
Occupancy, net of rental income, and furniture and equipment expense
totaled $38.5 million and $30.0 million for the years ended December 31, 2002
and 2001, respectively. We primarily attribute the increase to our
aforementioned acquisitions, including certain expenses associated with lease
termination obligations, the relocation of certain branches and operational
areas, increased depreciation expense associated with numerous capital
expenditures and the continued expansion and renovation of various corporate and
branch offices, including our facility that houses our centralized operations
and certain corporate and administrative functions.
Information technology fees were $32.1 million and $27.0 million for
the years ended December 31, 2002 and 2001, respectively. We attribute the
increased fees to growth and technological advancements consistent with our
product and service offerings, continued expansion and upgrades to technological
equipment, networks and communication channels, and expenses of approximately
$554,000 associated with the data processing conversions of Union and Plains,
completed in the first quarter of 2002, and of the Denton and Garland, Texas
branch purchases, completed in the second quarter of 2002.
Legal, examination and professional fees were $9.3 million and $7.0
million for the years ended December 31, 2002 and 2001, 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 $2.0 million and $8.2 million for the years ended December 31,
2002 and 2001, respectively. The significant decrease for 2002 is attributable
to the implementation of SFAS No. 142 in January 2002.
Other expense was $25.3 million and $32.5 million for the years ended
December 31, 2002 and 2001, respectively. Other expense encompasses numerous
general and administrative expenses including travel, meals and entertainment,
insurance, freight and courier services, correspondent bank charges, advertising
and business development, miscellaneous losses and recoveries, memberships and
subscriptions, transfer agent fees and sales taxes.
We attribute the majority of the decrease in other expense for 2002 to
an $11.5 million nonrecurring litigation settlement charge in June 2001. This
litigation was initiated by an unaffiliated bank against one of our subsidiaries
and certain individuals and related to allegations arising from the employment
by our subsidiary of individuals previously employed by the plaintiff bank, as
well as the conduct of those individuals while employed by the plaintiff bank.
The nature of the litigation was not covered under the terms of either our
general liability or directors and officers liability insurance policies.
Consequently, when it became apparent that the trial was not proceeding as we
anticipated, a decision was made to settle the matter to avoid the risk of more
substantial expenses. Because of the uninsured nature of this litigation and the
unique circumstances leading to the litigation, we do not consider this charge
to be a recurring expense.
The decrease in other expense also reflects the establishment of a
specific reserve for an unfunded letter of credit in the amount of $1.8 million
during 2001. The letter of credit was issued in connection with a participation
in a credit for the development of a nuclear waste remediation facility. The
aggregate credit arrangement included a line of credit, in which we
participated, and the sale of bonds to various investors, which were backed by
the letters of credit, in which we also participated. Because the development
failed to meet remediation performance expectations, and consequently the
economic viability required, the bondholders required payment from the issuers
of the letters of credit. Upon funding the letter of credit, the balance became
an addition to the loan principal, which was then fully charged-off.
The overall decrease in other expenses for 2002 was offset by expenses
associated with our acquisitions completed during 2001 and 2002 as well as the
continued growth and expansion of our banking franchise.
Provision for Income Taxes. The provision for income taxes was $22.8
million for the year ended December 31, 2002, representing an effective income
tax rate of 32.8%, in comparison to $30.0 million, representing an effective
income tax rate of 30.5%, for the year ended December 31, 2001. The increase in
the effective income tax rate is primarily attributable to:
>> a reduction of our deferred tax asset valuation allowance of
$13.1 million recorded in December 2001. This reduction, of which
$8.1 million represented a reduction in our provision for income
taxes and $5.0 million represented an increase in capital
surplus, reflects the recognition of deferred tax assets for net
operating loss carryforwards and the expectation of future
taxable income sufficient to realize the net deferred tax assets;
partially offset by
>> the significant decrease in amortization of intangibles
associated with the purchase of subsidiaries in accordance with
the requirements of SFAS No. 142, which is not deductible for tax
purposes.
Interest Rate Risk Management
For financial institutions, the maintenance of a satisfactory level of
net interest income is a primary factor in achieving acceptable income levels.
However, the maturity and repricing characteristics of the institution's loan
and investment portfolios may differ significantly from those within its deposit
structure. The nature of the loan and deposit markets within which a financial
institution operates, and its objectives for business development within those
markets at any point in time, influence these characteristics. In addition, the
ability of borrowers to repay loans and depositors to withdraw funds prior to
stated maturity dates introduces divergent option characteristics that operate
primarily as interest rates change. These factors cause various elements of the
institution's balance sheet to react in different manners and at different times
relative to changes in interest rates, potentially leading to increases or
decreases in net interest income over time. Depending upon the direction and
magnitude of interest rate movements and their effect on the specific components
of the institution's balance sheet, the effects on net interest income can be
substantial. Consequently, managing a financial institution requires
establishing effective control over the exposure of the institution to changes
in interest rates.
We strive to manage our interest rate risk by:
>> maintaining an Asset Liability Committee, or ALCO, responsible to
our Board of Directors, to review the overall interest rate risk
management activity and approve actions taken to reduce risk;
>> employing a financial simulation model to determine our exposure
to changes in interest rates;
>> coordinating the lending, investing and deposit-generating
functions to control the assumption of interest rate risk; and
>> utilizing various financial instruments, including derivatives,
to offset inherent interest rate risk should it become excessive.
The objective of these procedures is to limit the adverse impact that
changes in interest rates may have on our net interest income.
The ALCO has overall responsibility for the effective management of
interest rate risk and the approval of policy guidelines. The ALCO includes our
President, Chief Executive Officer and Chief Financial Officer, Chief Operating
Officer, Chief Credit Officer, Chief Investment Officer and the senior
executives of finance, and certain other officers. The Asset Liability
Management Group, which monitors interest rate risk, supports the ALCO, prepares
analyses for review by the ALCO and implements actions that are either
specifically directed by the ALCO or established by policy guidelines.
In managing sensitivity, we strive to reduce the adverse impact on
earnings by managing interest rate risk within internal policy constraints. Our
policy is to manage exposure to potential risks associated with changing
interest rates by maintaining a balance sheet posture in which annual net
interest income is not significantly impacted by reasonably possible near-term
changes in interest rates. To measure the effect of interest rate changes, we
project our net income over a two-year horizon on a pro forma basis. The
analysis assumes various scenarios for increases and decreases in interest rates
including both instantaneous and gradual, and parallel and non-parallel shifts
in the yield curve, in varying amounts. For purposes of arriving at reasonably
possible near-term changes in interest rates, we include scenarios based on
actual changes in interest rates, which have occurred over a two-year period,
simulating both a declining and rising interest rate scenario.
We are "asset-sensitive," indicating that our assets would generally
reprice with changes in interest rates more rapidly than our liabilities, and
our simulation model indicates a loss of projected net interest income should
interest rates decline. While a decline in interest rates of less than 100 basis
points has a relatively minimal impact on our net interest income, an
instantaneous parallel decline in the interest yield curve of 100 basis points
indicates a pre-tax projected loss of approximately 7.9% of net interest income,
based on assets and liabilities at December 31, 2003. 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.
We also prepare and review a more traditional interest rate sensitivity
position in conjunction with the results of our simulation model. The following
table presents the projected maturities and periods to repricing of our rate
sensitive assets and liabilities as of December 31, 2003, adjusted to account
for anticipated prepayments:
Over Over
three six Over
Three through through one Over
months six twelve through five
or less months months five years years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
Loans (1)...................................... $3,844,993 335,570 469,483 645,715 32,314 5,328,075
Investment securities.......................... 139,225 79,084 200,928 499,846 130,631 1,049,714
Short-term investments......................... 33,735 -- -- -- -- 33,735
---------- --------- --------- --------- --------- ---------
Total interest-earning assets.............. 4,017,953 414,654 670,411 1,145,561 162,945 6,411,524
Effect of interest rate swap agreements........ (1,100,000) -- 600,000 500,000 -- --
---------- --------- --------- --------- --------- ---------
Total interest-earning assets
after the effect of interest
rate swap agreements..................... $2,917,953 414,654 1,270,411 1,645,561 162,945 6,411,524
========== ========= ========= ========= ========= =========
Interest-bearing liabilities:
Interest-bearing demand accounts............... $ 311,911 193,890 126,450 92,730 118,020 843,001
Money market accounts.......................... 1,708,844 -- -- -- -- 1,708,844
Savings accounts............................... 71,373 58,777 50,381 71,373 167,935 419,839
Time deposits.................................. 389,393 340,083 531,105 694,624 359 1,955,564
Other borrowings............................... 166,479 -- -- 106,000 1,000 273,479
Note payable................................... -- -- 17,000 -- -- 17,000
Subordinated debentures........................ -- -- -- -- 209,320 209,320
---------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities......... 2,648,000 592,750 724,936 964,727 496,634 5,427,047
Effect of interest rate swap agreements........ 276,200 -- -- (150,000) (126,200) --
---------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities
after the effect of interest
rate swap agreements..................... $2,924,200 592,750 724,936 814,727 370,434 5,427,047
========== ========= ========= ========= ========= =========
Interest-sensitivity gap:
Periodic....................................... $ (6,247) (178,096) 545,475 830,834 (207,489) 984,477
=========
Cumulative..................................... (6,247) (184,343) 361,132 1,191,966 984,477
========== ========= ========= ========= =========
Ratio of interest-sensitive assets to
interest-sensitive liabilities:
Periodic..................................... 1.00 0.70 1.75 2.02 0.44 1.18
=========
Cumulative................................... 1.00 0.95 1.09 1.24 1.18
========== ========= ========= ========= =========
- --------------------------------
(1) Loans are presented net of unearned discount.
Management made certain assumptions in preparing the foregoing table.
These assumptions included:
>> loans will repay at projected repayment rates;
>> mortgage-backed securities, included in investment securities,
will repay at projected repayment rates;
>> interest-bearing demand accounts and savings accounts will behave
in a projected manner with regard to their interest rate
sensitivity; and
>> fixed maturity deposits will not be withdrawn prior to maturity.
A significant variance in actual results from one or more of these
assumptions could materially affect the results reflected in the table.
At December 31, 2003, our asset-sensitive position on a cumulative
basis through the twelve-month time horizon was $361.1 million, or 5.08% of
total assets, in comparison to our asset-sensitive position on a cumulative
basis through the twelve-month time horizon of $338.5 million, or 4.60% of total
assets at December 31, 2002. We attribute the increase for 2003 to changes in
customer preferences related to the current low interest rate environment and
economic conditions. This is observed in the shifting of deposits from time
deposits to interest-bearing deposits and in continued weak loan demand
resulting in increases in the amount of short-term investments. This was
partially offset by our interest rate swap agreements entered into in
conjunction with our interest rate risk management program.
The interest-sensitivity position is one of several measurements of the
impact of interest rate changes on net interest income. Its usefulness in
assessing the effect of potential changes in net interest income varies with the
constant change in the composition of our assets and liabilities and changes in
interest rates. For this reason, we place greater emphasis on our simulation
model for monitoring our interest rate risk exposure.
As previously discussed, 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 financial instruments we held as of December 31,
2003 and 2002 are summarized as follows:
December 31, 2003 December 31, 2002
----------------------- -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................ $1,250,000 2,857 1,050,000 2,179
Fair value hedges........................... 326,200 12,614 301,200 11,449
Interest rate cap agreements................ 450,000 -- 450,000 94
Interest rate lock commitments.............. 15,500 -- 89,000 --
Forward commitments to sell
mortgage-backed securities................ 58,500 -- 245,000 --
========== ====== ========= ======
The notional amounts of our derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
our credit exposure through our use of these instruments. The credit exposure
represents the 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 2003, 2002 and 2001, we realized net interest income on
derivative financial instruments of $64.6 million, $53.0 million and $23.4
million, respectively. The increase in 2003 is primarily attributable to
interest income associated with the additional swap agreements we entered into
during March, April and July, as well as the continued decline in prevailing
interest rates. In addition, we recorded a net gain on derivative instruments,
which is included in noninterest income in our consolidated statements of
income, of $496,000, $2.2 million and $18.6 million for the years ended December
31, 2003, 2002 and 2001, respectively. The decrease in 2003 reflects changes in
the fair value of our interest rate cap agreements, fair value hedges and the
underlying hedged liabilities. In addition, in September 2003, we discontinued
hedge accounting treatment on $50.0 million of fair value hedges that mature in
January 2004 due to the loss of our highly correlated hedge positions between
the swap agreements and the underlying hedged liabilities. The effect of the
loss of our highly correlated hedge position on the swap agreements resulted in
the recognition of a net loss of $291,000, which is included in noninterest
income in our consolidated financial statements.
Cash Flow Hedges. We entered into the following interest rate swap
agreements, designated as cash flow hedges, 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.
>> During 1998, we entered into interest rate swap agreements of
$280.0 million notional amount that provided for us to receive a
fixed rate of interest and pay an adjustable rate of interest
equivalent to the daily weighted average prime lending rate minus
2.705%. The underlying hedged assets were certain loans within
our commercial loan portfolio. The terms of the swap agreements
provided for us to pay interest on a quarterly basis and receive
payment on a semiannual basis. In June 2001 and November 2001, we
terminated $205.0 million and $75.0 million notional amount,
respectively, of these swap agreements, which would have expired
in 2002, in order to appropriately modify our overall hedge
position in accordance with our interest rate risk management
program. In conjunction with these terminations, we recorded
gains of $2.8 million and $1.7 million, respectively.
>> During 1999, we entered into interest rate swap agreements of
$175.0 million notional amount that provided 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%. The underlying hedged assets were certain loans within our
commercial loan portfolio. The terms of the swap agreements
provided for us to pay and receive interest on a quarterly basis.
In April 2001, we terminated these swap agreements, which would
have expired in September 2001, and replaced them with similar
swap agreements with extended maturities in order to lengthen the
period covered by the swaps. In conjunction with the termination
of these swap agreements, we recorded a gain of $985,000.
>> During September 2000, March 2001, April 2001, March 2002 and
July 2003, we entered into interest rate swap agreements of
$600.0 million, $200.0 million, $175.0 million, $150.0 million
and $200.0 million notional amount, respectively. The underlying
hedged assets are certain loans within our commercial loan
portfolio. The swap agreements provide for us to receive a fixed
rate of interest and pay an adjustable rate of interest
equivalent to the weighted average prime lending rate minus
2.70%, 2.82%, 2.82%, 2.80% and 2.85%, respectively. The terms of
the swap agreements provide for us to pay and receive interest on
a quarterly basis. In November 2001, we terminated $75.0 million
notional amount of the swap agreements originally entered into in
April 2001, which would have expired in April 2006, in order to
appropriately modify our overall hedge position in accordance
with our interest rate risk management program. We recorded a
gain of $2.6 million in conjunction with the termination of these
swap agreements. The amount receivable by us under the swap
agreements was $3.9 million and $3.1 million at December 31, 2003
and 2002, respectively, and the amount payable by us under the
swap agreements was $1.1 million and $888,000 at December 31,
2003 and 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 December 31, 2003 and 2002 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2003:
March 14, 2004.......................... $ 150,000 1.20% 3.93% $ 879
September 20, 2004...................... 600,000 1.30 6.78 23,250
March 21, 2005.......................... 200,000 1.18 5.24 8,704
April 2, 2006........................... 100,000 1.18 5.45 6,881
July 31, 2007........................... 200,000 1.15 3.08 501
---------- --------
$1,250,000 1.24 5.49 $ 40,215
========== ===== ===== ========
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 September 2000, we entered into $25.0 million notional
amount of one-year interest rate swap agreements and $25.0
million of five and one-half year interest rate swap agreements
that provided for us to receive fixed rates of interest ranging
from 6.60% to 7.25% and pay an adjustable rate equivalent to the
three-month London Interbank Offering Rate minus rates ranging
from 0.02% to 0.11%. The underlying hedged liabilities were a
portion of our other time deposits. The terms of the swap
agreements provided for us to pay interest on a quarterly basis
and receive interest on either a semiannual basis or an annual
basis. In September 2001, the one-year interest rate swap
agreements matured, and we terminated the five and one-half year
interest rate swap agreements because the underlying hedged
liabilities had either matured or been called by their respective
counterparties. There was no gain or loss recorded as a result of
the terminations.
>> 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 $5.2
million at December 31, 2003 and 2002, and the amount payable by
us under the swap agreements was $537,000 and $821,000 at
December 31, 2003 and 2002, respectively. During September 2003,
we discontinued hedge accounting treatment on the $50.0 million
notional amount of three-year swap agreements due to the loss of
their highly correlated hedge positions between the swap
agreements and the underlying hedged liabilities. The related
$1.3 million basis adjustment of the underlying hedged
liabilities was recorded as a reduction of interest expense over
the remaining weighted average maturity of the underlying hedged
liabilities of approximately three months.
>> 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. The underlying hedged liabilities are a portion of
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 under the swap
agreements at December 31, 2003 and 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 interest rate swap agreement in December 2002. The $46.0
million notional amount interest rate swap agreement was called
by its counterparty on May 21, 2003, resulting in final
settlement of this interest rate swap agreement on June 30, 2003.
There was no gain or loss recorded as a result of these
transactions.
>> During March 2003 and April 2003, we entered into $25.0 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 2.55% and 2.58%,
respectively. The underlying hedged liabilities are a portion of
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 under the swap
agreements at December 31, 2003.
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 December 31, 2003 and 2002 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2003:
January 9, 2004 (1)................... $ 50,000 1.15% 5.37% $ --
January 9, 2006....................... 150,000 1.15 5.51 9,932
December 31, 2031..................... 55,200 3.44 9.00 2,499
March 20, 2033........................ 25,000 3.69 8.10 (1,270)
June 30, 2033......................... 46,000 3.72 8.15 (2,008)
-------- -------
$326,200 2.10 6.65 $ 9,153
======== ===== ===== =======
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
======== ===== ===== =======
-------------------------
(1) Hedge accounting treatment was discontinued in September 2003 as further discussed above.
Interest Rate Cap Agreements. In conjunction with our interest rate
swap agreements designated as cash flow hedges that mature in September 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 December 31, 2003 and 2002, the
carrying value of these interest rate cap agreements, which is included in
derivative instruments in our consolidated balance sheets, was $0 and $94,000,
respectively.
Pledged Collateral. At December 31, 2003 and 2002, we had a $5.0
million letter of credit issued on our behalf to the counterparty and had
pledged investment securities available for sale with a fair value of $229,000
and $239,000, respectively, in connection with our interest rate swap
agreements. In addition, at December 31, 2003, we had pledged cash of $700,000
as collateral in connection with our interest rate swap agreements. At December
31, 2003 and 2002, we had accepted, as collateral in connection with our
interest rate swap agreements, cash of $51.3 million and $99.1 million,
respectively.
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.
Interest Rate Floor Agreements. During January 2001 and March 2001, we
entered into $200.0 million and $75.0 million notional amount, respectively, of
four-year interest rate floor agreements to further stabilize net interest
income in the event of a falling rate scenario. The interest rate floor
agreements provided 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 prices of 5.50% or 5.00%, respectively, should the
three-month London Interbank Offering Rate fall below the respective strike
prices. In November 2001, we terminated these interest rate floor agreements in
order to appropriately modify our overall hedge position in accordance with our
interest rate risk management program. In conjunction with the termination, we
recorded an adjustment of $4.0 million representing the decline in fair value
from our previous month-end measurement date. These agreements provided net
interest income of $2.1 million for the year ended December 31, 2001.
Mortgage Banking Activities
Our mortgage banking activities consist of the origination, purchase
and servicing of residential mortgage loans. The purchase of loans to be held
for sale is limited to loans held for sale that we acquire in conjunction with
our acquisition of other financial institutions. Exclusive of these acquired
loans, we do not purchase loans to be held for sale. Generally, we sell our
production of residential mortgage loans in the secondary loan markets. However,
in mid 2003, we made a business strategy decision to retain a portion of new
residential mortgage loan production in our real estate mortgage portfolio
primarily as a result of continued weak loan demand in other sectors of our loan
portfolio, as further discussed in "--Loans and Allowance for Loan Losses."
Servicing rights are both retained and released with respect to conventional,
FHA and VA conforming fixed-rate and conventional adjustable rate residential
mortgage loans.
For the three years ended December 31, 2003, 2002 and 2001, we
originated loans for resale totaling $2.16 billion, $1.95 billion and $1.52
billion and sold loans totaling $2.00 billion, $1.60 billion and $1.34 billion,
respectively. The origination and purchase of residential mortgage loans and the
related sale of the loans provides us with additional sources of income
including the gain or loss realized upon sale, the interest income earned while
the loan is held awaiting sale and the ongoing loan servicing fees from the
loans sold with servicing rights retained. Mortgage loans serviced for investors
aggregated $1.22 billion, $1.29 billion and $1.07 billion at December 31, 2003,
2002 and 2001, respectively.
The gain on mortgage loans originated for resale, including loans sold
and held for sale, was $15.6 million, $6.5 million and $5.5 million for the
years ended December 31, 2003, 2002 and 2001, respectively. We determine these
gains, net of losses, on a lower of cost or market basis. These gains are
realized at the time of sale. The cost basis reflects both the adjustments of
the carrying values of loans held for sale to the lower of cost, adjusted to
include the cost of hedging the loans held for sale, or current market values,
as well as the adjustments for any gains or losses on loan commitments for which
the interest rate has been established, net of anticipated underwriting
"fallout," (loans not funded due to issues discovered during the underwriting
process) adjusted for the cost of hedging these loan commitments. The increases
for 2003 and 2002 are primarily attributable to the continued growth of our
mortgage banking activities and the continued high volume of loans originated
and sold commensurate with the prevailing interest rate environment experienced
throughout 2002 and 2003. During the third quarter of 2003, we recognized
impairment of $800,000 through a valuation allowance associated with a decline
in the fair value of an individual mortgage servicing rights stratum below its
carrying value, net of the valuation allowance. We subsequently reversed the
$800,000 impairment valuation allowance during the third and fourth quarters of
2003 based upon an increase in the fair value of the mortgage servicing rights
stratum above the carrying value, net of the valuation allowance, as further
discussed in Note 6 to our Consolidated Financial Statements appearing elsewhere
in this report.
Interest income on loans held for sale was $17.0 million for the year
ended December 31, 2003, in comparison to $15.1 million and $11.1 million for
the years ended December 31, 2002 and 2001, respectively. The amount of interest
income realized on loans held for sale is a function of the average balance of
loans held for sale, the period for which the loans are held and the prevailing
interest rates when the loans are made. The average balance of loans held for
sale was $273.0 million, $206.0 million and $150.8 million for the years ended
December 31, 2003, 2002 and 2001, respectively. On an annualized basis, our
yield on the portfolio of loans held for sale was 6.21%, 7.32% and 7.38% for the
years ended December 31, 2003, 2002 and 2001, respectively. This compares with
our cost of funds, as a percentage of average interest-bearing liabilities, of
1.88%, 2.85% and 4.45% for the years ended December 31, 2003, 2002 and 2001,
respectively.
We report mortgage loan servicing fees net of amortization of mortgage
servicing rights, interest shortfall and mortgage-backed security guarantee fee
expense. Interest shortfall equals the difference between the interest collected
from a loan-servicing customer upon prepayment of the loan and a full month's
interest that is required to be remitted to the security owner. Loan servicing
fees, net, are included in other noninterest income in the consolidated
statements of operations. Net loan servicing fees decreased other noninterest
income by $3.8 million for the year ended December 31, 2003, whereas such net
fees increased other noninterest income by $321,000 and $222,000 for the years
ended December 31, 2002 and 2001, respectively. Amortization of mortgage
servicing rights was $7.5 million, $3.8 million and $3.7 million for the years
ended December 31, 2003, 2002 and 2001, respectively. We attribute the decrease
in net loan servicing fees in 2003 primarily to increased amortization of
mortgage servicing rights, resulting from the high volumes of loan refinancings
and payoffs associated with continued low mortgage interest rates experienced in
2002 and 2003, and a higher level of interest shortfall. The increase in net
loan servicing fees in 2002 primarily reflects the significant increase in the
volume of loans originated and sold commensurate with the reductions in mortgage
interest rates experienced in 2001.
Our interest rate risk management policy provides certain hedging
parameters to reduce the interest rate risk exposure arising from changes in
loan prices from the time of commitment until the sale of the security or loan.
To reduce this exposure, we use forward commitments to sell fixed-rate
mortgage-backed securities at a specified date in the future. At December 31,
2003, 2002 and 2001, we had $58.2 million, $234.6 million and $209.9 million,
respectively, of loans held for sale and related commitments, net of committed
loan sales and estimated underwriting fallout, of which $58.5 million, $245.0
million and $197.5 million, respectively, were hedged through the use of such
forward commitments.
Investment Securities
We classify the securities within our investment portfolio as held to
maturity or available for sale. We do not engage in the trading of investment
securities. Our investment security portfolio consists primarily of securities
designated as available for sale. The investment security portfolio was $1.05
billion and $1.15 billion at December 31, 2003 and 2002, respectively, compared
to $638.6 million at December 31, 2001. The significant increase in the
investment securities portfolio in 2002 and 2003, as compared to 2001, is
attributable to securities acquired through acquisitions and funds provided by
deposit growth combined with the overall level of reduced loan demand within our
market areas, which affects the amount of funds available for investment.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source
of income for First Bank. Interest and fees on loans were 90.9%, 91.6% and 92.5%
of total interest income for the years ended December 31, 2003, 2002 and 2001,
respectively. We recognize interest and fees on loans as income using the
interest method of accounting. Loan origination fees are deferred and accreted
to interest income over the estimated life of the loans using the interest
method of accounting. The accrual of interest on loans is discontinued when it
appears that interest or principal may not be paid in a timely manner in the
normal course of business. We generally record payments received on nonaccrual
and impaired loans as principal reductions, and defer the recognition of
interest income on loans until all principal has been repaid or an improvement
in the condition of the loan has occurred which would warrant the resumption of
interest accruals.
Loans, net of unearned discount, represented 75.0% of total assets as
of December 31, 2003, compared to 73.9% of total assets at December 31, 2002.
Total loans, net of unearned discount, decreased $104.5 million to $5.33 billion
for the year ended December 31, 2003, and increased $23.7 million to $5.43
billion for the year ended December 31, 2002. Exclusive of our acquisition of
BSG in 2003, which provided loans, net of unearned discount, of $43.7 million,
loans decreased $148.2 million in 2003. The overall decrease in loans, net of
unearned discount, primarily results from:
>> continued weak loan demand from our commercial customers, which
is indicative of the current economic conditions prevalent within
most of our markets;
>> a decline of $204.2 million in loans held for sale, resulting
from management's business strategy decision to retain a portion
of our new residential mortgage loan production in our portfolio,
as further discussed below, combined with a slowdown in overall
loan volumes experienced during the fourth quarter of 2003 and
the timing of loan sales in the secondary mortgage market;
>> continued decline of $59.5 million in our lease financing
portfolio, partially due to net loan charge-offs of $14.4 million
for 2003. Our leasing portfolio has declined since the
discontinuation of our New Mexico based leasing operation in
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 resulting in reduced
commercial leasing activities;
>> a decline of $35.4 million in our commercial, financial and
agricultural portfolio due to an anticipated amount of attrition
associated with our acquisitions completed during 2002 and
general runoff of balances within this portfolio; and
>> continued reductions in new consumer and installment loan volumes
and the repayment of principal on our existing portfolio
consistent with our objectives of de-emphasizing consumer lending
and expanding commercial lending; partially offset by
>> an increase of $138.1 million in our real estate mortgage
portfolio primarily associated with management's business
strategy decision in mid-2003 to retain a portion of our new
residential mortgage loan production in our real estate mortgage
portfolio primarily due to continued weak loan demand in other
sectors of our loan portfolio as previously discussed; and
>> an increase of $74.2 million in our real estate construction and
development portfolio resulting from seasonal increases on
existing and available credit lines.
In our evaluation of acquisitions, it is anticipated that as we apply
our standards for credit structuring, underwriting, documentation and approval,
a portion of the existing borrowers will elect to refinance with another
financial institution, because: (a) there may be an aggressive effort by other
financial institutions to attract them; (b) because they do not accept the
changes involved, or (c) they are unable to meet our credit requirements. In
addition, another portion of the portfolio may either enter our remedial
collection process to reduce undue credit exposure or improve problem loans, or
may be charged-off. The amount of this attrition will vary substantially among
acquisitions depending on the strength and discipline within the credit function
of the acquired institution; the magnitude of problems contained in the acquired
portfolio; the aggressiveness of competing institutions to attract business; and
the significance of the acquired institution to the overall banking market.
Typically, in acquisitions of institutions that have strong credit cultures
prior to their acquisitions and operate in relatively large markets, there is
relatively little attrition that occurs after the acquisition. However, in those
acquisitions in which the credit discipline has been weak, and particularly
those in small metropolitan or rural areas, we can experience substantially
greater attrition. Generally, this process occurs within approximately six to 12
months after completion of the acquisition.
During the five years ended December 31, 2003, total loans, net of
unearned discount, increased significantly from $3.58 billion at December 31,
1998 to $5.33 billion at December 31, 2003. Throughout this period, we have
substantially enhanced our capabilities for achieving and managing internal
growth. A key element of this process has been the expansion of our corporate
business development staff, which is responsible for the internal development
and management of both loan and deposit relationships with commercial customers.
While this process was occurring, in an attempt to achieve more diversification,
a higher level of interest yield and a reduction in interest rate risk within
our loan portfolio, we also focused on repositioning our portfolio. As the
corporate business development effort continued to originate a substantial
volume of new loans, substantially all of our conforming residential mortgage
loan production has been historically sold in the secondary mortgage market
until management's decision in 2003 to retain a portion of the new loan
production in our real estate mortgage portfolio to offset continued weak loan
demand in other sectors of our loan portfolio. We have also substantially
reduced our consumer lending by discontinuing the origination of indirect
automobile loans and the sale of our student loan and credit card loan
portfolios. This allowed us to fund part of the growth in corporate lending
through reductions in indirect automobile and other consumer-related loans.
In addition, our acquisitions added substantial portfolios of new
loans. Some of these portfolios contained significant loan problems, which we
had anticipated and attempted to consider in our acquisition pricing. As we
resolved the asset quality issues, the portfolios of the acquired entities
tended to decline due to the elimination of problem loans and because many of
the resources that would otherwise be directed toward generating new loans were
concentrated on improving or eliminating existing relationships. We continue to
experience this trend as a result of our acquisitions of Millennium Bank and
Union completed in December 2000 and 2001, respectively.
The following table summarizes the effects of these factors on our loan
portfolio, net of unearned discount, for the five years ended December 31, 2003:
(Decrease)Increase For the Year Ended December 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(dollars expressed in thousands)
Internal loan volume (decrease) increase:
Commercial lending................................ $ (22,211) (119,295) 174,568 360,410 363,486
Residential real estate lending (1) .............. (103,573) 36,074 48,616 20,137 (126,418)
Consumer lending, net of unearned discount........ (22,429) (44,060) (75,280) (64,606) (56,349)
Loans provided by acquisitions........................ 43,700 151,000 508,700 440,000 235,500
---------- --------- --------- --------- ---------
Total (decrease) increase......................... $ (104,513) 23,719 656,604 755,941 416,219
========== ========= ========= ========= =========
--------------------------------
(1) Includes loans held for sale, which decreased $204.2 million for the year ended December 31, 2003.
Our lending strategy emphasizes quality, growth and diversification.
Throughout our organization, we employ a common credit underwriting policy. Our
commercial lenders focus principally on small to middle-market companies.
Consumer lenders focus principally on residential loans, including home equity
loans, automobile financing and other consumer financing opportunities arising
out of our branch banking network.
Commercial, financial and agricultural loans include loans that are
made primarily based on the borrowers' general credit strength and ability to
generate cash flows for repayment from income sources even though such loans may
also be secured by real estate or other assets. Real estate construction and
development loans, primarily relating to residential properties and commercial
properties, represent financing secured by real estate under construction. Real
estate mortgage loans consist primarily of loans secured by single-family,
owner-occupied properties and various types of commercial properties on which
the income from the property is the intended source of repayment. Consumer and
installment loans are loans to individuals and consist primarily of loans
secured by automobiles. Loans held for sale are primarily fixed and adjustable
rate residential mortgage loans pending sale in the secondary mortgage market in
the form of a mortgage-backed security, or to various private third-party
investors.
The following table summarizes the composition of our loan portfolio by
major category and the percent of each category to the total portfolio as of the
dates presented:
December 31,
---------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------ ------------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ ---
(dollars expressed in thousands)
Commercial, financial
and agricultural............. $1,407,626 27.1% $1,443,016 28.4% $1,532,875 29.5% $1,372,196 29.3% $1,086,919 27.4%
Real estate construction
and development.............. 1,063,889 20.5 989,650 19.5 954,913 18.4 809,682 17.3 795,081 20.1
Real estate mortgage:
One-to-four-family
residential loans.......... 811,650 15.7 694,604 13.7 798,089 15.3 726,474 15.5 720,630 18.2
Multi-family
residential loans.......... 108,163 2.1 112,517 2.2 148,684 2.9 80,220 1.7 73,864 1.9
Commercial real estate loans. 1,662,451 32.1 1,637,001 32.2 1,499,074 28.8 1,396,163 29.8 1,057,075 26.7
Lease financing.................. 67,282 1.3 126,738 2.5 148,971 2.8 124,088 2.7 -- --
Consumer and installment, net of
unearned discount............ 61,268 1.2 79,097 1.5 122,057 2.3 174,337 3.7 225,343 5.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, excluding
loans held for sale... 5,182,329 100.0% 5,082,623 100.0% 5,204,663 100.0% 4,683,160 100.0% 3,958,912 100.0%
===== ===== ===== ===== =====
Loans held for sale.............. 145,746 349,965 204,206 69,105 37,412
---------- ---------- ---------- ---------- ----------
Total loans.............. $5,328,075 $5,432,588 $5,408,869 $4,752,265 $3,996,324
========== ========== ========== ========== ==========
Loans at December 31, 2003 mature as follows:
Over One Year
Through Five
Years Over Five Years
------------------- ----------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
Commercial, financial and agricultural.................... $1,220,172 154,903 15,424 17,127 -- 1,407,626
Real estate construction and development.................. 936,428 121,784 3,382 2,295 -- 1,063,889
Real estate mortgage:
One-to-four family residential loans.................. 448,132 125,892 91,455 145,217 954 811,650
Multi-family residential loans........................ 58,679 40,487 5,433 3,564 -- 108,163
Commercial real estate loans.......................... 1,030,784 467,282 72,105 92,280 -- 1,662,451
Lease financing........................................... 6,608 59,999 -- 675 -- 67,282
Consumer and installment, net of unearned discount........ 29,771 30,485 18 994 -- 61,268
Loans held for sale....................................... 145,746 -- -- -- -- 145,746
---------- --------- ------- ------- --- ---------
Total loans......................................... $3,876,320 1,000,832 187,817 262,152 954 5,328,075
========== ========= ======= ======= === =========
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:
December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual........................................ $ 26,876 15,787 17,141 21,424 18,397
Restructured terms................................ -- -- -- 22 29
Real estate construction and development:
Nonaccrual........................................ 6,402 23,378 3,270 11,068 1,886
Real estate mortgage:
One-to-four family residential loans:
Nonaccrual...................................... 21,611 14,833 20,780 5,645 7,703
Restructured terms.............................. 13 15 20 28 18
Multi-family residential loans:
Nonaccrual...................................... 804 772 476 593 722
Restructured terms.............................. -- -- -- 908 923
Commercial real estate loans:
Nonaccrual...................................... 13,994 8,890 20,642 10,286 7,989
Restructured terms.............................. -- 1,907 1,993 2,016 2,038
Lease financing:
Nonaccrual........................................ 5,328 8,723 2,185 1,013 --
Consumer and installment:
Nonaccrual........................................ 336 860 794 155 32
Restructured terms................................ -- -- 7 8 --
---------- --------- --------- --------- ---------
Total nonperforming loans................ 75,364 75,165 67,308 53,166 39,737
Other real estate................................... 11,130 7,609 4,316 2,487 2,129
---------- --------- --------- --------- ---------
Total nonperforming assets............... $ 86,494 82,774 71,624 55,653 41,866
========== ========= ========= ========= =========
Loans, net of unearned discount..................... $5,328,075 5,432,588 5,408,869 4,752,265 3,996,324
========== ========= ========= ========= =========
Loans past due 90 days or more and still accruing... $ 2,776 4,635 15,156 3,009 5,844
========== ========= ========= ========= =========
Ratio of:
Allowance for loan losses to loans................ 2.19% 1.83% 1.80% 1.72% 1.72%
Nonperforming loans to loans...................... 1.41 1.38 1.24 1.12 0.99
Allowance for loan losses to
nonperforming loans............................. 154.52 132.29 44.36 153.47 172.66
Nonperforming assets to loans
and other real estate........................... 1.62 1.52 1.32 1.17 1.05
========== ========= ========= ========= =========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $75.4 million at December 31, 2003, in
comparison to $75.2 million and $67.3 million at December 31, 2002 and 2001,
respectively. As further discussed under "--Lending Activities," the increase in
nonperforming loans in 2003 and 2002 is primarily attributable to the current
economic conditions as previously discussed, additional problems identified in
two acquired loan portfolios and continuing deterioration in our commercial
leasing portfolio, particularly the segment of the portfolio related to the
airline industry. Nonperforming assets, consisting of nonperforming loans and
other real estate owned were $86.5 million, $82.8 million and $71.6 million for
the years ended December 31, 2003, 2002 and 2001, respectively. In January 2003,
we foreclosed on a residential and recreational development property that had
been placed on nonaccrual status during the second quarter of 2002. The
relationship relates to a residential and recreational development project that
had significant financial difficulties and experienced inadequate project
financing, project delays and weak project management. This relationship had
previously been on nonaccrual status and was removed from nonaccrual status
during the third quarter of 2001 due to financing being recast with a new
borrower, who appeared able to meet ongoing developmental expectations. The new
borrower subsequently encountered internal management problems, which negatively
impacted and further delayed development of the project. As further discussed in
Note 25 to our Consolidated Financial Statements, we sold this property in
February 2004, thereby reducing nonperforming assets by $9.2 million. Loan
charge-offs, net of recoveries, decreased to $32.7 million for 2003, compared to
$54.6 million for 2002 and $22.0 million for 2001. Net loan charge-offs,
unrelated to our commercial leasing portfolio, included a $6.1 million net
charge-off on one significant credit relationship in 2003 and $38.6 million on
ten large credit relationships in 2002. Net charge-offs associated with our
commercial leasing portfolio increased to $14.4 million in 2003 from $7.9
million in 2002. The increase in nonperforming loans for 2001 reflects cyclical
trends experienced within the banking industry as a result of economic slowdown,
as well as the asset quality of acquired institutions. Our Union acquisition,
completed in December 2001, resulted in the addition of approximately $8.9
million of nonperforming loans and $3.6 million of loans past due 90 days or
more. We anticipate the trend of elevated nonperforming and delinquent loan
levels will continue during 2004, and we continue to monitor asset quality and
address the ongoing challenges posed by the current economic environment.
As of December 31, 2003, 2002 and 2001, $109.4 million, $98.2 million
and $123.2 million, respectively, of loans not included in the table above were
identified by management as having potential credit problems (problem loans).
The significant level of problem loans for the years ended December 31, 2003 and
2002 are primarily due to problem loans included in the acquisitions of
Millenium Bank and Union, completed in December 2000 and 2001, respectively,
continuing deterioration of our commercial leasing portfolio, portfolio growth
(both internal and external) and the gradual slow down and uncertainties that
have occurred in the economy in the markets in which we operate. As previously
discussed under "--Lending Activities," certain acquired loan portfolios
exhibited varying degrees of distress prior to their acquisition. While these
problems had been identified and considered in our acquisition pricing, the
acquisitions led to an increase in nonperforming assets and problem loans. As of
December 31, 2000, 1999 and 1998, problem loans totaled $50.2 million, $36.3
million and $21.3 million, respectively.
Our credit management policies and procedures focus on identifying,
measuring and controlling credit exposure. These procedures employ a
lender-initiated system of rating credits, which is ratified in the loan
approval process and subsequently tested in internal credit reviews, external
audits and regulatory bank examinations. The system requires rating all loans at
the time they are originated, except for homogeneous categories of loans, such
as residential real estate mortgage loans and consumer loans. These homogeneous
loans are assigned an initial rating based on our experience with each type of
loan. We adjust these ratings based on payment experience subsequent to their
origination.
We include adversely rated credits, including loans requiring close
monitoring which would not normally be considered criticized credits by
regulators, on our monthly loan watch list. Loans may be added to our watch list
for reasons that are temporary and correctable, such as the absence of current
financial statements of the borrower or a deficiency in loan documentation.
Other loans are added whenever any adverse circumstance is detected which might
affect the borrower's ability to meet the terms of the loan. The delinquency of
a scheduled loan payment, deterioration in the borrower's financial condition
identified in a review of periodic financial statements, a decrease in the value
of the collateral securing the loan, or a change in the economic environment
within which the borrower operates could initiate the addition of a loan to our
watch list. Loans on our watch list require periodic detailed loan status
reports prepared by the responsible officer, which are discussed in formal
meetings with credit review and credit administration staff members. Downgrades
of loan risk ratings may be initiated by the responsible loan officer at any
time. However, upgrades of risk ratings may only be made with the concurrence of
selected credit review and credit administration staff members generally at the
time of the formal watch list review meetings.
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
profiles 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 levels of risk in
the portfolio. Factors are applied to the loan portfolio for each category of
loan risk to determine acceptable levels of the allowance for loan losses. We
derive these factors from our actual loss experience and from published national
surveys of norms in the industry. In addition, a quarterly evaluation of each
lending unit is performed based on certain factors, such as lending personnel
experience, recent credit reviews, loan concentrations and other factors. Based
on this evaluation, additional provisions may be required due to the perceived
risk of particular portfolios. 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 appropriate levels. In
addition, management exercises a certain degree of judgment in its analysis of
the overall adequacy of the allowance for losses. In its analysis, management
considers the change in the portfolio, including growth, composition and 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 allocation of the allowance for loan losses by loan category is a
result of the application of our risk rating system augmented by qualitative
analysis. As such, the same procedures we employ to determine the overall risk
in our loan portfolio and our requirements for the allowance for loan losses
determines the distribution of the allowance by loan category. Consequently, the
distribution of the allowance will change from period to period due to:
>> changes in the aggregate loan balances by loan category;
>> changes in the identified risk in each loan in the portfolio over
time, excluding those homogeneous categories of loans such as
consumer and installment loans and residential real estate loans
for which risk ratings are changed based on payment performance;
and
>> changes in loan concentrations by borrower.
Since the methods of calculating the allowance requirements have not
changed over time, the reallocations among different categories of loans that
appear between periods are the result of the redistribution of the individual
loans that comprise the aggregate portfolio due to the factors listed above.
However, the perception of risk with respect to particular loans within the
portfolio will change over time as a result of the characteristics and
performance of those loans, as well as the overall economic trends and market
trends, including our actual and expected trends in nonperforming loans.
Consequently, while there are no specific allocations of the allowance resulting
from economic or market conditions or actual or expected trends in nonperforming
loans, these factors are considered in the initial assignment of risk ratings to
loans and in subsequent changes to those risk ratings.
The following table is a summary of loan loss experience for the five
years ended December 31, 2003:
As of or For the Years Ended December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of year......... $ 99,439 97,164 81,592 68,611 60,970
Acquired allowances for loan losses.................. 757 1,366 14,046 6,062 3,008
---------- ---------- ---------- ---------- ----------
100,196 98,530 95,638 74,673 63,978
---------- ---------- ---------- ---------- ----------
Loans charged-off:
Commercial, financial and agricultural........... (23,476) (45,697) (21,085) (9,690) (10,855)
Real estate construction and development......... (5,825) (7,778) (108) (2,229) (577)
Real estate mortgage:
One-to-four family residential loans.......... (4,167) (2,697) (802) (452) (1,010)
Multi-family residential loans................ (87) (109) (4) -- (19)
Commercial real estate loans.................. (1,708) (2,747) (1,012) (1,761) (1,532)
Lease financing.................................. (19,160) (8,426) (6,749) (78) --
Consumer and installment......................... (1,350) (3,070) (1,693) (2,840) (3,728)
---------- ---------- ---------- ---------- ----------
Total...................................... (55,773) (70,524) (31,453) (17,050) (17,721)
---------- ---------- ---------- ---------- ----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural........... 10,147 8,331 4,015 5,556 3,602
Real estate construction and development......... 1,659 631 1,171 319 849
Real estate mortgage:
One-to-four family residential loans.......... 781 628 755 536 407
Multi-family residential loans................ 99 792 15 93 286
Commercial real estate loans.................. 4,174 3,491 1,332 1,308 1,664
Lease financing.................................. 4,805 494 435 65 --
Consumer and installment......................... 1,363 1,566 1,746 1,965 2,473
---------- ---------- ---------- ---------- ----------
Total...................................... 23,028 15,933 9,469 9,842 9,281
---------- ---------- ---------- ---------- ----------
Net loans charged-off...................... (32,745) (54,591) (21,984) (7,208) (8,440)
---------- ---------- ---------- ---------- ----------
Provision for loan losses............................ 49,000 55,500 23,510 14,127 13,073
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, end of year............... $ 116,451 99,439 97,164 81,592 68,611
========== ========== ========== ========== ==========
Loans outstanding, net of unearned discount:
Average.......................................... $5,385,363 5,424,508 4,884,299 4,290,958 3,812,508
End of year...................................... 5,328,075 5,432,588 5,408,869 4,752,265 3,996,324
End of year, excluding loans held for sale....... 5,182,329 5,082,623 5,204,663 4,683,160 3,958,912
========== ========== ========== ========== ==========
Ratio of allowance for loan losses
to loans outstanding:
Average....................................... 2.16% 1.83% 1.99% 1.90% 1.80%
End of year................................... 2.19 1.83 1.80 1.72 1.72
End of year, excluding loans held for sale.... 2.25 1.96 1.87 1.74 1.73
Ratio of net charge-offs to
average loans outstanding........................ 0.61 1.01 0.45 0.17 0.22
Ratio of current year recoveries to
preceding year's total charge-offs............... 32.65 50.66 55.54 55.54 91.14
========== ========== ========== ========= ==========
The following table is a summary of the allocation of the allowance for
loan losses for the five years ended December 31, 2003:
2003 2002 2001 2000 1999
----------------- --------------- --------------- ---------------- -----------------
Percent Percent Percent Percent Percent
of of of of of
Category Category Category Category Category
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars expressed in thousands)
Commercial, financial
and agricultural................. $ 37,142 26.42% $34,915 26.56% $40,161 28.34% $32,130 28.87% $24,898 27.20%
Real estate construction
and development.................. 26,782 19.97 22,667 18.22 21,598 17.65 14,667 17.04 13,264 19.90
Real estate mortgage:
One-to-four family
residential loans.............. 9,684 15.23 7,913 12.79 5,349 14.76 4,334 15.29 3,449 18.03
Multi-family residential loans... 186 2.03 32 2.07 81 2.75 12 1.69 3 1.85
Commercial real estate loans..... 36,632 31.20 28,477 30.13 25,167 27.71 20,345 29.38 17,138 26.45
Lease financing..................... 4,830 1.26 3,649 2.33 3,062 2.75 1,114 2.61 -- --
Consumer and installment............ 668 1.15 703 1.46 937 2.26 2,028 3.67 4,390 5.64
Loans held for sale................. 527 2.74 1,083 6.44 809 3.78 222 1.45 160 0.93
Unallocated (1)..................... -- -- -- -- -- -- 6,740 -- 5,309 --
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total.......................... $116,451 100.00% $99,439 100.00% $97,164 100.00% $81,592 100.00% $68,611 100.00%
======== ====== ======= ====== ======= ====== ======= ====== ======= ======
- ----------------------
(1) During 2001, we reviewed our practice of maintaining unallocated reserves in light of continuing refinement in our loss
estimation processes. We concluded the use of unallocated reserves would be discontinued. Consequently, reserves were
aligned with their respective portfolios.
Deposits
Deposits are the primary source of funds for First Bank. Our deposits
consist principally of core deposits from our local market areas, including
individual and corporate customers.
The following table sets forth the distribution of our average deposit
accounts for the years indicated and the weighted average interest rates on each
category of deposits:
Year Ended December 31,
-----------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- --------------------------- -----------------------------
Percent Percent Percent
of of of
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(dollars expressed in thousands)
Noninterest-bearing
demand deposits.................. $1,007,400 16.64% --% $ 912,915 15.33% --% $ 754,763 14.83% --%
Interest-bearing demand deposits... 852,104 14.08 0.64 755,879 12.69 1.00 507,011 9.97 1.38
Savings deposits................... 2,147,573 35.47 1.09 1,991,510 33.44 1.79 1,548,441 30.43 3.25
Time deposits ..................... 2,046,741 33.81 2.65 2,295,431 38.54 3.71 2,278,263 44.77 5.49
---------- ------ ==== ---------- ------ ==== ---------- ------ ====
Total average deposits....... $6,053,818 100.00% $5,955,735 100.00% $5,088,478 100.00%
========== ====== ========== ====== ========== ======
Capital and Dividends
Historically, we have accumulated capital to support our acquisitions
by retaining most of our earnings. We pay relatively small dividends on our
Class A convertible, adjustable rate preferred stock and our Class B adjustable
rate preferred stock, totaling $786,000 for the years ended December 31, 2003,
2002 and 2001.
Management believes as of December 31, 2003 and 2002, First Bank and we
were "well capitalized," as defined by the Federal Deposit Insurance Corporation
Improvement Act of 1991.
We have formed seven statutory and business trusts, which were created
for the sole purpose of issuing trust preferred securities. As further described
in Note 12 to our Consolidated Financial Statements, the sole assets of the
statutory and business trusts are our subordinated debentures. Initially, the
trusts served as financing subsidiaries, however, as discussed in Note 1 to our
Consolidated Financial Statements, on December 31, 2003, we implemented FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51, which resulted in the deconsolidation of these
financing subsidiaries. Consequently, the trusts now serve as affiliated
statutory and business trusts. The implementation of this Interpretation had no
material effect on our consolidated financial position or results of operations.
A summary of the trust preferred securities issued by our affiliated
statutory and business trusts, and our related subordinated debentures issued to
the respective trusts in conjunction with the trust preferred securities
offerings, is as follows:
Preferred Subordinated
Name of Trust Date Formed Type of Offering Securities Debentures
------------- ----------- ---------------- ---------- ----------
First Preferred Capital Trust (1) December 1996 Publicly Underwritten $86,250,000 $88,917,550
First America Capital Trust (2) June 1998 Publicly Underwritten 46,000,000 47,422,700
First Preferred Capital Trust II October 2000 Publicly Underwritten 57,500,000 59,278,375
First Preferred Capital Trust III November 2001 Publicly Underwritten 55,200,000 56,907,250
First Bank Capital Trust April 2002 Private Placement 25,000,000 25,774,000
First Bank Statutory Trust March 2003 Private Placement 25,000,000 25,774,000
First Preferred Capital Trust IV January 2003 Publicly Underwritten 46,000,000 47,422,700
- --------------------
(1) On May 5, 2003, we redeemed in full the trust preferred securities and related subordinated debentures.
(2) On June 30, 2003, we redeemed in full the trust preferred securities and related subordinated debentures.
For regulatory reporting purposes, the trust preferred securities are
currently eligible for inclusion, subject to certain limitations, in our Tier 1
capital. Because of these limitations, as of December 31, 2003, $35.2 million of
the trust preferred securities were not includable in our Tier I capital,
although this amount was included in our total risk-based capital.
Liquidity
Our liquidity is the ability to maintain a cash flow that is adequate
to fund operations, service debt obligations and meet obligations and other
commitments on a timely basis. First 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 Banks and other borrowings,
including our revolving credit line. The aggregate funds acquired from these
sources were $726.9 million and $742.5 million at December 31, 2003 and 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,
other borrowings and our note payable, at December 31, 2003:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less................................ $ 92,622 166,479 259,101
Over three months through six months................ 78,112 -- 78,112
Over six months through twelve months............... 124,322 17,000 141,322
Over twelve months.................................. 141,383 107,000 248,383
-------- ------- -------
Total.......................................... $436,439 290,479 726,918
======== ======= =======
In addition to these sources of funds, First 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 December
31, 2003 and 2002, First Bank's borrowing capacity under the agreement was
approximately $909.3 million and $1.22 billion, respectively. In addition, First
Bank's borrowing capacity through its relationship with the Federal Home Loan
Bank was approximately $449.5 million and $223.6 million at December 31, 2003
and 2002, respectively. Exclusive of the Federal Home Loan Bank advances
outstanding of $7.0 million and $14.0 million at December 31, 2003 and 2002,
respectively, which represent advances assumed in conjunction with various
acquisitions, First Bank had no amounts outstanding under its borrowing
arrangement with the Federal Home Loan Bank at December 31, 2003 and 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 December 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.................................... $ 8,689 17,782 20,971 47,442
Certificates of deposit............................. 1,260,848 694,357 359 1,955,564
Other borrowings.................................... 166,479 106,000 1,000 273,479
Note payable........................................ 17,000 -- -- 17,000
Subordinated debentures............................. -- -- 209,320 209,320
Other contractual obligations....................... 6,175 725 37 6,937
---------- ------- ------- ---------
Total.......................................... $1,459,191 818,864 231,687 2,509,742
========== ======= ======= =========
Management believes the available liquidity and operating results of
First 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
interest on the subordinated debentures that we issued to our affiliated
statutory and business financing trusts.
Critical Accounting Policies
Our financial condition and results of operations presented in the
consolidated financial statements, accompanying notes to the consolidated
financial statements, selected consolidated and other financial data appearing
elsewhere in this report, and management's discussion and analysis of financial
condition and results of operations are, to a large degree, dependent upon our
accounting policies. The selection and application of our accounting policies
involve judgments, estimates and uncertainties that are susceptible to change.
We have identified the following accounting policies that we believe
are the most critical to the understanding of our financial condition and
results of operations. These critical accounting policies require management's
most difficult, subjective and complex judgments about matters that are
inherently uncertain. In the event that different assumptions or conditions were
to prevail, and depending upon the severity of such changes, the possibility of
a materially different financial condition and/or results of operations could be
a reasonable likelihood. The impact and any associated risks related to our
critical accounting policies on our business operations is discussed throughout
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations," where such policies affect our reported and expected financial
results. For a detailed discussion on the application of these and other
accounting policies, see Note 1 to our Consolidated Financial Statements
appearing elsewhere in this report.
Loans and Allowance for Loan Losses. We maintain an allowance for loan
losses at a level we consider adequate to provide for probable losses in our
loan portfolio. The determination of our allowance for loan losses requires
management to make significant judgments and estimates based upon a periodic
analysis of our loans held for portfolio and held for sale considering, among
other factors, current economic conditions, loan portfolio composition, past
loan loss experience, independent appraisals, the fair value of underlying loan
collateral, our customers' ability to repay their loans and selected key
financial ratios. If actual events prove the estimates and assumptions we used
in determining our allowance for loan losses were incorrect, we may need to make
additional provisions for loan losses. See further discussion under "--Loans and
Allowance for Loan Losses" and Note 4 to our Consolidated Financial Statements
appearing elsewhere in this report.
Derivative Financial Instruments. 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 judgments and assumptions that are most critical to the
application of this critical accounting policy are those affecting the
estimation of fair value and hedge effectiveness. Fair value is based on quoted
market prices where available. If quoted market prices are unavailable, fair
value is based on quoted market prices of comparable derivative instruments.
Factors that affect hedge effectiveness include the initial selection of the
derivative that will be used as a hedge and how well changes in its cash flow or
fair value have correlated and are expected to correlate with changes in the
cash flow or fair value of the underlying hedged asset or liability. Past
correlation is easy to demonstrate, but expected correlation depends upon
projections and trends that may not always hold true within acceptable limits.
Changes in assumptions and conditions could result in greater than expected
inefficiencies that, if large enough, could reduce or eliminate the economic
benefits anticipated when the hedges were established and/or invalidate
continuation of hedge accounting. Greater inefficiency and/or discontinuation of
hedge accounting are likely to result in increased volatility to our reported
earnings. For cash flow hedges, this would result as more or all of the change
in the fair value of the affected derivative being reported in noninterest
income. For fair value hedges, there would be minimal impact on our reported
earnings as the change in the fair value of the affected derivative would
virtually be offset by changes in the fair value of the underlying hedged asset
or liability. See further discussion under "--Effects of New Accounting
Standards," "--Interest Rate Risk Management" and Note 5 to our Consolidated
Financial Statements appearing elsewhere in this report.
Deferred Tax Assets. We recognize deferred tax assets and liabilities
for the estimated future tax effects of temporary differences, net operating
loss carryforwards and tax credits. We recognize deferred tax assets subject to
management's judgment based upon available evidence that realization is more
likely than not. Our deferred tax assets are reduced, if necessary, by a
deferred tax asset valuation allowance. In the event that we determine we would
not be able to realize all or part of our net deferred tax assets in the future,
we would need to adjust the recorded value of our deferred tax assets, which
would result in a direct charge to our provision for income taxes in the period
in which such determination is made. See further discussion under "--Comparison
of Results of Operations for 2002 and 2001 - Provision for Income Taxes" and
Note 13 to our Consolidated Financial Statements appearing elsewhere in this
report.
Business Combinations. We emphasize acquiring other financial
institutions as one means of achieving our growth objectives. The determination
of the fair value of the assets and liabilities acquired in these transactions
as well as the returns on investment that may be achieved requires management to
make significant judgments and estimates based upon detailed analyses of the
existing and future economic value of such assets and liabilities and/or the
related income streams, including the resulting intangible assets. If actual
events prove the estimates and assumptions we used in determining the fair
values of the acquired assets and liabilities or the projected income streams
were incorrect, we may need to make additional adjustments to the recorded
values of such assets and liabilities, which could result in increased
volatility to our reported earnings. In addition, we may need to make additional
adjustments to the recorded value of our intangible assets, which directly
impacts our regulatory capital levels. See further discussion under
"--Acquisitions" and Note 2, Note 8 and Note 21 to our Consolidated Financial
Statements appearing elsewhere in this report.
Effects of New Accounting Standards
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 September 30, 2003, and
for hedging relationships designated after June 30, 2003. All provisions of SFAS
No. 149 are required to be applied prospectively. In 2003, we implemented SFAS
No. 149, which did not have a material effect on our consolidated financial
statements.
On May 15, 2003, the FASB issued SFAS No. 150 -- Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity as it requires that those
instruments be classified as liabilities in statements of financial position.
Most of the guidance in SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. For private
companies, mandatorily redeemable financial instruments were initially subject
to the provisions of SFAS No. 150 for the fiscal period beginning after December
15, 2003. However, on November 7, 2003, the FASB elected to defer this effective
date of mandatorily redeemable financial instruments of certain private
companies to fiscal periods beginning after December 15, 2004. Furthermore, the
FASB elected to indefinitely defer the effective date of the provisions of SFAS
No. 150 for certain mandatorily redeemable noncontrolling interests. In 2003, we
implemented SFAS No. 150, which did not have a material effect on our
consolidated financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, a
revision to FASB Interpretation No. 46, Consolidation of Variable Interest
Entities issued in January 2003. This Interpretation is intended to achieve more
consistent application of consolidation policies to variable interest entities
and, thus to improve comparability between enterprises engaged in similar
activities even if some of those activities are conducted through variable
interest entities. The provisions of this Interpretation are effective for
financial statements issued for fiscal years ending after December 15, 2003. We
have several statutory and business trusts that were formed for the sole purpose
of issuing trust preferred securities. As further described in Note 1 and Note
12 to our Consolidated Financial Statements appearing elsewhere in this report,
on December 31, 2003, we implemented FASB Interpretation No. 46, as amended,
which resulted in the deconsolidation of our five statutory and business trusts.
The implementation of this Interpretation had no material effect on our
consolidated financial position or results of operations. Furthermore, in July
2003, the Board of Governors of the Federal Reserve System issued a supervisory
letter instructing bank holding companies to continue to include the trust
preferred securities in their Tier I capital for regulatory capital purposes,
subject to applicable limits, until notice is given to the contrary. The Federal
Reserve intends to review the regulatory implications of any accounting
treatment changes and, if necessary or warranted, provide further appropriate
guidance. There can be no assurance that the Federal Reserve will continue to
allow bank holding companies to include trust preferred securities in their Tier
I capital for regulatory capital purposes.
In January 2004, the FASB's Derivatives Implementation Group issued
preliminary guidance on SFAS No. 133 Implementation Issue No. G25, or DIG Issue
G25. DIG Issue G25 clarifies the FASB's position on the ability of entities to
hedge the variability in interest receipts or overall changes in cash flows on a
group of prime-rate based loans. DIG Issue G25 indicates that an entity is
unable to hedge variability in interest receipts on a group of prime rate based
loans as the prime rate is not considered a benchmark interest rate and that an
entity is unable to hedge overall changes in cash flows as credit risk is not
considered in the hedging interest rate swap. The effective date of DIG Issue
G25 is the first day of the first fiscal quarter beginning after the cleared
guidance is posted to the FASB's website, and should be applied to all hedging
relationships as of the effective date. If a pre-existing cash flow hedging
relationship has identified the hedged transactions in a manner inconsistent
with the guidance in DIG Issue G25, the hedging relationship must be
de-designated at the effective date and any derivative gains or losses in other
comprehensive income related to the de-designated hedging relationships should
be accounted for under paragraphs 31 and 32 under SFAS No. 133. Presently, we
have pre-existing cash flow hedging relationships that are inconsistent with the
guidance in DIG Issue G25. As of December 31, 2003, our other comprehensive
income included a $26.1 million gain attributable to these pre-existing cash
flow hedging relationships. Pending the outcome of DIG Issue G25, we may be
required to de-designate these specific hedging relationships and accrete this
gain into noninterest income over the remaining lives of the respective hedging
relationships. The public comment period on DIG Issue G25 ends on March 25,
2004.
In March 2004, the SEC issued Staff Accounting Bulletin No. 105 --
Application of Accounting Principles to Loan Commitments, which addresses the
application of generally accepted accounting principles to loan commitments
accounted for as derivative instruments. We are currently evaluating the
potential impact this Bulletin could have on our consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The quantitative and qualitative disclosures about market risk are
included under "Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Interest Rate Risk Management" appearing
on pages 32 through 37 of this report.
Effects of Inflation
Inflation affects financial institutions less than other types of
companies. Financial institutions make relatively few significant asset
acquisitions that are directly affected by changing prices. Instead, the assets
and liabilities are primarily monetary in nature. Consequently, interest rates
are more significant to the performance of financial institutions than the
effect of general inflation levels. While a relationship exists between the
inflation rate and interest rates, we believe this is generally manageable
through our asset-liability management program.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data appear on pages 58
through 95 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None.
Item 9A. Controls and Procedures
As of the December 31, 2003 and pursuant to Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, First
Banks, under the supervision and with the participation of the First Banks'
management, including its principal executive officer and principal financial
officer, has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures. Based upon this evaluation, the principal
executive officer and principal financial officer has concluded that, as of
December 31, 2003, First Banks' disclosure controls and procedures were
effective to ensure that information required to be disclosed by First Banks in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
During the quarter ended December 31, 2003, there have been no changes
made in First Banks' internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially
affected, or are reasonably likely to materially affect, the First Banks'
internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Board of Directors and Committees of the Board
Our Board of Directors consists of eight members, three of whom the
Board of Directors determined to be independent. Each of our directors
identified in the following table was elected or appointed to serve a one-year
term and until his successor has been duly qualified for office.
Director Principal Occupation(s) During Last Five Years
Name Age Since and Directorships of Public Companies
---- --- ----- -------------------------------------
James F. Dierberg (1) 66 1979 Chairman of the Board of Directors of First Banks, Inc. since 1988;
Chief Executive Officer of First Banks, Inc. from 1988 to April
2003; President of First Banks, Inc. from 1979 to 1992 and from
1994 to October 1999; Chairman of the Board of Directors, President
and Chief Executive Officer of FBA from 1994 until its merger with
First Banks on December 31, 2002.
Allen H. Blake 61 1988 President of First Banks, Inc. since October 1999; Chief Executive
Officer of First Banks, Inc. since April 2003; Chief Financial
Officer of First Banks, Inc. from 1984 to September 1999 and since
May 2001; Chief Operating Officer of First Banks, Inc. from 1998
to July 2002; Director and Secretary of First Banks, Inc. since
1988; Director, Executive Vice President, Chief Operating Officer
and Secretary of FBA from 1998 until its merger with First Banks
on December 31, 2002; Chief Financial Officer of FBA from 1994 to
September 1999 and from May 2001 until December 2002.
Terrance M. McCarthy 49 2003 Senior Executive Vice President and Chief Operating Officer of
First Banks, Inc. since August 2002; Director of First Banks, Inc.
since April 2003; Director of FBA from July 2001 until its merger
with First Banks on December 31, 2002; Executive Vice President of
FBA from 1999 to December 2002; Chairman of the Board of Directors
of First Bank since January 2003; President and Chief Executive
Officer of First Bank since August 2002; Chairman of the Board of
Directors, President and Chief Executive Officer of FB&T from
April 2000 until its merger with and into First Bank on March 31,
2003; Director of FB Commercial Finance, Inc. since March 2003.
Michael J. Dierberg (1) 32 2001 General Counsel of First Banks, Inc. since June 2002; Senior Vice
President (Northern California Region) of First Bank & Trust from
July 2001 to June 2002. Prior to joining First Banks, Inc., Mr.
Dierberg served as an attorney for the Office of the Comptroller
of the Currency in Washington, D.C. from 1998 to July 2001.
Gordon A. Gundaker (2) 69 2001 President and Chief Executive Officer of Coldwell Banker Gundaker,
a full-service real estate brokerage company, in St. Louis,
Missouri.
David L. Steward (2) 52 2000 Chairman of the Board of Directors, President and Chief Executive
Officer of World Wide Technology, Inc., an electronic procurement
and logistics company in the information technology industry, in
St. Louis, Missouri; Chairman of the Board of Directors of
Telcobuy.com (an affiliate of World Wide Technology, Inc.);
Director of Civic Progress of St. Louis, the St. Louis Regional
Commerce and Growth Association, the Regional Business Council,
Missouri Technology Corporation, Webster University, BJC Health
System, St. Louis Science Center, the United Way of Greater St.
Louis, Greater St. Louis Area Council - Boy Scouts of America and
Harris-Stowe State College African American Business Leadership
Council.
Hal J. Upbin (2) 65 2001 Director of Kellwood Company, a manufacturer and marketer of
apparel and related soft goods, in St. Louis, Missouri since 1995;
Chairman of the Board of Directors and Chief Executive Officer of
Kellwood Company since 1997; President of Kellwood Company from
1997 to December 2003; President and Chief Operating Officer of
Kellwood Company from 1994 to 1997; Executive Vice President
Corporate Development from 1992 to 1994; Vice President Corporate
Development from 1990 to 1992; Director of Brown Shoe Company.
Douglas H. Yaeger (2)(3) 55 2000 Chairman of the Board of Directors, President and Chief Executive
Officer of The Laclede Group, Inc., an exempt public utility
holding company in St. Louis, Missouri since 2001; Chairman of the
Board of Directors, President and Chief Executive Officer of
Laclede Gas Company since 1999; President of Laclede Gas Company
since 1997; Director and Chief Operating Officer of Laclede Gas
Company from 1997 to 1999; Executive Vice President - Operations
and Marketing of Laclede Gas Company from 1995 to 1997; Chairman
of the Board of Directors of the St. Louis Regional Commerce and
Growth Association; Director of Southern Gas Association, the St.
Louis Science Center, Civic Progress, Greater St. Louis Area
Council - Boy Scouts of America, the United Way of Greater St.
Louis, The Municipal Theatre Association of St. Louis and Webster
University.
- ----------------------------------
(1) Mr. Michael J. Dierberg is the son of Mr. James F. Dierberg. See Item 12. Security Ownership of Certain Beneficial
Owners and Management.
(2) Member of the Audit Committee.
(3) Mr. Douglas H. Yaeger serves as Chairman of the Audit Committee and audit committee financial expert.
Committees and Meetings of the Board of Directors
Four members of our Board of Directors serve on the Audit Committee,
three of whom the Board of Directors determined to be independent; there are no
other committees of the Board of Directors. The Audit Committee assists the
Board of Directors in fulfilling the Board's oversight responsibilities with
respect to the quality and integrity of the consolidated financial statements,
financial reporting process and systems of internal controls. The Audit
Committee also assists the Board of Directors in monitoring the independence and
performance of the independent auditors, the internal audit department and the
operation of ethics programs. The Audit Committee is composed of four directors
and operates under a written charter adopted by the Board of Directors.
The members of the committee as of March 25, 2004 were Mr. Gordon A.
Gundaker, Mr. David L. Steward, Mr. Hal J. Upbin and Mr. Douglas H. Yaeger, who
serves as the Chairman of the Audit Committee and the audit committee financial
expert. Mr. Steward, Mr. Upbin and Mr. Yaeger currently serve as independent
members of the Audit Committee. Mr. Gundaker currently serves as a
non-independent member of the Audit Committee. Previously, Mr. Gundaker served
as an independent member of the Audit Committee; however, in 2003, one of Mr.
Gundaker's related business interests maintained commercial real estate and
development loans with First Bank that resulted in interest and fee payments of
approximately $298,000 to First Bank in accordance with the respective loan
terms. These interest and fee payments exceeded 5% of Mr. Gundaker's related
business interest's gross revenues, or $204,000, in 2003. Consequently, at the
time the interest and fee payments exceeded $204,000, Mr. Gundaker was no longer
deemed to be independent in accordance with existing rules of the National
Association of Securities Dealers, or NASD. The Board of Directors subsequently
appointed Mr. Gundaker to the Audit Committee as a non-independent member in
accordance with existing NASD rules, which allow one director who is not
independent, and is not a current employee or an immediate family member of such
employee, to be appointed to the Audit Committee. The Board of Directors
determined, under the exceptional and limited circumstances exemption allowed by
the existing NASD rules, that Mr. Gundaker's membership on the Audit Committee
was desirable by First Banks' interests and the interests of First Banks'
shareholders, based upon his business expertise, his previous contributions to
First Banks as an independent member of the Audit Committee and other relevant
considerations. Furthermore, the Board of Directors took into account that Mr.
Gundaker is expected to meet the newly-enacted Audit Committee member
independence requirements of the NASD and the New York Stock Exchange that
become effective for First Banks on October 31, 2004.
Audit Committee Report
The Audit Committee is responsible for oversight of our financial
reporting process on behalf of the Board of Directors. Management has primary
responsibility for our financial statements and financial reporting, including
internal controls, subject to the oversight of the Audit Committee and the Board
of Directors. In fulfilling its responsibilities, the Audit Committee reviewed
the audited consolidated financial statements with management and discussed the
acceptability of the accounting principles used, the reasonableness of
significant judgments made and the clarity of the disclosures.
The Audit Committee reviewed with the independent auditors, who are
responsible for planning and carrying out a proper audit and expressing an
opinion on the conformity of our audited consolidated financial statements with
accounting principles generally accepted in the United States of America, their
judgments as to the acceptability of the accounting principles we use, and such
other matters as are required to be discussed with the Audit Committee by
Statement on Auditing Standards No. 61, Communications with Audit Committees, as
amended. In addition, the Audit Committee discussed with the independent
auditors their independence from management and the Company, including the
matters required by Standard No. 1 of the Independence Standards Board, and the
Audit Committee considered the compatibility of non-audit services provided by
the independent auditors with the auditors' independence. KPMG LLP has provided
the Audit Committee with the written disclosures and letter required by Standard
No. 1 of the Independent Standards Board.
The Audit Committee discussed with our internal and independent
auditors the overall scope and plans for their respective audits. The Audit
Committee met with the internal and independent auditors, with and without
management present, to discuss the results of their examinations, their
evaluations of our internal controls and the overall quality of our financial
reporting.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors, that the audited consolidated
financial statements be included in the Annual Report on Form 10-K as of and for
the year ended December 31, 2003 for filing with the SEC.
Audit Committee
---------------
Douglas H. Yaeger, Chairman of the Audit Committee
Gordon A. Gundaker
David L. Steward
Hal J. Upbin
Code of Ethics for Principal Executive Officer and Financial Professionals
The Board of Directors has approved a Code of Ethics for Principal
Executive Officer and Financial Professionals that covers the Principal
Executive Officer, the Chief Financial Officer, the Chief Operating Officer, the
Chief Credit Officer, the Chief Investment Officer, the Senior Vice President
and Controller, the Senior Vice President - Director of Taxes, the Senior Vice
President - Director of Management Accounting, and all professionals serving in
a Corporate Finance, Accounting, Treasury, Tax or Investor Relations role. These
individuals are also subject to the policies and procedures adopted by First
Banks that govern the conduct of all of its employees. The Code of Ethics for
Principal Executive Officer and Financial Professionals is included as an
exhibit to this Annual Report on Form 10-K.
Executive Officers
Our executive officers, each of who was elected to the office(s)
indicated by the Board of Directors, as of March 25, 2004, were as follows:
Current First Banks Principal Occupation(s)
Name Age Office(s) Held During Last Five Years
---- --- -------------- ----------------------
James F. Dierberg 66 Chairman of the Board of Directors. See Item 10 - "Directors and Executive
Officers of the Registrant - Board of
Directors."
Allen H. Blake 61 President, Chief Executive Officer, See Item 10 - "Directors and Executive
Chief Financial Officer, Secretary Officers of the Registrant - Board of
and Director. Directors."
Terrance M. McCarthy 49 Senior Executive Vice President, See Item 10 - "Directors and Executive
Chief Operating Officer and Officers of the Registrant - Board of
Director; Chairman of the Board of Directors."
Directors, President and Chief
Executive Officer of First Bank;
Director of FB Commercial Finance,
Inc.
Daniel W. Jasper 58 Executive Vice President and Chief Executive Vice President and Chief
Credit Officer; Director of First Credit Officer of First Banks, Inc.
Bank; Director of FB Commercial since October 2003; Senior Vice
Finance, Inc. President and Acting Chief Credit
Officer of First Banks, Inc. from May
2003 to October 2003; Senior Vice
President - Credit Administration of
First Banks, Inc. from 1995 to May 2003.
F. Christopher McLaughlin 50 Executive Vice President and Executive Vice President and Director
Director of Sales, Marketing and of Sales, Marketing and Products of
Products. First Banks, Inc. since September 2003;
Executive Vice President Personal
Banking Personal Banking Division, HSBC
Bank USA in Buffalo, New York from 1998
to June 2002, Independent Consultant
from July 2002 to August 2003.
Mary P. Sherrill 49 Executive Vice President and Executive Vice President and Director
Director of Operations; Director of of Operations of First Banks, Inc.
First Bank. since April 2003; Director of First
Bank since April 2003; Director, Vice
Chairman and Chief of Bank Operations,
Southwest Bank in St. Louis, Missouri
from 1999 to March 2003.
Mark T. Turkcan 48 Executive Vice President - Mortgage Mr. Turkcan has been employed in
Banking; Director and Executive various executive capacities with First
Vice President of First Bank. Banks, Inc. since 1990.
Section 16(a) Beneficial Ownership Reporting Compliance
To our knowledge, our directors, executive officers and shareholders,
who are subject, in their capacity as such, to the reporting obligations set
forth in Section 16 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, filed on a timely basis reports required by Section 16(a) of the
Exchange Act during the year ended December 31, 2003.
Item 11. Executive Compensation
The following table sets forth certain information regarding
compensation earned by the named executive officers for the years ended December
31, 2003, 2002 and 2001:
SUMMARY COMPENSATION TABLE
--------------------------
All Other
Name and Principal Position(s) Year Salary Bonus Compensation (1)
------------------------------ ---- ------ ----- ----------------
James F. Dierberg 2003 $ 610,000 -- 6,000
Chairman of the Board of Directors 2002 605,000 35,000 5,500
2001 585,000 100,000 2,850
Allen H. Blake 2003 397,300 -- 6,000
President, Chief Executive Officer and 2002 360,500 45,000 5,500
Chief Financial Officer 2001 343,700 58,000 2,590
Terrance M. McCarthy 2003 323,500 -- 6,000
Senior Executive Vice President and 2002 269,000 50,000 3,200
Chief Operating Officer; 2001 220,000 38,000 5,200
Chairman of the Board of Directors, President and
Chief Executive Officer of First Bank
Daniel W. Jasper (2) 2003 152,000 15,000 4,700
Executive Vice President and Chief Credit Officer;
Director of First Bank
Mark T. Turkcan 2003 203,000 47,700 6,000
Executive Vice President - Mortgage Banking; 2002 188,000 35,000 5,500
Director and Executive Vice President of First Bank 2001 177,500 22,500 5,250
Donald W. Williams (3) 2003 129,200 -- 630,300 (3)
2002 311,000 35,000 5,500
2001 297,000 48,000 5,250
- -----------------------
(1) All other compensation reported includes matching contributions to our 401(k) Plan for the year indicated and
ownership interests granted in units of Star Lane Trust, our unit investment trust that was created on January
21, 2000.
(2) Mr. Jasper became an Executive Officer of the Company in October 2003.
(3) Mr. Williams, Senior Executive Vice President and Chief Credit Officer, discontinued his employment with First
Banks in April 2003. Mr. Williams' compensation for 2003 includes a payment in the amount of $630,000 under an
employment contract by and among Mr. Williams, First Banks and First Bank.
Compensation of Directors. Only those directors who are neither our employees
nor employees of any of our subsidiaries receive remuneration for their services
as directors. Such non-employee directors (currently Messrs. Gordon Gundaker,
David Steward, Hal Upbin and Douglas Yaeger) received a fee of $3,000 for each
Board meeting attended and $1,000 for each Audit Committee meeting attended in
2003. Messr. Yaeger also received a fee of $4,000 per calendar quarter for his
service as Chairman of the Audit Committee, and Messrs. Gundaker, Steward and
Upbin also received a fee of $3,000 per calendar quarter for their service as
members of the Audit Committee. The Audit Committee is currently the only
committee of our Board of Directors. Messrs. Gundaker, Steward, Upbin and Yaeger
received $31,000, $30,000, $29,000 and $35,000, respectively, in director's
compensation in 2003.
Our executive officers that are also directors do not receive
remuneration other than salaries and bonuses for serving on our Board of
Directors.
Compensation Committee Interlocks and Insider Participation. Messrs. Dierberg,
Blake and McCarthy serve as executive officers and members of our Board of
Directors. First Banks does not have a compensation committee, but its Board of
Directors performs the functions of such a committee. Except for the foregoing,
none of our executive officers served during 2003 as a member of the
compensation committee, or any other committee performing similar functions, or
as a director of another entity, any of whose executive officers or directors
served on our Board of Directors.
See further information regarding transactions with related parties in
Note 19 to our consolidated financial statements appearing on page 89 of this
report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 25, 2004, certain
information with respect to the beneficial ownership of all classes of our
voting capital stock by each person known to us to be the beneficial owner of
more than five percent of the outstanding shares of the respective classes of
our stock:
Percent of
Number of Total
Title of Class Shares Percent Voting
and Name of Owner Owned of Class Power
----------------- ----- -------- -----
Common Stock ($250.00 par value)
- --------------------------------
James F. Dierberg II Family Trust (1)........................ 7,714.677 (2) 32.605% *
Ellen C. Dierberg Family Trust (1)........................... 7,714.676 (2) 32.605 *
Michael J. Dierberg Family Trust (1)......................... 4,255.319 (2) 17.985 *
Michael J. Dierberg Irrevocable Trust (1).................... 3,459.358 (2) 14.621 *
First Trust (Mary W. Dierberg and First Bank, Trustees) (1).. 516.830 (3) 2.184 *
Class A Convertible Adjustable Rate Preferred Stock
- ---------------------------------------------------
($20.00 par value)
- ------------------
James F. Dierberg, Trustee of the James F. Dierberg
Living Trust (1)......................................... 641,082 (4)(5) 100% 77.7%
Class B Non-Convertible Adjustable Rate Preferred Stock
- -------------------------------------------------------
($1.50 par value)
- -----------------
James F. Dierberg, Trustee of the James F. Dierberg
Living Trust (1)......................................... 160,505 (5) 100% 19.4%
All executive officers and directors
other than Mr. James F. Dierberg
and members of his immediate family........................... 0 0% 0.0%
- --------------------
* Represents less than 1.0%.
(1) Each of the above-named trustees and beneficial owners are United States citizens, and the business address
for each such individual is 135 North Meramec Avenue, Clayton, Missouri 63105. Mr. James F. Dierberg, our
Chairman of the Board, and Mrs. Mary W. Dierberg, are husband and wife, and Messrs. James F. Dierberg II,
Michael J. Dierberg and Mrs. Ellen D. Schepman, formerly Ms. Ellen C. Dierberg, are their adult children.
(2) Due to the relationship between Mr. James F. Dierberg, his wife and their children, Mr. Dierberg is deemed
to share voting and investment power over these shares.
(3) Due to the relationship between Mr. James F. Dierberg, his wife and First Bank, Mr. Dierberg is deemed to
share voting and investment power over these shares.
(4) Convertible into common stock, based on the appraised value of the common stock at the date of conversion.
Assuming an appraised value of the common stock equal to the book value, the number of shares of common
stock into which the Class A Preferred Stock is convertible at December 31, 2003 is 565, which shares are
not included in the above table.
(5) Sole voting and investment power.
Item 13. Certain Relationships and Related Transactions
Outside of normal customer relationships, no directors, executive
officers or shareholders holding over 5% of our voting securities, and no
corporations or firms with which such persons or entities are associated,
currently maintain or have maintained since the beginning of the last full
fiscal year, any significant business or personal relationship with our
subsidiaries or us, other than that which arises by virtue of such position or
ownership interest in our subsidiaries or us, except as set forth in Item 11 -
"Executive Compensation - Compensation of Directors," or as described in the
following paragraphs.
First Bank has had in the past, and may have in the future, loan
transactions and related banking services in the ordinary course of business
with our directors or their affiliates. These loan transactions have been on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unaffiliated persons and did not involve
more than the normal risk of collectibility or present other unfavorable
features. First Bank does not extend credit to our officers or to officers of
First Bank, except extensions of credit secured by mortgages on personal
residences, loans to purchase automobiles and personal credit card accounts.
Certain of our directors and officers and their respective affiliates
have deposit accounts and related banking services with First Bank. It is First
Bank's policy not to permit any of its officers or directors or their affiliates
to overdraw their respective deposit accounts unless that person has been
previously approved for overdraft protection under a plan whereby a credit limit
has been established in accordance with First Bank's standard credit criteria.
Transactions with related parties are more fully described in Note 19
to our Consolidated Financial Statements.
Item 14. Principal Accountant Fees and Services
Fees of Independent Auditors
During 2003 and 2002, KPMG LLP served as our independent auditors and
provided additional services to our affiliates and us. The following table sets
forth fees for professional audit services rendered by KPMG LLP for the audit of
our consolidated financial statements in 2003 and 2002:
2003 2002
---- ----
Audit fees, excluding audit related fees (1)......................... $ 475,000 523,000
Audit related fees................................................... -- --
Tax fees............................................................. 76,784 19,990
All other fees (2)................................................... 8,173 284,093
--------- ---------
Total......................................................... $ 559,957 827,083
========= =========
------------------------
(1) Audit fees include audits of the financial statements of Star Lane Trust as well as services
provided for reporting requirements under FDICIA and mortgage banking activities. For 2003,
audit related fees consisted of work performed related to the First Preferred Capital Trust
IV trust preferred securities offering. For 2002, audit related fees principally consisted
of consultation on various accounting matters, reporting requirements for Lender's Interest
and Special Allowance Request and Reports submitted to the U.S. Department of Education
associated with our former student lending programs and the review of FBA's proxy statement.
(2) All other fees consist primarily of tax compliance and consultative services. For 2002,
these fees also include fees associated with a branch operations and organization consulting
project.
Policy Regarding the Approval of Independent Auditor Provision of Audit and
Non-Audit Services
Consistent with the Securities and Exchange Commission requirements
regarding auditor independence, the Audit Committee recognizes the importance of
maintaining the independence, in fact and appearance, of our independent
auditors. As such, the Audit Committee has adopted a policy for pre-approval of
all audit and permissible non-audit services provided by the independent
auditor. Under the policy, the Audit Committee, or its designated member, must
pre-approve services prior to commencement of the specified service. The
requests for pre-approval are submitted to the Audit Committee or its designated
member by the Director of Audit with a statement as to whether in his view the
request is consistent with the Securities and Exchange Commission's rules on
auditor independence. The Audit Committee reviews the pre-approval requests and
the fees paid for such services at their regularly scheduled quarterly meetings.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements and Supplementary Data - The financial
statements and supplementary data filed as part of this
Report are included in Item 8.
2. Financial Statement Schedules - These schedules are omitted
for the reason they are not required or are not applicable.
3. Exhibits - The exhibits are listed in the index of exhibits
required by Item 601 of Regulation S-K at Item (c) below
and are incorporated herein by reference.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2003, we filed one
Current Report on Form 8-K on October 28, 2003. Item 12 of
the report referenced a press release announcing First
Banks, Inc.'s financial results for the three and nine
months ended September 30, 2003. A copy of the press
release was included as Exhibit 99.5.
(c) The index of required exhibits is included beginning on page
100 of this Report.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
December 31,
--------------------------
2003 2002
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks....................................................... $ 179,802 194,519
Short-term investments........................................................ 33,735 8,732
---------- ---------
Total cash and cash equivalents.......................................... 213,537 203,251
---------- ---------
Investment securities:
Available for sale............................................................ 1,038,787 1,129,244
Held to maturity (fair value of $11,341 and $16,978, respectively)............ 10,927 16,426
---------- ---------
Total investment securities.............................................. 1,049,714 1,145,670
---------- ---------
Loans:
Commercial, financial and agricultural........................................ 1,407,626 1,443,016
Real estate construction and development...................................... 1,063,889 989,650
Real estate mortgage.......................................................... 2,582,264 2,444,122
Lease financing............................................................... 67,282 126,738
Consumer and installment...................................................... 71,652 86,763
Loans held for sale........................................................... 145,746 349,965
---------- ---------
Total loans.............................................................. 5,338,459 5,440,254
Unearned discount............................................................. (10,384) (7,666)
Allowance for loan losses..................................................... (116,451) (99,439)
---------- ---------
Net loans................................................................ 5,211,624 5,333,149
---------- ---------
Derivative instruments............................................................. 49,291 97,887
Bank premises and equipment, net of accumulated depreciation and amortization...... 136,739 152,418
Goodwill........................................................................... 145,548 140,112
Bank-owned life insurance.......................................................... 97,521 92,616
Deferred income taxes.............................................................. 102,844 92,157
Other assets....................................................................... 100,122 93,917
---------- ---------
Total assets............................................................. $7,106,940 7,351,177
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand.................................................... $1,034,367 986,674
Interest-bearing demand....................................................... 843,001 819,429
Savings....................................................................... 2,128,683 2,176,616
Time deposits of $100 or more................................................. 436,439 469,904
Other time deposits........................................................... 1,519,125 1,720,197
---------- ---------
Total deposits........................................................... 5,961,615 6,172,820
Other borrowings................................................................... 273,479 265,644
Note payable....................................................................... 17,000 7,000
Subordinated debentures............................................................ 209,320 278,389
Deferred income taxes.............................................................. 41,683 61,204
Accrued expenses and other liabilities............................................. 54,028 47,079
---------- ---------
Total liabilities........................................................ 6,557,125 6,832,136
---------- ---------
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.................................................................. 495,714 433,689
Accumulated other comprehensive income............................................. 29,213 60,464
---------- ---------
Total stockholders' equity............................................... 549,815 519,041
---------- ---------
Total liabilities and stockholders' equity............................... $7,106,940 7,351,177
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(dollars expressed in thousands, except share and per share data)
Years Ended December 31,
----------------------------------
2003 2002 2001
---- ---- ----
Interest income:
Interest and fees on loans.......................................... $ 355,472 390,062 412,153
Investment securities:
Taxable........................................................... 32,442 31,845 26,886
Nontaxable........................................................ 1,737 1,865 888
Federal funds sold and other........................................ 1,502 1,949 5,458
--------- -------- --------
Total interest income.......................................... 391,153 425,721 445,385
--------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand........................................... 5,470 7,551 7,019
Savings........................................................... 23,373 35,668 50,388
Time deposits of $100 or more..................................... 13,075 19,047 28,026
Other time deposits............................................... 41,201 66,002 97,105
Other borrowings.................................................... 2,243 3,450 5,847
Note payable........................................................ 785 1,032 2,629
Subordinated debentures............................................. 17,879 24,801 19,232
--------- -------- --------
Total interest expense......................................... 104,026 157,551 210,246
--------- -------- --------
Net interest income............................................ 287,127 268,170 235,139
Provision for loan losses.............................................. 49,000 55,500 23,510
--------- -------- --------
Net interest income after provision for loan losses............ 238,127 212,670 211,629
--------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees....... 36,113 30,978 22,865
Gain on mortgage loans sold and held for sale....................... 15,645 6,471 5,469
Net gain on sales of available-for-sale investment securities....... 8,761 90 18,722
Gain on sales of branches, net of expenses.......................... 3,992 -- --
Bank-owned life insurance investment income......................... 5,469 5,928 4,415
Net gain on derivative instruments.................................. 496 2,181 18,583
Other............................................................... 17,232 21,863 19,041
--------- -------- --------
Total noninterest income....................................... 87,708 67,511 89,095
--------- -------- --------
Noninterest expense:
Salaries and employee benefits...................................... 95,441 89,569 83,938
Occupancy, net of rental income..................................... 20,940 21,030 17,432
Furniture and equipment............................................. 18,286 17,495 12,612
Postage, printing and supplies...................................... 5,100 5,556 4,869
Information technology fees......................................... 32,136 32,135 26,981
Legal, examination and professional fees............................ 8,131 9,284 6,988
Amortization of intangibles associated
with the purchase of subsidiaries................................. 2,506 2,012 8,248
Communications...................................................... 2,667 3,166 3,247
Advertising and business development................................ 4,271 5,023 5,237
Charitable contributions............................................ 5,334 204 125
Other............................................................... 32,257 25,338 32,480
--------- -------- --------
Total noninterest expense...................................... 227,069 210,812 202,157
--------- -------- --------
Income before provision for income taxes, minority
interest in income of subsidiary and cumulative
effect of change in accounting principle..................... 98,766 69,369 98,567
Provision for income taxes............................................. 35,955 22,771 30,048
--------- -------- --------
Income before minority interest in income
of subsidiary and cumulative
effect of change in accounting principle..................... 62,811 46,598 68,519
Minority interest in income of subsidiary.............................. -- 1,431 2,629
--------- -------- --------
Income before cumulative effect of change
in accounting principle...................................... 62,811 45,167 65,890
Cumulative effect of change in accounting principle, net of tax........ -- -- (1,376)
--------- -------- --------
Net income..................................................... 62,811 45,167 64,514
Preferred stock dividends.............................................. 786 786 786
--------- -------- --------
Net income available to common stockholders.................... $ 62,025 44,381 63,728
========= ======== ========
Basic earnings per common share:
Income before cumulative effect of change in accounting principle... $2,621.39 1,875.69 2,751.54
Cumulative effect of change in accounting principle, net of tax..... -- -- (58.16)
--------- -------- --------
Basic............................................................... $2,621.39 1,875.69 2,693.38
========= ======== ========
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle... $2,588.31 1,853.64 2,684.93
Cumulative effect of change in accounting principle, net of tax..... -- -- (58.16)
--------- -------- --------
Diluted............................................................. $2,588.31 1,853.64 2,626.77
========= ======== ========
Weighted average shares of common stock outstanding.................... 23,661 23,661 23,661
========= ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Three Years Ended December 31, 2003
(dollars expressed in thousands, except per share data)
Adjustable Rate Accu-
Preferred Stock mulated
--------------- Other Total
Class A Additional Compre- Compre- Stock-
Conver- Common Paid-in hensive Retained hensive holders'
tible Class B Stock Capital Income Earnings Income Equity
----- ------- ----- ------- ------- -------- ------ ------
Consolidated balances, January 1, 2001........... $12,822 241 5,915 2,267 325,580 6,021 352,846
Year ended December 31, 2001:
Comprehensive income:
Net income................................. -- -- -- -- 64,514 64,514 -- 64,514
Other comprehensive income, net of tax:
Unrealized losses on investment
securities, net of reclassification
adjustment (1).......................... -- -- -- -- (1,871) -- (1,871) (1,871)
Derivative instruments:
Cumulative effect of change in
accounting principle, net........... -- -- -- -- 9,069 -- 9,069 9,069
Current period transactions............ -- -- -- -- 27,021 -- 27,021 27,021
Reclassification to earnings........... -- -- -- -- (5,943) -- (5,943) (5,943)
-------
Comprehensive income....................... 92,790
=======
Class A preferred stock dividends,
$1.20 per share.......................... -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share.......................... -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- 3,807 -- -- 3,807
------- ---- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2001......... 12,822 241 5,915 6,074 389,308 34,297 448,657
Year ended December 31, 2002:
Comprehensive income:
Net income................................. -- -- -- -- 45,167 45,167 -- 45,167
Other comprehensive income, net of tax:
Unrealized gains on investment
securities, net of reclassification
adjustment (1)......................... -- -- -- -- 8,909 -- 8,909 8,909
Derivative instruments:
Current period transactions............ -- -- -- -- 17,258 -- 17,258 17,258
-------
Comprehensive income....................... 71,334
=======
Class A preferred stock dividends,
$1.20 per share.......................... -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share.......................... -- -- -- -- (17) -- (17)
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
Year ended December 31, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 62,811 62,811 -- 62,811
Other comprehensive loss, net of tax:
Unrealized losses on investment
securities, net of reclassification
adjustment (1)......................... -- -- -- -- (9,986) -- (9,986) (9,986)
Derivative instruments:
Current period transactions............ -- -- -- -- (21,265) -- (21,265) (21,265)
-------
Comprehensive income....................... 31,560
=======
Class A preferred stock dividends,
$1.20 per share.......................... -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share.......................... -- -- -- -- (17) -- (17)
------- ---- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2003......... $12,822 241 5,915 5,910 495,714 29,213 549,815
======= ==== ===== ===== ======= ======= =======
- --------------------------------------
(1) Disclosure of reclassification adjustment:
Years Ended December 31,
------------------------------
2003 2002 2001
---- ---- ----
Unrealized (losses) gains on investment securities arising during the year.......... $(4,291) 8,968 10,298
Less reclassification adjustment for gains included in net income................... 5,695 59 12,169
------- ------ ------
Unrealized (losses) gains on investment securities.................................. $(9,986) 8,909 (1,871)
======= ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars expressed in thousands)
Years ended December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income.............................................................. $ 62,811 45,167 64,514
Adjustments to reconcile net income to net cash
used in operating activities:
Cumulative effect of change in accounting principle, net of tax.... -- -- 1,376
Depreciation and amortization of bank premises and equipment....... 20,068 18,902 12,713
Amortization, net of accretion..................................... 24,996 17,769 11,203
Originations and purchases of loans held for sale.................. (2,158,251) (1,954,346) (1,524,156)
Proceeds from sales of loans held for sale......................... 2,003,574 1,602,500 1,339,258
Provision for loan losses.......................................... 49,000 55,500 23,510
Provision for income taxes......................................... 35,955 22,771 30,048
Payments of income taxes........................................... (43,632) (34,287) (19,297)
Decrease in accrued interest receivable............................ 4,614 2,197 11,641
Interest accrued on liabilities.................................... 104,026 157,551 210,246
Payments of interest on liabilities................................ (107,295) (162,825) (219,099)
Gain on mortgage loans sold and held for sale...................... (15,645) (6,471) (5,469)
Net gain on sales of available-for-sale investment securities...... (8,761) (90) (18,722)
Gain on sales of branches, net of expenses......................... (3,992) -- --
Net gain on derivative instruments................................. (496) (2,181) (18,583)
Other operating activities, net.................................... 7,390 (1,138) 2,837
Minority interest in income of subsidiary.......................... -- 1,431 2,629
---------- ---------- ----------
Net cash used in operating activities......................... (25,638) (237,550) (95,351)
---------- ---------- ----------
Cash flows from investing activities:
Cash received for acquired entities, net of
cash and cash equivalents paid........................................ 14,870 11,715 6,351
Proceeds from sales of investment securities available for sale......... 6,019 55,130 85,824
Maturities of investment securities available for sale.................. 1,499,476 1,085,993 762,548
Maturities of investment securities held to maturity.................... 5,573 6,829 4,292
Purchases of investment securities available for sale................... (1,209,592) (1,380,165) (824,300)
Proceeds from terminations of derivative instruments.................... -- -- 22,203
Net decrease (increase) in loans........................................ 18,786 199,051 (6,252)
Recoveries of loans previously charged-off.............................. 23,028 15,933 9,469
Purchases of bank premises and equipment................................ (4,359) (15,565) (36,452)
Other investing activities.............................................. 3,254 6,992 (1,081)
---------- ---------- ----------
Net cash provided by (used in) investing activities........... 357,055 (14,087) 22,602
---------- ---------- ----------
Cash flows from financing activities:
Increase in demand and savings deposits................................. 13,287 450,541 299,466
Decrease in time deposits............................................... (223,555) (245,637) (254,748)
Repayments of Federal Home Loan Bank advances........................... (8,548) (16,600) (5,000)
(Decrease) increase in federal funds purchased.......................... (55,000) (26,000) 70,000
Increase in securities sold under agreements to repurchase.............. 69,835 46,989 8,438
Advances drawn on note payable.......................................... 34,500 43,500 69,500
Repayments of note payable.............................................. (24,500) (64,000) (125,000)
Proceeds from issuance of subordinated debentures....................... 70,907 25,007 54,474
Payments for redemptions of subordinated debentures..................... (136,341) -- --
Sale of branch deposits................................................. (60,930) -- --
Payment of preferred stock dividends.................................... (786) (786) (786)
---------- ---------- ----------
Net cash (used in) provided by financing activities........... (321,131) 213,014 116,344
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......... 10,286 (38,623) 43,595
Cash and cash equivalents, beginning of year................................. 203,251 241,874 198,279
---------- ---------- ----------
Cash and cash equivalents, end of year....................................... $ 213,537 203,251 241,874
========== ========== ==========
Noncash investing and financing activities:
Reduction of deferred tax asset valuation reserve....................... $ -- -- 4,971
Loans transferred to other real estate.................................. 13,525 7,607 3,493
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies
followed by First Banks, Inc. and subsidiaries (First Banks or the Company):
Basis of Presentation. The accompanying consolidated financial
statements of First Banks 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.
Principles of Consolidation. The consolidated financial statements
include the accounts of the parent company and its subsidiaries, net of minority
interest, as more fully described below. All significant intercompany accounts
and transactions have been eliminated. Certain reclassifications of 2002 and
2001 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 SFC's wholly owned subsidiary bank, First Bank, headquartered in
St. Louis County, Missouri.
On December 31, 2002, First Banks completed its acquisition of all of
the publicly held outstanding capital stock of First Banks America, Inc., San
Francisco, California (FBA), for a price of $40.54 per share, or approximately
$32.4 million. Prior to consummation of this transaction, First Banks owned
93.78% of FBA's outstanding stock, with approximately 6.22% or 798,753 shares of
FBA's outstanding stock held publicly. As a result, FBA became a wholly owned
subsidiary of First Banks, was merged with and into First Banks and FBA's
subsidiaries, SFC and First Bank & Trust, became wholly owned subsidiaries of
First Banks. On March 31, 2003, First Bank & Trust, headquartered in San
Francisco, California (FB&T), was merged with and into First Bank to allow
certain administrative and operational economies not available while the two
subsidiary banks maintained separate charters.
On December 31, 2003, First Banks implemented FASB Interpretation No.
46, Consolidation of Variable Interest Entities, an interpretation of ARB No.
51, resulting in the deconsolidation of First Banks' five statutory and business
trusts, which were created for the sole purpose of issuing trust preferred
securities. The implementation of this Interpretation had no material effect on
the Company's consolidated financial position or results of operations. The
implementation resulted in the Company's $6.5 million investment in the common
equity of the five trusts being included in the consolidated balance sheets as
available-for-sale investment securities and the interest income and interest
expense received from and paid to the trusts, respectively, being included in
the consolidated statements of income as interest income and interest expense.
The increase to interest income and interest expense totaled $696,000 for the
year ended December 31, 2003. Prior period results were restated to conform to
the 2003 presentation.
Cash and Cash Equivalents. Cash, due from banks and short-term
investments, which include federal funds sold and interest-bearing deposits, are
considered to be cash and cash equivalents for purposes of the consolidated
statements of cash flows.
First Bank is required to maintain certain daily reserve balances on
hand in accordance with regulatory requirements. These reserve balances
maintained in accordance with such requirements were $34.0 million and $26.5
million at December 31, 2003 and 2002, respectively.
Investment Securities. The classification of investment securities as
available for sale or held to maturity is determined at the date of purchase.
First Banks does not engage in the trading of investment securities.
Investment securities designated as available for sale, which include
any security that First Banks has no immediate plan to sell but which may be
sold in the future under different circumstances, are stated at fair value.
Realized gains and losses are included in noninterest income, based on the
amortized cost of the individual security sold. Unrealized gains and losses, net
of related income tax effects, are recorded in accumulated other comprehensive
income. All previous fair value adjustments included in the separate component
of accumulated other comprehensive income are reversed upon sale.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment securities designated as held to maturity, which include any
security that First Banks has the positive intent and ability to hold to
maturity, are stated at cost, net of amortization of premiums and accretion of
discounts computed on the level-yield method taking into consideration the level
of current and anticipated prepayments.
A decline in the market value of any available-for-sale or
held-to-maturity investment security below its carrying value that is deemed to
be other-than-temporary results in a permanent reduction of the carrying value
to fair value. The permanent impairment is charged to noninterest income and a
new cost basis is established. When determining permanent impairment,
consideration is given as to whether First Banks has the ability and intent to
hold the investment security until a market price recovery and whether evidence
indicating the carrying value of the investment security is recoverable
outweighs evidence to the contrary.
Loans Held for Portfolio. Loans held for portfolio are carried at cost,
adjusted for amortization of premiums and accretion of discounts using the
interest method. Interest and fees on loans are recognized as income using the
interest method. Loan origination fees are deferred and accreted to interest
income over the estimated life of the loans using the interest method. Loans
held for portfolio are stated at cost as First Banks has the ability and it is
management's intention to hold them to maturity.
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal course of
business. Generally, payments received on nonaccrual and impaired loans are
recorded as principal reductions. Interest income is recognized after all
delinquent principal has been repaid or an improvement in the condition of the
loan has occurred which would warrant resumption of interest accruals.
A loan is considered impaired when it is probable that First Banks will
be unable to collect all amounts due, both principal and interest, according to
the contractual terms of the loan agreement. When measuring impairment, the
expected future cash flows of an impaired loan or lease are discounted at the
loan's effective interest rate. Alternatively, impairment is measured by
reference to an observable market price, if one exists, or the fair value of the
collateral for a collateral-dependent loan. Regardless of the historical
measurement method used, First Banks measures impairment based on the fair value
of the collateral when foreclosure is probable. Additionally, impairment of a
restructured loan is measured by discounting the total expected future cash
flows at the loan's effective rate of interest as stated in the original loan
agreement.
In addition, First Banks monitors the fair value of the underlying
collateral of its lease portfolio to identify any impairment as a result of a
decline in the residual value of the underlying collateral, which may not be
apparent from the payment performance of the lease.
Loans Held for Sale. Loans held for sale are carried at the lower of
cost or market value, which is determined on an individual loan basis. The
amount by which cost exceeds market value is recorded in a valuation allowance
as a reduction of loans held for sale. Changes in the valuation allowance are
reflected as part of the gain on mortgage loans sold and held for sale in the
consolidated statements of income in the periods in which the changes occur.
Gains or losses on the sale of loans held for sale are determined on a specific
identification method. Loans held for sale transferred to loans held for
portfolio or available-for-sale investment securities are transferred at fair
value.
Loan Servicing Income. Loan servicing income is included in noninterest
income and represents fees earned for servicing real estate mortgage loans owned
by investors, net of federal agency guarantee fees, interest shortfall,
amortization of mortgage servicing rights and the impairment valuation
allowance. Such fees are generally calculated on the outstanding principal
balance of the loans serviced and are recorded as income when earned.
Allowance for Loan Losses. The allowance for loan losses is maintained
at a level considered adequate to provide for probable losses. The provision for
loan losses is based on a periodic analysis of the loans held for portfolio and
held for sale, considering, among other factors, current economic conditions,
loan portfolio composition, past loan loss experience, independent appraisals,
loan collateral, payment experience and selected key financial ratios. As
adjustments become necessary, they are reflected in the results of operations in
the periods in which they become known. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowance for loan losses. Such agencies may require First Banks to modify
its allowance for loan losses based on their judgment about information
available to them at the time of their examination.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Derivative Instruments and Hedging Activities. First Banks utilizes
derivative instruments and hedging activities to assist in the management of
interest rate sensitivity and to modify the repricing, maturity and option
characteristics of certain assets and liabilities. First Banks uses such
derivative instruments solely to reduce its interest rate risk exposure. First
Banks accounts for derivative instruments and hedging activities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 133 -- Accounting
for Derivative Instruments and Hedging Activities, as amended, which requires
all derivative instruments to be recorded in the consolidated balance sheets and
measured at fair value.
At inception of a derivative transaction, First Banks designates the
derivative instrument as either a hedge of the fair value of a recognized asset
or liability or of an unrecognized firm commitment (fair value hedges) or a
hedge of a forecasted transaction or the variability of cash flows to be
received or paid related to a recognized asset or liability (cash flow hedges).
For all hedging relationships, First Banks formally documents the hedging
relationship and its risk-management objectives and strategy for entering into
the hedging relationship including the hedging instrument, the hedged item(s),
the nature of the risk being hedged, how the hedging instrument's effectiveness
in offsetting the hedged risk will be assessed and a description of the method
the Company will utilize to measure hedge ineffectiveness. This process also
includes linking all derivative instruments that are designated as fair value
hedges or cash flow hedges to the underlying assets and liabilities or to
specific firm commitments or forecasted transactions. First Banks also assesses,
both at the hedge's inception and on an ongoing basis, whether the derivative
instruments that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of the hedged item(s).
First Banks discontinues hedge accounting prospectively when it is
determined that the derivative instrument is no longer effective in offsetting
changes in the fair value or cash flows of the hedged item(s), the derivative
instrument expires or is sold, terminated, or exercised, the derivative
instrument is de-designated as a hedging instrument, because it is unlikely that
a forecasted transaction will occur, a hedged firm commitment no longer meets
the definition of a firm commitment, or management determines that designation
of the derivative instrument as a hedging transaction is no longer appropriate.
A summary of First Banks' accounting policies for its various
derivative instruments and hedging activities is as follows:
>> Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate
swap agreements designated as cash flow hedges are accounted for
at fair value. The effective portion of the change in the cash
flow hedge's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into
noninterest income when the underlying transaction affects
earnings. The ineffective portion of the change in the cash flow
hedge's gain or loss is recorded in noninterest income on each
monthly measurement date. The net interest differential is
recognized as an adjustment to interest income or interest
expense of the related asset or liability being hedged. In the
event of early termination, the net proceeds received or paid on
the interest rate swap agreements are recognized immediately in
noninterest income.
>> Interest Rate Swap Agreements - Fair Value Hedges. Interest rate
swap agreements designated as fair value hedges are accounted for
at fair value. Changes in the fair value of the swap agreements
are recognized currently in noninterest income. The change in the
fair value of the underlying hedged item attributable to the
hedged risk adjusts the carrying amount of the underlying hedged
item and is also recognized currently in noninterest income. All
changes in fair value are measured on a monthly basis. The net
interest differential is recognized as an adjustment to interest
income or interest expense of the related asset or liability. In
the event of early termination or ineffectiveness, the net
proceeds received or paid are recognized immediately in
noninterest income and the future net interest differential, if
any, is recognized prospectively in noninterest income. The
cumulative change in the fair value of the underlying hedged item
is deferred and amortized or accreted to interest income or
interest expense over the weighted average life of the related
asset or liability. If, however, the underlying hedged item is
repaid, the cumulative change in the fair value of the underlying
hedged item is recognized immediately in noninterest income.
>> Interest Rate Cap and Floor Agreements. Interest rate cap and
floor agreements are accounted for at fair value. Changes in the
fair value of interest rate cap and floor agreements are
recognized in noninterest income on each monthly measurement
date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
>> Interest Rate Lock Commitments. Commitments to originate loans
(interest rate lock commitments), which primarily consist of
commitments to originate fixed rate residential mortgage loans,
are recorded at fair value. Changes in the fair value are
recognized in noninterest income on a monthly basis.
>> Forward Contracts to Sell Mortgage-Backed Securities. Forward
commitments to sell mortgage-backed securities are recorded at
fair value. Changes in the fair value of forward contracts to
sell mortgage-backed securities are recognized in noninterest
income on a monthly basis.
Bank Premises and Equipment, Net. Bank premises and equipment are
carried at cost less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful lives of the
related assets. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the useful life of the improvement or
term of the lease. Bank premises and improvements are depreciated over five to
40 years and equipment over three to seven years.
Intangibles Associated With the Purchase of Subsidiaries. Intangibles
associated with the purchase of subsidiaries include goodwill and core deposit
intangibles.
On January 1, 2002, First Banks adopted SFAS No. 142 -- Goodwill and
Other Intangible Assets, and SFAS No 144 -- Accounting for the Impairment or
Disposal of Long-Lived Assets. Pursuant to SFAS No. 142, goodwill and intangible
assets with indefinite useful lives are not amortized, but instead tested for
impairment at least annually. Intangible assets with definite useful lives are
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No 144. In
2002, First Banks completed the required transitional goodwill impairment test,
to determine the potential impact, if any, on the consolidated financial
statements. The results of the transitional and annual goodwill impairment
testing did not identify any goodwill impairment losses.
At the date of adoption, First Banks had unamortized goodwill of $115.9
million and core deposit intangibles of $9.6 million, which were subject to the
transition provisions of SFAS No. 142. Accordingly, First Banks continues to
amortize, on a straight-line basis, its core deposit intangibles and goodwill
associated with the purchase of branch offices. Core deposit intangibles are
amortized over the estimated periods to be benefited, which has been estimated
at seven years, and goodwill associated with the purchase of branch offices is
amortized over the estimated periods to be benefited, which has been estimated
at 15 years. Goodwill associated with the purchase of subsidiaries is no longer
amortized, but instead, is tested annually for impairment following First Banks'
existing methods of measuring and recording impairment losses, as described
below. Prior to January 1, 2002, goodwill was amortized using the straight-line
method over the estimated periods to be benefited, which ranged from 10 to 15
years.
First Banks reviews intangible assets for impairment whenever events or
changes in circumstances indicate the carrying value of an underlying asset may
not be recoverable. First Banks measures recoverability based upon the future
cash flows expected to result from the use of the underlying asset and its
eventual disposition. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying value of the underlying
asset, First Banks recognizes an impairment loss. The impairment loss recognized
represents the amount by which the carrying value of the underlying asset
exceeds the fair value of the underlying asset. If an asset being tested for
recoverability was acquired in a business combination accounted for using the
purchase method, goodwill that arose in the transaction is included as part of
the asset grouping in determining recoverability. If some but not all of the
assets acquired in that transaction are being tested, goodwill is allocated to
the assets being tested for recoverability on a pro rata basis using the
relative fair values of the long-lived assets and identifiable intangibles
acquired at the acquisition dates. In instances where goodwill is identified
with assets that are subject to an impairment loss, the carrying amount of the
identified goodwill is eliminated before reducing the carrying amounts of
impaired long-lived assets and identifiable intangibles. As such adjustments
become necessary, they are reflected in the results of operations in the periods
in which they become known.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage Servicing Rights. Mortgage servicing rights are amortized in
proportion to the related estimated net servicing income on a basis that
approximates the 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 five years. The value of mortgage
servicing rights is adversely affected when mortgage interest rates decline
which normally causes mortgage loan prepayments to increase. First Banks
assesses impairment using stratifications based on the predominant risk
characteristics of the underlying mortgage loans, including size, interest rate,
weighted average original term, weighted average remaining term and estimated
prepayment speeds. The amount by which the carrying value of the mortgage
servicing rights for each stratum exceeds the fair value is recorded in a
valuation allowance as a reduction of mortgage servicing rights. Changes in the
valuation allowance are reflected in the consolidated statements of income in
the periods in which the change occurs.
Other Real Estate. Other real estate, consisting of real estate
acquired through foreclosure or deed in lieu of foreclosure, is stated at the
lower of cost or fair value less applicable selling costs. The excess of cost
over fair value of the property at the date of acquisition is charged to the
allowance for loan losses. Subsequent reductions in carrying value, to reflect
current fair value or costs incurred in maintaining the properties, are charged
to expense as incurred.
Income Taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in the tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
First Banks, Inc. and its eligible subsidiaries file a consolidated
federal income tax return and unitary or consolidated state income tax returns
in all applicable states.
Financial Instruments With Off-Balance-Sheet Risk. A financial
instrument is defined as cash, evidence of an ownership interest in an entity,
or a contract that conveys or imposes on an entity the contractual right or
obligation to either receive or deliver cash or another financial instrument.
First Banks utilizes financial instruments to reduce the interest rate risk
arising from its financial assets and liabilities. These instruments involve, in
varying degrees, elements of interest rate risk and credit risk in excess of the
amount recognized in the consolidated balance sheets. "Interest rate risk" is
defined as the possibility that interest rates may move unfavorably from the
perspective of First Banks. The risk that a counterparty to an agreement entered
into by First Banks may default is defined as "credit risk."
First Banks is a party to commitments to extend credit and commercial
and standby letters of credit in the normal course of business to meet the
financing needs of its customers. These commitments involve, in varying degrees,
elements of interest rate risk and credit risk in excess of the amount
recognized in the consolidated balance sheets.
Earnings Per Common Share. Basic earnings per common share (EPS) are
computed by dividing the income available to common stockholders (the numerator)
by the weighted average number of shares of common stock outstanding (the
denominator) during the year. The computation of dilutive EPS is similar except
the denominator is increased to include the number of additional shares of
common stock that would have been outstanding if the dilutive potential shares
had been issued. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back any convertible preferred
dividends.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS, INTEGRATION COSTS AND OTHER CORPORATE TRANSACTIONS
During the three years ended December 31, 2003, First Banks completed
the following acquisitions:
Total Purchase
Entity Date Assets Price Goodwill
------ ---- ------ ----- --------
(dollars expressed in thousands)
2003
----
Bank of Ste. Genevieve
Ste. Genevieve, Missouri March 31, 2003 $ 115,100 17,900 3,400
========= ======= ========
2002
----
Union Planters Bank N.A.
Denton and Garland, Texas
branch offices June 22, 2002 $ 63,700 65,100 --
Plains Financial Corporation
Des Plaines, Illinois January 15, 2002 256,300 36,500 12,600
--------- ------- --------
$ 320,000 101,600 12,600
========= ======= ========
2001
----
Union Financial Group, Ltd.
Swansea, Illinois December 31, 2001 $ 360,000 26,700 11,500
BYL Bancorp
Orange, California October 31, 2001 281,500 49,000 19,000
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 18,900 6,300
--------- ------- --------
$ 743,000 94,600 36,800
========= ======= ========
Goodwill associated with the acquisitions included in the table above
is not expected to be deductible for tax purposes. For 2003, 2002 and 2001
acquisitions, goodwill in the amounts of $3.4 million, $12.6 million and $36.8
million, respectively, was assigned to First Bank.
The aforementioned transactions were accounted for using the purchase
method of accounting and, accordingly, the consolidated financial statements
include the financial position and results of operations for the periods
subsequent to the respective acquisition dates, and the assets acquired and
liabilities assumed were recorded at fair value at the acquisition dates. These
acquisitions were funded from available cash reserves, proceeds from exchanges,
sales and maturities of available-for-sale investment securities, borrowings
under First Banks' revolving credit agreement and proceeds from the issuance of
trust preferred securities. Due to the immaterial effect on previously reported
financial information, pro forma disclosures have not been prepared for the
aforementioned transactions.
As discussed in Note 1 to the Notes to Consolidated Financial
Statements, FB&T was merged with and into First Bank on March 31, 2003 to allow
certain administrative and operational economies not available while the two
subsidiary banks maintained separate charters.
On December 31, 2003, the net assets of First Banc Mortgage, Inc., a
subsidiary of First Bank, were distributed to First Bank.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, as previously discussed, on December 31, 2002, First Banks
completed its acquisition of all of the outstanding capital stock of FBA that it
did not already own. This transaction was accounted for using the purchase
method of accounting, and goodwill in the amount of $14.6 million was recorded
and assigned to First Bank. The goodwill is not deductible for tax purposes.
First Banks accrues certain costs associated with its acquisitions as
of the respective consummation dates. The accrued costs relate 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 First Banks incurs 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 two to 15 years and
are triggered as a result of the change in control of the acquired entity. Other
severance benefits for employees that are terminated in conjunction with the
integration of the acquired entities into First Banks' existing operations are
normally paid to the recipients within 90 days of the respective consummation
date. The accrued severance balance of $1.4 million, as summarized in the table
below, is comprised of contractual obligations under salary continuation
agreements to 10 individuals and have remaining terms ranging from four months
to approximately 13 years. Payments made under these agreements are paid from
accrued expenses and other liabilities and consequently, do not have any impact
on the consolidated statements of income.
A summary of acquisition and integration costs attributable to the
acquisitions included in the foregoing table, which were accrued as of the
consummation dates of the respective acquisition, is listed below. These
acquisition and integration costs are reflected in accrued expenses and other
liabilities in the consolidated balance sheets.
Information
Severance Technology Fees Total
--------- --------------- -----
(dollars expressed in thousands)
Balance at December 31, 2000.................. $3,169 -- 3,169
Year Ended December 31, 2001:
Amounts accrued at acquisition date......... 3,885 516 4,401
Payments.................................... (3,120) (363) (3,483)
------ ----- ------
Balance at December 31, 2001.................. 3,934 153 4,087
Year Ended December 31, 2002:
Amounts accrued at acquisition date......... 239 250 489
Payments.................................... (1,822) (375) (2,197)
------ ----- ------
Balance at December 31, 2002.................. 2,351 28 2,379
Year Ended December 31, 2003:
Amounts accrued at acquisition date......... 100 350 450
Reversal to goodwill........................ (39) (108) (147)
Payments.................................... (1,000) (270) (1,270)
------ ----- ------
Balance at December 31, 2003.................. $1,412 -- 1,412
====== ===== ======
On October 17, 2003, First Bank completed its divestiture of three
branch offices in the northern and central Illinois market area, and on December
5, 2003, First Bank completed its divestiture of one branch office in regional
Missouri. These branch divestitures resulted in a reduction of the deposit base
of approximately $88.3 million, and a pre-tax gain of approximately $4.0
million, which is included in noninterest income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities Available for Sale. The amortized cost, contractual
maturity, gross unrealized gains and losses and fair value of investment
securities available for sale at December 31, 2003 and 2002 were as follows:
Maturity
---------------------------------------- Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized --------------- Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2003:
Carrying value:
U.S. Government agencies
and corporations:
Mortgage-backed.......... $ 613 7,913 63,394 743,476 815,396 6,353 (3,725) 818,024 4.55%
Other.................... 50,048 81,227 1,293 -- 132,568 1,288 (533) 133,323 3.13
State and political
subdivisions................ 3,749 11,293 14,280 1,924 31,246 801 (11) 32,036 3.72
Corporate debt securities...... 17,029 5,772 -- -- 22,801 477 -- 23,278 5.47
Equity investments ............ 449 -- -- 7,457 7,906 78 -- 7,984 7.83
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)..... 24,142 -- -- -- 24,142 -- -- 24,142 5.31
-------- ------- ------ ------- --------- ------ ------ ---------
Total................... $ 96,030 106,205 78,967 752,857 1,034,059 8,997 (4,269) 1,038,787 4.41
======== ======= ====== ======= ========= ====== ====== ========= ====
Fair value:
Debt securities................ $ 72,247 106,999 80,558 746,857
Equity securities.............. 24,591 -- -- 7,535
-------- ------- ------ -------
Total................... $ 96,838 106,999 80,558 754,392
======== ======= ====== =======
Weighted average yield............ 4.65% 2.84% 4.51% 4.59%
======== ======= ====== =======
December 31, 2002:
Carrying value:
U.S. Treasury.................. $149,963 -- -- -- 149,963 -- (65) 149,898 1.12%
U.S. Government agencies
and corporations:
Mortgage-backed.......... 797 10,841 37,617 494,832 544,087 8,632 (145) 552,574 4.55
Other.................... 223,106 81,774 2,340 -- 307,220 3,509 (37) 310,692 2.45
State and political
subdivisions................ 1,605 7,946 17,487 5,655 32,693 592 (38) 33,247 3.78
Corporate debt securities...... 5,012 20,847 -- -- 25,859 514 (8) 26,365 5.76
Equity investments............. 15,434 -- -- 13,350 28,784 7,880 (307) 36,357 5.35
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)..... 20,111 -- -- -- 20,111 -- -- 20,111 4.45
-------- ------- ------ ------- --------- ------ ------ ---------
Total................... $416,028 121,408 57,444 513,837 1,108,717 21,127 (600) 1,129,244 3.53
======== ======= ====== ======= ========= ====== ====== ========= ====
Fair value:
Debt securities................ $381,224 125,038 58,291 508,223
Equity securities.............. 42,952 -- -- 13,516
-------- ------- ------ -------
Total................... $424,176 125,038 58,291 521,739
======== ======= ====== =======
Weighted average yield............ 1.77% 4.58% 4.17% 4.64%
======== ======= ====== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Securities Held to Maturity. The amortized cost, contractual maturity,
gross unrealized gains and losses and fair value of investment securities held
to maturity at December 31, 2003 and 2002 were as follows:
Maturity
--------------------------------------- Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized --------------- Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2003:
Carrying value:
Mortgage-backed securities..... $ -- -- -- 576 576 26 -- 602 6.34%
State and political
subdivisions.................. 3,098 2,968 4,285 -- 10,351 388 -- 10,739 4.93
-------- ------ ------ ------- ------ ---- --- ------
Total...................... $ 3,098 2,968 4,285 576 10,927 414 -- 11,341 5.00
======== ====== ====== ======= ====== ==== === ====== ====
Fair value:
Debt securities................ $ 3,150 3,142 4,447 602
======== ====== ====== =======
Weighted average yield............ 5.22% 4.46% 5.04% 6.34%
======== ====== ====== =======
December 31, 2002:
Carrying value:
Mortgage-backed securities..... $ -- -- -- 2,203 2,203 66 -- 2,269 6.69%
State and political
subdivisions.................. 2,472 6,313 5,438 -- 14,223 487 (1) 14,709 4.88
-------- ------ ------ ------- ------ ---- --- ------
Total...................... $ 2,472 6,313 5,438 2,203 16,426 553 (1) 16,978 5.12
======== ====== ====== ======= ====== ==== === ====== ====
Fair value:
Debt securities................ $ 2,517 6,581 5,611 2,269
======== ====== ====== =======
Weighted average yield............ 4.76% 4.93% 4.88% 6.69%
======== ====== ====== =======
Proceeds from sales of available-for-sale investment securities were
$6.0 million, $55.1 million and $85.8 million for the years ended December 31,
2003, 2002 and 2001, respectively. Gross gains of $576,600, $91,000 and $19.1
million were realized on these sales during the years ended December 31, 2003,
2002 and 2001, respectively. Gross losses of $1,600 and $384,000 were realized
on these sales during the years ended December 31, 2002 and 2001, respectively.
There were no gross losses realized on securities sales in 2003. In 2003, First
Banks also recognized non-cash gains of $6.3 million on the partial exchange of
equity securities for a 100% ownership interest in Bank of Ste. Genevieve, and
$2.3 million gain on the subsequent contribution of the remaining shares of
equity securities to a charitable foundation. In addition, First Banks
recognized a $431,000 impairment loss due to an other-than-temporary decline in
the fair value of an equity fund investment.
Proceeds from calls of investment securities were $41.5 million, $64.0
million and $121.8 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Gross gains of $11,200 and $6,800 were realized on these called
securities during the years ended December 31, 2003 and 2001, respectively.
Gross losses of $1,900 and $1,400 were realized on these called securities
during the years ended December 31, 2003 and 2001, respectively. There were no
gross gains or gross losses realized on called securities in 2002.
First Bank is a member of the Federal Home Loan Bank (FHLB) system and
the Federal Reserve Bank (FRB) system and maintains investments in FHLB and FRB
Stock. These investments are recorded at cost, which represents redemption
value. The investment in FRB stock is maintained at a minimum of 6% of First
Bank's capital stock and capital surplus. The investments in FHLB of Chicago
stock and FHLB of San Francisco stock are maintained at an amount equal to 5% of
advances. The investment in FHLB of Des Moines stock is maintained at an amount
equal to 0.12% of First Bank's total assets as of December 31, 2002 plus 4.45%
of advances plus 0.15% of outstanding standby letters of credit.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment securities with a carrying value of approximately $379.4
million and $313.0 million at December 31, 2003 and 2002, respectively, were
pledged in connection with deposits of public and trust funds, securities sold
under agreements to repurchase and for other purposes as required by law.
Gross unrealized losses on investment securities and the fair value of
the related securities, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position,
at December 31, 2003, were as follows:
Less than 12 months 12 months or more Total
------------------------- ------------------------- ------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
(dollars expressed in thousands)
Available for sale:
U.S. Government agencies
and corporations:
Mortgage-backed............. $ 226,339 (3,716) 450 (9) 226,789 (3,725)
Other....................... 50,094 (533) -- -- 50,094 (533)
State and political subdivisions.. 1,315 (11) -- -- 1,315 (11)
--------- ------- ---- ---- -------- -------
Total.................... $ 277,748 (4,260) 450 (9) 278,198 (4,269)
========= ======= ==== ==== ======== =======
U.S. Government agencies and corporations - The unrealized losses on
investments in mortgage-backed securities and other agency securities were
caused by fluctuations in interest rates. The contractual terms of these
securities are guaranteed by government-sponsored enterprises. It is expected
that the securities would not be settled at a price less than the amortized
cost. Because First Banks has the ability and intent to hold these investments
until a market price recovery or maturity, these investments are not considered
other-than-temporarily impaired.
State and political subdivisions - The unrealized losses on investments
in state and political subdivisions were caused by fluctuations in interest
rates. It is expected that the securities would not be settled at a price less
than the amortized cost. Because the decline in fair value is attributable to
changes in interest rates and not credit quality, and because First Banks has
the ability and intent to hold these investments until a market price recovery
or maturity, these investments are not considered other-than-temporarily
impaired.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December
31, 2003, 2002 and 2001 were as follows:
2003 2002 2001
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year................................. $ 99,439 97,164 81,592
Acquired allowances for loan losses........................ 757 1,366 14,046
-------- ------- -------
100,196 98,530 95,638
-------- ------- -------
Loans charged-off.......................................... (55,773) (70,524) (31,453)
Recoveries of loans previously charged-off................. 23,028 15,933 9,469
-------- ------- -------
Net loans charged-off................................... (32,745) (54,591) (21,984)
-------- ------- -------
Provision for loan losses.................................. 49,000 55,500 23,510
-------- ------- -------
Balance, end of year....................................... $116,451 99,439 97,164
======== ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2003 and 2002, First Banks had $75.4 million and $75.2
million of impaired loans, including $75.4 million and $73.2 million,
respectively, of loans on nonaccrual status. At December 31, 2003 and 2002,
impaired loans also include $13,000 and $2.0 million of restructured loans.
Interest on nonaccrual loans, which would have been recorded under the original
terms of the loans, was $5.9 million, $7.1 million and $8.2 million for the
years ended December 31, 2003, 2002 and 2001, respectively. Of these amounts,
$2.6 million, $2.2 million and $2.9 million was actually recorded as interest
income on such loans in 2003, 2002 and 2001, respectively. The allowance for
loan losses includes an allocation for each impaired loan. The aggregate
allocation of the allowance for loan losses related to impaired loans was
approximately $17.7 million and $14.8 million at December 31, 2003 and 2002,
respectively. The average recorded investment in impaired loans was $69.6
million, $78.1 million and $62.4 million for the years ended December 31, 2003,
2002 and 2001, respectively. The amount of interest income recognized using a
cash basis method of accounting during the time these loans were impaired was
$2.6 million, $4.6 million and $5.8 million in 2003, 2002 and 2001,
respectively. At December 31, 2003 and 2002, First Banks had $2.8 million and
$4.6 million, respectively, of loans past due 90 days or more and still accruing
interest.
First Banks' primary market areas are the states of Missouri, Illinois,
Texas and California. At December 31, 2003 and 2002, approximately 91% and 92%
of the total loan portfolio, respectively, and 80% and 78% of the commercial,
financial and agricultural loan portfolio, respectively, were made to borrowers
within these states.
Real estate lending constituted the only significant concentration of
credit risk. Real estate loans comprised approximately 71% and 70% of the loan
portfolio at December 31, 2003 and 2002, respectively, of which 25% and 28%,
respectively, were made to consumers in the form of residential real estate
mortgages and home equity lines of credit.
In general, First Banks is a collateral lender. At December 31, 2003
and 2002, 99% and 98%, respectively, of the loan portfolio was collateralized.
Collateral is required in accordance with the normal credit evaluation process
based upon the creditworthiness of the customer and the credit risk associated
with the particular transaction.
(5) DERIVATIVE INSTRUMENTS
First Banks utilizes derivative financial instruments to assist in the
management of interest rate sensitivity by modifying the repricing, maturity and
option characteristics of certain assets and liabilities. Derivative financial
instruments held by First Banks at December 31, 2003 and 2002 are summarized as
follows:
December 31,
---------------------------------------------------
2003 2002
------------------------ -------------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges.............................. $1,250,000 2,857 1,050,000 2,179
Fair value hedges............................. 326,200 12,614 301,200 11,449
Interest rate cap agreements.................. 450,000 -- 450,000 94
Interest rate lock commitments................ 15,500 -- 89,000 --
Forward commitments to sell
mortgage-backed securities.................. 58,500 -- 245,000 --
========== ====== ========== ======
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
First Banks' credit exposure through its use of these instruments. The credit
exposure represents the accounting loss First Banks 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 2003, 2002 and 2001, First Banks realized net interest income on
derivative financial instruments of $64.6 million, $53.0 million and $23.4
million, respectively. In addition, First Banks recorded a net gain on
derivative instruments, which is included in noninterest income in the
consolidated statements of income, of $496,000, $2.2 million and $18.6 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
Cash Flow Hedges. First Banks entered into the following interest rate
swap agreements, designated as cash flow hedges, 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:
>> During 1998, First Banks entered into interest rate swap
agreements of $280.0 million notional amount that provided for
First Banks to receive a fixed rate of interest and pay an
adjustable rate of interest equivalent to the daily weighted
average prime lending rate minus 2.705%. The underlying hedged
assets were certain loans within the commercial loan portfolio.
The terms of the swap agreements provided for First Bank to pay
interest on a quarterly basis and receive payment on a semiannual
basis. In June 2001 and November 2001, First Banks terminated
$205.0 million and $75.0 million notional amount, respectively,
of these swap agreements, which would have expired in 2002, in
order to appropriately modify the overall hedge position in
accordance with First Banks' interest rate risk management
program. In conjunction with these terminations, First Banks
recorded gains of $2.8 million and $1.7 million, respectively.
>> During 1999, First Banks entered into interest rate swap
agreements of $175.0 million notional amount that provided for
First Banks 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%. The underlying hedged assets were
certain loans within the commercial loan portfolio. The terms of
the swap agreements provided for First Banks to pay and receive
interest on a quarterly basis. In April 2001, First Banks
terminated these swap agreements, which would have expired in
September 2001, and replaced them with similar swap agreements
with extended maturities in order to lengthen the period covered
by the swaps. In conjunction with the termination of these swap
agreements, First Banks recorded a gain of $985,000.
>> During September 2000, March 2001, April 2001, March 2002 and
July 2003, First Banks entered into interest rate swap agreements
of $600.0 million, $200.0 million, $175.0 million, $150.0 million
and $200.0 million notional amount, respectively. The underlying
hedged assets are certain loans within the commercial loan
portfolio. The swap agreements provide for First Banks to receive
a fixed rate of interest and pay an adjustable rate of interest
equivalent to the weighted average prime lending rate minus
2.70%, 2.82%, 2.82%, 2.80% and 2.85%, respectively. The terms of
the swap agreements provide for First Banks to pay and receive
interest on a quarterly basis. In November 2001, First Banks
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 its overall hedge
position in accordance with its interest rate risk management
program. First Banks recorded a gain of $2.6 million in
conjunction with the termination of these swap agreements. The
amount receivable under the swap agreements was $3.9 million and
$3.1 million at December 31, 2003 and 2002, respectively, and the
amount payable under the swap agreements was $1.1 million and
$888,000 at December 31, 2003 and 2002, respectively.
The maturity dates, notional amounts, interest rates paid and received
and fair value of First Banks' interest rate swap agreements designated as cash
flow hedges as of December 31, 2003 and 2002 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2003:
March 14, 2004........................ $ 150,000 1.20% 3.93% $ 879
September 20, 2004.................... 600,000 1.30 6.78 23,250
March 21, 2005........................ 200,000 1.18 5.24 8,704
April 2, 2006......................... 100,000 1.18 5.45 6,881
July 31, 2007......................... 200,000 1.15 3.08 501
---------- --------
$1,250,000 1.24 5.49 $ 40,215
========== ===== ===== ========
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. First Banks 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 September 2000, First Banks entered into $25.0 million
notional amount of one-year interest rate swap agreements and
$25.0 million of five and one-half year interest rate swap
agreements that provided for First Banks to receive fixed rates
of interest ranging from 6.60% to 7.25% and pay an adjustable
rate equivalent to the three-month London Interbank Offering Rate
minus rates ranging from 0.02% to 0.11%. The underlying hedged
liabilities were a portion of the other time deposits. The terms
of the swap agreements provided for First Banks to pay interest
on a quarterly basis and receive interest on either a semiannual
basis or an annual basis. In September 2001, the one-year
interest rate swap agreements matured, and First Banks terminated
the five and one-half year interest rate swap agreements because
the underlying hedged liabilities had either matured or been
called by their respective counterparties. There was no gain or
loss recorded as a result of the terminations.
>> During January 2001, First Banks 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 First Banks 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 First Banks' other time
deposits. The terms of the swap agreements provide for First
Banks to pay interest on a quarterly basis and receive interest
on a semiannual basis. The amount receivable under the swap
agreements was $5.2 million at December 31, 2003 and 2002, and
the amount payable under the swap agreements was $537,000 and
$821,000 at December 31, 2003 and 2002, respectively. During
September 2003, First Banks discontinued hedge accounting
treatment on the $50.0 million notional amount of three-year swap
agreements due to the loss of their highly correlated hedge
positions between the swap agreements and the underlying hedged
liabilities. The related $1.3 million basis adjustment of the
underlying hedged liabilities was recorded as a reduction of
interest expense over the remaining weighted average maturity of
the underlying hedged liabilities of approximately three months.
In addition, the effect of the loss of the highly correlated
hedge position on the swap agreements resulted in the recognition
of a net loss of $291,000, which is included in noninterest
income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
>> During May 2002, First Banks entered into $55.2 million notional
amount of interest rate swap agreements that provide for First
Banks 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, First Banks entered
into $86.3 million and $46.0 million notional amount,
respectively, of interest rate swap agreements that provide for
First Banks 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. The
underlying hedged liabilities are a portion of First Banks'
subordinated debentures. The terms of the swap agreements provide
for First Banks to pay and receive interest on a quarterly basis.
There were no amounts receivable or payable under the swap
agreements at December 31, 2003 and 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 interest rate swap agreement in December 2002. The $46.0
million notional amount interest rate swap agreement was called
by its counterparty on May 21, 2003, resulting in final
settlement of this interest rate swap agreement on June 30, 2003.
There was no gain or loss recorded as a result of these
transactions.
>> During March 2003 and April 2003, First Banks entered into $25.0
million and $46.0 million notional amount, respectively, of
interest rate swap agreements that provide for First Banks 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% and 2.58%, respectively. The underlying hedged
liabilities are a portion of First Banks' subordinated
debentures. The terms of the swap agreements provide for First
Banks to pay and receive interest on a quarterly basis. There
were no amounts receivable or payable under the swap agreements
at December 31, 2003.
The maturity dates, notional amounts, interest rates paid and received
and fair value of First Banks' interest rate swap agreements designated as fair
value hedges as of December 31, 2003 and 2002 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2003:
January 9, 2004 (1)...................... $ 50,000 1.15% 5.37% $ --
January 9, 2006.......................... 150,000 1.15 5.51 9,932
December 31, 2031........................ 55,200 3.44 9.00 2,499
March 20, 2033........................... 25,000 3.69 8.10 (1,270)
June 30, 2033............................ 46,000 3.72 8.15 (2,008)
-------- --------
$326,200 2.10 6.65 $ 9,153
======== ===== ===== ========
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
======== ===== ===== ========
----------------------
(1) Hedge accounting treatment was discontinued in September 2003 as further discussed above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest Rate Cap Agreements. In conjunction with the interest rate
swap agreements designated as cash flow hedges that mature in September 2004,
First Banks also entered into $450.0 million notional amount of four-year
interest rate cap agreements to limit the net interest expense associated with
the interest rate swap agreements in the event of a rising rate scenario. The
interest rate cap agreements provide for First Banks 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
December 31, 2003 and 2002, the carrying value of these interest rate cap
agreements, which is included in derivative instruments in the consolidated
balance sheets, was $0 and $94,000, respectively.
Pledged Collateral. At December 31, 2003 and 2002, First Banks had a
$5.0 million letter of credit issued on its behalf to the counterparty and had
pledged investment securities available for sale with a fair value of $229,000
and $239,000, respectively, in connection with the interest rate swap
agreements. In addition, at December 31, 2003, First Banks had pledged cash of
$700,000 as collateral in connection with the interest rate swap agreements. At
December 31, 2003 and 2002, First Banks had accepted, as collateral in
connection with the interest rate swap agreements, cash of $51.3 million and
$99.1 million, respectively.
Interest Rate Lock Commitments / Forward Commitments to Sell
Mortgage-Backed Securities. Derivative financial instruments issued by First
Banks 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.
Interest Rate Floor Agreements. During January 2001 and March 2001,
First Banks entered into $200.0 million and $75.0 million notional amount,
respectively, of four-year interest rate floor agreements to further stabilize
net interest income in the event of a falling rate scenario. The interest rate
floor agreements provided for First Banks to receive a quarterly adjustable rate
of interest equivalent to the differential between the three-month London
Interbank Offering Rate and the strike prices of 5.50% or 5.00%, respectively,
should the three-month London Interbank Offering Rate fall below the respective
strike prices. In November 2001, First Banks terminated these interest rate
floor agreements in order to appropriately modify the overall hedge position in
accordance with the interest rate risk management program. In conjunction with
the termination, First Banks recorded an adjustment of $4.0 million representing
the decline in fair value from the previous month-end measurement date. These
agreements provided net interest income of $2.1 million for the year ended
December 31, 2001.
(6) MORTGAGE BANKING ACTIVITIES
At December 31, 2003 and 2002, First Banks serviced loans for others
amounting to $1.22 billion and $1.29 billion, respectively. Borrowers' escrow
balances held by First Banks on such loans were $4.7 million and $6.1 million at
December 31, 2003 and 2002, respectively.
Changes in mortgage servicing rights, net of amortization, for the
years ended December 31, 2003 and 2002 were as follows:
2003 2002
---- ----
(dollars expressed in thousands)
Balance, beginning of year........................................... $ 14,882 10,125
Originated mortgage servicing rights................................. 8,062 8,566
Amortization......................................................... (7,536) (3,809)
Impairment valuation allowance....................................... (800) --
Reversal of impairment valuation allowance........................... 800 --
--------- --------
Balance, end of year................................................. $ 15,408 14,882
========= ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of mortgage servicing rights was $18.3 million and $17.2
million at December 31, 2003 and 2002, respectively. At December 31, 2003 and
2002, the excess of the fair value of mortgage servicing rights over the
carrying value was $2.9 million and $2.3 million, respectively. 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.
During 2003, First Banks recognized impairment of $800,000 through a
valuation allowance associated with a decline in the fair value of an individual
mortgage servicing rights stratum below its carrying value, net of the valuation
allowance. Subsequently, First Banks reversed the $800,000 impairment valuation
allowance based upon an increase in the fair value of the mortgage servicing
rights stratum above the carrying value, net of the valuation allowance. First
Banks did not incur any impairment of mortgage servicing rights during the years
ended December 31, 2002 and 2001, respectively. First Banks capitalizes its
mortgage servicing rights by allocating the total cost of the mortgage loans to
mortgage servicing rights and the loans (without mortgage servicing rights)
based on the relative fair values of the two components. Upon capitalizing the
mortgage servicing rights, they are amortized, in proportion to the related
estimated net servicing income on a basis that approximates the disaggregated,
discounted basis, over the expected lives of the related loans, which range from
five to ten years. The weighted average amortization period of mortgage
servicing rights is approximately five years. When loans are prepaid or
refinanced, the related unamortized balance of the mortgage servicing rights is
charged to amortization expense. The determination of the fair value of the
mortgage servicing rights is performed monthly based upon an independent third
party valuation. Based on these analyses, a comparison of the fair value of the
mortgage servicing rights with the carrying value of the mortgage servicing
rights is made monthly, with impairment, if any, recognized at that time. The
impairment analyses are prepared using stratifications of the mortgage servicing
rights based on the predominant risk characteristics of the underlying mortgage
loans, including size, interest rate, weighted average original term, weighted
average remaining term and estimated prepayment speeds. As part of these
analyses, the fair value of the mortgage servicing rights for each stratum is
compared to the carrying value of the mortgage servicing rights for each
stratum. To the extent the carrying value of the mortgage servicing rights
exceeds the fair value of the mortgage servicing rights for a stratum, First
Banks recognizes impairment equal to the amount by which the carrying value of
the mortgage servicing rights for a stratum exceeds the fair value. Impairment
is recognized through a valuation allowance that is recorded as a reduction of
mortgage servicing rights. Changes in the valuation allowance are reflected in
the consolidated statements of income in the periods in which the change occurs.
First Banks does not, however, recognize fair value of the mortgage servicing
rights in excess of the carrying value of mortgage servicing rights for any
stratum.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amortization of mortgage servicing rights, as it relates to the balance
at December 31, 2003 of $15.4 million, has been estimated through 2008 in the
following table:
(dollars expressed
in thousands)
Year ending December 31:
2004..................................... $ 4,594
2005..................................... 4,269
2006..................................... 3,648
2007..................................... 2,179
2008..................................... 718
-------
Total................................ $15,408
=======
(7) BANK PREMISES AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION AND
AMORTIZATION
Bank premises and equipment were comprised of the following at December
31, 2003 and 2002:
2003 2002
---- ----
(dollars expressed in thousands)
Land................................................................. $ 22,901 23,175
Buildings and improvements........................................... 103,053 100,787
Furniture, fixtures and equipment.................................... 109,403 114,910
Leasehold improvements............................................... 24,194 28,006
Construction in progress............................................. 4,056 4,134
--------- ---------
Total............................................................ 263,607 271,012
Less accumulated depreciation and amortization....................... 126,868 118,594
--------- ---------
Bank premises and equipment, net................................. $ 136,739 152,418
========= =========
Depreciation and amortization expense for the years ended December 31,
2003, 2002 and 2001 totaled $20.1 million, $18.9 million and $12.7 million,
respectively.
First Banks leases land, office properties and equipment under
operating leases. Certain of the leases contain renewal options and escalation
clauses. Total rent expense was $14.1 million, $13.9 million and $12.9 million
for the years ended December 31, 2003, 2002 and 2001, respectively. Future
minimum lease payments under noncancellable operating leases extend through 2084
as follows:
(dollars expressed in thousands)
Year ending December 31:
2004................................................................... $ 8,689
2005................................................................... 6,222
2006................................................................... 5,040
2007................................................................... 3,628
2008................................................................... 2,892
Thereafter............................................................. 20,971
-------
Total future minimum lease payments................................ $47,442
=======
First Banks also leases to unrelated parties a portion of its banking
facilities. Total rental income was $6.1 million, $5.8 million and $4.8 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) 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 December 31, 2003 and 2002:
2003 2002
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles.............. $ 17,391 (4,233) 13,871 (1,869)
Goodwill associated with
purchases of branch offices......... 2,210 (861) 2,210 (718)
--------- ------- ------- -------
Total............................ $ 19,601 (5,094) 16,081 (2,587)
========= ======= ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 144,199 138,620
========= =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $2.5 million, $2.0 million and $8.3 million
for the years ended December 31, 2003, 2002 and 2001, respectively. As of
December 31, 2003, the remaining estimated life of the amortization period for
goodwill associated with purchases of branch offices and core deposit
intangibles was 11 years and seven years, respectively. Amortization of
intangibles associated with the purchase of subsidiaries, including amortization
of core deposit intangibles and branch office purchases, has been estimated
through 2008 in the following table, and does not take into consideration any
potential future acquisitions or branch office purchases.
(dollars expressed in thousands)
Year ending December 31:
2004............................... $ 2,632
2005............................... 2,632
2006............................... 2,632
2007............................... 2,632
2008............................... 2,632
---------
Total............................ $ 13,160
=========
Changes in the carrying amount of goodwill for the years ended December
31, 2003 and 2002 were as follows:
2003 2002
---- ----
(dollars expressed in thousands)
Balance, beginning of year.................................... $ 140,112 115,860
Goodwill acquired during year................................. 1,026 24,963
Acquisition-related adjustments............................... 4,553 (569)
Amortization - purchases of branch offices.................... (143) (142)
---------- --------
Balance, end of year.......................................... $ 145,548 140,112
========== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of reported net income to net income
adjusted to reflect the adoption of SFAS No. 142, as if it had been implemented
on January 1, 2001:
Years Ended December 31,
-----------------------------------------
2003 2002 2001
---- ---- ----
(dollars expressed in thousands, except per share data)
Net income:
Reported net income...................................... $ 62,811 45,167 64,514
Add back - goodwill amortization......................... -- -- 8,078
--------- -------- --------
Adjusted net income.................................... $ 62,811 45,167 72,592
========= ======== ========
Basic earnings per share:
Reported net income...................................... $2,621.39 1,875.69 2,693.38
Add back - goodwill amortization......................... -- -- 341.14
--------- -------- --------
Adjusted net income.................................... $2,621.39 1,875.69 3,034.52
========= ======== ========
Diluted earnings per share:
Reported net income...................................... $2,588.31 1,853.64 2,626.77
Add back - goodwill amortization......................... -- -- 328.99
--------- -------- --------
Adjusted net income.................................... $2,588.31 1,853.64 2,955.76
========= ======== ========
(9) MATURITIES OF TIME DEPOSITS
A summary of maturities of time deposits of $100,000 or more and other
time deposits as of December 31, 2003 is as follows:
Time deposits of Other time
$100,000 or more deposits Total
---------------- -------- -----
(dollars expressed in thousands)
Year ending December 31:
2004............................................... $ 295,056 965,792 1,260,848
2005............................................... 72,091 316,640 388,731
2006............................................... 22,880 92,775 115,655
2007............................................... 30,964 90,300 121,264
2008............................................... 15,448 53,259 68,707
Thereafter......................................... -- 359 359
--------- --------- ---------
Total........................................... $ 436,439 1,519,125 1,955,564
========= ========= =========
(10) OTHER BORROWINGS
Other borrowings were comprised of the following at December 31, 2003
and 2002:
2003 2002
---- ----
(dollars expressed in thousands)
Federal funds purchased.............................................. $ -- 55,000
Securities sold under agreements to repurchase:
Daily.............................................................. 166,479 196,644
Term............................................................... 100,000 --
FHLB advances........................................................ 7,000 14,000
--------- --------
Total other borrowings........................................... $ 273,479 265,644
========= ========
The average balance of other borrowings was $219.3 million and $194.1
million, respectively, and the maximum month-end balance of other borrowings was
$294.1 million and $265.6 million, respectively, for the years ended December
31, 2003 and 2002. The average rates paid on other borrowings during the years
ended December 31, 2003, 2002 and 2001 were 1.02%, 1.78% and 3.70%,
respectively. The assets underlying the daily securities sold under agreements
to repurchase and the FHLB advances are held by First Banks. The assets
underlying the term securities sold under agreements to repurchase are held by
other financial institutions under safekeeping agreements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On July 30, 2003, First Banks entered into a $50.0 million four-year
reverse repurchase agreement under a master repurchase agreement. Interest is
paid quarterly and is equivalent to the three-month London Interbank Offering
Rate minus 0.68% plus a floating amount equal to the differential between the
three-month London Interbank Offering Rate and the strike price of 3.50%, if the
three-month London Interbank Offering Rate exceeds 3.50%. On August 13, 2003,
First Banks entered into an additional $50.0 million three-year reverse
repurchase agreement under a master repurchase agreement. Interest is paid
quarterly and is equivalent to the three-month London Interbank Offering Rate
minus 0.565% plus a floating amount equal to the differential between the
three-month London Interbank Offering Rate and the strike price of 3.00%, if the
three-month London Interbank Offering Rate exceeds 3.00%. The underlying
securities associated with the reverse repurchase agreements are mortgage-backed
securities and are not under First Banks' physical control.
(11) NOTE PAYABLE
First Banks has a revolving credit line with a group of unaffiliated
financial institutions (Credit Agreement). The Credit Agreement, dated August
14, 2003, replaced a similar revolving credit agreement dated August 22, 2002.
The Credit Agreement provides a $60.0 million revolving credit line and a $20.0
million letter of credit facility. Interest is payable on outstanding principal
loan balances at a floating rate equal to either the lender's prime rate or, at
First Banks' option, the London Interbank Offering Rate plus a margin determined
by the outstanding loan balances and First Banks' net income for the preceding
four calendar quarters. If the loan balances outstanding under the revolving
credit line are accruing at the prime rate, interest is to be paid quarterly. If
the loan balances outstanding under the revolving credit line are accruing at
the London InterBank Offering Rate, interest is payable based on the one, two,
three or six-month London Interbank Offering Rate, as selected by First Banks.
The interest rate for borrowings under the Credit Agreement was 2.19% at
December 31, 2003, and was based on the applicable London Interbank Offering
Rate plus a margin of 1.00%. Amounts may be borrowed under the Credit Agreement
until August 12, 2004, at which time the principal and interest is due and
payable.
The Credit Agreement requires First Banks to comply with various
covenants, including maintenance of certain minimum capital ratios for First
Banks and First Bank, certain maximum nonperforming assets ratios for First
Banks and First Bank and a minimum return on assets ratio for First Banks. In
addition, it prohibits the payment of dividends on First Banks' common stock. At
December 31, 2003 and 2002, First Banks and First Bank were in compliance with
all restrictions and requirements of the respective credit agreements.
Loans under the Credit Agreement are secured by First Banks' ownership
interest in the capital stock of its subsidiaries. Under the Credit Agreement,
there were outstanding borrowings of $17.0 million at December 31, 2003. At
December 31, 2002, there were outstanding borrowings of $7.0 million under the
previous credit agreement.
The average balance and maximum month-end balance of borrowings
outstanding under the Credit Agreement during the years ended December 31, 2003
and 2002 were as follows:
2003 2002
---- ----
(dollars expressed in thousands)
Average balance........................................................... $ 15,418 17,947
Maximum month-end balance................................................. 34,500 50,000
======== =======
The average rates paid on the outstanding borrowings during the years
ended December 31, 2003, 2002 and 2001 were 5.09%, 5.75% and 6.32%,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) SUBORDINATED DEBENTURES
In February 1997, First Preferred Capital Trust (First Preferred I), a
newly formed Delaware business trust, issued 3.45 million shares of 9.25%
cumulative trust preferred securities at $25 per share in an underwritten public
offering, and issued 106,702 shares of common securities to First Banks at $25
per share. First Banks owned all of First Preferred I's common securities. The
gross proceeds of the offering were used by First Preferred I to purchase $88.9
million of 9.25% subordinated debentures from First Banks, maturing on March 31,
2027. The maturity date could have been shortened to a date not earlier than
March 31, 2002 or extended to a date not later than March 31, 2046 if certain
conditions were met. The subordinated debentures were the sole asset of First
Preferred I. In connection with the issuance of the preferred securities, First
Banks made certain guarantees and commitments that, in the aggregate,
constituted a full and unconditional guarantee by First Banks of the obligations
of First Preferred I under the First Preferred I preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to First
Preferred I, net of underwriting fees and offering expenses, were $85.8 million.
On May 5, 2003, First Banks redeemed in full the $88.9 million of subordinated
debentures. The funds necessary for the redemption were provided from the net
proceeds from the issuance of additional subordinated debentures to First Bank
Statutory Trust and First Preferred Capital Trust IV of $25.3 million and $45.6
million, respectively, as further discussed below, and approximately $18.0
million from available cash. First Banks' distributions on the subordinated
debentures, which were payable quarterly in arrears, were $2.9 million for the
year ended December 31, 2003, and $8.2 million for the years ended December 31,
2002 and 2001.
In July 1998, First America Capital Trust (FACT), a newly formed
Delaware business trust, issued 1.84 million shares of 8.50% 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 owned all of FACT's common securities. The gross proceeds of the offering
were used by FACT to purchase $47.4 million of 8.50% subordinated debentures
from First Banks, maturing on June 30, 2028. The maturity date could have been
shortened to a date not earlier than June 30, 2003 or extended to a date not
later than June 30, 2037 if certain conditions were met. The subordinated
debentures were the sole asset of FACT. In connection with the issuance of the
FACT preferred securities, First Banks made certain guarantees and commitments
that, in the aggregate, constituted a full and unconditional guarantee by First
Banks of the obligations of FACT under the FACT preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to FACT, net of
underwriting fees and offering expenses, were $45.4 million. On June 30, 2003,
First Banks redeemed in full the $47.4 million of subordinated debentures. The
funds necessary for the redemption were provided from available cash of $12.9
million and an advance of $34.5 million on First Banks' note payable. First
Banks' distributions on the subordinated debentures, which were payable
quarterly in arrears, were $2.0 million for the year ended December 31, 2003,
and $4.0 million for the years ended December 31, 2002 and 2001.
In October 2000, First Preferred Capital Trust II (First Preferred II),
a newly formed Delaware business trust, issued 2.3 million shares of 10.24%
cumulative trust preferred securities at $25 per share in an underwritten public
offering, and issued 71,135 shares of common securities to First Banks at $25
per share. First Banks owns all of First Preferred II's common securities. The
gross proceeds of the offering were used by First Preferred II to purchase $59.3
million of 10.24% subordinated debentures from First Banks, maturing on
September 30, 2030. The maturity date may be shortened to a date not earlier
than September 30, 2005, if certain conditions are met. The subordinated
debentures are the sole asset of First Preferred II. 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 II under the
First Preferred II preferred securities. First Banks' proceeds from the issuance
of the subordinated debentures to First Preferred II, net of underwriting fees
and offering expenses, were $56.9 million. First Banks' distributions on the
subordinated debentures issued to First Preferred II, which are payable
quarterly in arrears, were $6.1 million for the years ended December 31, 2003,
2002 and 2001.
In November 2001, First Preferred Capital Trust III (First Preferred
III), a newly formed Delaware business trust, issued 2.2 million shares of 9.00%
cumulative trust preferred securities at $25 per share in an underwritten public
offering, and issued 68,290 shares of common securities to First Banks at $25
per share. First Banks owns all of First Preferred III's common securities. The
gross proceeds of the offering were used by First Preferred III to purchase
$56.9 million of 9.00% subordinated debentures from First Banks, maturing on
September 30, 2031. The maturity date may be shortened to a date not earlier
than September 30, 2006, if certain conditions are met. The subordinated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
debentures are the sole asset of First Preferred III. 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 III under the
First Preferred III preferred securities. First Banks' proceeds from the
issuance of the subordinated debentures to First Preferred III, net of
underwriting fees and offering expenses, were $54.6 million. First Banks'
distributions on the subordinated debentures issued to First Preferred III,
which are payable quarterly in arrears, were $5.1 million for the years ended
December 2003 and 2002, and $640,000 for the year ended December 31, 2001.
In April 2002, First Bank Capital Trust (FBCT), a newly formed Delaware
business trust, issued 25,000 shares of variable rate 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 FBCT. The gross proceeds of the offering were used by
FBCT to purchase $25.8 million of variable rate subordinated debentures from
First Banks, maturing on April 22, 2032. The maturity date of the subordinated
debentures may be shortened to a date not earlier than April 22, 2007, if
certain conditions are met. The subordinated debentures are the sole asset of
FBCT. In connection with the issuance of the FBCT 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 FBCT
under the FBCT preferred securities. First Banks' proceeds from the issuance of
the subordinated debentures to FBCT, net of offering expenses, were $25.0
million. The distribution rate on the FBCT securities is equivalent to the
six-month London Interbank Offering Rate plus 387.5 basis points, and is payable
semi-annually in arrears on April 22 and October 22, beginning on October 22,
2002. First Banks' distributions on the subordinated debentures issued to FBCT
were $1.4 million and $1.1 million for the years ended December 31, 2003 and
2002, respectively.
On March 20, 2003, First Bank Statutory Trust (FBST), a newly formed
Connecticut statutory trust, 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 $25.8 million of 8.10% 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 $25.3
million. First Banks' distributions on the subordinated debentures issued to
FBST, which are payable quarterly in arrears beginning March 31, 2003, were $1.7
million for the year ended December 31, 2003.
On April 1, 2003, First Preferred Capital Trust IV (First Preferred
IV), a newly formed Delaware business trust, 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 owned 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 $45.6 million. First Banks'
distributions on the subordinated debentures issued to First Preferred IV, which
are payable quarterly in arrears beginning on June 30, 2003, were $2.9 million
for the year ended December 31, 2003.
The distributions payable on all of First Banks' subordinated
debentures are included in interest expense in the consolidated statements of
income.
The subordinated debentures were issued in conjunction with the
formation of various financing entities and their issuance of trust preferred
securities. First Banks has five issues of trust preferred securities as of
December 31, 2003. The structure of the trust preferred securities currently
satisfies the regulatory requirements for inclusion, subject to certain
limitations, in First Banks' capital base.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
First Banks previously followed the practice of amortizing its deferred
issuance costs associated with its subordinated debentures over the 30-year
period through the respective maturity date of each issue. In 2002, First Banks
reviewed this practice relative to the significant decline in prevailing
interest rates experienced in 2001 and continuing in 2002 and determined that it
was probable that some or all of the existing issues would be called by First
Banks prior to their stated maturity date. Therefore, First Banks changed the
period over which its deferred issuance costs are amortized to the five-year
period ending on the respective dates the issues became callable. The effect of
this change in accounting estimate on the results of operations for the year
ended December 31, 2002 was a reduction of net income of $4.4 million, net of
$1.5 million tax benefit.
(13) INCOME TAXES
Income tax expense attributable to income from continuing operations
for the years ended December 31, 2003, 2002 and 2001 consists of:
2003 2002 2001
---- ---- ----
(dollars expressed in thousands)
Current income tax expense:
Federal.................................................... $40,194 15,210 22,252
State...................................................... 12,717 3,510 1,583
------- ------ ------
52,911 18,720 23,835
------- ------ ------
Deferred income tax expense:
Federal.................................................... (12,463) 4,020 13,691
State...................................................... (4,493) 31 626
------- ------ ------
(16,956) 4,051 14,317
------- ------ ------
Reduction in deferred valuation allowance...................... -- -- (8,104)
------- ------ ------
Total.................................................. $35,955 22,771 30,048
======= ====== ======
The effective rates of federal income taxes for the years ended
December 31, 2003, 2002 and 2001 differ from statutory rates of taxation as
follows:
Years Ended December 31,
----------------------------------------------------------
2003 2002 2001
---------------- ---------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Income before provision for income taxes,
minority interest in income
of subsidiary and cumulative effect of
change in accounting principle............... $98,766 $69,369 $98,567
======= ======= =======
Provision for income taxes calculated
at federal statutory income tax rates........ $34,568 35.0% $24,279 35.0% $34,498 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income, net of
tax preference adjustment................ (911) (0.9) (972) (1.4) (539) (0.5)
State income taxes........................... 5,346 5.4 2,302 3.3 1,436 1.5
Amortization of intangibles associated
with the purchase of subsidiaries........ -- -- -- -- 2,827 2.9
Reduction in deferred valuation allowance.... -- -- -- -- (8,104) (8.2)
Bank owned life insurance, net of premium.... (1,762) (1.8) (1,957) (2.8) (1,431) (1.5)
Other, net................................... (1,286) (1.3) (881) (1.3) 1,361 1.3
------- ----- ------- ----- ------- -----
Provision for income taxes............. $35,955 36.4% $22,771 32.8% $30,048 30.5%
======= ===== ======= ===== ======= =====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2003 and 2002 are as follows:
December 31,
------------
2003 2002
---- ----
(dollars expressed in thousands)
Deferred tax assets:
Net operating loss carryforwards................................ $ 30,702 38,666
Allowance for loan losses....................................... 49,680 37,730
Alternative minimum tax credits................................. 2,667 2,773
Quasi-reorganization adjustment of bank premises................ 1,076 1,126
Interest on nonaccrual loans.................................... 2,649 3,354
Mortgage servicing rights....................................... 6,250 5,549
Deferred compensation........................................... 2,977 2,112
Other real estate............................................... 24 118
State taxes..................................................... 5,018 --
Other........................................................... 1,801 729
-------- --------
Deferred tax assets......................................... 102,844 92,157
-------- --------
Deferred tax liabilities:
Depreciation on bank premises and equipment..................... 9,399 7,457
Net fair value adjustment for investment securities
available for sale............................................ 1,655 7,184
Net fair value adjustment for derivative instruments............ 14,075 26,566
Unrealized gains on investment securities....................... 3,156 2,276
Operating leases................................................ 1,812 6,808
Core deposit intangibles........................................ 4,328 3,460
Discount on loans............................................... 1,377 1,654
Equity investments.............................................. 5,405 3,656
FHLB stock dividends............................................ 181 407
State taxes..................................................... -- 797
Other........................................................... 295 939
-------- --------
Deferred tax liabilities.................................... 41,683 61,204
-------- --------
Net deferred tax assets..................................... $ 61,161 30,953
======== ========
The realization of First Banks' net deferred tax assets is based on the
availability of carrybacks to prior taxable periods, the expectation of future
taxable income and the utilization of tax planning strategies. Based on these
factors, management believes it is more likely than not that First Banks will
realize the recognized net deferred tax assets of $61.2 million.
There were no changes in the deferred tax asset valuation allowance for
the years ended December 31, 2003 and 2002. Changes in the deferred tax asset
valuation allowance for the year ended December 31, 2001 were as follows:
2001
----
(dollars expressed in thousands)
Balance, beginning of year........................................... $ 13,075
Current year deferred provision, change in
deferred tax asset valuation allowance........................... (8,104)
Reduction attributable to utilization of deferred tax assets:
Adjustment to additional paid-in capital.......................... (4,971)
--------
Balance, end of year................................................. $ --
========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The valuation allowances were established by First Banks in connection
with three separate acquisitions that occurred in 1994 and 1995. First Banks
acquired BancTEXAS Group, Inc. in 1994 and CCB Bancorp, Inc. and First
Commercial Bancorp, Inc. in 1995.
The ability to utilize the deferred tax assets recorded in connection
with these acquisitions was subject to a number of limitations. Among these
limitations was the restriction that net operating losses and other attributes
can only be used against income generated by the acquired subsidiaries and,
also, limitations were placed on the amount of net operating losses utilized
during a specified period. The requirement that BancTEXAS Group, Inc. file
separate federal income tax returns placed further limitations on the ability to
utilize the deferred tax assets. The prior operating history of the three
acquired entities did not provide First Banks with adequate assurances to
conclude at the time of the acquisition that it was more likely than not that
the deferred tax assets would be realized.
During the years 1995 through 2000 to the extent that certain of the
deferred tax assets were realized, the valuation allowances were reduced
accordingly.
During 2001, based on management's analysis, it was determined that the
remaining valuation allowances were no longer needed. The reversal of the
valuation allowances that were established in connection with the acquisition of
BancTEXAS Group, Inc. and First Commercial Bancorp, Inc. were credited to
additional paid-in capital as a result of the entities' implementation of
quasi-reorganizations in 1994 and 1996, respectively. The reversal of the
valuation allowance established as a result of the acquisition of CCB Bancorp,
Inc. was credited to the provision for income taxes as there was no positive
goodwill or other intangibles associated with the purchase of CCB Bancorp, Inc.
The valuation allowance for deferred tax assets at December 31, 1999
included $1.3 million that was recognized in 2000 and credited to intangibles
associated with the purchase of subsidiaries. In addition, the valuation
allowance for deferred tax assets at December 31, 2000 included $5.0 million,
which was credited to additional paid-in capital in 2001 under the terms of the
quasi-reorganizations implemented for BancTEXAS Group, Inc. and First Commercial
Bancorp, Inc. as of December 31, 1994 and 1996, respectively.
At December 31, 2003 and 2002, the accumulation of prior years'
earnings representing tax bad debt deductions were approximately $30.8 million.
If these tax bad debt reserves were charged for losses other than bad debt
losses, First Bank would be required to recognize taxable income in the amount
of the charge. It is not contemplated that such tax-restricted retained earnings
will be used in a manner that would create federal income tax liabilities.
At December 31, 2003 and 2002, for federal income taxes purposes, First
Banks had net operating loss carryforwards of approximately $87.7 million and
$110.5 million, respectively. The net operating loss carryforwards for First
Banks expire as follows:
(dollars expressed
in thousands)
Year ending December 31:
2004............................................ $ 856
2005............................................ 8,591
2006............................................ 3,412
2007............................................ 6,930
2008............................................ 30,132
2009 - 2020..................................... 37,798
---------
Total....................................... $ 87,719
=========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted earnings per
share computations for the periods indicated:
Per Share
Income Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Year ended December 31, 2003:
Basic EPS - income available to common stockholders............... $ 62,025 23,661 $2,621.39
Effect of dilutive securities:
Class A convertible preferred stock............................. 769 600 (33.08)
--------- ------- ---------
Diluted EPS - income available to common stockholders............. $ 62,794 24,261 $2,588.31
========= ======= =========
Year ended December 31, 2002:
Basic EPS - income available to common stockholders............... $ 44,381 23,661 $1,875.69
Effect of dilutive securities:
Class A convertible preferred stock............................. 769 696 (22.05)
--------- ------- ---------
Diluted EPS - income available to common stockholders............. $ 45,150 24,357 $1,853.64
========= ======= =========
Year ended December 31, 2001:
Basic EPS - income before cumulative effect....................... $ 65,104 23,661 $2,751.54
Cumulative effect of change in accounting principle, net of tax... (1,376) -- (58.16)
--------- ------- ---------
Basic EPS - income available to common stockholders............... 63,728 23,661 2,693.38
Effect of dilutive securities:
Class A convertible preferred stock............................. 769 893 (66.61)
--------- ------- ---------
Diluted EPS - income available to common stockholders............. $ 64,497 24,554 $2,626.77
========= ======= =========
(15) CREDIT COMMITMENTS
First Banks is a party to commitments to extend credit and commercial
and standby letters in credit in the normal course of business to meet the
financing needs of its customers. These instruments involve, in varying degrees,
elements of credit risk and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The interest rate risk associated
with these credit commitments relates primarily to the commitments to originate
fixed-rate loans. As more fully discussed in Note 5 to the consolidated
financial statements, the interest rate risk of the commitments to originate
fixed-rate loans has been hedged with forward contracts to sell mortgage-backed
securities. The credit risk amounts are equal to the contractual amounts,
assuming the amounts are fully advanced and the collateral or other security is
of no value. First Banks uses the same credit policies in granting commitments
and conditional obligations as it does for on-balance-sheet items. At December
31, 2003, First Banks established a $1.0 million specific reserve for estimated
losses on a $5.3 million letter of credit that was subsequently funded as a loan
in early January 2004.
Commitments to extend credit at December 31, 2003 and 2002 were as
follows:
December 31,
-----------------
2003 2002
---- ----
(dollars expressed in thousands)
Commitments to extend credit.......................................... $ 2,269,311 1,921,896
Commercial and standby letters of credit.............................. 187,789 188,567
----------- ---------
$ 2,457,100 2,110,463
=========== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The standby letters of credit at December 31,
2003 expire within 15 years. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, income-producing commercial properties or
single family residential properties. In the event of nonperformance, First
Banks may obtain and liquidate the collateral to recover amounts paid under its
guarantees on these financial instruments.
Commercial and standby letters of credit are conditional commitments
issued to guarantee the performance of a customer to a third party. The letters
of credit are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. Most letters of credit extend for less than one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Upon issuance of the
commitments, First Banks typically holds marketable securities, certificates of
deposit, inventory, real property or other assets as collateral supporting those
commitments for which collateral is deemed necessary.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is management's estimate of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including the mortgage
banking operation, deferred tax assets, bank premises and equipment and
intangibles associated with the purchase of subsidiaries. Further, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on the fair value estimates and have not been
considered in any of the estimates.
The estimated fair value of First Banks' financial instruments at
December 31, 2003 and 2002 were as follows:
2003 2002
-------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(dollars expressed in thousands)
Financial Assets:
Cash and cash equivalents.......................... $ 213,537 213,537 203,251 203,251
Investment securities:
Available for sale............................... 1,038,787 1,038,787 1,129,244 1,129,244
Held to maturity................................. 10,927 11,341 16,426 16,978
Net loans.......................................... 5,211,624 5,229,213 5,333,149 5,355,838
Derivative instruments............................. 49,291 49,291 97,887 97,887
Bank-owned life insurance.......................... 97,521 97,521 92,616 92,616
Accrued interest receivable........................ 32,797 32,797 35,665 35,665
Interest rate lock commitments..................... (77) (77) 1,258 1,258
Forward contracts to sell
mortgage-backed securities....................... (636) (636) (2,752) (2,752)
========== ========= ========= ==========
Financial Liabilities:
Deposits:
Noninterest-bearing demand....................... $1,034,367 1,034,367 986,674 986,674
Interest-bearing demand.......................... 843,001 843,001 819,429 819,429
Savings ......................................... 2,128,683 2,128,683 2,176,616 2,176,616
Time deposits.................................... 1,955,564 1,988,035 2,190,101 2,239,882
Other borrowings................................... 273,479 273,479 265,644 265,644
Note payable....................................... 17,000 17,000 7,000 7,000
Accrued interest payable........................... 8,799 8,799 11,778 11,778
Subordinated debentures............................ 209,320 225,227 278,389 293,135
========== ========= ========= ==========
Off-Balance-Sheet Financial Instuments............... $ -- -- -- --
========== ========= ========= ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following methods and assumptions were used in estimating the fair
value of financial instruments:
Cash and cash equivalents and accrued interest receivable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Investment securities: The fair value of investment securities
available for sale is the amount reported in the consolidated balance sheets.
The fair value of investment securities held to maturity is based on quoted
market prices where available. If quoted market prices were not available, the
fair value was based on quoted market prices of comparable instruments.
Net loans: The fair value of most loans held for portfolio was
estimated utilizing discounted cash flow calculations that applied interest
rates currently being offered for similar loans to borrowers with similar risk
profiles. The fair value of loans held for sale, which is the amount reported in
the consolidated balance sheets, is based on quoted market prices where
available. If quoted market prices were not available, the fair value was based
on quoted market prices of comparable instruments. The carrying value of loans
is net of the allowance for loan losses and unearned discount.
Derivative instruments and bank-owned life insurance: The fair value of
derivative instruments, including cash flow hedges, fair value hedges, interest
rate cap agreements and interest rate lock commitments, and bank-owned life
insurance is based on quoted market prices where available. If quoted market
prices were not available, the fair value was based on quoted market prices of
comparable instruments.
Forward contracts to sell mortgage-backed securities: The fair value of
forward contracts to sell mortgage-backed securities is based on quoted market
prices. The fair value of these contracts has been reflected in the consolidated
balance sheets in the carrying value of the loans held for sale portfolio.
Deposits: The fair value disclosed for deposits generally payable on
demand (i.e., noninterest-bearing and interest-bearing demand and savings
accounts) is considered equal to their respective carrying amounts as reported
in the consolidated balance sheets. The fair value disclosed for demand deposits
does not include the benefit that results from the low-cost funding provided by
deposit liabilities compared to the cost of borrowing funds in the market. The
fair value disclosed for time deposits was estimated utilizing a discounted cash
flow calculation that applied interest rates currently being offered on similar
deposits to a schedule of aggregated monthly maturities of time deposits.
Other borrowings, note payable and accrued interest payable: The
carrying values reported in the consolidated balance sheets approximate fair
value.
Subordinated debentures: The fair value is based on quoted market
prices.
Off-Balance-Sheet Financial Instruments: The fair value of commitments
to extend credit, standby letters of credit and financial guarantees is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements, the likelihood of the
counterparties drawing on such financial instruments and the credit worthiness
of the counterparties. These fees in aggregate are not considered material, and
as such, were not assigned a value for purposes of this disclosure.
(17) EMPLOYEE BENEFITS
First Banks' 401(k) plan is a self-administered savings and incentive
plan covering substantially all employees. Employer-match contributions are
determined annually under the plan by First Banks' Board of Directors. Employee
contributions are limited to $12,000 of gross compensation for 2003. Total
employer contributions under the plan were $1.7 million for the years ended
December 31, 2003 and 2002, and $1.3 million for the year ended December 31,
2001. The plan assets are held and managed under a trust agreement with First
Bank's trust department.
(18) PREFERRED STOCK
First Banks has two classes of preferred stock outstanding. The Class A
preferred stock is convertible into shares of common stock at a rate based on
the ratio of the par value of the preferred stock to the current market value of
the common stock at the date of conversion, to be determined by independent
appraisal at the time of conversion. Shares of Class A preferred stock may be
redeemed by First Banks at any time at 105.0% of par value. The Class B
preferred stock may not be redeemed or converted. The redemption of any issue of
preferred stock requires the prior approval of the Federal Reserve Board.
The holders of the Class A and Class B preferred stock have full voting
rights. Dividends on the Class A and Class B preferred stock are adjustable
quarterly based on the highest of the Treasury Bill Rate or the Ten Year
Constant Maturity Rate for the two-week period immediately preceding the
beginning of the quarter. This rate shall not be less than 6.0% nor more than
12.0% on the Class A preferred stock, or less than 7.0% nor more than 15.0% on
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Class B preferred stock. The annual dividend rates for the Class A and Class
B preferred stock were 6.0% and 7.0%, respectively, for the years ended December
31, 2003, 2002 and 2001.
(19) TRANSACTIONS WITH RELATED PARTIES
Outside of normal customer relationships, no directors or officers of
First Banks, no shareholders holding over 5% of First Banks' voting securities
and no corporations or firms with which such persons or entities are associated
currently maintain or have maintained, since the beginning of the last full
fiscal year, any significant business or personal relationships with First Banks
or its subsidiaries, other than that which arises by virtue of such position or
ownership interest in First Banks or its subsidiaries, except as described in
the following paragraphs.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and members of his immediate family, provides information
technology and various related services to First Banks, Inc. and its
subsidiaries. Fees paid under agreements with First Services, L.P. were $26.8
million for the years ended December 31, 2003 and 2002, and $23.1 million for
the year ended December 31, 2001. During 2003, 2002 and 2001, First Services,
L.P. paid First Bank $4.2 million, $3.9 million and $2.0 million, respectively,
in rental fees for the use of data processing and other equipment owned by First
Banks.
First Brokerage America, L.L.C., a limited liability company which is
indirectly owned by First Banks' Chairman and members of his immediate family,
received approximately $3.2 million, $3.3 million and $3.0 million for the years
ended December 31, 2003, 2002 and 2001, respectively, in commissions paid by
unaffiliated third-party companies. The commissions received were primarily in
connection with the sales of annuities, securities and other insurance products
to customers of First Bank.
First Title Guaranty LLC (First Title), a limited liability company
established and administered by and for the benefit of First Banks' Chairman and
members of his immediate family, received approximately $492,000, $412,000 and
$316,000 for the years ended December 31, 2003, 2002 and 2001, respectively, in
commissions for policies purchased by First Banks or customers of First Bank
from unaffiliated third-party insurers. The insurance premiums on which the
aforementioned commissions were earned were competitively bid, and First Banks
deems the commissions First Title earned from unaffiliated third-party companies
to be comparable to those that would have been earned by an unaffiliated
third-party agent.
First Bank has in the past, and may have in the future, loan
transactions in the ordinary course of business with its directors or
affiliates. These loan transactions have been on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and did not involve more than the normal
risk of collectibility or present other unfavorable features. Loans to
directors, their affiliates and executive officers of First Banks, Inc. were
approximately $20.0 million and $12.8 million at December 31, 2003 and 2002,
respectively. First 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.
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 First Bank by the employees of First Capital
America, Inc.
During 2001, Tidal Insurance Limited (Tidal), a former corporation
owned indirectly by First Banks' Chairman and members of his immediate family,
received approximately $132,000 in insurance premiums for accident, health and
life insurance policies purchased by loan customers of First Banks. The
insurance policies were issued by an unaffiliated company and subsequently ceded
to Tidal. First Banks believes the premiums paid by the loan customers of First
Bank were comparable to those that such loan customers would have paid if the
premiums were subsequently ceded to an unaffiliated third-party insurer.
On October 27, 2003, First Banks contributed 231,779 shares of
Allegiant Bancorp, Inc., or Allegiant, common stock with a fair value of $5.1
million to The Dierberg Foundation, a charitable trust created by and for the
benefit of First Banks' Chairman and members of his immediate family. In
conjunction with this transaction, First Banks recorded charitable contribution
expense of $5.1 million, which was partially offset by a gain on the
contribution of these available-for-sale investment securities of $2.3 million,
representing the difference between the cost basis and the fair value of the
common stock on the date of the contribution. In addition, First Banks recorded
a tax benefit of $2.5 million associated with this transaction. The contribution
of the common stock eliminated First Banks' investment in Allegiant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business
segments are consistent with the management structure of First Banks, First Bank
and the internal reporting system that monitors performance. First Bank provides
similar products and services in its defined geographic areas through its branch
network. The products and services offered include a broad range of commercial
and personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, First Bank markets combined basic services for
various customer groups, including packaged accounts for more affluent
customers, and sweep accounts, lock-box deposits and cash management products
for commercial customers. First Bank also offers both consumer and commercial
loans. Consumer lending includes residential real estate, home equity and
installment lending. Commercial lending includes commercial, financial and
agricultural loans, real estate construction and development loans, commercial
real estate loans, asset-based loans and trade financing. Other financial
services include mortgage banking, debit cards, brokerage services,
credit-related insurance, internet banking, automated teller machines, telephone
banking, safe deposit boxes and trust, private banking and institutional money
management services. The revenues generated by First Bank consist primarily of
interest income, generated from the loan and investment security portfolios, and
service charges and fees, generated from the deposit products and services. The
geographic areas include eastern Missouri, Illinois, southern and northern
California and Houston, Dallas, Irving, McKinney and Denton, Texas. The products
and services are offered to customers primarily within First Banks' respective
geographic areas.
The business segment results are consistent with First Banks' internal
reporting system and, in all material respects, with generally accepted
accounting principles and practices predominant in the banking industry. Such
principles and practices are summarized in Note 1 to the consolidated financial
statements.
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
-------------------------------- -------------------------- ----------------------------
2003 2002 (2) 2001 (2) 2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................ $1,042,809 1,114,479 613,572 6,905 31,191 25,072 1,049,714 1,145,670 638,644
Loans, net of unearned discount...... 5,328,075 5,432,589 5,409,286 -- (1) (417) 5,328,075 5,432,588 5,408,869
Goodwill............................. 145,548 140,112 115,860 -- -- -- 145,548 140,112 115,860
Total assets......................... 7,097,635 7,357,155 6,765,001 9,305 (5,978) 21,044 7,106,940 7,351,177 6,786,045
Deposits............................. 5,977,042 6,189,928 5,698,072 (15,427) (17,108) (14,168) 5,961,615 6,172,820 5,683,904
Note payable......................... -- -- -- 17,000 7,000 27,500 17,000 7,000 27,500
Subordinated debentures.............. -- -- -- 209,320 278,389 243,457 209,320 278,389 243,457
Stockholders' equity................. 766,397 777,548 720,049 (216,582)(258,507)(271,392) 549,815 519,041 448,657
========== ========= ========= ======== ======== ======== ========= ========= =========
Income statement information:
Interest income...................... $ 390,340 424,358 445,180 813 1,363 205 391,153 425,721 445,385
Interest expense..................... 85,524 132,040 189,957 18,502 25,511 20,289 104,026 157,551 210,246
---------- --------- --------- -------- -------- -------- --------- --------- ---------
Net interest income............. 304,816 292,318 255,223 (17,689) (24,148) (20,084) 287,127 268,170 235,139
Provision for loan losses............ 49,000 55,500 23,510 -- -- -- 49,000 55,500 23,510
---------- --------- --------- -------- -------- -------- --------- --------- ---------
Net interest income
after provision
for loan losses............... 255,816 236,818 231,713 (17,689) (24,148) (20,084) 238,127 212,670 211,629
Noninterest income................... 79,813 69,355 71,578 7,895 (1,844) 17,517 87,708 67,511 89,095
Noninterest expense.................. 216,373 207,576 185,148 10,696 3,236 17,009 227,069 210,812 202,157
---------- --------- --------- -------- -------- -------- --------- --------- ---------
Income before provision for
income taxes, minority
interest in income of
subsidiary and cumulative
effect of change in
accounting principle.......... 119,256 98,597 118,143 (20,490) (29,228) (19,576) 98,766 69,369 98,567
Provision for income taxes........... 44,871 35,332 36,218 (8,916) (12,561) (6,170) 35,955 22,771 30,048
---------- --------- --------- -------- -------- -------- --------- --------- ---------
Income before minority
interest in income
of subsidiary and
cumulative effect of
change in accounting
principle..................... 74,385 63,265 81,925 (11,574) (16,667) (13,406) 62,811 46,598 68,519
Minority interest in
income of subsidiary............ -- -- -- -- 1,431 2,629 -- 1,431 2,629
---------- --------- --------- -------- -------- -------- --------- -------- ---------
Income before cumulative
effect of change in
accounting principle.......... 74,385 63,265 81,925 (11,574) (18,098) (16,035) 62,811 45,167 65,890
Cumulative effect of change
in accounting principle,
net of tax........................ -- -- (1,376) -- -- -- -- -- (1,376)
---------- --------- --------- -------- -------- -------- --------- --------- ---------
Net income...................... $ 74,385 63,265 80,549 (11,574) (18,098) (16,035) 62,811 45,167 64,514
========== ========= ========= ======== ======== ======== ========= ========= =========
- ----------------------------------
(1) Corporate and other includes $11.6 million, $16.1 million and $12.5 million of interest expense on subordinated debentures,
after applicable income tax benefit of $6.3 million, $8.7 million and $6.7 million, for the years ended December 31, 2003,
2002 and 2001, respectively.
(2) First Bank & Trust was merged with and into First Bank on March 31, 2003 as further described in Note 2 to the consolidated
financial statements. Accordingly, the 2002 and 2001 amounts have been restated to reflect this combination of entities
under common control.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) REGULATORY CAPITAL
First Banks and First Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
First Banks and First Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and First Bank to maintain minimum amounts and
ratios of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 2003, First Banks and First Bank were each well
capitalized.
As of December 31, 2003, the most recent notification from First Banks'
primary regulator categorized First Banks and First Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, First Banks and First Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
table below.
At December 31, 2003 and 2002, First Banks' and First Bank's required
and actual capital ratios were as follows:
Actual To be Well
------------------ Capitalized Under
For Capital Prompt Corrective
2003 2002 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.27% 10.68% 8.0% 10.0%
First Bank.............................. 10.41 10.75 8.0 10.0
FB&T (1)................................ -- 10.18 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 8.46 7.47 4.0 6.0
First Bank.............................. 9.15 9.49 4.0 6.0
FB&T (1)................................ -- 8.93 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 7.62 6.45 3.0 5.0
First Bank.............................. 8.22 7.79 3.0 5.0
FB&T (1)................................ -- 8.26 3.0 5.0
- ------------------------------
(1) First Bank & Trust was merged with and into First Bank on March 31, 2003.
(22) DISTRIBUTION OF EARNINGS OF FIRST BANK
First Bank is restricted by various state and federal regulations, as
well as by the terms of the Credit Agreement described in Note 11 to the
consolidated financial statements, as to the amount of dividends that are
available for payment to First Bank, Inc. Under the most restrictive of these
requirements, the future payment of dividends from First Bank is limited to
approximately $16.7 million at December 31, 2003, unless prior permission of the
regulatory authorities and/or the lending banks is obtained.
(23) PARENT COMPANY ONLY FINANCIAL INFORMATION
Following are condensed balance sheets of First Banks, Inc. as of
December 31, 2003 and 2002, and condensed statements of income and cash flows
for the years ended December 31, 2003, 2002 and 2001:
CONDENSED BALANCE SHEETS
December 31,
-----------------
2003 2002
---- ----
(dollars expressed in thousands)
Assets
------
Cash deposited in subsidiary bank........................................... $ 15,917 4,469
Investment securities....................................................... 6,905 31,191
Investment in subsidiaries.................................................. 767,311 778,520
Other assets................................................................ 1,563 7,227
---------- --------
Total assets.......................................................... $ 791,696 821,407
========== ========
Liabilities and Stockholders' Equity
------------------------------------
Note payable................................................................ $ 17,000 7,000
Subordinated debentures..................................................... 209,320 278,389
Accrued expenses and other liabilities...................................... 15,561 16,977
---------- --------
Total liabilities..................................................... 241,881 302,366
Stockholders' equity........................................................ 549,815 519,041
---------- --------
Total liabilities and stockholders' equity............................ $ 791,696 821,407
========== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
2003 2002 2001
---- ---- ----
(dollars expressed in thousands)
Income:
Dividends from subsidiaries........................................ $ 67,000 28,000 53,500
Management fees from subsidiaries.................................. 23,992 21,754 20,443
Gain on sale of securities......................................... 8,218 97 19,134
Other.............................................................. 1,301 3,383 6,008
--------- ------- ------
Total income................................................... 100,511 53,234 99,085
--------- ------- ------
Expense:
Interest........................................................... 18,664 21,855 17,759
Salaries and employee benefits..................................... 19,366 15,726 13,309
Legal, examination and professional fees........................... 3,903 2,824 2,895
Charitable contributions........................................... 5,134 11 16
Other.............................................................. 6,852 7,906 20,323
--------- ------- ------
Total expense.................................................. 53,919 48,322 54,302
--------- ------- ------
Income before income tax benefit and equity
in undistributed earnings of subsidiaries................... 46,592 4,912 44,783
Income tax benefit................................................... (8,891) (10,502) (2,418)
--------- ------- ------
Income before equity in undistributed earnings
of subsidiaries............................................. 55,483 15,414 47,201
Equity in undistributed earnings of subsidiaries..................... 7,328 29,753 17,313
--------- ------- ------
Net income..................................................... $ 62,811 45,167 64,514
========= ======= ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------
2003 2002 2001
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
Net income...................................................... $ 62,811 45,167 64,514
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income of subsidiaries.................................. (74,328) (57,753) (70,730)
Dividends from subsidiaries................................. 67,000 28,000 53,500
Other, net.................................................. 292 3,366 (1,441)
--------- -------- --------
Net cash provided by operating activities................ 55,775 18,780 45,843
--------- -------- --------
Cash flows from investing activities:
Decrease (increase) in investment securities.................... -- 261 (9,382)
Investment in common securities of FBST,
First Preferred IV, FBCT and First Preferred III.............. (2,197) (774) (1,707)
Payments from redemption of investment in common securities
of First Preferred I and FACT................................. 4,090 -- --
Acquisitions of subsidiaries.................................... -- (56,334) (63,767)
Capital reductions (contributions) from (to) subsidiaries....... 10,000 (70) (5,900)
Decrease in advances to subsidiary.............................. -- 34,000 27,000
Other, net...................................................... -- (9) 6,540
--------- -------- --------
Net cash provided by (used in) investing activities...... 11,893 (22,926) (47,216)
--------- -------- --------
Cash flows from financing activities:
Advances drawn on note payable.................................. 34,500 43,500 69,500
Repayments of note payable...................................... (24,500) (64,000) (125,000)
Proceeds from issuance of subordinated debentures............... 70,907 25,007 54,474
Payments for redemption of subordinated debentures.............. (136,341) -- --
Payment of preferred stock dividends............................ (786) (786) (786)
--------- -------- --------
Net cash (used in) provided by financing activities...... (56,220) 3,721 (1,812)
--------- -------- --------
Net increase (decrease) in cash deposited in First Bank.. 11,448 (425) (3,185)
Cash deposited in First Bank, beginning of year................... 4,469 4,894 8,079
--------- -------- --------
Cash deposited in First Bank, end of year......................... $ 15,917 4,469 4,894
========= ======== ========
Noncash investing activities:
Cash paid for interest.......................................... $ 16,489 21,855 21,068
Reduction of deferred tax asset valuation reserve............... -- -- 636
========= ======== ========
(24) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty
contracts. For value received, and for the purpose of inducing a pension fund
and its trustees and a welfare fund and its trustees (the Funds) to conduct
business with Missouri Valley Partners, Inc. (MVP), First Bank's institutional
investment management subsidiary, First Banks irrevocably and unconditionally
guaranteed payment of and promised to pay to each of the Funds any amounts up to
the sum of $5.0 million to the extent MVP is liable to the Funds for a breach of
the Investment Management Agreements (including the Investment Policy Statement
and Investment Guidelines), by and between MVP and the Funds and/or any
violation of the Employee Retirement Income Security Act by MVP resulting in
liability to the Funds. The guaranties are continuing guaranties of all
obligations that may arise for transactions occurring prior to termination of
the Investment Management Agreements and are co-existent with the term of the
Investment Management Agreements. The Investment Management Agreements have no
specified term but may be terminated at any time upon written notice by the
Trustees or, at First Banks' option, upon thirty days written notice to the
Trustees. In the event of termination of the Investment Management Agreements,
such termination shall have no effect on the liability of First Banks with
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 December 31,
2003, First Banks had not recorded a liability for the obligations associated
with these guaranty contracts as the likelihood that First Banks will be
required to make payments under the contracts is remote.
In the ordinary course of business, First Banks and its subsidiaries
become involved in legal proceedings. Management, in consultation with legal
counsel, believes the ultimate resolution of these proceedings will not have a
material adverse effect on the financial condition or results of operations of
First Banks and/or its subsidiaries.
(25) SUBSEQUENT EVENTS
On February 9, 2004, First Banks sold a residential and recreational
development property that had been held as other real estate since January 2003.
Prior to foreclosure, the real estate construction and development loan was on
nonaccrual status due to significant financial difficulties, inadequate project
financing, project delays and weak project management. At December 31, 2003,
this property had a carrying value of $9.2 million, representing approximately
82.5% of First Banks' total other real estate assets. First Banks recorded a
gain, before applicable income taxes, of approximately $2.7 million on the sale
of this property.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Banks, Inc.:
We have audited the accompanying consolidated balance sheets of First Banks,
Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of First Banks, Inc.
and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
/s/ KPMG LLP
-------------
KPMG LLP
St. Louis, Missouri
March 18, 2004
QUARTERLY CONDENSED FINANCIAL DATA -- UNAUDITED
2003 Quarter Ended
-------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands, except per share data)
Interest income.............................................. $ 99,814 98,481 96,164 96,694
Interest expense............................................. 30,651 27,468 23,084 22,823
--------- -------- -------- --------
Net interest income...................................... 69,163 71,013 73,080 73,871
Provision for loan losses.................................... 11,000 10,000 15,000 13,000
--------- -------- -------- --------
Net interest income after provision for loan losses...... 58,163 61,013 58,080 60,871
Noninterest income........................................... 25,547 18,925 20,242 22,994
Noninterest expense.......................................... 53,587 57,545 54,530 61,407
--------- -------- -------- --------
Income before provision for income taxes................. 30,123 22,393 23,792 22,458
Provision for income taxes................................... 11,092 7,693 10,092 7,078
--------- -------- -------- --------
Net income............................................... $ 19,031 14,700 13,700 15,380
========= ======== ======== ========
Earnings per common share:
Basic.................................................... $ 796.04 615.70 570.75 638.90
========= ======== ======== ========
Diluted.................................................. $ 784.29 606.04 565.09 634.38
========= ======== ======== ========
2002 Quarter Ended
-------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands, except per share data)
Interest income.............................................. $ 106,806 107,508 106,017 105,390
Interest expense............................................. 42,684 41,820 37,836 35,211
--------- -------- -------- --------
Net interest income...................................... 64,122 65,688 68,181 70,179
Provision for loan losses.................................... 13,000 12,000 13,700 16,800
--------- -------- -------- --------
Net interest income after provision for loan losses...... 51,122 53,688 54,481 53,379
Noninterest income........................................... 13,442 15,276 20,087 18,706
Noninterest expense.......................................... 51,465 53,967 53,765 51,615
--------- -------- -------- --------
Income before provision for income taxes and
minority interest in income of subsidiary.............. 13,099 14,997 20,803 20,470
Provision for income taxes................................... 4,771 5,328 7,372 5,300
--------- -------- -------- --------
Income before minority interest in income of subsidiary.. 8,328 9,669 13,431 15,170
Minority interest in income of subsidiary.................... 328 301 437 365
--------- -------- -------- --------
Net income............................................... $ 8,000 9,368 12,994 14,805
========= ======== ======== ========
Earnings per common share:
Basic.................................................... $ 329.84 390.35 540.87 614.64
========= ======== ======== ========
Diluted.................................................. $ 328.30 384.48 534.32 609.63
========= ======== ======== ========
INVESTOR INFORMATION
FIRST BANKS, INC. PREFERRED SECURITIES
- --------------------------------------
The preferred securities of First Preferred Capital Trust II and First
Preferred Capital Trust III are traded on the Nasdaq National Market System with
the ticker symbols "FBNKN" and "FBNKM," respectively. The preferred securities
of First Preferred Capital Trust II and First Preferred Capital Trust III are
represented by a global security that has been deposited with and registered in
the name of The Depository Trust Company, New York, New York (DTC). The
beneficial ownership interests of these preferred securities are recorded
through the DTC book-entry system. The high and low preferred securities prices
and the dividends declared for 2003 and 2002 are summarized as follows:
FIRST PREFERRED CAPITAL TRUST II (ISSUE DATE - OCTOBER 2000) - FBNKN
2003 2002
------------------ ----------------- Dividend
High Low High Low Declared
---- --- ---- --- --------
First quarter............................................ $29.00 27.80 28.50 27.55 $ 0.640000
Second quarter........................................... 29.25 27.90 28.40 26.85 0.640000
Third quarter............................................ 28.70 27.40 28.65 27.85 0.640000
Fourth quarter........................................... 28.14 27.25 28.25 27.30 0.640000
----------
$ 2.560000
==========
FIRST PREFERRED CAPITAL TRUST III (ISSUE DATE - NOVEMBER 2001) - FBNKM
2003 2002
------------------ ----------------- Dividend
High Low High Low Declared
---- --- ---- --- --------
First quarter............................................ $27.70 26.55 26.75 25.90 $ 0.562500
Second quarter........................................... 28.50 27.00 27.22 26.25 0.562500
Third quarter............................................ 28.55 26.90 27.00 26.50 0.562500
Fourth quarter........................................... 29.80 27.21 27.05 26.50 0.562500
----------
$ 2.250000
==========
The preferred securities of First Preferred Capital Trust IV are traded
on the New York Stock Exchange with the ticker symbol "FBSPrA." The preferred
securities of First Preferred Capital Trust IV are represented by a global
security that has been deposited with and registered in the name of DTC. The
beneficial ownership interests of these preferred securities are recorded
through the DTC book-entry system. The high and low preferred securities prices
and the dividends declared for 2003 are summarized as follows:
FIRST PREFERRED CAPITAL TRUST IV (ISSUE DATE - APRIL 1, 2003) - FBSPrA
2003
----------------- Dividend
High Low Declared
---- --- --------
Second quarter................................................................ $ 27.80 26.00 $ 0.503715
Third quarter................................................................. 28.20 27.35 0.509375
Fourth quarter................................................................ 28.20 27.23 0.509375
----------
$ 1.522465
==========
INVESTOR INFORMATION (CONTINUED)
FOR INFORMATION CONCERNING FIRST BANKS, PLEASE CONTACT:
Allen H. Blake Terrance M. McCarthy
President, Chief Executive Officer Senior Executive Vice President
and Chief Financial Officer and Chief Operating Officer
600 James S. McDonnell Boulevard 600 James S. McDonnell Boulevard
Mail Code - M1-199-014 Mail Code - M1-199-071
Hazelwood, Missouri 63042 Hazelwood, Missouri 63042
Telephone - (314) 592-5000 Telephone - (314) 592-5000
www.firstbanks.com www.firstbanks.com
TRANSFER AGENTS:
FBNKN and FBNKM FBSPrA
--------------- ------
U. S. Bank Corporate Trust Services Computershare Investor Services, LLC
One Federal Street, Third Floor 2 North LaSalle Street
Boston, Massachusetts 02110 Chicago, Illinois 60602
Telephone - (800) 934-6802 Telephone - (312) 588-4990
www.usbank.com www.computershare.com
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.
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)
Date: March 25, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
Signatures Title Date
- -------------------------------------------------------------------------------------------------------------------
/s/ James F. Dierberg Director March 25, 2004
------------------------------------------
James F. Dierberg
/s/ Allen H. Blake Director March 25, 2004
------------------------------------------
Allen H. Blake
/s/ Terrance M. McCarthy Director March 25, 2004
------------------------------------------
Terrance M. McCarthy
/s/ Michael J. Dierberg Director March 25, 2004
------------------------------------------
Michael J. Dierberg
/s/ Gordon A. Gundaker Director March 25, 2004
------------------------------------------
Gordon A. Gundaker
/s/ David L. Steward Director March 25, 2004
------------------------------------------
David L. Steward
/s/ Hal J. Upbin Director March 25, 2004
------------------------------------------
Hal J. Upbin
/s/ Douglas H. Yaeger Director March 25, 2004
------------------------------------------
Douglas H. Yaeger
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3(i) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993).
3.2 By-Laws of the Company (incorporated herein by reference to Exhibit
3.2 to Amendment No. 2 to the Company's Registration Statement on Form
S-1, File No. 33-50576, dated September 15, 1992).
4.1 Reference is made to Article III of the Company's Restated Articles of
Incorporation (incorporated herein by reference to Exhibit 3.1 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1997).
4.2 The Company agrees to furnish to the Securities and Exchange
Commission upon request pursuant to Item 601(b)(4)(iii) of Regulation
S-K, copies of instruments defining the rights of holders of long term
debt of the Company and its subsidiaries.
4.3 Agreement as to Expenses and Liabilities (relating to First Preferred
Capital Trust ("First Preferred I")) (incorporated herein by reference
to Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
4.4 Agreement as to Expenses and Liabilities dated October 19, 2000
(relating to First Preferred Capital Trust II ("First Preferred II"))
(filed as Exhibit 4.8 to the Company's Registration Statement on Form
S-2, File No. 333-46270, dated September 20, 2000).
4.5 Agreement as to Expenses and Liabilities between First Banks, Inc. and
First Preferred Capital Trust III, dated November 15, 2001 (relating
to First Preferred Capital Trust III ("First Preferred III")) (filed
as Exhibit 4.8 to the Company's Registration Statement on Form S-2,
File No. 333-71652, dated October 15, 2001).
4.6 Agreement as to Expenses and Liabilities between First Banks, Inc. and
First Preferred Capital Trust IV, dated April 1, 2003 (relating to
First Preferred Capital Trust IV ("First Preferred IV")) (incorporated
herein by reference to Exhibit 10.20 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003).
4.7 Preferred Securities Guarantee Agreement (relating to First Preferred
I) (incorporated herein by reference to Exhibit 4(b) to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).
4.8 Preferred Securities Guarantee Agreement by and between First Banks,
Inc. and State Street Bank and Trust Company of Connecticut, National
Association, dated October 19, 2000 (relating to First Preferred II)
(filed as Exhibit 4.7 to the Company's Registration Statement on Form
S-2, File No. 333-46270, dated September 20, 2000).
4.9 Preferred Securities Guarantee Agreement by and between First Banks,
Inc. and State Street Bank and Trust Company of Connecticut, National
Association, dated November 15, 2001 (relating to First Preferred III)
(filed as Exhibit 4.7 to the Company's Registration Statement on Form
S-2, File No. 333-71652, dated October 15, 2001).
4.10 Preferred Securities Guarantee Agreement by and between First Banks,
Inc. and Fifth Third Bank, dated April 1, 2003 (relating to First
Preferred IV) (incorporated herein by reference to Exhibit 10.21 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003).
4.11 Indenture (relating to First Preferred I) (incorporated herein by
reference to Exhibit 4(c) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997).
4.12 Indenture between First Banks, Inc. and State Street Bank and Trust
Company of Connecticut, National Association, as Trustee, dated
October 19, 2000 (relating to First Preferred II) (filed as Exhibit
4.1 to the Company's Registration Statement on Form S-2, File No.
333-46270, dated September 20, 2000).
4.13 Indenture between First Banks, Inc. and State Street Bank and Trust
Company of Connecticut, National Association, as Trustee, dated
November 15, 2001 (relating to First Preferred III) (filed as Exhibit
4.1 to the Company's Registration Statement on Form S-2, File No.
333-71652, dated October 15, 2001).
4.14 Indenture between First Banks, Inc. and Fifth Third Bank, as Trustee,
dated April 1, 2003 (relating to First Preferred IV) (incorporated
herein by reference to Exhibit 10.22 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003).
4.15 Amended and Restated Trust Agreement (relating to First Preferred I)
(incorporated herein by reference to Exhibit 4(d) to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).
4.16 Amended and Restated Trust Agreement among First Banks, Inc., as
Depositor, State Street Bank and Trust Company of Connecticut,
National Association, as Property Trustee, Wilmington Trust Company,
as Delaware Trustee, and the Administrative Trustees, dated October
19, 2000 (relating to First Preferred II) (filed as Exhibit 4.5 to the
Company's Registration Statement on Form S-2, File No. 333-46270,
dated September 20, 2000).
4.17 Amended and Restated Trust Agreement among First Banks, Inc., as
Depositor, State Street Bank and Trust Company of Connecticut,
National Association, as Property Trustee, Wilmington Trust Company,
as Delaware Trustee, and the Administrative Trustees, dated November
15, 2001 (relating to First Preferred III) (filed as Exhibit 4.5 to
the Company's Registration Statement on Form S-2, File No. 333-71652,
dated October 15, 2001).
4.18 Amended and Restated Trust Agreement among First Banks, Inc., as
Depositor, Fifth Third Bank, as Property Trustee, Wilmington Trust
Company, as Delaware Trustee, and the Administrative Trustees, dated
April 1, 2003 (relating to First Preferred IV) (incorporated herein by
reference to Exhibit 10.23 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).
4.19 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust
Company, as Trustee, dated as of April 10, 2002 (incorporated herein
by reference to Exhibit 4.15 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002).
4.20 Guarantee Agreement for First Bank Capital Trust, dated as of April
10, 2002 (incorporated herein by reference to Exhibit 4.16 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
4.21 Amended and Restated Declaration of Trust of First Bank Capital Trust,
dated as of April 10, 2002 (incorporated herein by reference to
Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
4.22 Floating Rate Junior Subordinated Debt Security Certificate of First
Banks, Inc., dated April 10, 2002 (incorporated herein by reference to
Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
4.23 Capital Security Certificate of First Bank Capital Trust, dated as of
April 10, 2002 (incorporated herein by reference to Exhibit 4.19 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002).
4.24 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).
4.25 Amended and Restated Declaration of 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).
4.26 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).
4.27 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).
4.28 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).
4.29 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).
4.30 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).
4.31 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).
10.1 Shareholders' Agreement by and among James F. Dierberg II and Mary W.
Dierberg, Trustees under the Living Trust of James F. Dierberg II,
dated July 24, 1989, Michael James Dierberg and Mary W. Dierberg,
Trustees under the Living Trust of Michael James Dierberg, dated July
24, 1989; Ellen C. Dierberg and Mary W. Dierberg, Trustees under the
Living Trust of Ellen C. Dierberg dated July 17, 1992, and First
Banks, Inc. (incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, File No 33-50576, dated
August 6, 1992).
10.2 Comprehensive Banking System License and Service Agreement dated as of
July 24, 1991, by and between the Company and FiServ CIR, Inc.
(incorporated herein by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1, File No. 33-50576, dated August 6,
1992).
10.3* Employment Agreement by and among the Company, First Bank and Donald
W. Williams, dated March 22, 1993 (incorporated herein by reference to
Exhibit 10(iii)(A) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
10.4 Secured Credit Agreement ($60,000,000 Revolving Loan Facility and
$20,000,000 Letter of Credit Facility), dated as of August 14, 2003,
among First Banks, Inc. and Wells Fargo Bank, National Association, as
Agent, Bank One, LaSalle Bank National Association, The Northern Trust
Company, Union Bank of California, N.A., Fifth Third Bank (Chicago)
and U.S. Bank national Association (incorporated herein by reference
to Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003).
10.5* Service Agreement by and between First Services, L.P. and First Banks,
Inc., dated October 15, 2001 (incorporated herein by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001).
10.6* Service Agreement by and between First Services, L.P. and First Bank,
dated December 30, 2002 (incorporated herein by reference to Exhibit
10.19 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003).
10.7* First Banks, Inc. - Executive Incentive Compensation Plan
(incorporated herein by reference to Exhibit 10.26 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
14 Code of Ethics for Principal Executive Officer and Financial
Professionals - filed herewith.
21.1 Subsidiaries of the Company - filed herewith.
31 Rule 13a-14(a) / 15d -14(a) Certifications - filed herewith.
32 Section 1350 Certifications - filed herewith.
* Exhibits designated by an asterisk in the Index to Exhibits relate to
management contracts and/or compensatory plans or arrangements.
Exhibit 14
================================================================================
FIRST BANKS, INC.
CODE OF ETHICS FOR PRINCIPAL EXECUTIVE OFFICER
AND FINANCIAL PROFESSIONALS
================================================================================
INTRODUCTION
------------
The Board of Directors of First Banks, Inc. ("First Banks" or the "Company") has
adopted this Code of Ethics (the "Code") to govern the professional conduct of
its Principal Executive Officer and Financial Professionals (as such term is
hereinafter defined) for the purposes of promoting:
1. Honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
2. Full, fair, accurate, timely and understandable disclosure in reports
and documents that a registrant files with, or submits to, the
Securities and Exchange Commission (the "SEC") and in other public
communications made by the registrant and that are within the
Principal Executive Officer's responsibility;
3. Compliance with applicable governmental laws, rules and regulations;
4. The prompt internal reporting to an appropriate person or persons
identified in the code of violations of the code; and
5. Accountability for adherence to the code.
This Code applies to the Principal Executive Officer (i.e. the Chief Executive
Officer) of First Banks and all Financial Professionals of the Company and First
Bank, collectively the "Covered Officers." For purposes of this Code, the term
"Financial Professionals" includes the Chief Financial Officer, the Chief
Operating Officer, the Chief Credit Officer, the Chief Investment Officer, the
Senior Vice President and Controller, the Senior Vice President - Director of
Taxes, the Senior Vice President - Director of Management Accounting, and all
professionals serving in a Corporate Finance, Accounting, Treasury, Tax or
Investor Relations role.
First Banks expects its employees to act in accordance with the highest
standards of professional and personal integrity in all aspects of their job
responsibilities and activities; to comply and assure the Company's compliance
with all applicable laws, rules and regulations of the jurisdictions under which
the Company operates; to deter wrongdoing; and to conduct themselves in
accordance with the employment guidelines described in the First Banks Employee
Handbook and other policies and procedures adopted by First Banks that govern
the conduct of its employees. Covered Officers are reminded of their obligations
under the First Banks Employee Handbook. The obligations under this Code are
intended to supplement the First Banks Employee Handbook.
CONFLICTS OF INTEREST
---------------------
Each Covered Officer is required to adhere to the highest standards of business
ethics and should be highly sensitive to situations that may give rise to actual
or apparent conflicts of interest. A "conflict of interest" occurs when a
Covered Officer's private interest interferes with the interests of First Banks,
or the Covered Officer's service to First Banks. A Covered Officer must not
improperly use his or her personal influence or personal relationships to
influence corporate decisions or financial reporting whereby the Covered Officer
would benefit personally to the detriment of the Company. Covered Officers shall
conduct their personal and professional affairs in a manner that avoids both
real and apparent conflicts of interest between their interests and the
interests of First Banks. In addition, each Covered Officer shall provide prompt
and full disclosure to the Director of Human Resources and/or the Director of
Audit, in writing, of any material transaction or relationship that may
reasonably be expected to give rise to a conflict of interest.
EXPECTED STANDARDS OF ETHICAL BEHAVIOR
--------------------------------------
Covered Officers are expected to:
1. Maintain skills appropriate and necessary for the performance of their
job responsibilities for the Company.
2. Engage in and promote honest and ethical conduct, including the
ethical handling of actual or apparent conflicts of interest between
personal and professional relationships.
3. Refrain from engaging in any activity that would compromise their
professional ethics or otherwise prejudice their ability to carry out
their required duties for the Company.
4. Consult with other officers and employees (to the extent appropriate
within his or her area of responsibility) with a goal of promoting
full, fair, accurate, timely and understandable disclosure in reports
and documents that a registrant files with, or submits to, the
Securities and Exchange Commission (the "SEC") and in other public
communications made by the registrant and that are within the
Principal Executive Officer's responsibility.
5. Establish, administer and adhere to appropriate systems and procedures
to ensure that transactions are recorded in First Banks' financial
records in accordance with accounting principles generally accepted in
the United States of America, established Company policy and
appropriate regulatory pronouncements and guidelines.
6. Establish, administer and adhere to financial accounting controls that
are appropriate to ensure the integrity of the financial reporting
process and the availability of timely, relevant information for the
safe, sound and profitable operation of the Company.
7. Completely disclose all relevant information reasonably expected to be
needed by regulatory examiners and internal and external auditors for
the full, complete and successful discharge of their duties and
responsibilities;
8. Comply with all applicable governmental laws, rules and regulations,
as well as the rules and regulations of self-regulatory organizations
of which First Banks or its subsidiaries is a member.
9. Promptly report any violations or possible violations of this Code to
the Director of Human Resources and/or the Director of Audit or any of
the parties of channels listed in the First Banks Employee Handbook.
Failure to do so is in itself a violation of this Code.
10. Strictly adhere to all aspects of this Code.
REPORTING AND ACCOUNTABILITY
----------------------------
Upon adoption of the Code (or thereafter as applicable, upon becoming a Covered
Officer), each Covered Officer shall affirm in writing to the Director of Human
Resources that he or she has received, read and understands the Code by
completing the "Acknowledgement Form" included herein. Thereafter, on an annual
basis beginning on December 31, 2004, each Covered Officer shall affirm that he
or she has complied with the requirements of the Code by completing the "Annual
Certification Form" included herein. The Covered Officers' employment is
contingent upon completion of the Acknowledgement Form and the Annual
Certification Forms.
The Board of Directors hereby designates the Director of Audit as the "Code
Compliance Officer." The Code Compliance Officer (or his/her designee) shall
take all action considered appropriate to investigate any actual or potential
conflicts of interest or violations of the Code reported to him/her. Any matters
the Code Compliance Officer believes is a conflict of interest or violation of
the Code will be reported to the Board of Directors of First Banks, which shall
determine further appropriate action(s). The Director of Audit shall be
responsible for reviewing any requests for waivers from the provisions of this
Code and such requests for waivers will be reported to the Board of Directors of
First Banks, which shall have sole authority to grant or deny any such waivers.
Any violations of this Code, any waivers granted from this Code and any
potential conflicts of interest and their resolution shall be reported to the
Board of Directors of First Banks at the next regularly scheduled meeting. This
provision of the Code and any waivers, including implicit waivers, shall be
appropriately disclosed in accordance with applicable SEC rules and regulations.
AMENDMENTS
----------
The Board of Directors of First Banks must approve and adopt any amendments to
this Code.
ADOPTED: November 1, 2003
ACKNOWLEDGEMENT FORM
I acknowledge that I have received, read and understand the First Banks, Inc.
Code of Ethics for Principal Executive Officer and Financial Professionals (the
"Code"), dated November 1, 2003, and understand my obligations as a Covered
Officer (as such term is defined in the Code) to comply with all aspects of the
Code. I also understand my obligations under the Code supplement my obligations
under the "First Banks Employee Handbook."
Furthermore, I understand:
o that I will be held accountable for my adherence to the Code;
o that my failure to observe the terms of the Code may result in
disciplinary action, up to and including termination of employment;
o that violations of the Code may also constitute violations of law and
may result in civil and criminal penalties for me, my supervisors
and/or First Banks;
o that my agreement to comply with the Code does not constitute a
contract for employment.
o that should I have any questions regarding the appropriate course of
action to take in a particular situation, I should immediately contact
the Director of Human Resources and/or the Director of Audit; and
o I may choose to remain anonymous in reporting any violations or
possible violations of the Code through the use of "First Banks'
Policy for Submission of Concerns Regarding Questionable Accounting or
Auditing Matters," which I have received, read and understand.
---------------------------------------------
Signature of Covered Officer
---------------------------------------------
Printed Name of Covered Officer
---------------------------------------------
Title of Covered Officer
---------------------------------------------
Date
ANNUAL CERTIFICATION FORM
I acknowledge that I have received, read and understand the First Banks, Inc.
Code of Ethics for Principal Executive Officer and Financial Professionals (the
"Code"), dated November 1, 2003, and understand my obligations as a Covered
Officer (as such term is defined in the Code) to comply with all aspects of the
Code. I also understand my obligations under the Code supplement my obligations
under the First Banks Employee Handbook. Furthermore, I understand that my
agreement to comply with the Code does not constitute a contract for employment.
I certify that I have fully complied with all aspects of the Code during the
calendar year ended December 31, 20__.
---------------------------------------------
Signature of Covered Officer
---------------------------------------------
Printed Name of Covered Officer
---------------------------------------------
Title of Covered Officer
---------------------------------------------
Date
EXHIBIT 21.1
FIRST BANKS, INC.
Subsidiaries
The following is a list of our subsidiaries and the jurisdiction of
incorporation or organization.
Jurisdiction of Incorporation
Name of Subsidiary of Organization
------------------ ---------------
The San Francisco Company Delaware
First Bank Missouri
First Land Trustee Corp. Missouri
FB Commercial Finance, Inc. Missouri
Missouri Valley Partners, Inc. Missouri
Bank of San Francisco Realty Investors, Inc. California
Star Lane Holdings Trust Statutory Trust Connecticut
Star Lane Trust New York
EXHIBIT 31
CERTIFICATIONS REQUIRED BY
RULE 13a-(14)(a) (17 CFR 240.13a-14(a))
OR RULE 15d-14(a) (17 CFR 240.15d-14(a))
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Allen H. Blake, certify that:
1. I have reviewed this Annual Report on Form 10-K (the "Report") of First
Banks, Inc. (the "Registrant");
2. Based on my knowledge, this 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
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 Report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 Report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this Report based on such evaluation; and
c) Disclosed in this Report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent year end that has materially affected, or is reasonably
likely to materially affect, the Registrant's internal control over
financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: March 25, 2004
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 32
CERTIFICATIONS REQUIRED BY
RULE 13a-(14)(b) (17 CFR 240.13a-14(b))
OR RULE 15d-14(b) (17 CFR 240.15d-14(b))
AND SECTION 1350 OF CHAPTER 63 OF
TITLE 18 OF THE UNITED STATES CODE (18 U.S.C. 1350)
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 Annual Report on Form 10-K of the Company for the annual period
ended December 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: March 25, 2004
/s/ Allen H. Blake
----------------------------------------------
Allen H. Blake
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
A signed original of this written statement required by Section 906 has been
provided to First Banks, Inc. and will be retained by First Banks, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.