UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares outstanding
Class at October 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)
September 30, December 31,
2001 2000
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks....................................................... $ 155,720 167,474
Interest-bearing deposits with other financial institutions
with maturities of three months or less..................................... 4,753 4,005
Federal funds sold............................................................ 48,600 26,800
------------ -----------
Total cash and cash equivalents..................................... 209,073 198,279
------------ -----------
Investment securities:
Available for sale, at fair value............................................. 511,530 539,386
Held to maturity, at amortized cost (fair value of $22,508 and $24,507
at September 30, 2001 and December 31, 2000, respectively).................. 21,619 24,148
------------ -----------
Total investment securities......................................... 533,149 563,534
------------ -----------
Loans:
Commercial, financial and agricultural........................................ 1,499,528 1,496,284
Real estate construction and development...................................... 855,763 809,682
Real estate mortgage.......................................................... 2,186,203 2,202,857
Consumer and installment...................................................... 108,212 181,602
Loans held for sale........................................................... 134,237 69,105
------------ -----------
Total loans......................................................... 4,783,943 4,759,530
Unearned discount............................................................. (9,643) (7,265)
Allowance for loan losses..................................................... (80,748) (81,592)
------------ -----------
Net loans........................................................... 4,693,552 4,670,673
------------ -----------
Derivative instruments............................................................. 88,879 --
Bank premises and equipment, net of depreciation and amortization.................. 131,281 114,771
Intangibles associated with the purchase of subsidiaries, net of amortization...... 81,713 85,021
Accrued interest receivable........................................................ 39,738 45,226
Deferred income taxes.............................................................. 69,010 75,699
Other assets....................................................................... 130,378 123,488
------------ -----------
Total assets........................................................ $ 5,976,773 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)
September 30, December 31,
2001 2000
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing........................................................ $ 748,016 808,251
Interest-bearing............................................................ 513,905 448,146
Savings....................................................................... 1,590,950 1,447,898
Time:
Time deposits of $100 or more............................................... 467,368 499,956
Other time deposits......................................................... 1,751,851 1,808,164
------------ -----------
Total deposits........................................................... 5,072,090 5,012,415
Short-term borrowings.............................................................. 135,152 140,569
Note payable....................................................................... 29,500 83,000
Accrued interest payable........................................................... 22,962 23,227
Deferred income taxes.............................................................. 45,622 12,774
Accrued expenses and other liabilities............................................. 33,044 54,944
Minority interest in subsidiary.................................................... 16,629 14,067
------------ -----------
Total liabilities........................................................ 5,354,999 5,340,996
------------ -----------
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debentures..................................... 138,618 138,569
First Banks America, Inc. subordinated debentures............................. 44,327 44,280
------------ -----------
Total guaranteed preferred beneficial interests in
subordinated debentures.............................................. 182,945 182,849
------------ -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding at September 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.................................................................... 2,526 2,267
Retained earnings.................................................................. 359,688 325,580
Accumulated other comprehensive income............................................. 57,637 6,021
------------ -----------
Total stockholders' equity............................................... 438,829 352,846
------------ -----------
Total liabilities and stockholders' equity............................... $ 5,976,773 5,876,691
============ ===========
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three months ended Nine Months Ended
September 30, September 30,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Interest and fees on loans............................................ $102,181 99,758 315,098 285,584
Investment securities................................................. 6,098 7,085 20,919 21,104
Federal funds sold and other.......................................... 2,445 739 4,100 2,772
-------- ------- -------- -------
Total interest income............................................ 110,724 107,582 340,117 309,460
-------- ------- -------- -------
Interest expense:
Deposits:
Interest-bearing demand............................................. 1,892 1,480 5,372 4,365
Savings............................................................. 12,402 13,176 39,927 37,246
Time deposits of $100 or more....................................... 6,788 7,932 22,117 13,787
Other time deposits................................................. 23,486 22,691 76,629 72,913
Short-term borrowings................................................. 1,338 1,641 5,000 4,156
Note payable.......................................................... 555 1,220 2,328 3,731
-------- ------- -------- -------
Total interest expense........................................... 46,461 48,140 151,373 136,198
-------- ------- -------- -------
Net interest income.............................................. 64,263 59,442 188,744 173,262
Provision for loan losses.................................................. 6,800 3,865 13,910 11,067
-------- ------- -------- -------
Net interest income after provision for loan losses.............. 57,463 55,577 174,834 162,195
-------- ------- -------- -------
Noninterest income:
Service charges on deposit accounts and customer service fees......... 5,731 5,184 16,268 14,648
Gain on mortgage loans sold and held for sale......................... 2,386 1,898 9,718 5,166
Gain on sale of credit card portfolio, net of expenses................ (422) -- 1,853 --
Net gain (loss) on sales of available-for-sale securities............. (32) (180) (145) 199
Gain on derivative instruments, net................................... 8,915 -- 14,401 --
Other................................................................. 5,268 3,848 15,649 11,772
-------- ------- -------- -------
Total noninterest income......................................... 21,846 10,750 57,744 31,785
-------- ------- -------- -------
Noninterest expense:
Salaries and employee benefits........................................ 23,092 18,200 68,889 53,437
Occupancy, net of rental income....................................... 4,163 3,754 12,379 10,409
Furniture and equipment............................................... 3,228 2,851 8,845 8,524
Postage, printing and supplies........................................ 1,270 1,027 3,528 3,210
Data processing fees.................................................. 6,940 5,714 19,891 16,377
Legal, examination and professional fees.............................. 1,991 1,108 5,415 3,111
Amortization of intangibles associated with the
purchase of subsidiaries............................................ 1,861 1,312 5,573 3,685
Guaranteed preferred debentures....................................... 4,489 2,996 13,467 9,008
Other................................................................. 7,778 5,814 32,841 14,725
-------- ------- -------- -------
Total noninterest expense........................................ 54,812 42,776 170,828 122,486
-------- ------- -------- -------
Income before provision for income taxes,
minority interest in income of subsidiary
and cumulative effect of change in accounting
principle..................................................... 24,497 23,551 61,750 71,494
Provision for income taxes................................................. 9,539 8,947 24,120 26,688
-------- ------- -------- -------
Income before minority interest in income
of subsidiary and cumulative
effect of change in accounting principle ..................... 14,958 14,604 37,630 44,806
Minority interest in income of subsidiary.................................. 577 546 1,622 1,489
-------- ------- -------- -------
Income before cumulative effect of change
in accounting principle....................................... 14,381 14,058 36,008 43,317
Cumulative effect of change in accounting principle, net of tax............ -- -- (1,376) --
-------- ------- -------- -------
Net income....................................................... 14,381 14,058 34,632 43,317
Preferred stock dividends.................................................. 196 196 524 524
-------- ------- -------- -------
Net income available to common stockholders...................... $ 14,185 13,862 34,108 42,793
======== ======= ======== =======
Earnings per common share:
Basic:
Income before cumulative effect of change in accounting principle... $ 599.47 585.87 1,499.67 1,808.59
Cumulative effect of change in accounting principle, net of tax..... -- -- (58.16) --
Basic............................................................... $ 599.47 585.87 1,441.51 1,808.59
========= ======== ======== ========
Diluted:
Income before cumulative effect of change in accounting principle... $ 587.93 570.33 1,468.14 1,750.62
Cumulative effect of change in accounting principle, net of tax..... -- -- (58.16) --
--------- ------- -------- --------
Diluted............................................................. $ 587.93 570.33 1,409.98 1,750.62
========= ======= ======== ========
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)
Nine months ended September 30, 2001 and 2000 and three months ended December 31, 2000
(dollars expressed in thousands, except per share data)
Adjustable rate Accu-
preferred stock mulated
------------------ 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
Nine months ended September 30, 2000:
Comprehensive income:
Net income................................. -- -- -- -- 43,317 43,317 -- 43,317
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 550 -- 550 550
------
Comprehensive income....................... 43,867
======
Class A preferred stock dividends,
$0.80 per share.......................... -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share.......................... -- -- -- -- (11) -- (11)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- (321) -- -- (321)
------- ----- ----- ----- ------- ------ -------
Consolidated balances, September 30, 2000........ 12,822 241 5,915 2,997 313,052 2,900 337,927
Three months ended December 31, 2000:
Comprehensive income:
Net income................................. -- -- -- -- 12,790 12,790 -- 12,790
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 3,121 -- 3,121 3,121
------
Comprehensive income....................... 15,911
======
Class A preferred stock dividends,
$0.40 per share.......................... -- -- -- -- (256) -- (256)
Class B preferred stock dividends,
$0.04 per share.......................... -- -- -- -- (6) -- (6)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- (730) -- -- (730)
------- ----- ----- ----- ------- ------ -------
Consolidated balances, December 31, 2000......... 12,822 241 5,915 2,267 325,580 6,021 352,846
Nine months ended September 30, 2001:
Comprehensive income:
Net income................................. -- -- -- -- 34,632 34,632 -- 34,632
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 10,555 -- 10,555 10,555
Derivative instruments:
Cumulative effect of change in
accounting principle, net........... -- -- -- -- 9,069 -- 9,069 9,069
Current period transactions............ -- -- -- -- 34,919 -- 34,919 34,919
Reclassification to earnings........... -- -- -- -- (2,927) -- (2,927) (2,927)
------
Comprehensive income....................... 86,248
======
Class A preferred stock dividends,
$0.80 per share........................... -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share........................... -- -- -- -- (11) -- (11)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- 259 -- -- 259
------- ----- ----- ----- ------- ------ -------
Consolidated balances, September 30, 2001........ $12,822 241 5,915 2,526 359,688 57,637 438,829
======= ===== ===== ===== ======= ====== =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three months ended Nine months ended Three months ended
September 30, September 30, December 31,
------------- ------------- ------------
2001 2000 2001 2000 2000
---- ---- ---- ---- ----
Unrealized gains on investment securities arising
during the period....................................... $1,005 1,900 10,461 679 3,101
Less reclassification adjustment for (losses)
gains included in net income............................ (21) (117) (94) 129 (20)
------ ----- ------ ---- -----
Unrealized gains on investment securities................. $1,026 2,017 10,555 550 3,121
====== ===== ====== ==== =====
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)
Nine months ended
September 30,
-------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 34,632 43,317
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..................... 8,954 6,967
Amortization, net of accretion................................................... 6,641 5,878
Originations and purchases of loans held for sale................................ (1,088,069) (378,628)
Proceeds from the sale of loans held for sale.................................... 982,205 290,102
Provision for loan losses........................................................ 13,910 11,067
Provision for income taxes....................................................... 24,120 26,688
Payments of income taxes......................................................... (21,290) (7,684)
Decrease (increase) in accrued interest receivable............................... 5,488 (3,262)
Interest accrued on liabilities.................................................. 151,373 136,198
Payments of interest on liabilities.............................................. (151,638) (129,984)
Gain on sale of branch facility.................................................. -- (1,355)
Gain on sale of credit card portfolio............................................ (1,853) --
Net loss (gain) on sales of available-for-sale investment securities............. 145 (199)
Other operating activities, net.................................................. (43,047) (18,648)
Minority interest in income of subsidiary........................................ 1,622 1,489
----------- ---------
Net cash used in operating activities......................................... (75,431) (18,054)
----------- ---------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received......... -- (9,115)
Proceeds from sales of investment securities available for sale.................... 74,991 28,488
Maturities of investment securities available for sale............................. 425,492 256,998
Maturities of investment securities held to maturity............................... 2,765 712
Purchases of investment securities available for sale.............................. (455,190) (150,180)
Purchases of investment securities held to maturity................................ (240) (769)
Net decrease (increase) in loans................................................... 57,944 (265,191)
Recoveries of loans previously charged-off......................................... 7,202 7,954
Purchases of bank premises and equipment........................................... (29,212) (21,022)
Other investing activities, net.................................................... 8,543 3,960
----------- ---------
Net cash provided by (used in) investing activities........................... 92,295 (148,165)
----------- ---------
Cash flows from financing activities:
Increase in demand and savings deposits............................................ 148,576 83,733
(Decrease) increase in time deposits............................................... (95,111) 70,473
Increase in federal funds purchased................................................ -- 1,900
Increase in Federal Home Loan Bank advances........................................ -- --
(Decrease) increase in securities sold under agreements to repurchase.............. (5,417) 28,054
Advances drawn on note payable..................................................... 5,000 (9,500)
Repayments of note payable......................................................... (58,500) --
Payment of preferred stock dividends............................................... (524) (524)
Sale of branch deposits............................................................ -- 892
Other financing activities, net.................................................... (94) (23)
----------- ---------
Net cash (used in) provided by financing activities........................... (6,070) 175,005
----------- ---------
Net increase in cash and cash equivalents..................................... 10,794 8,786
Cash and cash equivalents, beginning of period.......................................... 198,279 170,894
----------- ---------
Cash and cash equivalents, end of period................................................ $ 209,073 179,680
=========== =========
Noncash investing and financing activities:
Loans transferred to other real estate............................................. $ 2,821 1,226
Reductions of deferred tax asset valuation reserve................................. 565 1,267
Loans held for sale transferred to available-for-sale investment securities........ -- 18,584
Loans exchanged for and transferred to available-for-sale investment securities.... -- 37,634
Loans held for sale transferred to loans........................................... 35,074 63,783
=========== =========
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 nine months
ended September 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 93.27% and 92.86% owned by First Banks at
September 30, 2001 and December 31, 2000, respectively.
(2) ACQUISITIONS
On October 16, 2001, FBA completed its acquisition of Charter Pacific
Bank (Charter Pacific), Agoura Hills, California, in exchange for $19.3 million
in cash. Charter Pacific was headquartered in Agoura Hills, California, and had
one other branch office in Beverly Hills, California. At the time of the
transaction, Charter Pacific had $101.5 million in total assets, $70.2 million
in loans, net of unearned discount, $7.5 million in investment securities and
$89.0 million in deposits. FBA funded the acquisition from an advance on the
revolving line of credit it maintains with First Banks. Charter Pacific was
merged with and into First Bank & Trust at the time of the transaction.
On October 31, 2001, FBA completed its acquisition of BYL Bancorp
(BYL), and its wholly owned banking subsidiary, BYL Bank Group, in exchange for
$49.0 million in cash. BYL was headquartered in Orange, California, and had six
other branch offices located in Orange and Riverside counties. At the time of
the transaction, BYL had $281.5 million in total assets, $175.0 million in
loans, net of unearned discount, $12.6 million in investment securities and
$251.8 million in deposits. FBA funded the acquisition using a combination of
dividends from FB&T, borrowings under a line of credit FBA maintains with First
Banks and the sale of approximately 804,000 shares of additional common stock to
First Banks. The common stock was sold to First Banks for $32.50 per share, a
price set by FBA's Board of Directors based on recent trading prices for FBA's
stock on the New York Stock Exchange. FBA intends to conduct a rights offering
during the first quarter of 2002, whereby all of its stockholders will be given
the right to purchase proportionate amounts of FBA common stock at the same
price paid by First Banks. BYL Bank Group was merged with and into FB&T at the
time of the transaction.
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 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 September 30, 2001, UFG had $362.0
million in total assets, $271.3 million in loans, net of unearned discount,
$66.7 million in investment securities and $298.2 million in deposits. First
Banks expects this transaction, which is subject to regulatory approvals, to 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. Under the terms of the agreement, the shareholders of PFC will receive
$293.07 per share in cash, or a total of approximately $36.5 million. 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 September 30,
2001, PFC had $255.2 million in total assets, $149.8 million in loans, net of
unearned discount, $85.5 million in investment securities and $219.7 million in
deposits. First Banks expects this transaction, which is subject to regulatory
approvals, to 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 noninterest income 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 September 30, 2001:
Basic EPS - income before cumulative effect..................... $ 14,185 23,661 $ 599.47
Cumulative effect of change in accounting principle,
net of tax.................................................... -- -- --
--------- ------- ----------
Basic EPS - income available to common stockholders............. 14,185 23,661 599.47
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 791 (11.54)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 14,377 24,452 $ 587.93
========= ======= ==========
Three months ended September 30, 2000:
Basic EPS - income available to common stockholders............. $ 13,862 23,661 $ 585.87
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 982 (15.54)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 14,054 24,643 $ 570.33
========= ======= ==========
Nine months ended September 30, 2001:
Basic EPS - income before cumulative effect..................... $ 35,484 23,661 $ 1,499.67
Cumulative effect of change in accounting principle,
net of tax.................................................... (1,376) -- (58.16)
--------- ------- ----------
Basic EPS - income available to common stockholders............. 34,108 23,661 1,441.51
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 893 (31.53)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 34,621 24,554 $ 1,409.98
========= ======= ==========
Nine months ended September 30, 2000:
Basic EPS - income available to common stockholders............. $ 42,793 23,661 $ 1,808.59
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 1,076 (57.97)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 43,306 24,737 $ 1,750.62
========= ======= ==========
(5) TRANSACTIONS WITH RELATED PARTIES
First Brokerage America, L.L.C., a limited liability company which is
indirectly owned by First Banks' Chairman and members of his immediate family,
received approximately $600,000 and $2.0 million for the three and nine months
ended September 30, 2001, and $500,000 and $1.6 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
Banks' 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 $6.0 million and $16.9 million
for the three and nine months ended September 30, 2001, and $5.0 million and
$14.2 million for the comparable periods in 2000, respectively. During the three
months ended September 30, 2001 and 2000, First Services, L.P. paid First Banks
$516,000 and $411,000, respectively, and during the nine months ended September
30, 2001 and 2000, First Services, L.P. paid First Banks $1.5 million and $1.3
million, 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 Banks' 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 September 30, 2001, First Banks and the Subsidiary Banks were
each well capitalized under the applicable regulations.
As of September 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 September 30, 2001 and December 31, 2000, First Banks' and the
Subsidiary Banks' required and actual capital ratios were as follows:
Actual To be well
--------------------------- capitalized under
September 30, December 31, For capital prompt corrective
2001 2000 adequacy purposes action provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.98% 10.21% 8.0% 10.0%
First Bank.............................. 10.50 10.71 8.0 10.0
FB&T.................................... 11.09 10.58 8.0 10.0
BSF (1)................................. -- 22.38 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 8.48% 7.56 4.0 6.0
First Bank.............................. 9.24 9.46 4.0 6.0
FB&T.................................... 9.84 9.32 4.0 6.0
BSF (1)................................. -- 21.42 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 7.66% 7.45 3.0 5.0
First Bank.............................. 8.25 8.49 3.0 5.0
FB&T.................................... 9.19 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 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 eastern 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 Banks' internal
reporting system and, in all material respects, with accounting principles
generally accepted in the United States of America and practices predominant in
the banking industry.
The business segment results are summarized as follows:
First Bank First Bank & Trust (1)
------------------------------ ----------------------------
September 30, December 31, September 30, December 31,
2001 2000 2001 2000
---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities........................................... $ 164,088 214,005 342,074 330,478
Loans, net of unearned discount................................. 2,750,177 2,694,005 2,035,926 2,058,628
Total assets.................................................... 3,227,149 3,152,885 2,734,952 2,733,545
Deposits........................................................ 2,794,299 2,729,489 2,290,127 2,306,469
Stockholders' equity............................................ 293,777 273,848 338,738 333,186
========== ========= ========= =========
First Bank First Bank & Trust (1)
-------------------------- ----------------------
Three months ended Three months ended
September 30, September 30,
-------------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Income statement information:
Interest income................................................. $ 59,779 63,621 50,773 44,945
Interest expense................................................ 27,266 29,939 18,818 18,381
---------- --------- --------- ---------
Net interest income........................................ 32,513 33,682 31,955 26,564
Provision for loan losses....................................... 4,800 3,500 2,000 365
---------- --------- --------- ---------
Net interest income after provision for loan losses........ 27,713 30,182 29,955 26,199
---------- --------- --------- ---------
Noninterest income.............................................. 13,187 7,965 9,023 3,354
Noninterest expense............................................. 26,943 22,914 22,383 15,950
---------- --------- --------- ---------
Income (loss) before provision (benefit)
for income taxes and minority interest
in income of subsidiary.................................. 13,957 15,233 16,595 13,603
Provision (benefit) for income taxes............................ 4,922 5,324 6,751 5,392
---------- --------- --------- ---------
Income (loss) before minority interest in income of
subsidiary............................................... 9,035 9,909 9,844 8,211
Minority interest in income of subsidiary....................... -- -- -- --
---------- --------- --------- ---------
Net income................................................. 9,035 9,909 9,844 8,211
========== ========= ========= =========
First Bank First Bank & Trust (1)
-------------------------- ----------------------
Nine months ended Nine months ended
September 30, September 30,
-------------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Income statement information:
Interest income................................................. $ 182,765 184,248 157,851 126,413
Interest expense................................................ 88,563 84,459 61,870 50,422
---------- --------- --------- ---------
Net interest income........................................ 94,202 99,789 95,981 75,991
Provision for loan losses....................................... 11,000 9,250 2,910 1,817
---------- --------- --------- ---------
Net interest income after provision for loan losses........ 83,202 90,539 93,071 74,174
---------- --------- --------- ---------
Noninterest income.............................................. 38,992 23,930 19,876 9,197
Noninterest expense............................................. 75,810 64,840 65,346 47,068
---------- --------- --------- ---------
Income (loss) before provision (benefit) for
income taxes, minority interest
in income of subsidiary and cumulative
effect of change in accounting principle................. 46,384 49,629 47,601 36,303
Provision (benefit) for income taxes............................ 16,249 17,254 18,807 14,419
---------- --------- --------- ---------
Income (loss) before minority interest in income of
subsidiary and cumulative effect of change in
accounting principle..................................... 30,135 32,375 28,794 21,884
Minority interest in income of subsidiary....................... -- -- -- --
---------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle..................................... 30,135 32,375 28,794 21,884
Cumulative effect of change in accounting principle, net of tax. 917 -- 459 --
---------- --------- --------- ---------
Net income................................................. 29,218 32,375 28,335 21,884
========== ========= ========= =========
- ---------------------------
(1) Includes BSF, which was acquired by FBA on December 31, 2000. FB&T was merged with BSF on March 29, 2001. BSF was renamed
First Bank & Trust.
(2) Corporate and other includes $2.9 million and $8.7 million of guaranteed preferred debentures expense, after applicable
income tax benefit of $1.6 million and $4.8 million for the three and nine months ended September 30, 2001, and $1.0 million
and $5.9 million of guaranteed preferred debentures expense, after applicable income tax benefit of $2.0 million and $3.1
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
------------------------------------- ---------------------------------
September 30, December 31, September 30, December 31,
2001 2000 2001 2000
---- ---- ---- ----
(dollars expressed in thousands)
26,987 19,051 533,149 563,534
(11,803) (368) 4,774,300 4,752,265
14,672 (9,739) 5,976,773 5,876,691
(12,336) (23,543) 5,072,090 5,012,415
(193,686) (254,188) 438,829 352,846
========= ======== ========= =========
Corporate, other and
intercompany reclassifications (2) Consolidated totals
---------------------------------- ---------------------------------
Three months ended Three months ended
September 30, September 30,
------------------------------- ---------------------------------
2001 2000 2001 2000
---- ---- ---- ----
172 (984) 110,724 107,582
377 (180) 46,461 48,140
--------- -------- --------- -------
(205) (804) 64,263 59,442
-- -- 6,800 3,865
--------- -------- --------- ---------
(205) (804) 57,463 55,577
--------- -------- --------- ---------
(364) (569) 21,846 10,750
5,486 3,912 54,812 42,776
--------- -------- --------- ---------
(6,055) (5,285) 24,497 23,551
(2,134) (1,769) 9,539 8,947
--------- -------- --------- ---------
(3,921) (3,516) 14,958 14,604
577 546 577 546
--------- -------- --------- ---------
(4,498) (4,062) 14,381 14,058
========= ======== ========= =========
Corporate, other and
intercompany reclassifications (2) Consolidated totals
---------------------------------- ---------------------------------
Nine months ended Nine months ended
September 30, September 30,
---------------------------------- ---------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(499) (1,201) 340,117 309,460
940 1,317 151,373 136,198
--------- -------- --------- ---------
(1,439) (2,518) 188,744 173,262
-- -- 13,910 11,067
--------- -------- --------- ---------
(1,439) (2,518) 174,834 162,195
--------- -------- --------- ---------
(1,124) (1,342) 57,744 31,785
29,672 10,578 170,828 122,486
--------- -------- --------- ---------
(32,235) (14,438) 61,750 71,494
(10,936) (4,985) 24,120 26,688
--------- -------- --------- ---------
(21,299) (9,453) 37,630 44,806
1,622 1,489 1,622 1,489
--------- -------- --------- ---------
(22,921) (10,942) 36,008 43,317
-- -- 1,376 --
--------- -------- --------- ---------
(22,921) (10,942) 34,632 43,317
========= ======== ========= =========
(8) SUBSEQUENT EVENT
On November 15, 2001, First Preferred Capital Trust III (FPCT III), a
newly-formed Delaware business trust subsidiary of First Banks, expects to issue
1.92 million shares of 9.00% cumulative trust preferred securities at $25 per
share in an underwritten public offering, and to issue 59,382 shares of common
securities to First Banks at $25 per share. First Banks will own all of the
common securities of FPCT III. The gross proceeds of the offering are to be used
by FPCT III to purchase $48.0 million of 9.00% subordinated debentures from
First Banks, maturing on December 31, 2031. The maturity date of the
subordinated debentures may be shortened to a date not earlier than December 31,
2006, if certain conditions are met. The subordinated debentures are to be the
sole asset of FPCT III. In connection with the issuance of the FPCT III
preferred securities, First Banks will make certain guarantees and commitments
that, in the aggregate, constitute a full and unconditional guarantee by First
Banks of the obligations of FPCT III under the FPCT III preferred securities.
First Banks' proceeds from the issuance of the subordinated debentures to FPCT
III, net of underwriting fees and offering expenses, are expected to be
approximately $45.9 million (which may be increased up to $52.9 million if the
underwriters' overallotment option is exercised). We expect to use the net
proceeds to reduce indebtedness currently outstanding under our revolving credit
line with a group of unaffiliated banks. Distributions on the FPCT III
securities are payable quarterly on March 31, June 30, September 30 and December
31.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to fluctuations in interest
rates and in the economy, including the negative impact on the economy resulting
from the events of September 11, 2001 in New York City and Washington D.C.; 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 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 142 branch
offices throughout California, Illinois, Missouri and Texas. At September 30,
2001, we had total assets of $5.98 billion, loans, net of unearned discount, of
$4.77 billion, total deposits of $5.07 billion and total stockholders' equity of
$438.8 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 93.27% and 92.86% of FBA at September 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, internet banking, automated teller machines, telephone
banking, bankruptcy, escrow and stock option services, safe deposit boxes 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 $5.98 billion and $5.88 billion at September 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 $22.0 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 $30.4 million to $533.1 million at
September 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 nine months ended September 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 $21.8 million in federal funds
sold to $48.6 million at September 30, 2001 from $26.8 million at December 31,
2000. The increase in assets is also due to derivative instruments of $88.9
million at September 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 $16.5 million to
$131.3 million at September 30, 2001 from $114.8 million at December 31, 2000.
We primarily attribute this increase to the purchase and remodeling of a new
operations center and corporate administrative building. Total deposits
increased by $60.0 million to $5.07 billion at September 30, 2001 from $5.01
billion at December 31, 2000. The increase primarily reflects higher savings
deposits offset by reductions in time deposits, including $50.0 million in time
deposits of $100,000 or more that either matured or were called in September
2001, and an anticipated level of attrition associated with our acquisitions in
the fourth quarter of 2000. Our note payable decreased by $53.5 million to $29.5
million at September 30, 2001 from $83.0 million at December 31, 2000, and was
primarily funded with dividends from our subsidiaries. In addition, the merger
of our former subsidiary, First Bank & Trust, with Bank of San Francisco,
effective March 29, 2001, allowed us to further reduce our note payable through
a capital reduction of $23.0 million. In conjunction with this merger, Bank of
San Francisco was renamed First Bank & Trust. In addition, accrued expenses and
other liabilities decreased by $21.9 million to $33.0 million at September 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 $14.4 million, or $587.93 per common share on a diluted
basis, for the three months ended September 30, 2001, in comparison to $14.1
million, or $570.33 per common share on a diluted basis, for the comparable
period in 2000. For the nine months ended September 30, 2001 and 2000, net
income was $34.6 million, or $1,409.98 per common share on a diluted basis, in
comparison to $43.3 million, or $1,750.62 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 $36.0 million, or $1,468.14 per common share on a diluted
basis, for the nine months ended September 30, 2001. The accounting for
derivatives under the requirements of SFAS No. 133 will continue to have an
impact on future financial results as further discussed under "--Noninterest
Income." The primary factors that led to the decline in earnings for the nine
months ended September 30, 2001 were continued reductions in prevailing interest
rates, an increased provision for loan losses 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 increased primarily as a result of increased
earning assets generated through internal loan growth along with our
acquisitions of Lippo Bank, certain assets of FCG, Bank of Ventura, Commercial
Bank of San Francisco, Millennium Bank and Bank of San Francisco, completed
during 2000. The improvement in net interest income, however, was partially
offset by continued reductions in prevailing interest rates throughout the first
nine months of 2001. During the three and nine months ended September 30, 2001,
noninterest income increased to $21.8 million and $57.7 million, from $10.8
million and $31.8 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 $54.8 million and $170.8 million for
the three and nine months ended September 30, 2001, compared to $42.8 million
and $122.5 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 for an unfunded letter of credit.
Guaranteed preferred debentures expense of $1.5 million and $4.5
million for the three and nine months ended September 30, 2001, respectively, on
the trust preferred securities issued by First Preferred Capital Trust II in
October 2000 also contributed to the overall increase in operating expenses.
These higher operating expenses, exclusive of the litigation settlement and the
specific reserve for the unfunded letter of credit, are reflective of
significant investments that have been made in personnel, technology, equipment,
facilities and new product and business lines in conjunction with our overall
strategic growth plan. The payback on these investments is expected to occur
over time through higher and more diversified revenue streams.
Net Interest Income
Net interest income (expressed on a tax equivalent basis) increased to
$64.4 million, or 4.75% of interest-earning assets, for the three months ended
September 30, 2001, from $59.7 million, or 4.98% of interest-earning assets, for
the comparable period in 2000, respectively. For the nine months ended September
30, 2001 and 2000, net interest income (expressed on a tax equivalent basis) was
$189.3 million, or 4.74% of interest-earning assets, and $173.9 million, or
4.92% of interest-earning assets, respectively. We credit the increased net
interest income for the three and nine months ended September 30, 2001 primarily
to the net interest-earning assets provided by our 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
prevailing interest rates throughout the first nine months of 2001.
Average loans, net of unearned discount, were $4.83 billion and $4.84
billion for the three and nine months ended September 30, 2001, in comparison to
$4.32 billion and $4.23 billion for the comparable periods in 2000,
respectively. The yield on our loan portfolio, however, decreased to 8.40% and
8.72% for the three and nine months ended September 30, 2001, in comparison to
9.20% and 9.03% for the comparable periods in 2000, respectively. This was a
major contributor to the decline in our net interest rate margin of 23 basis
points and 18 basis points for the three and nine months ended September 30,
2001, 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 prevailing interest rates throughout the first nine months of 2001.
During the period from December 31, 2000 through September 30, 2001, the Board
of Governors of the Federal Reserve System decreased the targeted Federal funds
rate eight times, resulting in eight decreases in the prime rate of interest
from 9.5% to 6.0%. 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 nine months
ended September 30, 2001, these agreements provided net interest income of $7.1
million and $12.8 million, respectively, in comparison to net interest expense
of $1.4 million and $3.1 million incurred for the comparable periods in 2000.
For the three and nine months ended September 30, 2001, the aggregate
weighted average rate paid on our deposit portfolio decreased to 4.09% and
4.51%, compared to 4.72% and 4.52% for the comparable periods in 2000,
respectively. We attribute the decline primarily to rates paid on savings
deposits, which have continued to decline in conjunction with interest rate
reductions as previously discussed. The overall decrease in rates paid for the
three and nine months ended September 30, 2001, is a result of generally
decreasing interest rates during the first nine months of 2001 as compared to
generally increasing rates for the comparable period in 2000, offset by
increased rates paid by us to attract and retain deposits due to the high level
of competition within our market areas. In addition, the aggregate weighted
average rate paid on our note payable decreased to 7.09% and 6.84% for the three
and nine months ended September 30, 2001, respectively, compared to 8.56% and
7.85% 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
significantly 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 nine months ended September 30, 2001
as compared to the comparable periods in 2000, 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 nine months ended September 30, 2001 and 2000:
Three months ended September 30, Nine months ended September 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).......... $4,828,254 102,244 8.40% $4,317,762 99,858 9.20% $4,836,210 315,305 8.72% $4,226,438 285,845 9.03%
Investment securities (4)... 414,968 6,216 5.94 412,501 7,214 6.96 424,200 21,288 6.71 431,104 21,493 6.66
Federal funds sold and other 137,255 2,445 7.07 40,462 739 7.27 84,093 4,100 6.52 60,300 2,772 6.14
---------- ------- ---------- ------- ---------- -------- ---------- -------
Total interest-earning
assets............... 5,380,477 110,905 8.18 4,770,725 107,811 8.99 5,344,503 340,693 8.52 4,717,842 310,110 8.78
------- ------- ------- -------
Nonearning assets.............. 559,510 395,230 536,149 378,382
---------- ---------- ---------- ----------
Total assets........... $5,939,987 $5,165,955 $5,880,652 $5,096,224
========== ========== ========== ==========
Liabilities and
Stockholders' Equity
- --------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits................ $ 515,406 1,892 1.46% $ 416,302 1,480 1.41% $ 482,891 5,372 1.49% $ 420,442 4,365 1.39%
Savings deposits.......... 1,551,180 12,402 3.17 1,277,167 13,176 4.10 1,485,391 39,927 3.59 1,253,312 37,246 3.97
Time deposits (3)......... 2,258,644 30,274 5.32 2,120,397 30,623 5.75 2,301,246 98,746 5.74 2,118,313 86,700 5.47
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
deposits............. 4,325,230 44,568 4.09 3,813,866 45,279 4.72 4,269,528 144,045 4.51 3,792,067 128,311 4.52
Short-term borrowings....... 151,823 1,338 3.50 110,545 1,641 5.91 161,755 5,000 4.13 100,920 4,156 5.50
Note payable................ 31,059 555 7.09 56,708 1,220 8.56 45,521 2,328 6.84 63,482 3,731 7.85
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
liabilities.......... 4,508,112 46,461 4.09 3,981,119 48,140 4.81 4,476,804 151,373 4.52 3,956,469 136,198 4.60
------- ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits............. 725,624 644,158 718,468 616,359
Other liabilities........... 294,864 209,687 295,678 209,139
---------- ---------- ---------- ----------
Total liabilities...... 5,528,600 4,834,964 5,490,950 4,781,967
Stockholders' equity........... 411,387 330,991 389,702 314,257
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity. $5,939,987 $5,165,955 $5,880,652 $5,096,224
========== ========== ========== ==========
Net interest income............ 64,444 59,671 189,320 173,912
======= ====== ======= =======
Interest rate spread........... 4.09 4.18 4.00 4.18
Net interest margin............ 4.75% 4.98% 4.74% 4.92%
==== ==== ==== ====
- --------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income/expense 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
$181,000 and $576,000 for the three and nine months ended September 30, 2001, and $229,000 and $650,000 for the comparable
periods in 2000, respectively.
Provision for Loan Losses
The provision for loan losses was $6.8 million and $13.9 million for
the three and nine months ended September 30, 2001, compared to $3.9 million and
$11.1 million for the comparable periods in 2000, respectively. The provision
for loan losses reflects 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. The increased provision for loan losses is attributable to
loan portfolio growth as well as an increase in net loan charge-offs and past
due loans, largely resulting from the slow down in economic conditions prevalent
within our markets. Loan charge-offs were $6.6 million and $22.0 million for the
three and nine months ended September 30, 2001, in comparison to $3.7 million
and $8.7 million for the comparable periods in 2000, respectively. 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 slow down in economic
conditions prevalent within our markets. Loan recoveries were $3.4 million and
$7.2 million for the three and nine months ended September 30, 2001, in
comparison to $1.8 million and $8.0 million for the comparable periods in 2000,
respectively. Past-due loans have increased during the nine months ended
September 30, 2001, and we anticipate this trend 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 $21.8 million and $57.7 million for the three
and nine months ended September 30, 2001, in comparison to $10.8 million and
$31.8 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 $5.7
million and $16.3 million for the three and nine months ended September 30,
2001, in comparison to $5.2 million and $14.6 million for the comparable periods
in 2000, respectively. We attribute the increase in service charges and customer
service fees to:
>> increased savings and interest-bearing 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 July 1, 2001, 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 $2.4 million and
$9.7 million for the three and nine months ended September 30, 2001, in
comparison to $1.9 million and $5.2 million for the comparable periods in 2000,
respectively. The overall increase 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 nine months
of 2001 as well as the continued expansion of our mortgage banking activities
into new and existing markets.
During the nine months ended September 30, 2001, we recorded a $1.9
million pre-tax gain on the sale of our credit card portfolio. The reduction in
the net gain of $422,000 recorded for the three months ended September 30, 2001,
represents an adjustment to the initial settlement in accordance with the terms
of the underlying sale agreement. The sale of this portfolio is 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 nine months ended September 30, 2001
included a net loss on the sale of available-for-sale investment securities of
$145,000, in comparison to a net gain on the sale of available-for-sale
investment securities of $199,000 for the comparable period in 2000. The net
loss for 2001 resulted primarily from the liquidation of certain 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 $8.9 million and $14.4
million for the three and nine months ended September 30, 2001, respectively,
includes $3.8 million of gains resulting from the termination of certain
interest rate swap agreements in April and June 2001 to adjust our interest rate
hedge position consistent with changes in the 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, in
accordance with the requirements of SFAS No. 133, as amended, which was
implemented on January 1, 2001. See Note 3 to our consolidated financial
statements.
Other income was $5.3 million and $15.6 million for the three and nine
months ended September 30, 2001, in comparison to $3.8 million and $11.8 million
for the comparable periods in 2000, respectively. We attribute the primary
components of the increase for the nine months ended September 30, 2001 to:
>> our acquisitions completed during 2000;
>> increased portfolio management fee income of $2.5 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 in December 2000;
>> increased rental income of $1.3 million associated with our
commercial leasing activities that were acquired in conjunction with
our acquisition of FCG in February 2000; and
>> income of approximately $900,000 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 $54.8 million and $170.8 million for the three
and nine months ended September 30, 2001, in comparison to $42.8 million and
$122.5 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 $23.1 million and $68.9 million for
the three and nine months ended September 30, 2001, in comparison to $18.2
million and $53.4 million for the comparable periods in 2000, respectively. We
primarily associate the increase with our 2000 acquisitions and higher
commissions paid to mortgage loan originators due to increased volume. 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 $7.4 million and $21.2 million for the three and nine months ended
September 30, 2001, in comparison to $6.6 million and $18.9 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 $6.9 million and $19.9 million for the three
and nine months ended September 30, 2001, in comparison to $5.7 million and
$16.4 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, Bank of San
Francisco and Millennium Bank, completed in February 2001, March 2001, June 2001
and July 2001, respectively.
Legal, examination and professional fees were $2.0 million and $5.4
million for the three and nine months ended September 30, 2001, in comparison to
$1.1 million and $3.1 million for the comparable periods in 2000, respectively.
We primarily attribute the increase in these fees to certain litigation and the
continued expansion of overall corporate activities, 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 $5.6 million for the three and nine months
ended September 30, 2001, in comparison to $1.3 million and $3.7 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 $13.5
million for the three and nine months ended September 30, 2001, in comparison to
$3.0 million and $9.0 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 $7.8 million and $32.8 million for the three and nine
months ended September 30, 2001, in comparison to $5.8 million and $14.7 million
for the comparable periods in 2000, respectively. Other expense encompasses
numerous general and administrative expenses including travel, meals and
entertainment, insurance, freight and courier services, correspondent bank
charges, advertising and business development, miscellaneous losses and
recoveries, memberships and subscriptions, transfer agent fees and sales taxes.
We attribute the majority of the 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 during June 2001 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 for an unfunded letter of
credit in the amount of $1.8 million; and
>> overall continued growth and expansion of our banking franchise.
Provision for Income Taxes
The provision for income taxes was $9.5 million and $24.1 million for
the three and nine months ended September 30, 2001, representing an effective
income tax rate of 38.9% and 39.1%, respectively, in comparison to $8.9 million
and $26.7 million, representing an effective income tax rate of 38.0% and 37.3%
for the comparable periods in 2000, respectively. The increase in the effective
income tax rate for the three and nine months ended September 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
approximately $405,000 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:
September 30, 2001 December 31, 2000
----------------------- ----------------------
Notional Credit Notional Credit
amount exposure amount exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $1,050,000 1,591 1,055,000 3,449
Fair value hedges.................................... 200,000 3,200 50,000 758
Interest rate floor agreements....................... 275,000 13,401 35,000 6
Interest rate cap agreements......................... 450,000 1,063 450,000 3,753
Interest rate lock commitments....................... 28,000 -- 4,100 --
Forward commitments to sell
mortgage-backed securities........................... 113,000 -- 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 nine months ended September 30, 2001, the net
interest income realized on our derivative financial instruments was $7.1
million and $12.8 million, respectively, in comparison to net interest expense
of $1.4 million and $3.1 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 $365,000 and $224,000 at
September 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 September 30, 2001 and December 31, 2000, respectively, and the
amount payable by us under the swap agreements was $2.4 million and $1.2 million
at September 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 September 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)
September 30, 2001:
September 16, 2002.............................. $ 75,000 3.80% 5.36% $ 1,929
September 20, 2004.............................. 600,000 3.30 6.78 48,135
March 21, 2005.................................. 200,000 3.18 5.24 7,510
April 2, 2006................................... 175,000 3.38 5.45 8,142
---------- ---------
$1,050,000 3.33 6.16 $ 65,716
========== ==== ==== =========
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 were designated as fair value hedges, provided 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 provided for
us to pay interest on a quarterly basis and receive interest either on a
semiannual or an annual basis. In September 2001, the one-year interest rate
swap agreements matured, and we terminated the five and one-half year interest
rate swap agreements as a result of the underlying interest-bearing liabilities
maturing or being called by their respective counterparties. There was no gain
or loss recorded as a result of the terminations.
During January 2001, we entered into $50.0 million notional amount of
three-year interest rate swap agreements and $150.0 million notional amount of
five-year interest rate swap agreements 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 $2.5 million at September 30, 2001, and the amount
payable by us under the swap agreements was $1.8 million at September 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 September 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)
September 30, 2001:
January 9, 2004................................. $ 50,000 3.82% 5.37% $ 1,999
January 9, 2006................................. 150,000 3.82 5.51 6,699
---------- ---------
$ 200,000 3.82 5.47 $ 8,698
========== ==== ==== =========
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 September 30, 2001, the carrying value of
the interest rate floor agreements, which is included in derivative instruments
in the consolidated balance sheet at fair value, was $13.4 million. For the
three and nine months ended September 30, 2001, these agreements provided net
interest income of $1.1 million and $1.4 million, respectively.
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
September 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 $1.1 million and $3.8 million, respectively.
Pledged Collateral
At September 30, 2001, we had pledged investment securities available
for sale with a carrying value of $2.2 million in connection with our interest
rate swap agreements. In addition, at September 30, 2001, we had accepted
investment securities with a fair value of $73.8 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
September 30, 2001, we had not sold or repledged any of this collateral.
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 92.3% and
92.6% of total interest income for the three and nine months ended September 30,
2001, in comparison to 92.7% and 92.3% for the comparable periods in 2000,
respectively. Total loans, net of unearned discount, increased $22.0 million to
$4.77 billion, or 79.9% of total assets, at September 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 $65.1 million in our loans held for sale
portfolio to $134.2 million at September 30, 2001 from $69.1 million at December
31, 2000. We primarily attribute this increase to a significantly higher volume
of residential mortgage loans originated, including both new fundings as well as
refinancings, as a result of continued declining interest rates experienced
during the first nine months of 2001. This increase was offset by a decline in
our consumer and installment portfolio, net of unearned discount, to $98.6
million at September 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 consumer
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:
September 30, December 31,
2001 2000
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual..................................................... $ 25,402 22,437
Restructured terms............................................. -- 22
Real estate construction and development:
Nonaccrual..................................................... 465 11,068
Real estate mortgage:
Nonaccrual..................................................... 15,909 16,524
Restructured terms............................................. 2,918 2,952
Consumer and installment:
Nonaccrual..................................................... 396 155
Restructured terms............................................. 7 8
----------- ----------
Total nonperforming loans.................................. 45,097 53,166
Other real estate................................................... 3,707 2,487
----------- ----------
Total nonperforming assets................................. $ 48,804 55,653
=========== ==========
Loans, net of unearned discount..................................... $ 4,774,300 4,752,265
=========== ==========
Loans past due 90 days or more and still accruing................... $ 8,514 3,009
=========== ==========
Allowance for loan losses to loans.................................. 1.69% 1.72%
Nonperforming loans to loans........................................ 0.94 1.12
Allowance for loan losses to nonperforming loans.................... 179.05 153.47
Nonperforming assets to loans and other real estate................. 1.02 1.17
=========== ==========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $45.1 million at September 30, 2001, in
comparison to $53.2 million at December 31, 2000. The decrease is primarily
attributable to the removal of a single borrowing relationship of $14.3 million
and $10.9 million at September 30, 2001 and December 31, 2000, respectively,
from nonaccrual real estate construction and development loans during the third
quarter of 2001. The relationship relates to a residential and recreational
development project that had significant financial difficulties and experienced
inadequate project financing at inception, project delays and weak project
management. Financing for this project has since been recast with a new
borrower, and is presently meeting developmental expectations. Exclusive of this
borrowing relationship, nonperforming loans increased $2.8 million during the
nine months ended September 30, 2001. We attribute the increase in nonperforming
loans and past-due loans for the nine months ended September 30, 2001 to be
reflective of cyclical trends experienced within the banking industry as a
result of economic slow down. Consistent with the 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 Nine months ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of period.............. $77,141 77,822 81,592 68,611
Acquired allowances for loan losses......................... -- 547 -- 1,346
------- ------ ------ ------
77,141 78,369 81,592 69,957
------- ------ ------ ------
Loans charged-off........................................... (6,620) (3,697) (21,956) (8,667)
Recoveries of loans previously charged-off.................. 3,427 1,774 7,202 7,954
------- ------ ------ ------
Net loan charge-offs........................................ 3,193) (1,923) (14,754) (713)
------- ------ ------- ------
Provision for loan losses................................... 6,800 3,865 13,910 11,067
------- ------ ------ ------
Allowance for loan losses, end of period.................... $80,748 80,311 80,748 80,311
======= ====== ====== ======
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 $632.0 million and $723.5 million at September 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 September 30, 2001:
(dollars expressed in thousands)
Three months or less.......................................................... $280,931
Over three months through six months.......................................... 97,435
Over six months through twelve months......................................... 140,490
Over twelve months............................................................ 113,164
--------
Total.................................................................. $632,020
========
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 September 30, 2001 and December 31, 2000, the
borrowing capacity of our subsidiary banks under these agreements was
approximately $1.18 billion and $1.24 billion, respectively. In addition, our
subsidiary banks' borrowing capacity through their relationships with the
Federal Home Loan Banks was approximately $279.8 million and $262.1 million at
September 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, First Preferred Capital Trust II
and First Preferred Capital Trust III, 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 No. 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 No. 141 also specifies criteria
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. SFAS No. 142 requires 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 No. 142. SFAS No. 142 also requires 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 No. 142, which for calendar year-end companies,
will be January 1, 2002.
As of January 1, 2002, the date of adoption, we expect to have
unamortized goodwill, exclusive of our closed acquisitions of Charter Pacific
and BYL and our pending acquisition of UFG, of approximately $79.9 million, all
of which will be subject to the transition provisions of SFAS No. 141 and SFAS
No. 142. Amortization of intangibles associated with the purchase of
subsidiaries was $1.9 million and $5.6 million for the three and nine months
ended September 30, 2001, in comparison to $1.3 million and $3.7 million for the
comparable periods in 2000, respectively. We are currently evaluating the
additional requirements of SFAS No. 141 and SFAS No. 142 to determine their
potential impact on our consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144 -- Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and requires that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS No. 144 broadens the
presentation of discontinued operations to include more disposal transactions.
Therefore, the accounting for similar events and circumstances will be the same.
The provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years, with early application encouraged. The provisions of SFAS No. 144
generally are to be applied prospectively. We are currently evaluating the
requirements of SFAS No. 144 to determine its potential impact on our
consolidated financial statements. However, we do not believe these requirements
will have a material effect 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 September 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 nine
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 prevailing interest
rates throughout the last nine months, is reflected in our reduced net interest
rate margin for the three and nine months ended September 30, 2001 as further
discussed under "--Results of Operations." During the three and nine months
ended September 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
-------------- -----------
10.1 $120,000,000 Secured CreditAgreement,
dated as of August 23, 2001, among
First Banks, Inc., and Wells Fargo
Bank Minnesota, National Association,
American National Bank and Trust
Company of Chicago, Harris Trust and
Savings Bank, The Northern Trust
Company, Union Bank of California
N.A., SunTrust Bank, Nashville,
LaSalle Bank National Association and
Wells Fargo Bank Minnesota, National
Association, as Agent (incorporated
herein by reference to Exhibit 10.6
to the Company's Registration
Statement on Form S-2, File No.
333-71652, dated October 15, 2001).
(b) We filed a current report on Form 8-K on July 27, 2001. Item 5 of the
report is a press release announcing First Banks, Inc.'s financial
results for the three and six months ended June 30, 2001. A copy of the
press release was attached as Exhibit 99.1.
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.
November 13, 2001 By: /s/ James F. Dierberg
-----------------------------------------
James F. Dierberg
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
November 13, 2001 By: /s/ Allen H. Blake
----------------------------------------
Allen H. Blake
President,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting
Officer)