UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
__________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares outstanding
Class at July 31, 2001
----- ----------------
Common Stock, $250.00 par value 23,661
First Banks, Inc.
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - (Unaudited):
Consolidated Balance Sheets......................................................... 1
Consolidated Statements of Income................................................... 3
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income........................................................ 4
Consolidated Statements of Cash Flows............................................... 5
Notes to Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 28
SIGNATURES........................................................................................ 29
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
First Banks, Inc.
Consolidated Balance Sheets - (Unaudited)
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2001 2000
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks....................................................... $ 130,964 167,474
Interest-bearing deposits with other financial institutions
with maturities of three months or less..................................... 3,196 4,005
Federal funds sold............................................................ 133,100 26,800
------------ ---------
Total cash and cash equivalents..................................... 267,260 198,279
------------ ---------
Investment securities:
Available for sale, at fair value............................................. 362,515 539,386
Held to maturity, at amortized cost (fair value of $23,165 and $24,507
at June 30, 2001 and December 31, 2000, respectively)....................... 22,495 24,148
------------ ---------
Total investment securities......................................... 385,010 563,534
------------ ---------
Loans:
Commercial, financial and agricultural........................................ 1,559,990 1,496,284
Real estate construction and development...................................... 813,574 809,682
Real estate mortgage.......................................................... 2,187,572 2,202,857
Consumer and installment...................................................... 119,160 181,602
Loans held for sale........................................................... 189,788 69,105
------------ ---------
Total loans......................................................... 4,870,084 4,759,530
Unearned discount............................................................. (8,141) (7,265)
Allowance for loan losses..................................................... (77,141) (81,592)
------------ ---------
Net loans........................................................... 4,784,802 4,670,673
------------ ---------
Derivative instruments............................................................. 27,417 -
Bank premises and equipment, net of depreciation and amortization.................. 125,820 114,771
Intangibles associated with the purchase of subsidiaries, net of amortization...... 83,574 85,021
Accrued interest receivable........................................................ 42,277 45,226
Deferred income taxes.............................................................. 71,878 75,699
Other assets....................................................................... 116,165 123,488
------------ ---------
Total assets........................................................ $ 5,904,203 5,876,691
============ =========
The accompanying notes are an integral part of the consolidated financial statements.
First Banks, Inc.
Consolidated Balance Sheets (Continued) - (Unaudited)
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2001 2000
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing........................................................ $ 734,398 808,251
Interest-bearing............................................................ 490,019 448,146
Savings....................................................................... 1,491,761 1,447,898
Time:
Time deposits of $100 or more............................................... 520,107 499,956
Other time deposits......................................................... 1,757,834 1,808,164
------------ ---------
Total deposits........................................................... 4,994,119 5,012,415
Short-term borrowings.............................................................. 201,177 140,569
Note payable....................................................................... 34,500 83,000
Accrued interest payable........................................................... 27,170 23,227
Deferred income taxes.............................................................. 26,618 12,774
Accrued expenses and other liabilities............................................. 26,316 54,944
Minority interest in subsidiary.................................................... 15,018 14,067
------------ ---------
Total liabilities........................................................ 5,324,918 5,340,996
------------ ---------
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debentures..................................... 138,570 138,569
First Banks America, Inc. subordinated debentures............................. 44,311 44,280
------------ ---------
Total guaranteed preferred beneficial interests in
subordinated debentures.............................................. 182,881 182,849
------------ ---------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding at June 30, 2001 and December 31, 2000...................... -- --
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
Capital surplus.................................................................... 2,610 2,267
Retained earnings.................................................................. 345,503 325,580
Accumulated other comprehensive income............................................. 29,313 6,021
------------ ---------
Total stockholders' equity............................................... 396,404 352,846
------------ ---------
Total liabilities and stockholders' equity............................... $ 5,904,203 5,876,691
============ =========
First Banks, Inc.
Consolidated Statements of Income - (Unaudited)
(dollars expressed in thousands, except per share data)
Three months ended Six Months Ended
June 30, June 30
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Interest and fees on loans............................................ $105,855 96,148 212,917 185,826
Investment securities................................................. 6,341 7,149 14,821 14,019
Federal funds sold and other.......................................... 1,160 864 1,655 2,033
-------- ------- ------- --------
Total interest income............................................ 113,356 104,161 229,393 201,878
-------- ------- ------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................. 1,807 1,420 3,480 2,885
Savings............................................................. 13,342 12,434 27,525 24,070
Time deposits of $100 or more....................................... 7,453 2,840 15,329 5,855
Other time deposits................................................. 25,954 26,315 53,143 50,222
Short-term borrowings................................................. 1,673 1,406 3,662 2,515
Note payable.......................................................... 543 1,356 1,773 2,511
-------- ------- ------- --------
Total interest expense........................................... 50,772 45,771 104,912 88,058
-------- ------- ------- --------
Net interest income.............................................. 62,584 58,390 124,481 113,820
Provision for loan losses.................................................. 3,720 3,620 7,110 7,202
-------- ------- ------- --------
Net interest income after provision for loan losses.............. 58,864 54,770 117,371 106,618
-------- ------- ------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees......... 5,312 4,872 10,537 9,464
Gain on mortgage loans sold and held for sale......................... 3,864 1,876 7,332 3,268
Gain on sale of credit card portfolio................................. -- -- 2,275 --
Net gain (loss) on sales of available-for-sale securities............. 61 -- (113) 379
Gain on derivative instruments, net................................... 4,989 -- 5,486 --
Other................................................................. 5,198 4,723 10,381 7,924
-------- ------- ------- --------
Total noninterest income......................................... 19,424 11,471 35,898 21,035
-------- ------- ------- --------
Noninterest expense:
Salaries and employee benefits........................................ 23,345 18,346 45,797 35,237
Occupancy, net of rental income....................................... 4,100 3,433 8,216 6,655
Furniture and equipment............................................... 2,406 2,998 5,617 5,673
Postage, printing and supplies........................................ 1,103 1,075 2,258 2,183
Data processing fees.................................................. 6,452 5,474 12,951 10,663
Legal, examination and professional fees.............................. 1,734 1,014 3,424 2,003
Amortization of intangibles associated with the purchase
of subsidiaries.................................................. 1,862 1,202 3,712 2,373
Guaranteed preferred debentures....................................... 4,489 2,998 8,978 6,012
Other................................................................. 18,907 5,377 25,063 8,911
-------- ------- ------- --------
Total noninterest expense........................................ 64,398 41,917 116,016 79,710
-------- ------- ------- --------
Income before provision for income taxes, minority interest
in income of subsidiary and cumulative effect of change
in accounting principle..................................... 13,890 24,324 37,253 47,943
Provision for income taxes................................................. 5,457 9,197 14,581 17,741
-------- ------- ------- --------
Income before minority interest in income of subsidiary
and cumulative effect of change in accounting principle .... 8,433 15,127 22,672 30,202
Minority interest in income of subsidiary.................................. 534 455 1,045 943
-------- ------- ------- --------
Income before cumulative effect of change in
accounting principle........................................ 7,899 14,672 21,627 29,259
Cumulative effect of change in accounting principle, net of tax............ - - 1,376 -
-------- ------- ------- --------
Net income....................................................... 7,899 14,672 20,251 29,259
Preferred stock dividends.................................................. 132 132 328 328
-------- ------- ------- --------
Net income available to common stockholders...................... $ 7,767 14,540 19,923 28,931
======== ======= ======= ========
Earnings per common share:
Basic:
Income before cumulative effect of change in accounting principle... $ 328.27 614.51 900.21 1,222.71
Cumulative effect of change in accounting principle, net of tax..... -- -- (58.16) --
--------- ------- ------- --------
Basic............................................................... $ 328.27 614.51 842.05 1,222.71
========= ======= ======= ========
Diluted:
Income before cumulative effect of change in accounting principle... $ 322.78 594.12 882.65 1,182.47
Cumulative effect of change in accounting principle, net of tax..... - - -- (58.16) --
--------- ------- ------- --------
Diluted............................................................. $ 322.78 594.12 824.49 1,182.47
========= ======= ======= ========
Weighted average common stock outstanding.................................. 23,661 23,661 23,661 23,661
========= ======= ======= ========
The accompanying notes are an integral part of the consolidated financial statements.
First Banks, Inc.
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income - (Unaudited)
Six months ended June 30, 2001 and 2000 and six months ended December 31, 2000
(dollars expressed in thousands, except per share data)
Accu-
Adjustable rate mulated
preferred stock other Total
---------------
Class A Compre- compre- stock-
conver- Common Capital hensive Retained hensive holders'
tible Class B stock surplus income earnings income equity
----- ------- ----- ------- ------- -------- ------ ------
Consolidated balances, December 31, 1999......... $12,822 241 5,915 3,318 270,259 2,350 294,905
Six months ended June 30, 2000:
Comprehensive income:
Net income................................. -- -- -- -- 29,259 29,259 -- 29,259
Other comprehensive income, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (1,467) -- (1,467) (1,467)
------
Comprehensive income....................... 27,792
======
Class A preferred stock dividends,
$0.50 per share.......................... -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share.......................... -- -- -- -- (7) -- (7)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- (329) -- -- (329)
------- --- ----- ----- ------- ------ -------
Consolidated balances, June 30, 2000............. 12,822 241 5,915 2,989 299,190 883 322,040
Six months ended December 31, 2000:
Comprehensive income:
Net income................................. -- -- -- -- 26,848 26,848 -- 26,848
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 5,138 -- 5,138 5,138
------ ----- -----
Comprehensive income....................... 31,986
======
Class A preferred stock dividends,
$0.70 per share.......................... -- -- -- -- (448) -- (448)
Class B preferred stock dividends,
$0.07 per share.......................... -- -- -- -- (10) -- (10)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- (722) -- -- (722)
------- --- ----- ----- ------- ------ -------
Consolidated balances, December 31, 2000......... 12,822 241 5,915 2,267 325,580 6,021 352,846
Six months ended June 30, 2001:
Comprehensive income:
Net income................................. -- -- -- -- 20,251 20,251 -- 20,251
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 9,529 -- 9,529 9,529
Derivative instruments:
Cumulative effect of change in
accounting principle, net........... -- -- -- -- 9,069 -- 9,069 9,069
Current period transactions............ -- -- -- -- 7,621 -- 7,621 7,621
Reclassification to earnings........... -- -- -- -- (2,927) -- (2,927) (2,927)
------
Comprehensive income....................... 43,543
======
Class A preferred stock dividends,
$0.50 per share.......................... -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share.......................... -- -- -- -- (7) -- (7)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- 343 -- -- 343
------- --- ----- ----- ------- ------ -------
Consolidated balances, June 30, 2001............. $12,822 241 5,915 2,610 45,503 29,313 396,404
======= === ===== ===== ======= ====== =======
_________________________
(1) Disclosure of reclassification adjustment:
Three months ended Six months ended Six months ended
June 30, June 30, December 31,
------------------ ---------------- ----------------
2001 2000 2001 2000 2000
---- ---- ---- ---- ----
Unrealized gains (losses) on investment securities
arising during the period..................................... $4,098 (613) 9,456 (1,221) 5,001
Less reclassification adjustment for gains (losses)
included in net income........................................ 40 -- (73) 246 (137)
------ ---- ----- ------ -----
Unrealized gains (losses) on investment securities................ $4,058 (613) 9,529 (1,467) 5,138
====== ==== ===== ====== =====
The accompanying notes are an integral part of the consolidated financial statements.
First Banks, Inc.
Consolidated Statements of Cash Flows - (Unaudited)
(dollars expressed in thousands)
Six months ended
June 30,
-------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income........................................................................... $ 20,251 29,259
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....................... 5,734 4,578
Amortization, net of accretion..................................................... 4,090 3,801
Originations and purchases of loans held for sale.................................. (757,526) (238,508)
Proceeds from the sale of loans held for sale...................................... 587,612 185,316
Provision for loan losses.......................................................... 7,110 7,202
Provision for income taxes......................................................... 14,581 17,741
Payments of income taxes........................................................... (21,288) (5,382)
Decrease (increase) in accrued interest receivable................................. 2,949 (3,295)
Interest accrued on liabilities.................................................... 104,912 88,058
Payments of interest on liabilities................................................ (100,969) (87,088)
Gain on sale of branch facility.................................................... -- (1,355)
Gain on sale of credit card portfolio.............................................. (2,275) --
Net loss (gain) on sales of available-for-sale investment securities............... 113 (379)
Other operating activities, net.................................................... (21,392) (12,080)
Minority interest in income of subsidiary.......................................... 1,045 943
--------- --------
Net cash used in operating activities........................................... (153,677) (11,189)
--------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received........... -- (2,709)
Proceeds from sales of investment securities available for sale...................... 71,023 8,148
Maturities of investment securities available for sale............................... 194,642 191,276
Maturities of investment securities held to maturity................................. 1,887 679
Purchases of investment securities available for sale................................ (57,421) (149,971)
Purchases of investment securities held to maturity.................................. (240) (489)
Net decrease (increase) in loans..................................................... 27,258 (254,431)
Recoveries of loans previously charged-off........................................... 3,775 6,180
Purchases of bank premises and equipment............................................. (20,403) (10,039)
Other investing activities, net...................................................... 6,494 2,183
--------- --------
Net cash provided by (used in) investing activities............................. 227,015 (209,173)
--------- --------
Cash flows from financing activities:
Increase in demand and savings deposits.............................................. 11,883 55,340
(Decrease) increase in time deposits................................................. (27,926) 81,595
Increase in federal funds purchased.................................................. -- 36,100
Increase in Federal Home Loan Bank advances.......................................... 50,000 --
Increase in securities sold under agreements to repurchase........................... 10,608 41,158
Advances drawn on note payable....................................................... 5,000 10,000
Repayments of note payable........................................................... (53,500) (15,500)
Payment of preferred stock dividends................................................. (328) (328)
Other financing activities, net...................................................... (94) 892
--------- --------
Net cash (used in) provided by financing activities............................. (4,357) 209,257
--------- --------
Net increase (decrease) in cash and cash equivalents............................ 68,981 (11,105)
Cash and cash equivalents, beginning of period............................................ 198,279 170,894
--------- --------
Cash and cash equivalents, end of period.................................................. $ 267,260 159,789
========= ========
Noncash investing and financing activities:
Loans transferred to other real estate............................................... $ 1,312 1,081
Reduction of deferred tax asset valuation reserve.................................... 565 1,267
Loans held for sale transferred to available-for-sale investment securities.......... 15,139 7,186
Loans held for sale transferred to loans............................................. 28,351 46,153
========= ========
The accompanying notes are an integral part of the consolidated financial statements.
First Banks, Inc.
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The consolidated financial statements of First Banks, Inc. and
subsidiaries (First Banks) are unaudited and should be read in conjunction with
the consolidated financial statements contained in the 2000 Annual Report on
Form 10-K. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and conform to predominant practices within the banking industry.
Management of First Banks has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America. In the opinion of management, all adjustments,
consisting of normal recurring accruals considered necessary for a fair
presentation of the results of operations for the interim periods presented
herein, have been included. Operating results for the three and six months ended
June 30, 2001 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2001.
The consolidated financial statements include the accounts of First
Banks, Inc. and its subsidiaries, net of minority interest, as more fully
described below. All significant intercompany accounts and transactions have
been eliminated. Certain reclassifications of 2000 amounts have been made to
conform to the 2001 presentation.
First Banks operates through its subsidiary bank holding companies and
subsidiary financial institutions (collectively referred to as the Subsidiary
Banks) and through its non-banking subsidiary, First Capital Group, Inc., as
follows:
First Bank, headquartered in St. Louis County, Missouri;
First Capital Group, Inc., headquartered in Albuquerque,
New Mexico (FCG);
First Banks America, Inc., headquartered in St. Louis County, Missouri
(FBA), and its wholly owned subsidiary:
The San Francisco Company, headquartered in San Francisco, California
(SFC), and its wholly-owned subsidiary:
First Bank & Trust, headquartered in San Francisco, California
(FB&T).
The Subsidiary Banks and FCG are wholly owned by their respective
parent companies except FBA, which was 93.16% and 92.86% owned by First Banks at
June 30, 2001 and December 31, 2000, respectively.
(2) Acquisitions
On May 23, 2001, FBA and Charter Pacific Bank (Charter Pacific)
executed a definitive agreement providing for the acquisition of Charter Pacific
by FBA. Under the terms of the agreement, the shareholders of Charter Pacific
will receive $3.80 per share in cash, or a total of approximately $21.4 million,
subject to a $0.20 per share escrow relating to certain potential litigation
costs. Charter Pacific is headquartered in Agoura Hills, California, and has one
other branch office in Beverly Hills, California. At June 30, 2001, Charter
Pacific had $107.6 million in total assets, $71.4 million in loans, net of
unearned discount, $10.7 million in investment securities and $94.0 million in
deposits. FBA expects this transaction, which is subject to regulatory approvals
and the approval of Charter Pacific's shareholders, will be completed during the
third quarter of 2001.
On June 22, 2001, FBA and BYL Bancorp (BYL) executed a definitive
agreement providing for the acquisition of BYL and its wholly owned banking
subsidiary, BYL Bank Group, by FBA. Under the terms of the agreement, the
shareholders of BYL will receive $18.50 per share in cash, or a total of
approximately $52.0 million. BYL Bank is headquartered in Orange, California,
and has six branches located in Orange and Riverside counties. At June 30, 2001,
BYL had $278.2 million in total assets, $151.2 million in loans, net of unearned
discount, $12.3 million in investment securities and $246.1 million in deposits.
FBA expects this transaction, which is subject to regulatory approvals and the
approval of BYL's shareholders, will be completed during the fourth quarter of
2001.
On July 20, 2001, First Banks and Union Financial Group, Ltd. (UFG)
executed a definitive agreement providing for the acquisition of UFG by First
Banks for a total purchase price of approximately $26.8 million. Under the terms
of the agreement, the common shareholders of UFG will receive $11.00 per share
in cash, or a total of $18.0 million, subject to a $1.60 per common share escrow
to cover certain contingent liabilities. The shareholders of Series C preferred
stock may convert their shares to common stock at closing and receive the common
equivalent transaction value, or they will receive the stated value of $1,000
per share, plus, in either case, cumulative dividends. The shareholders of
Series D preferred stock will receive the stated value of $100,000 per share.
UFG is headquartered in Swansea, Illinois, and operates nine banking offices
located in St. Clair, Madison, Jersey and Macoupin counties. At June 30, 2001,
UFG had $361.0 million in total assets, $270.0 million in loans, net of unearned
discount, $62.3 million in investment securities and $300.8 million in deposits.
First Banks expects this transaction, which is subject to regulatory approvals
and the approval of UFG's shareholders, will be completed during the fourth
quarter of 2001.
On August 2, 2001, First Banks and Plains Financial Corporation (PFC)
executed a definitive agreement providing for the acquisition of PFC by First
Banks. PFC is headquartered in Des Plaines, Illinois, and has a total of three
banking offices in Des Plaines, and one banking office in Elk Grove, Illinois.
At June 30, 2001, PFC had $255.4 million in total assets, $149.7 million in
loans, net of unearned discount, $72.7 million in investment securities and
$220.3 million in deposits. Under the terms of the agreement, the shareholders
of PFC will receive cash in exchange for their shares. The total merger
consideration is approximately $36.5 million. First Banks expects this
transaction, which is subject to regulatory approvals and the approval of PFC's
shareholders, will be completed during the first quarter of 2002.
(3) Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 - Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). In June 1999 and June
2000, the FASB issued SFAS No. 137 - Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,
an Amendment of FASB Statement No. 133, and SFAS No. 138 - Accounting for
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133, respectively. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133,
as amended, requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge in one of three categories. The accounting for changes in
the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. Under SFAS 133, as
amended, an entity that elects to apply hedge accounting is required to
establish, at the inception of the hedge, the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.
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 exposure. The following is a summary of First Banks' accounting
policies for derivative instruments and hedging activities under SFAS 133, as
amended.
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 earnings on each monthly measurement date. The swap
agreements are accounted for on an accrual basis with the net interest
differential being recognized as an adjustment to interest income or interest
expense of the related asset or liability.
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 on 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 swap agreements are accounted
for on an accrual basis with the net interest differential being recognized as
an adjustment to interest income or interest expense of the related asset or
liability.
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 earnings on each
monthly measurement date.
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 contracts
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.
On January 1, 2001, First Banks implemented SFAS 133, as amended. The
implementation of SFAS 133, as amended, resulted in an increase in derivative
instruments of $12.5 million, an increase in deferred tax liabilities of $5.1
million and an increase in other comprehensive income of $9.1 million. In
addition, First Banks recorded a cumulative effect of change in accounting
principle of $1.4 million, net of taxes of $741,000, as a reduction of net
income.
(4) Earnings Per Common Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share (EPS) computations for the periods
indicated:
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- --------
(dollars in thousands, except per share data)
Three months ended June 30, 2001:
Basic EPS - income before cumulative effect..................... $ 7,767 23,661 $ 328.27
Cumulative effect of change in accounting principle, net of tax. - - -
--------- ------ ---------
Basic EPS - income available to common stockholders............. 7,767 23,661 328.27
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 800 (5.49)
--------- ------ ---------
Diluted EPS - income available to common stockholders........... $ 7,895 24,461 $ 322.78
========= ====== =========
Three months ended June 30, 2000:
Basic EPS - income available to common stockholders............. $ 14,540 23,661 $ 614.51
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 1,028 (20.39)
--------- ------ ---------
Diluted EPS - income available to common stockholders........... $ 14,668 24,689 $ 594.12
========= ====== =========
Six months ended June 30, 2001:
Basic EPS - income before cumulative effect..................... $ 21,299 23,661 $ 900.21
Cumulative effect of change in accounting principle, net of tax. 1,376 - (58.16)
--------- ------ ------
Basic EPS - income available to common stockholders............. 19,923 23,661 842.05
========= ====== =========
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 893 (17.56)
--------- ------ ---------
Diluted EPS - income available to common stockholders........... $ 20,244 24,554 $ 824.49
========= ====== =========
Six months ended June 30, 2000:
Basic EPS - income available to common stockholders............. $ 28,931 23,661 $1,222.71
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 1,076 (40.24)
--------- ------ ---------
Diluted EPS - income available to common stockholders........... $ 29,252 24,737 $1,182.47
========= ====== =========
(5) Transactions with Related Parties
First Brokerage America, L.L.C., a limited liability company which is
indirectly owned by First Bank' Chairman and members of his immediate family,
received approximately $676,000 and $1.4 million for the three and six months
ended June 30, 2001, and $565,000 and $1.1 million for the comparable periods in
2000, respectively, in commissions paid by unaffiliated third-party companies.
The commissions received were primarily in connection with sales of annuities,
securities and other insurance products to customers of the Subsidiary Banks.
First Services, L.P., a limited partnership indirectly owned by First
Bank' Chairman and his adult children, provides data processing services and
operational support for First Banks, Inc. and the Subsidiary Banks. Fees paid
under agreements with First Services, L.P. were $5.6 million and $10.9 million
for the three and six months ended June 30, 2001, and $4.7 million and $9.2
million for the comparable periods in 2000, respectively. During the three
months ended June 30, 2001 and 2000, First Services, L.P. paid First Banks
$498,000 and $435,000, respectively, and during the six months ended June 30,
2001 and 2000, First Services, L.P. paid First Banks $984,000 and $889,000,
respectively, in rental fees for the use of data processing and other equipment
owned by First Banks.
(6) Regulatory Capital
First Banks and the Subsidiary Banks 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 Bank' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, First Banks and the Subsidiary Banks 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 the Subsidiary Banks to maintain minimum
amounts and ratios of total and Tier I capital (as defined in the regulations)
to risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of June 30, 2001, First Banks and the Subsidiary Banks were each
well capitalized under the applicable regulations.
As of June 30, 2001, the most recent notification from First Banks'
primary regulator categorized First Banks and the Subsidiary Banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, First Banks and the Subsidiary Banks must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table below.
At June 30, 2001 and December 31, 2000, First Banks' and the Subsidiary
Banks' required and actual capital ratios were as follows:
To be well
Actual capitalized under
------------------------
June 30, December 31, For capital prompt corrective
2001 2000 adequacy purposes action provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.60% 10.21% 8.0% 10.0%
First Bank.............................. 10.45 10.71 8.0 10.0
FB&T.................................... 10.70 10.58 8.0 10.0
BSF (1)................................. -- 22.38 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 8.01 7.56 4.0 6.0
First Bank.............................. 9.20 9.46 4.0 6.0
FB&T.................................... 9.45 9.32 4.0 6.0
BSF (1)................................. -- 21.42 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 7.33 7.45 3.0 5.0
First Bank.............................. 8.10 8.49 3.0 5.0
FB&T.................................... 8.73 9.27 3.0 5.0
BSF (1)................................. -- 22.00 3.0 5.0
____________________
(1) BSF was acquired by FBA on December 31, 2000. FB&T merged with BSF on March 29, 2001, and BSF was renamed First Bank & Trust.
(7) Business Segment Results
First Banks' business segments are its Subsidiary Banks. The reportable
business segments are consistent with the management structure of First Banks,
the Subsidiary Banks and the internal reporting system that monitors
performance.
Through the respective branch networks, the Subsidiary Banks provide
similar products and services in their defined geographic areas. The products
and services offered include a broad range of commercial and personal deposit
products, including demand, savings, money market and time deposit accounts. In
addition, the Subsidiary Banks 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. The Subsidiary Banks also offer both consumer and commercial loans.
Consumer lending includes residential real estate, home equity and installment
lending. Commercial lending includes commercial, financial and agricultural
loans, real estate construction and development loans, commercial real estate
loans, asset-based loans, commercial leasing and trade financing.
Other financial services include mortgage banking, debit cards,
brokerage services, credit-related insurance, automated teller machines,
telephone banking, bankruptcy, escrow and stock option services, safe deposit
boxes and trust, private banking and institutional money management services.
The revenues generated by each business segment consist primarily of interest
income, generated from the loan and investment security portfolios, and service
charges and fees, generated from the deposit products and services. The
geographic areas include Missouri, Illinois, southern and northern California
and Houston, Dallas, Irving and McKinney, Texas. The products and services are
offered to customers primarily within their respective geographic areas, with
the exception of loan participations executed between the Subsidiary Banks.
The business segment results are consistent with First Bank' internal
reporting system and, in all material respects, with accounting principles
generally accepted in the United States of America and practices predominant in
the banking industry.
The business segment results are summarized as follows:
First Bank First Bank & Trust (1)
-------------------------- -----------------------
June 30, December 31, June 30, December 31,
2001 2000 2001 2000
---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities........................................... $154,789 214,005 203,610 330,478
Loans, net of unearned discount................................. 2,809,064 2,694,005 2,053,295 2,058,628
Total assets.................................................... 3,244,560 3,152,885 2,628,378 2,733,545
Deposits........................................................ 2,784,522 2,729,489 2,224,079 2,306,469
Stockholder' equity............................................ 281,750 273,848 316,646 333,186
========= ========= ========= =========
First Bank First Bank & Trust (1)
------------------ ----------------------
Three months ended Three months ended
June 30, June 30,
------------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Income statement information:
Interest income................................................. $ 61,391 61,869 52,339 42,661
Interest expense................................................ 30,121 28,268 20,712 16,943
-------- ------ ------ ------
Net interest income........................................ 31,270 33,601 31,627 25,718
Provision for loan losses....................................... 2,900 3,150 820 470
-------- ------ ------ ------
Net interest income after provision for loan losses........ 28,370 30,451 30,807 25,248
-------- ------ ------ ------
Noninterest income.............................................. 13,373 8,971 6,343 2,797
Noninterest expense............................................. 24,561 22,120 22,171 16,436
-------- ------ ------ ------
Income (loss) before provision (benefit) for income
taxes and minority interest in income of subsidiary...... 17,182 17,302 14,979 11,609
Provision (benefit) for income taxes............................ 6,000 6,097 5,772 4,631
-------- ------ ------ ------
Income (loss) before minority interest in income of
subsidiary............................................... 11,182 11,205 9,207 6,978
Minority interest in income of subsidiary....................... -- -- -- --
-------- ------ ------ ------
Net income.............................................. 11,182 11,205 9,207 6,978
======== ====== ====== ======
First Bank First Bank & Trust (1)
-------------------------- ----------------------
Six months ended Six months ended
June 30, June 30,
------------------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
Income statement information:
Interest income.................................................. $122,986 120,627 107,078 81,468
Interest expense................................................. 61,297 54,520 43,052 32,041
-------- ------- ------- ------
Net interest income......................................... 61,689 66,107 64,026 49,427
Provision for loan losses........................................ 6,200 5,750 910 1,452
-------- ------- ------- ------
Net interest income after provision for loan losses......... 55,489 60,357 63,116 47,975
Noninterest income............................................... 25,805 15,965 10,853 5,843
-------- ------- ------- ------
Noninterest expense.............................................. 48,867 41,926 42,963 31,118
Income (loss) before provision (benefit) for income taxes,
minority interest in income of subsidiary and cumulative
of change in accounting principle......................... 32,427 34,396 31,006 22,700
Provision (benefit) for income taxes............................. 11,327 11,930 12,056 9,027
-------- ------- ------- ------
Income (loss) before minority interest in income of
subsidiary and cumulative effect of change in
accounting principle...................................... 21,100 22,466 18,950 13,673
Minority interest in income of subsidiary........................ -- -- -- --
-------- ------- ------- ------
Income before cumulative effect of change in
accounting principle...................................... 21,100 22,466 18,950 13,673
Cumulative effect of change in accounting principle, net of tax.. 917 -- 459 --
-------- ------- ------- ------
Net income.................................................. 20,183 22,466 18,491 13,673
======== ======= ======= ======
___________________________
(1) Includes BSF, which was acquired by FBA on December 31, 2000. FB&T merged with BSF on March 29, 2001, and BSF was renamed
First Bank & Trust.
(2) Corporate and other includes $2.9 million and $5.8 million of guaranteed preferred debenture expense, after applicable
income tax benefit of $1.6 million and $3.2 million for the three and six months ended June 30, 2001, and $2.0 million and
$3.9 million of guaranteed preferred debenture expense, after applicable income tax benefit of $1.0 million and $2.1
million, for the comparable periods in 2000, respectively. In addition, corporate and other includes FCG and holding company
expenses.
Corporate, other and
intercompany reclassifications (2) Consolidated totals
---------------------------------- -------------------
June 30, December 31, June 30, December 31,
2001 2000 2001 2000
---- ---- ---- ----
(dollars expressed in thousands)
26,611 19,051 385,010 563,534
(416) (368) 4,861,943 4,752,265
31,265 (9,739) 5,904,203 5,876,691
(14,482) (23,543) 4,994,119 5,012,415
(201,992) (254,188) 396,404 352,846
======== ======== ========= =========
Corporate, other and
intercompany reclassifications (2) Consolidated totals
---------------------------------- -------------------------------
Three months ended Three months ended
June 30, June 30,
---------------------------------- -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(374) (369) 113,356 104,161
(61) 560 50,772 45,771
------- ------ ------- -------
(313) (929) 62,584 58,390
- - 3,720 3,620
(313) (929) 58,864 54,770
------- ------ ------- -------
(292) (297) 19,424 11,471
17,666 3,361 64,398 41,917
------- ------ ------- -------
(18,271) (4,587) 13,890 24,324
(6,315) (1,531) 5,457 9,197
------- ------ ------- -------
(11,956) (3,056) 8,433 15,127
534 455 534 455
------- ------ ------- -------
(12,490) (3,511) 7,899 14,672
======= ====== ======= =======
Corporate, other and
intercompany reclassifications (2) Consolidated totals
---------------------------------- -------------------
Six months ended Six months ended
June 30, June 30,
---------------------------------- -----------------------------
2001 2000 2001 2000
---- ---- ---- ----
(671) (217) 229,393 201,878
563 1,497 104,912 88,058
------- ------ ------- -------
(1,234) (1,714) 124,481 113,820
-- -- 7,110 7,202
------- ------ ------- -------
(1,234) (1,714) 117,371 106,618
------ ------ ------- -------
(760) (773) 35,898 21,035
24,186 6,666 116,016 79,710
------- ------ ------- -------
(26,180) (9,153) 37,253 47,943
(8,802) (3,216) 14,581 17,741
------- ------ ------- -------
(17,378) (5,937) 22,672 30,202
1,045 943 1,045 943
------- ------ ------- -------
(18,423) (6,880) 21,627 29,259
-- -- 1,376 --
------- ------ ------- -------
(18,423) (6,880) 20,251 29,259
======= ====== ======= =======
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to fluctuations in interest
rates and in the economy; 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;
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
potential for higher than anticipated operating costs arising from the
geographic dispersion of our offices, as compared with competitors operating
solely in contiguous markets; the competition of larger acquirers with greater
resources than us, fluctuations in the prices at which acquisition targets may
be available for sale and in the market for our securities; and the potential
for difficulty or unanticipated costs in realizing the benefits of particular
acquisition transactions. Readers of our Form 10-Q should therefore not place
undue reliance on forward-looking statements.
General
We are a registered bank holding company incorporated in Missouri and
headquartered in St. Louis County, Missouri. Through the operation of our
subsidiaries, we offer a broad array of financial services to consumer and
commercial customers. We currently operate banking subsidiaries with 135 branch
offices throughout California, Illinois, Missouri and Texas. At June 30, 2001,
we had total assets of $5.90 billion, loans, net of unearned discount, of $4.86
billion, total deposits of $4.99 billion and total stockholder' equity of
$396.4 million.
We operate through two subsidiary banks, two subsidiary bank holding
companies, and through our subsidiary leasing company, as follows:
First Bank, headquartered in St. Louis County, Missouri;
First Capital Group, Inc., or FCG, headquartered in Albuquerque,
New Mexico;
First Banks America, Inc., or FBA, headquartered in St. Louis County,
Missouri, and its wholly owned subsidiary:
The San Francisco Company, or SFC, headquartered in San Francisco,
California, and its wholly owned subsidiary:
First Bank & Trust, or FB&T, headquartered in San Francisco,
California.
Our subsidiary banks and FCG are wholly owned by their respective
parent companies. We owned 93.16% and 92.86% of FBA at June 30, 2001 and
December 31, 2000, respectively.
Through our subsidiary banks, we offer a broad range of commercial and
personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, we market combined basic services for various
customer groups, including packaged accounts for more affluent customers, and
sweep accounts, lock-box deposits and cash management products for commercial
customers. We also offer both consumer and commercial loans. Consumer lending
includes residential real estate, home equity and installment lending.
Commercial lending includes commercial, financial and agricultural loans, real
estate construction and development loans, commercial real estate loans,
asset-based loans, commercial leasing and trade financing. Other financial
services offered include mortgage banking, debit cards, brokerage services,
credit-related insurance, automated teller machines, telephone banking, safe
deposit boxes, escrow and bankruptcy deposit services, stock option services,
and trust, private banking and institutional money management services.
Primary responsibility for managing our subsidiary banking units rests
with the officers and directors of each unit. However, we centralize overall
corporate policies, procedures and administrative functions and provide
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our subsidiary banking
units to focus on customer service.
Financial Condition
Our total assets were $5.90 billion and $5.88 billion at June 30, 2001
and December 31, 2000, respectively. The increase in total assets is primarily
attributable to internal loan growth, bank premises and equipment, net of
depreciation and amortization, and derivative instruments partially offset by an
anticipated level of attrition associated with our acquisitions of Commercial
Bank of San Francisco, Millennium Bank and Bank of San Francisco, which were
completed during the fourth quarter of 2000. Loans, net of unearned discount,
increased by $109.7 million, which is further discussed under "-Loans and
Allowance for Loan Losses." Offsetting the overall increase in total assets was
a decrease in investment securities of $178.5 million to $385.0 million at June
30, 2001 from $563.5 million at December 31, 2000. We attribute the decrease in
investment securities primarily to the liquidation of certain investment
securities held by FBA and a higher than normal level of investment security
calls experienced during the six months ended June 30, 2001. The funds generated
from the reduction of investment securities were utilized to fund loan growth,
with the remaining funds being temporarily invested in cash and cash
equivalents, resulting in an increase of $106.3 million in federal funds sold to
$133.1 million at June 30, 2001 from $26.8 million at December 31, 2000. The
increase in assets is also due to derivative instruments of $27.4 million at
June 30, 2001, resulting solely from the implementation of Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137 - Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, an Amendment of FASB Statement No. 133, and SFAS No.
138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment
of FASB Statement No. 133. In addition, bank premises and equipment, net of
depreciation and amortization, increased $11.0 million to $125.8 million at June
30, 2001 from $114.8 million at December 31, 2000. We primarily attribute this
increase to our recent acquisitions as well as the purchase and remodeling of a
new operations center and corporate administrative building. Total deposits
decreased by $20.0 million to $4.99 billion at June 30, 2001 from $5.01 billion
at December 31, 2000, which reflects an anticipated level of attrition
associated with our acquisitions in the fourth quarter of 2000. Short-term
borrowings increased by $60.6 million to $201.2 million at June 30, 2001 from
$140.6 million at December 31, 2000. This increase reflects a slight increase in
securities sold under agreements to repurchase and a $50.0 million Federal Home
Loan Bank advance drawn as an additional source of funds principally for the
substantial increase in loans held for sale as the general reductions in
interest rates led to substantial refinancing of single family mortgage loans.
Our note payable decreased by $48.5 million to $34.5 million at June 30, 2001
from $83.0 million at December 31, 2000. The reduction of our note payable was
funded with dividends from our subsidiaries and a capital reduction of $23.0
million that was recorded in conjunction with the merger of our former
subsidiary, First Bank & Trust, with Bank of San Francisco, effective March 29,
2001. In conjunction with this merger, Bank of San Francisco was renamed First
Bank & Trust. In addition, accrued expenses and other liabilities decreased by
$28.6 million to $26.3 million at June 30, 2001 from $54.9 million at December
31, 2000. We attribute the majority of this decrease to our quarterly tax
payments and the timing of certain other routine payments.
Results of Operations
Net Income
Net income was $7.9 million, or $322.78 per common share on a diluted
basis, for the three months ended June 30, 2001, in comparison to $14.7 million,
or $594.12 per common share on a diluted basis, for the comparable period in
2000. For the six months ended June 30, 2001, net income was $20.3 million, or
$824.49 per common share on a diluted basis, in comparison to $29.3 million, or
$1,182.47 per common share on a diluted basis, for 2000. The implementation of
SFAS No. 133, as amended, 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 was $21.6 million, or
$882.65 per common share on a diluted basis, for the six months ended June 30,
2001. The primary factors that led to the decline in earnings for the three and
six months ended June 30, 2001 were continued reductions in the prime lending
rate and higher operating expenses, including nonrecurring charges associated
with the establishment of a specific reserve relating to a contingent liability
and the settlement of certain litigation. Net interest income improved primarily
as a result of increased earning assets generated through internal loan growth
along with our acquisitions of Lippo Bank, certain assets of First Capital
Group, Inc., Bank of Ventura, Commercial Bank of San Francisco, Millennium Bank
and Bank of San Francisco, completed during 2000. However, the improvement in
net interest income was partially offset by six reductions in the prime lending
rate during the first and second quarters of 2001. During the three and six
months ended June 30, 2001, noninterest income improved to $19.4 million and
$35.9 million, from $11.5 million and $21.0 million for the comparable periods
in 2000, respectively, as further discussed under "-Noninterest Income."
The improvement in net interest income and noninterest income was
offset by increased operating expenses of $64.4 million and $116.0 million for
the three and six months ended June 30, 2001, compared to $41.9 million and
$79.7 million for the comparable periods in 2000, respectively. The increased
operating expenses are primarily attributable to:
>> the operating expenses of the aforementioned acquisitions subsequent to
their respective acquisition dates;
>> increased salaries and employee benefit expenses;
>> increased data processing fees;
>> increased legal, examination and professional fees;
>> increased amortization of intangibles associated with the purchase of
the aforementioned entities;
>> a nonrecurring litigation settlement charge; and
>> a charge to other expense associated with the establishment of a
specific reserve on an unfunded letter of credit.
Additionally, guaranteed preferred debentures expense of $1.5 million
on the trust preferred securities issued by First Preferred Capital Trust II in
October 2000 further contributed to the overall increase in operating expenses.
These higher operating expenses, exclusive of the litigation settlement and the
specific reserve on the unfunded letter of credit, are reflective of significant
investments that we have made in personnel, technology, capital expenditures and
new business lines in conjunction with our overall strategic growth plan. The
payback on these investments is expected to occur over a longer period of time
through higher and more diversified revenue streams.
Net Interest Income
Net interest income (expressed on a tax equivalent basis) improved to
$62.8 million, or 4.70% of interest-earning assets, for the three months ended
June 30, 2001, from $58.6 million, or 4.94% of interest-earning assets, for the
comparable period in 2000. For the six months ended June 30, 2001 and 2000, net
interest income (expressed on a tax equivalent basis) was $124.9 million, or
4.73% of interest earning assets, and $114.2 million, or 4.90% of interest
earning assets, respectively. We credit the improved net interest income for the
three and six months ended June 30, 2001 primarily to the net interest-earning
assets provided by our aforementioned acquisitions completed during 2000,
internal loan growth, and earnings on our interest rate swap agreements that we
entered into in conjunction with our risk management program. The overall
increase in net interest income was partially offset by reductions in the prime
lending rate that occurred during the first and second quarters of 2001.
Average loans, net of unearned discount, were $4.88 billion and $4.84
billion for the three and six months ended June 30, 2001, in comparison to $4.27
billion and $4.18 billion for the comparable periods in 2000, respectively. The
yield on our loan portfolio decreased to 8.70% and 8.88% for the three and six
months ended June 30, 2001, respectively, in comparison to 9.05% and 8.95% for
the comparable periods in 2000. The increase in the cost of deposits while there
was a decrease in the yield on loans was the major contributor to the decline in
our net interest rate margin for the three and six months ended June 30, 2001,
of 24 basis points and 17 basis points, respectively, from the comparable
periods in 2000. We attribute the decline in yields and our net interest rate
margin primarily to the continued decreases in the prime lending rate. During
the period from December 31, 2000 through June 30, 2001, the Board of Governors
of the Federal Reserve System decreased the targeted Federal funds rate six
times, resulting in six decreases in the prime rate of interest from 9.50% to
6.75%. 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 further discussed under "-Interest Rate Risk Management," the
reduced level of interest income earned on our loan portfolio as a result of
declining interest rates was partially mitigated by the earnings associated with
our interest rate swap agreements. For the three and six months ended June 30,
2001, these agreements provided income of $4.7 million and $5.7 million,
respectively, in comparison to expense of $1.0 million and $1.7 million incurred
for the comparable periods in 2000.
For the three and six months ended June 30, 2001, the aggregate
weighted average rate paid on our deposit portfolio increased to 4.56% and
4.73%, respectively, compared to 4.52% and 4.42% for the comparable periods in
2000. The overall increases reflect increased rates paid by us to attract and
retain deposits as a result of generally increasing interest rates during the
first six months of 2000 compared to generally decreasing interest rates during
the first six months of 2001,and the high level of competition within our market
areas. The aggregate weighted average rate paid on our note payable decreased to
5.93% and 6.78% for the three and six months ended June 30, 2001, compared to
7.95% and 7.55% for the comparable periods in 2000. Amounts outstanding under
our $120.0 million line of credit with a group of unaffiliated banks bear
interest at the lead bank's corporate base rate or, at our option, at the
Eurodollar rate plus a margin determined by the outstanding balance and our
profitability. Thus, our revolving credit line represents a relatively high-cost
funding source, although it has been mitigated by the continued reductions in
the prime lending rate, so that increased advances under the revolving note
payable have the effect of increasing the weighted average rate of non-deposit
liabilities. During 2000, we utilized the note payable to fund our acquisitions
of Commercial Bank of San Francisco, Millennium Bank and Bank of San Francisco,
thus resulting in a higher level of borrowings occurring during the fourth
quarter of 2000. Furthermore, the aggregate weighted average rate paid on our
short-term borrowings also declined for the three and six months ended June 30,
2001, reflecting continued reductions in the current interest rate environment.
The following table sets forth, on a tax-equivalent basis, certain
information relating to First Banks' average balance sheets, and reflects the
average yield earned on interest-earning assets, the average cost of
interest-bearing liabilities and the resulting net interest income for the three
and six months ended June 30, 2001 and 2000:
Three months ended June 30, Six months ended June 30,
------------------------------------------------- ----------------------------------------------
2001 2000 2001 2000
------------------------ ----------------------- ----------------------- ---------------------
Interest Interest Interest Interest
Average income/ Yield/ Average income/ Yield/ Average income/ Yield/ Average income/ Yield/
balance expense rate balance expense rate balance expense rate balance expense rate
------- ------- ---- ------- ------- ----- ------- ------- ---- --------------------
(dollars expressed in thousands)
Assets
------
Interest-earning assets:
Loans (1)(2)(3)(4).......... $4,883,268 105,931 8.70% $4,274,961 96,234 9.05% $4,840,188 213,069 8.88% $4,180,776 185,987 8.95%
Investment securities (4)... 388,456 6,466 6.68 440,008 7,277 6.65 428,817 15,072 7.09 440,405 14,279 6.52
Federal funds sold and other 82,631 1,160 5.63 56,891 864 6.11 57,511 1,655 5.80 70,222 2,033 5.82
---------- ------- ---- ---------- ------ ---- ---------- ------- ---- ---------- ------- ----
Total interest-earning
assets............... 5,354,355 113,557 8.51 4,771,860 104,375 8.80 5,326,516 229,796 8.70 4,691,403 202,299 8.67
------- ------- ------- -------
Nonearning assets.............. 541,033 345,751 524,469 348,529
---------- ---------- ---------- ----------
Total assets........... $5,895,388 $5,117,611 $5,850,985 $5,039,932
========== ========== ========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits................ $ 478,771 1,807 1.51% $ 421,937 1,420 1.35% $ 466,634 3,480 1.50% $ 422,512 2,885 1.37%
Savings deposits.......... 1,479,117 13,342 3.62 1,257,448 1 2,434 3.98 1,452,496 27,525 3.82 1,241,385 24,070 3.90
Time deposits of $100
or more (3)............. 534,970 7,453 5.59 210,945 2,841 5.42 527,164 15,329 5.86 223,941 5,855 5.26
Other time deposits (3)... 1,778,304 25,954 5.85 1,939,657 26,314 5.46 1,795,382 53,143 5.97 1,893,330 50,222 5.33
---------- ------- ---- ---------- ------ ---- --------- ------ ---- ---------- ------- ----
Total interest-bearing
deposits............. 4,271,162 48,556 4.56 3,829,987 43,009 4.52 4,241,676 99,477 4.73 3,781,168 83,032 4.42
Short-term borrowings....... 174,667 1,673 3.84 105,033 1,406 5.38 166,720 3,662 4.43 96,109 2,515 5.26
Note payable................ 36,700 543 5.93 68,611 1,356 7.95 52,753 1,773 6.78 66,869 2,511 7.55
---------- ------- ---- ---------- ------ ---- ---------- ------ ---- ---------- ------- ----
Total interest-bearing
liabilities.......... 4,482,529 50,772 4.54 4,003,631 45,771 4.60 4,461,149 104,912 4.74 3,944,146 88,058 4.49
------- ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits............. 718,259 617,501 714,891 602,459
Other liabilities........... 297,410 179,961 296,085 187,437
---------- ---------- ---------- ----------
Total liabilities...... 5,498,198 4,801,093 5,472,125 4,734,042
Stockholder' equity............ 397,190 316,518 378,860 305,890
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity. $5,895,388 $5,117,611 $5,850,985 $5,039,932
========== ========== ========== ==========
Net interest income............ 62,785 58,604 124,884 114,241
======= ====== ======= =======
Interest rate spread........... 3.97 4.20 3.96 4.18
Net interest margin............ 4.70% 4.94% 4.73% 4.90%
==== ==== ==== ====
____________________
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Includes the effects of interest rate exchange agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were approximately
$201,000 and $403,000 for the three and six months ended June 30, 2001, and $214,000 and $421,000 for the comparable periods in
2000, respectively.
Provision for Loan Losses
The provision for loan losses was $3.7 million and $7.1 million for the
three and six months ended June 30, 2001, compared to $3.6 million and $7.2
million for the comparable periods in 2000, respectively. The provisions for
loan losses reflect the level of loan charge-offs and recoveries, the adequacy
of the allowance for loan losses and the effect of economic conditions within
our markets. Loan charge-offs were $6.4 million and $15.3 million for the three
and six months ended June 30, 2001, in comparison to $1.8 million and $5.0
million for the comparable periods in 2000. The increase in loan charge-offs
reflects a single loan in the amount of $4.5 million that was charged-off due to
suspected fraud on the part of the borrower, a $1.4 million charge-off on a
single credit relationship, a $675,000 charge-off with respect to a loan in an
acquired portfolio as well as the recent general slow down in economic
conditions prevalent within our markets. Loan recoveries were $1.9 million and
$3.8 million for the three and six months ended June 30, 2001, in comparison to
$2.1 million and $6.2 million for the comparable periods in 2000, respectively.
Nonperforming assets and past-due loans have increased during the six months
ended June 30, 2001, and we anticipate these trends will continue in the near
future. However, we believe these trends represent normal cyclical trends
experienced within the banking industry during times of economic slow down.
Management 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
Noninterest income was $19.4 million and $35.9 million for the three
and six months ended June 30, 2001, in comparison to $11.5 million and $21.0
million for the comparable periods in 2000, respectively. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, a gain on the sale of our credit card
portfolio, net gains on derivative instruments and other income.
Service charges on deposit accounts and customer service fees were $5.3
million and $10.5 million for the three and six months ended June 30, 2001, in
comparison to $4.9 million and $9.5 million for the comparable periods in 2000,
respectively. We attribute the increase in service charges and customer service
fees to:
>> increased deposit balances provided by internal growth;
>> our acquisitions completed during 2000;
>> 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 June 1, 2000, and enhanced control of fee
waivers; and
>> increased income associated with automated teller machine services
and debit cards.
The gain on mortgage loans sold and held for sale was $3.9 million and
$7.3 million for the three and six months ended June 30, 2001, in comparison to
$1.9 million and $3.3 million for the comparable periods in 2000, respectively.
The overall increase for the three and six months ended June 30, 2001 is
primarily attributable to a significant increase in the volume of loans
originated and sold commensurate with the continued reductions in mortgage loan
rates experienced in the first six months of 2001 as well as the continued
expansion of our mortgage banking activities into new and existing markets.
During the six months ended June 30, 2001, we recorded a $2.3 million
pre-tax gain on the sale of our credit card portfolio. This gain is solely
attributable to the sale of this portfolio consistent with our strategic
decision to exit this product line and enter into an agent relationship with a
larger credit card service provider.
Noninterest income for the six months ended June 30, 2001 included a
net loss on the sale of available-for-sale investment securities of $113,000, in
comparison to a net gain on the sale of available-for-sale investment securities
of $379,000 for the comparable period in 2000. The net loss for 2001 resulted
primarily from the liquidation of certain equity investment securities held by
FBA that resulted in a loss of $134,000, whereas the net gain in 2000 resulted
primarily from sales of certain investment securities held by acquired
institutions that did not meet our overall investment objectives.
The net gain on derivative instruments of $5.0 million and $5.5 million
for the three and six months ended June 30, 2001, respectively, primarily
results from the termination of certain interest rate swap agreements in April
and June 2001 to adjust the interest rate hedge position consistent with the
changes in portfolio structure and mix. In addition, the net gain reflects
changes in the fair value of our interest rate cap agreements, interest rate
floor agreements and fair value hedges, and results from the implementation of
SFAS No. 133, as amended, on January 1, 2001. See Note 3 to our consolidated
financial statements.
Other income was $5.2 million and $10.4 million for the three and six
months ended June 30, 2001, in comparison to $4.7 million and $7.9 million for
the comparable periods in 2000, respectively. We attribute the primary
components of the increase to:
>> our acquisitions completed during 2000;
>> increased portfolio management fee income of $1.6 million
associated with our Institutional Money Management Division, which
was formed in August 2000;
>> increased brokerage revenue, which is primarily associated with
the stock option services acquired in conjunction with our
acquisition of Bank of San Francisco;
>> increased rental income of $761,000 associated with our commercial
leasing activities that were acquired in conjunction with our
acquisition of First Capital Group, Inc. in February 2000; and
>> income of approximately $600,000 associated with equipment leasing
activities that were acquired in conjunction with our
acquisition of Bank of San Francisco in December 2000.
Noninterest Expense
Noninterest expense was $64.4 million and $116.0 million for the three
and six months ended June 30, 2001, in comparison to $41.9 million and $79.7
million for the comparable periods in 2000, respectively. The increase reflects:
>> the noninterest expense of our acquisitions completed during 2000,
including certain nonrecurring expenses associated with those
acquisitions;
>> increased salaries and employee benefit expenses;
>> increased data processing fees;
>> increased legal, examination and professional fees;
>> increased amortization of intangibles associated with the purchase
of subsidiaries;
>> increased guaranteed preferred debentures expense; and
>> increased other expense.
Salaries and employee benefits were $23.3 million and $45.8 million for
the three and six months ended June 30, 2001, in comparison to $18.3 million and
$35.2 million for the comparable periods in 2000, respectively. We primarily
associate the increase with our 2000 acquisitions. However, the increase also
reflects the competitive environment in the employment market that has resulted
in a higher demand for limited resources, thus escalating industry salary and
employee benefit costs associated with employing and retaining qualified
personnel. In addition, the increase includes various additions to staff
throughout 2000 to enhance executive and senior management expertise, improve
technological support, strengthen centralized operational functions and expand
our product lines.
Occupancy, net of rental income, and furniture and equipment expense
totaled $6.5 million and $13.8 million for the three and six months ended June
30, 2001, in comparison to $6.4 million and $12.3 million for the comparable
periods in 2000, respectively. We primarily attribute the increase to our
aforementioned acquisitions, the relocation of certain branches and operational
areas and increased depreciation expense associated with numerous capital
expenditures, including our new facility that houses various centralized
operations and certain corporate administrative functions.
Data processing fees were $6.5 million and $13.0 million for the three
and six months ended June 30, 2001 in comparison to $5.5 million and $10.7
million for the comparable periods in 2000, respectively. As more fully
described in Note 5 to our consolidated financial statements, First Services,
L.P. provides data processing and various related services to our subsidiaries
and us. We attribute the increased data processing fees to growth and
technological advancements consistent with our product and service offerings,
continued upgrades to technological equipment, networks and communication
channels, and certain nonrecurring expenses associated with the data processing
conversions of Redwood Bank, Commercial Bank of San Francisco, and Bank of San
Francisco, completed in February 2001, March 2001 and June 2001, respectively.
Legal, examination and professional fees were $1.7 million and $3.4
million for the three and six months ended June 30, 2001, in comparison to $1.0
million and $2.0 million for the comparable periods in 2000, respectively. We
primarily attribute the increase in these fees to the ongoing professional
services utilized by certain of our acquired entities, increased professional
fees associated with our Institutional Money Management Division, which was
formed in August 2000, and increased legal fees associated with commercial loan
documentation, collection efforts and certain defense litigation.
Amortization of intangibles associated with the purchase of
subsidiaries was $1.9 million and $3.7 million for the three and six months
ended June 30, 2001, in comparison to $1.2 million and $2.4 million for the
comparable periods in 2000, respectively. The increase for 2001 is primarily
attributable to amortization of the cost in excess of the fair value of the net
assets acquired of the six acquisitions that we completed during 2000.
Guaranteed preferred debentures expense was $4.5 million and $9.0
million for the three and six months ended June 30, 2001, in comparison to $3.0
million and $6.0 million for the comparable periods in 2000, respectively. The
increase for 2001 is solely attributable to the issuance of trust preferred
securities in October 2000 by our financing subsidiary, First Preferred Capital
Trust II.
Other expense was $18.9 million and $25.1 million for the three and six
months ended June 30, 2001, in comparison to $5.4 million and $8.9 million for
the comparable periods in 2000, respectively. Other expense encompasses numerous
general and administrative expenses including but not limited to 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 increase in other expense to:
>> our acquisitions completed during 2000;
>> increased advertising and business development expenses associated
with various product and service initiatives and enhancements;
>> increased travel expenses primarily associated with business
development efforts and the ongoing integration of the recently
acquired entities into our corporate culture and systems;
>> a nonrecurring litigation settlement charge in the amount of
$11.5 million associated with a lawsuit brought by an
unaffiliated bank against one of our subsidiaries and certain
individuals 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 establishment of a specific reserve on an unfunded letter of
credit; and
>> overall continued growth and expansion of our banking franchise.
Provision for Income Taxes
The provision for income taxes was $5.5 million and $14.6 million for
the three and six months ended June 30, 2001, representing an effective income
tax rate of 39.29% and 39.14%, respectively, in comparison to $9.2 million and
$17.7 million, representing an effective income tax rate of 37.81% and 37.00%
for the comparable periods in 2000, respectively. The increase in the effective
income tax rate for the three and six months ended June 30, 2001 is primarily
attributable to:
>> the increase in amortization of intangibles associated with the
purchase of subsidiaries, which is not deductible for tax
purposes; and
>> a reduction of the deferred tax asset valuation reserve of $404,000
related to the utilization of net operating losses associated with
a previously acquired entity, which was recorded in March 2000.
Interest Rate Risk Management
We utilize derivative financial instruments and hedging activities
solely to assist in our management of interest rate sensitivity by modifying the
repricing, maturity and option characteristics of certain assets and
liabilities. The derivative instruments we hold are summarized as follows:
June 30, 2001 December 31, 2000
---------------------- ----------------------
Notional Credit Notional Credit
amount exposure amount exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $1,050,000 1,971 1,055,000 3,449
Fair value hedges.................................... 250,000 5,553 50,000 758
Interest rate floor agreements....................... 310,000 5,631 35,000 6
Interest rate cap agreements......................... 450,000 1,976 450,000 3,753
Interest rate lock commitments....................... 22,000 -- 4,100 --
Forward commitments to sell mortgage-backed
securities....................................... 101,000 -- 32,000 --
========== ===== ========= =====
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
our credit exposure through our use of these instruments. The credit exposure
represents the accounting loss we would incur in the event the counterparties
failed completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value.
During the three and six months ended June 30, 2001, the net interest
income realized on our derivative financial instruments was $4.7 million and
$5.7 million, respectively, in comparison to net interest expense of $1.0
million and $1.7 million realized on our derivative financial instruments for
the comparable periods in 2000, respectively.
Cash Flow Hedges
During 1998, we entered into $280.0 million notional amount of interest
rate swap agreements to effectively lengthen the repricing characteristics of
certain interest-earning assets to correspond more closely with their funding
source with the objective of stabilizing cash flow, and accordingly, net
interest income, over time. The swap agreements, which are designated as cash
flow hedges, provide for us to receive a fixed rate of interest and pay an
adjustable rate of interest equivalent to the daily weighted average prime
lending rate minus 2.705%. The terms of the swap agreements provide for us to
pay quarterly and receive payment semiannually. In June 2001, we terminated
$205.0 million notional amount of these swap agreements, which would have
expired in 2002, in order to appropriately modify our overall hedge position in
accordance with our risk management program. In conjunction with the partial
termination of these swap agreements, we recorded a pre-tax gain of $2.8
million. The amount receivable and payable by us under the remaining $75.0
million notional amount of the swap agreements was $1.2 million and $115,000 at
June 30, 2001, respectively.
During September 1999, we entered into $175.0 million notional amount
of interest rate swap agreements to effectively lengthen the repricing
characteristics of certain interest-earning assets to correspond more closely
with their funding source with the objective of stabilizing cash flow, and
accordingly, net interest income, over time. The swap agreements, which had been
designated as cash flow hedges, 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 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,
in order to lengthen the period covered by the swaps. In conjunction with the
termination of these swap agreements, we recorded a pre-tax gain of $985,000.
During September 2000, March 2001 and April 2001, we entered into
$600.0 million, $200.0 million and $175.0 million notional amount, respectively,
of interest rate swap agreements to effectively lengthen the repricing
characteristics of certain interest-earning assets to correspond more closely
with their funding source with the objective of stabilizing cash flow, and
accordingly, net interest income, over time. The swap agreements, which have
been designated as cash flow hedges, provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the weighted
average prime lending rate minus either 2.70% or 2.82%. The terms of the swap
agreements provide for us to pay and receive interest on a quarterly basis. The
amount receivable by us under the swap agreements was $3.9 million and $1.2
million at June 30, 2001 and December 31, 2000, respectively, and the amount
payable by us under the swap agreements was $3.0 million and $1.2 million at
June 30, 2001 and December 31, 2000, 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 June 30, 2001 and December 31, 2000 were as follows:
Notional Interest rate Interest rate Fair
Maturity date amount paid received value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
June 30, 2001:
September 16, 2002.............................. $ 75,000 4.05% 5.36% $ 890
September 20, 2004.............................. 600,000 4.05 6.78 24,634
March 21, 2005.................................. 200,000 3.93 5.24 (1,855)
April 2, 2006................................... 175,000 3.93 5.45 (1,871)
---------- ---- ---- ---------
$1,050,000 4.01 6.16 $ 21,798
========== ==== ==== =========
December 31, 2000:
September 27, 2001.............................. $ 175,000 6.80% 6.14% $ 65
June 11, 2002................................... 15,000 6.80 6.00 7
September 16, 2002.............................. 195,000 6.80 5.36 (1,776)
September 18, 2002.............................. 70,000 6.80 5.33 (690)
September 20, 2004.............................. 600,000 6.80 6.78 16,869
---------- ---- ---- ---------
$1,055,000 6.80 5.92 $ 14,475
========== ==== ==== =========
Fair Value Hedges
During September 2000, we entered into $25.0 million notional amount of
one-year interest rate swap agreements and $25.0 million notional amount of five
and one-half year interest rate swap agreements to effectively shorten the
repricing characteristics of certain interest-bearing liabilities with the
objective of stabilizing net interest income over time. The swap agreements,
which have been designated as fair value hedges, provide for us to receive fixed
rates of interest ranging from 6.60% to 7.25% and pay an adjustable rate of
interest equivalent to the three-month London Interbank Offering Rate minus
rates ranging from 0.02% to 0.11%. The terms of the swap agreements provide for
us to pay interest on a quarterly basis and receive interest either on a
semiannual or an annual basis. The amount receivable by us under the swap
agreements was $1.8 million and $1.0 million at June 30, 2001 and December 31,
2000, respectively, and the amount payable by us under the swap agreements was
$68,000 and $119,000 at June 30, 2001 and December 31, 2000, respectively.
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 to effectively shorten the repricing
characteristics of certain interest-bearing liabilities with the objective of
stabilizing net interest income over time. The swap agreements, which have been
designated as fair value hedges, 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 terms of the swap agreements provide for us
to pay and receive interest on a quarterly basis. The amount receivable by us
under the swap agreements was $5.2 million at June 30, 2001, and the amount
payable by us under the swap agreements was $2.2 million at June 30, 2001.
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 June 30, 2001 were as follows:
Notional Interest rate Interest rate Fair
Maturity date amount paid received value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
June 30, 2001:
September 13, 2001.............................. $ 12,500 3.89% 6.80% $ 70
September 21,2001............................... 12,500 3.71 6.60 79
January 9, 2004................................. 50,000 4.80 5.37 (84)
January 9, 2006................................. 150,000 4.80 5.51 (2,073)
March 13, 2006.................................. 12,500 3.80 7.25 86
March 22, 2006.................................. 12,500 3.64 7.20 101
---------- ---- ---- -------
$ 250,000 4.59 5.77 $(1,821)
========== ==== ==== =======
December 31, 2000:
September 13, 2001.............................. $ 12,500 6.56% 6.80% $ 42
September 21, 2001.............................. 12,500 6.47 6.60 43
March 13, 2006.................................. 12,500 6.47 7.25 5
March 22, 2006.................................. 12,500 6.39 7.20 6
---------- ---- ---- -------
$ 50,000 6.47 6.96 $ 96
========== ==== ==== =======
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 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 prices of 5.50% or
5.00%, respectively, should the three-month London Interbank Offering Rate fall
below the respective strike prices. At June 30, 2001, the carrying value of the
interest rate floor agreements, which is included in derivative instruments in
the consolidated balance sheet, was $5.6 million.
Interest Rate Cap Agreements
In conjunction with the interest rate swap agreements that we entered
into in September 2000, 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 June
30, 2001 and December 31, 2000, the carrying value of these interest rate cap
agreements, which is included in derivative instruments in the consolidated
balance sheet, was $2.0 million and $3.8 million, respectively.
Pledged Collateral
At June 30, 2001, we had pledged investment securities available for
sale with a carrying value of $2.4 million in connection with our interest rate
swap agreements. In addition, at June 30, 2001, we had accepted investment
securities with a fair value of $34.7 million as collateral in connection with
our interest rate swap agreements. We are permitted by contract to sell or
repledge the collateral accepted from our counterparties, however, at June 30,
2001, we had not sold or repledged any of this collateral.
Interest Rate Lock Commitments/Forward Commitments to Sell Mortgage-Backed
Securities
Derivative financial instruments issued by us consist of interest rate
lock commitments to originate fixed-rate loans. Commitments to originate
fixed-rate loans consist primarily of residential real estate loans. These net
loan commitments and loans held for sale are hedged with forward contracts to
sell mortgage-backed securities.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source
of income for our subsidiary banks. Interest and fees on loans were 93.38% and
92.82% of total interest income for the three and six months ended June 30,
2001, in comparison to 92.31% and 92.05% for the comparable periods in 2000,
respectively. Total loans, net of unearned discount, increased $109.7 million to
$4.86 billion, or 82.4% of total assets, at June 30, 2001, compared to $4.75
billion, or 80.9% of total assets, at December 31, 2000. The increase in loans,
as summarized on our consolidated balance sheets, is primarily attributable to
an increase of $120.7 million in our loans held for sale portfolio to $189.8
million at June 30, 2001 from $69.1 million at December 31, 2000. We primarily
attribute this increase to be the result of a significantly higher volume of
residential mortgage loans originated, including both new fundings as well as
refinancings, as a result of declining interest rates experienced during the
first six months of 2001. This increase was partially offset by a decline in our
consumer and installment portfolio, net of unearned discount, to $111.0 million
at June 30, 2001 from $174.3 million at December 31, 2000. This decrease
reflects the sale of our student loan and credit card portfolios, reductions in
new loan volumes and the repayment of principal on our existing portfolio, and
is also consistent with our objectives of de-emphasizing indirect automobile
lending and expanding commercial lending. In addition, the overall increase in
loans, net of unearned discount, was further offset by an anticipated amount of
attrition associated with our acquisitions completed during the fourth quarter
of 2000.
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:
June 30, December 31,
2001 2000
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual..................................................... $ 26,887 22,437
Restructured terms............................................. -- 22
Real estate construction and development:
Nonaccrual..................................................... 13,316 11,068
Real estate mortgage:
Nonaccrual..................................................... 17,820 16,524
Restructured terms............................................. 2,930 2,952
Consumer and installment:
Nonaccrual..................................................... 58 155
Restructured terms............................................. 7 8
---------- ---------
Total nonperforming loans.................................. 61,018 53,166
Other real estate................................................... 3,690 2,487
---------- ---------
Total nonperforming assets................................. $ 64,708 55,653
========== =========
Loans, net of unearned discount..................................... $4,861,943 4,752,265
========== =========
Loans past due 90 days or more and still accruing................... $ 7,550 3,009
== ========== =========
Allowance for loan losses to loans.................................. 1.59% 1.72%
Nonperforming loans to loans........................................ 1.26 1.12
Allowance for loan losses to nonperforming loans.................... 126.42 153.47
Nonperforming assets to loans and other real estate................. 1.33 1.17
========== =========
Nonperforming loans (also considered impaired loans), consisting of
loans on nonaccrual status and certain restructured loans, were $61.0 million at
June 30, 2001, in comparison to $53.2 million at December 31, 2000. Included in
nonaccrual real estate mortgage loans at June 30, 2001 and December 31, 2000 is
a single borrowing relationship of $12.7 million and $10.9 million,
respectively, relating to a residential and recreational development project
that has had significant financial difficulties. This project experienced
inadequate project financing at inception, project delays and weak project
management. Financing for this project has since been recast, and is presently
meeting development expectations. We attribute the increase in nonperforming
loans and past-due loans since December 2000 to be reflective of cyclical trends
experienced within the banking industry as a result of economic slow down.
Consistent with the recent general economic slow down experienced within our
primary markets, we anticipate this trend will continue in the upcoming months.
The following table is a summary of our loan loss experience for the periods indicated:
Three months ended Six months ended
June 30, June 30,
----------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of period.............. $77,996 73,859 81,592 68,611
Acquired allowances for loan losses......................... - - - 799
------- ------ ------- ------
77,996 73,859 81,592 69,410
------- ------ ------- ------
Loans charged-off........................................... (6,433) 1,756) (15,336) (4,970)
Recoveries of loans previously charged-off.................. 1,858 2,099 3,775 6,180
-------- ------ ------- ------
Net loan (charge-offs) recoveries........................... (4,575) 343 (11,561) 1,210
------- ------ ------- ------
Provision for loan losses................................... 3,720 3,620 7,110 7,202
------- ------ ------- ------
Allowance for loan losses, end of period.................... $77,141 77,822 77,141 77,822
======= ====== ======= ======
The allowance for loan losses is monitored on a monthly basis. Each
month, the credit administration department provides management with detailed
lists of loans on the watch list and summaries of the entire loan portfolio of
each subsidiary bank by risk rating. These are coupled with analyses of changes
in the risk profiles of the portfolios, 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 portfolios. Factors are applied to the loan portfolios for each category
of loan risk to determine acceptable levels of allowance for loan losses. We
derive these factors from the actual loss experience of our subsidiary banks and
from published national surveys of norms in the industry. The calculated
allowances required for the portfolios are then compared to the actual allowance
balances to determine the provisions necessary to maintain the allowances at
appropriate levels. In addition, management exercises a certain degree of
judgment in its analysis of the overall adequacy of the allowance for loan
losses. In its analysis, management considers the change in the portfolio,
including growth, composition, the ratio of net loans to total assets, and the
economic conditions of the regions in which we operate. Based on this
quantitative and qualitative analysis, provisions are made to the allowance for
loan losses. Such provisions are reflected in our consolidated statements of
income.
Liquidity
Our liquidity and the liquidity of our subsidiary banks is the ability
to maintain a cash flow which is adequate to fund operations, service debt
obligations and meet obligations and other commitments on a timely basis. Our
subsidiary banks receive 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 sold 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 $755.8 million and $723.5 million at June 30, 2001 and December 31,
2000, respectively.
The following table presents the maturity structure of these other
sources of funds, which consists of certificates of deposit of $100,000 or more,
short-term borrowings and our revolving note payable, at June 30, 2001:
(dollars expressed
in thousands)
Three months or less................................. $ 349,342
Over three months through six months................. 94,028
Over six months through twelve months................ 126,966
Over twelve months................................... 185,358
---------
Total......................................... $ 755,784
=========
In addition to these sources of funds, our subsidiary banks have
established borrowing relationships with the Federal Reserve Banks in their
respective districts. These borrowing relationships, which are secured by
commercial loans, provide an additional liquidity facility that may be utilized
for contingency purposes. At June 30, 2001 and December 31, 2000, the borrowing
capacity of our subsidiary banks under these agreements was approximately $1.85
billion and $1.24 billion, respectively. In addition, our subsidiary banks'
borrowing capacity through their relationships with the Federal Home Loan Banks
was approximately $213.6 million and $262.1 million at June 30, 2001 and
December 31, 2000, respectively.
Management believes the available liquidity and operating results of
our subsidiary banks will be sufficient to provide funds for growth and to
permit the distribution of dividends to us sufficient to meet our operating and
debt service requirements, both on a short-term and long-term basis, and to pay
the dividends on the trust preferred securities issued by our financing
subsidiaries, First Preferred Capital Trust I and First Preferred Capital Trust
II, and FBA's financing subsidiary, First America Capital Trust.
Effects of New Accounting Standards
In September 2000, the FASB issued SFAS No. 140 - Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a replacement of FASB Statement 125. SFAS 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. SFAS 140 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities which are based on the consistent application of
a financial-components approach. SFAS 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001, and is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2001. On December 31,
2000, we implemented the disclosure requirements of SFAS 140, which did not have
a material effect on our consolidated financial statements. We have evaluated
the additional requirements of SFAS 140 to determine their potential impact on
our consolidated financial statements and do not believe they will have a
material effect on our consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141 - Business Combinations, and
SFAS No. 142 - Goodwill and Other Intangible Assets. SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill noting that any purchase price
allocable to an assembled workforce may not be accounted for separately. SFAS
142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 will also
require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121 - Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
amortization of goodwill ceases upon adoption of SFAS 142, which for calendar
year-end companies, will be January 2, 2002. We are currently evaluating the
requirements of SFAS 141 and SFAS 142 to determine their potential impact on our
consolidated financial statements.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
At December 31, 2000, our risk management program's simulation model
indicated a loss of projected net interest income in the event of a decline in
interest rates. While a decline in interest rates of less than 100 basis points
was projected to have a relatively minimal impact on our net interest income, an
instantaneous, parallel decline in the interest yield curve of 100 basis points
indicated a pre-tax projected loss of approximately 5.2% of net interest income.
An instantaneous, parallel decline in the interest yield curve of 200 basis
points and 300 basis points indicated a pre-tax projected loss of approximately
7.1% and 10.3% of net interest income, respectively, based on assets and
liabilities at December 31, 2000. At June 30, 2001, we remain in an
"asset-sensitive" position and thus, remain subject to a higher level of risk in
a declining interest-rate environment, as experienced during the first six
months of 2001. Although we do not anticipate that instantaneous shifts in the
yield curve as projected in our simulation model are likely, these are
indications of the effects that changes in interest rates would have over time.
Our asset-sensitive position, coupled with reductions in the prime lending rate
throughout the last six months, is reflected in our reduced net interest rate
margin for the three and six months ended June 30, 2001 as further discussed
under "-Results of Operations." During the three and six months ended June 30,
2001, our asset-sensitive position and overall susceptibility to market risks
have not changed materially.
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) The exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
Exhibit Number Description
-------------- -----------
None Not Applicable
(b) We filed no reports on Form 8-K during the three months ended June 30, 2001.
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.
August 15, 2001 By: /s/ James F. Dierberg
---------------------------------------
James F. Dierberg
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
August 15, 2001 By: /s/ Allen H. Blake
---------------------------------------
Allen H. Blake
President,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial
and Accounting Officer)