UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Shares outstanding
Class at April 30, 2002
----- -----------------
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......................................................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................... 25
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 26
SIGNATURES....................................................................................... 27
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)
March 31, December 31,
2002 2001
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks....................................................... $ 169,877 181,522
Interest-bearing deposits with other financial institutions
with maturities of three months or less..................................... 2,658 4,664
Federal funds sold............................................................ 123,308 55,688
----------- ----------
Total cash and cash equivalents..................................... 295,843 241,874
----------- ----------
Investment securities:
Available for sale, at fair value............................................. 619,435 610,466
Held to maturity, at amortized cost (fair value of $22,338 and $20,812
at March 31, 2002 and December 31, 2001, respectively)...................... 21,727 20,602
----------- ----------
Total investment securities......................................... 641,162 631,068
----------- ----------
Loans:
Commercial, financial and agricultural........................................ 1,596,221 1,681,846
Real estate construction and development...................................... 973,533 954,913
Real estate mortgage.......................................................... 2,566,869 2,445,847
Consumer and installment...................................................... 120,311 124,542
Loans held for sale........................................................... 198,424 204,206
----------- ----------
Total loans......................................................... 5,455,358 5,411,354
Unearned discount............................................................. (3,717) (2,485)
Allowance for loan losses..................................................... (99,683) (97,164)
----------- ----------
Net loans........................................................... 5,351,958 5,311,705
----------- ----------
Derivative instruments............................................................. 42,135 54,889
Bank premises and equipment, net of accumulated depreciation and amortization...... 153,178 149,604
Intangibles associated with the purchase of subsidiaries, net of amortization...... 140,729 125,440
Bank-owned life insurance.......................................................... 88,403 87,200
Accrued interest receivable........................................................ 35,189 37,349
Deferred income taxes.............................................................. 93,153 94,546
Other assets....................................................................... 43,042 44,776
----------- ----------
Total assets........................................................ $ 6,884,792 6,778,451
=========== ==========
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)
March 31, December 31,
2002 2001
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing........................................................ $ 928,373 921,455
Interest-bearing............................................................ 675,597 629,015
Savings....................................................................... 1,942,415 1,832,939
Time:
Time deposits of $100 or more............................................... 489,025 484,201
Other time deposits......................................................... 1,803,159 1,816,294
----------- ----------
Total deposits........................................................... 5,838,569 5,683,904
Short-term borrowings.............................................................. 189,726 243,134
Note payable....................................................................... 43,000 27,500
Guaranteed preferred beneficial interests in:
First Banks, Inc. subordinated debentures..................................... 191,953 191,539
First Banks America, Inc. subordinated debentures............................. 44,460 44,342
Accrued interest payable........................................................... 20,231 16,006
Deferred income taxes.............................................................. 41,107 43,856
Accrued expenses and other liabilities............................................. 47,888 61,515
Minority interest in subsidiary.................................................... 18,011 17,998
----------- ----------
Total liabilities........................................................ 6,434,945 6,329,794
----------- ----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding at March 31, 2002 and December 31, 2001..................... -- --
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.................................................................... 6,074 6,074
Retained earnings.................................................................. 397,112 389,308
Accumulated other comprehensive income............................................. 27,683 34,297
----------- ----------
Total stockholders' equity............................................... 449,847 448,657
----------- ----------
Total liabilities and stockholders' equity............................... $ 6,884,792 6,778,451
=========== ==========
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except per share data)
Three Months Ended
March 31,
-------------------
2002 2001
---- ----
Interest income:
Interest and fees on loans.............................................................. $ 99,042 107,062
Investment securities................................................................... 7,281 8,480
Federal funds sold and other............................................................ 289 495
-------- -------
Total interest income.............................................................. 106,612 116,037
-------- -------
Interest expense:
Deposits:
Interest-bearing demand............................................................... 1,672 1,673
Savings............................................................................... 9,169 14,183
Time deposits of $100 or more......................................................... 5,290 7,876
Other time deposits................................................................... 18,881 27,189
Short-term borrowings................................................................... 917 1,989
Note payable............................................................................ 349 1,230
Guaranteed preferred debentures......................................................... 6,212 4,489
-------- -------
Total interest expense............................................................. 42,490 58,629
-------- -------
Net interest income................................................................ 64,122 57,408
Provision for loan losses.................................................................... 13,000 3,390
-------- -------
Net interest income after provision for loan losses................................ 51,122 54,018
-------- -------
Noninterest income:
Service charges on deposit accounts and customer service fees........................... 6,480 5,225
Gain on mortgage loans sold and held for sale........................................... 5,167 3,468
Gain on sale of credit card portfolio................................................... -- 2,275
Net gain (loss) on sales of available-for-sale investment securities.................... 92 (174)
Bank-owned life insurance investment income............................................. 1,287 1,055
Net (loss) gain on derivative instruments............................................... (339) 497
Other................................................................................... 6,148 4,128
-------- -------
Total noninterest income........................................................... 18,835 16,474
-------- -------
Noninterest expense:
Salaries and employee benefits.......................................................... 27,261 22,452
Occupancy, net of rental income......................................................... 4,672 4,116
Furniture and equipment................................................................. 4,143 3,211
Postage, printing and supplies.......................................................... 1,542 1,155
Information technology fees............................................................. 8,100 6,499
Legal, examination and professional fees................................................ 1,491 1,690
Amortization of intangibles associated with the purchase of subsidiaries................ 482 1,850
Communications.......................................................................... 796 781
Advertising and business development.................................................... 1,444 1,587
Other................................................................................... 6,927 3,788
-------- -------
Total noninterest expense.......................................................... 56,858 47,129
-------- -------
Income before provision for income taxes, minority interest in income
of subsidiary and cumulative effect of change in accounting principle............. 13,099 23,363
Provision for income taxes................................................................... 4,771 9,124
-------- -------
Income before minority interest in income of subsidiary and cumulative
effect of change in accounting principle ......................................... 8,328 14,239
Minority interest in income of subsidiary.................................................... 328 511
-------- -------
Income before cumulative effect of change in accounting principle.................. 8,000 13,728
Cumulative effect of change in accounting principle, net of tax.............................. -- (1,376)
-------- -------
Net income......................................................................... 8,000 12,352
Preferred stock dividends.................................................................... 196 196
-------- -------
Net income available to common stockholders........................................ $ 7,804 12,156
======== =======
Basic earnings per common share:
Income before cumulative effect of change in accounting principle..................... $ 329.84 571.94
Cumulative effect of change in accounting principle, net of tax....................... -- (58.16)
-------- -------
Basic................................................................................. $ 329.84 513.78
======== =======
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle..................... $ 328.30 561.09
Cumulative effect of change in accounting principle, net of tax....................... -- (58.16)
-------- -------
Diluted............................................................................... $ 328.30 502.93
======== =======
Weighted average shares of common stock outstanding.......................................... 23,661 23,661
======== =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Three Months Ended March 31, 2002 and 2001 and Nine Months Ended December 31, 2001
(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, 2000......... $12,822 241 5,915 2,267 325,580 6,021 352,846
Three months ended March 31, 2001:
Comprehensive income:
Net income................................. -- -- -- -- 12,352 12,352 -- 12,352
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment (1)..... -- -- -- -- 5,471 -- 5,471 5,471
Derivative instruments:
Cumulative effect of change in
accounting principle, net........... -- -- -- -- 9,069 -- 9,069 9,069
Current period transactions............ -- -- -- -- 12,406 -- 12,406 12,406
------
Comprehensive income....................... 39,298
======
Class A preferred stock dividends,
$0.30 per share............................ -- -- -- -- (192) -- (192)
Class B preferred stock dividends,
$0.03 per share............................ -- -- -- -- (4) -- (4)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- 328 -- -- 328
------- --- ----- ----- ------- ------ -------
Consolidated balances, March 31, 2001............ 12,822 241 5,915 2,595 337,736 32,967 392,276
Nine months ended December 31, 2001:
Comprehensive income:
Net income................................. -- -- -- -- 52,162 52,162 -- 52,162
Other comprehensive income, net of tax:
Unrealized losses on securities, net
of reclassification adjustment (1)..... -- -- -- -- (7,342) -- (7,342) (7,342)
Derivative instruments:
Current period transactions............ -- -- -- -- 14,615 -- 14,615 14,615
Reclassification to earnings........... -- -- -- -- (5,943) -- (5,943) (5,943)
------
Comprehensive income....................... -- -- -- -- 53,492
======
Class A preferred stock dividends,
$0.90 per share............................ -- -- -- -- (577) -- (577)
Class B preferred stock dividends,
$0.08 per share............................ -- -- -- -- (13) -- (13)
Effect of capital stock transactions of
majority-owned subsidiary................. -- -- -- 3,479 -- -- 3,479
------- --- ----- ----- ------- ------ -------
Consolidated balances, December 31, 2001......... 12,822 241 5,915 6,074 389,308 34,297 448,657
Three months ended March 31, 2002:
Comprehensive income:
Net income................................. -- -- -- -- 8,000 8,000 -- 8,000
Other comprehensive income, net of tax:
Unrealized gains on securities, net
of reclassification adjustment (1)..... -- -- -- -- 534 -- 534 534
Derivative instruments:
Current period transactions............ -- -- -- -- (7,148) -- (7,148) (7,148)
------
Comprehensive income....................... 1,386
======
Class A preferred stock dividends,
$0.30 per share............................ -- -- -- -- (192) -- (192)
Class B preferred stock dividends,
$0.03 per share............................ -- -- -- -- (4) -- (4)
------- --- ----- ----- ------- ------ -------
Consolidated balances, March 31, 2002............ $12,822 241 5,915 6,074 397,112 27,683 449,847
======= === ===== ===== ======= ====== =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Nine Months Ended
March 31, December 31,
------------------- -----------------
2002 2001 2001
---- ---- ----
Unrealized gains on investment securities arising during the period...... $ 594 5,358 4,940
Less reclassification adjustment for gains (losses) included in net income 60 (113) 12,282
----- ----- -------
Unrealized gains (losses) on investment securities....................... $ 534 5,471 (7,342)
===== ===== =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Three Months Ended
March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 8,000 12,352
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..................... 4,341 3,219
Amortization, net of accretion................................................... 3,013 1,783
Originations and purchases of loans held for sale................................ (449,574) (331,761)
Proceeds from the sale of loans held for sale.................................... 403,130 187,174
Provision for loan losses........................................................ 13,000 3,390
Provision for income taxes....................................................... 4,771 9,124
Payments of income taxes......................................................... (16,038) (16,990)
Decrease in accrued interest receivable.......................................... 2,648 5,509
Interest accrued on liabilities.................................................. 42,490 58,629
Payments of interest on liabilities.............................................. (38,987) (55,751)
Gain on mortgage loans sold and held for sale.................................... (5,167) (3,468)
Gain on sale of credit card portfolio............................................ -- (2,275)
Net (gain) loss on sales of available-for-sale investment securities............. (92) 174
Net loss (gain) on derivative instruments........................................ 339 (497)
Other operating activities, net.................................................. (452) (6,572)
Minority interest in income of subsidiary........................................ 328 511
----------- --------
Net cash used in operating activities......................................... (28,250) (134,073)
----------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received......... (18,303) --
Proceeds from sales of investment securities available for sale.................... 192 67,918
Maturities of investment securities available for sale............................. 194,948 121,101
Maturities of investment securities held to maturity............................... 1,067 500
Purchases of investment securities available for sale.............................. (72,585) (18,991)
Purchases of investment securities held to maturity................................ (2,195) --
Net decrease in loans.............................................................. 86,897 42,612
Recoveries of loans previously charged-off......................................... 4,561 1,917
Purchases of bank premises and equipment........................................... (2,554) (7,411)
Other investing activities, net.................................................... 2,933 519
----------- --------
Net cash provided by investing activities..................................... 194,961 208,165
----------- --------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits................................. 31,976 (51,616)
(Decrease) increase in time deposits............................................... (88,481) 8,134
Decrease in federal funds purchased................................................ (81,000) --
Repayments of Federal Home Loan Bank advances...................................... (4,000) --
Increase in securities sold under agreements to repurchase......................... 13,471 10,409
Advances drawn on note payable..................................................... 36,500 --
Repayments of note payable......................................................... (21,000) (40,000)
Payment of preferred stock dividends............................................... (196) (196)
Other financing activities, net.................................................... (12) (94)
----------- --------
Net cash used in financing activities......................................... (112,742) (73,363)
----------- --------
Net increase in cash and cash equivalents..................................... 53,969 729
Cash and cash equivalents, beginning of period.......................................... 241,874 198,279
----------- --------
Cash and cash equivalents, end of period................................................ $ 295,843 199,008
=========== ========
Noncash investing and financing activities:
Reductions of deferred tax asset valuation reserve................................. $ -- 541
Loans transferred to other real estate............................................. 1,245 451
Loans held for sale transferred to mortgage-backed securities ..................... 50,604 10,522
Loans held for sale transferred to loans........................................... 1,586 18,195
=========== ========
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 2001 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 the opinion of
management, all adjustments, consisting of normal recurring accruals considered
necessary for a fair presentation of the results of operations for the interim
periods presented herein, have been included. Operating results for the three
months ended March 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002.
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 2001 amounts have been made to conform
to the 2002 presentation. Specifically, the guaranteed preferred beneficial
interests in First Banks, Inc. and First Banks America, Inc. subordinated
debentures has been reclassified into the liabilities section on the
consolidated balance sheets rather than presented as a separate line item
excluded from the calculation of total liabilities. Consequently, the guaranteed
preferred debentures expense has been reclassified to interest expense from
noninterest expense in the consolidated statements of income.
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:
Union Financial Group, Ltd., headquartered in Swansea, Illinois (UFG), and
its wholly owned subsidiary:
First Bank, headquartered in St. Louis County, Missouri;
First Capital Group, Inc., headquartered in Albuquerque, New Mexico (FCG);
First Banks America, Inc., headquartered in San Francisco,California (FBA),
and its wholly owned subsidiaries:
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 93.69% owned by First Banks at March 31, 2002
and December 31, 2001.
(2) ACQUISITIONS
On January 15, 2002, First Banks completed its acquisition of Plains
Financial Corporation (PFC), and its wholly owned banking subsidiary, PlainsBank
of Illinois, National Association (Plainsbank), Des Plaines, Illinois, in
exchange for $36.5 million in cash. PFC operated a total of three banking
facilities in Des Plaines, Illinois, and one banking office in Elk Grove
Village, Illinois. The acquisition was funded from borrowings under First Banks'
credit agreement with a group of unaffiliated financial institutions. At the
time of the transaction, PFC had $256.3 million in total assets, $150.4 million
in loans, net of unearned discount, $81.0 million in investment securities and
$213.4 million in deposits. This transaction was accounted for using the
purchase method of accounting. The excess of the cost over the fair value of the
net assets acquired was approximately $12.6 million and will not be amortized,
but instead will be periodically tested for impairment in accordance with the
requirements of SFAS No. 142 (as described below). The core deposit intangibles
were approximately $2.9 million and will be amortized over seven years utilizing
the straight-line method. PFC was merged with and into UFG, and PlainsBank was
merged with and into First Bank.
(3) IMPLEMENTATION OF ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142 -- Goodwill and Other
Intangible Assets. 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. 144 --
Accounting for the Impairment or Disposal of Long-Lived Assets as discussed
below. The amortization of goodwill ceased upon adoption of SFAS No. 142, which
for calendar year-end companies was January 1, 2002.
On January 1, 2002, First Banks adopted SFAS No. 142. At the date of
adoption, First Banks had unamortized goodwill of $115.9 million and core
deposit intangibles of $9.6 million, which were subject to the transition
provisions of SFAS No. 142. Under SFAS No. 142, First Banks will continue to
amortize, on a straight-line basis, its core deposit intangibles and goodwill
associated with purchases of branch offices. Goodwill associated with the
purchase of subsidiaries will no longer be amortized, but instead, will be
tested annually for impairment following First Banks' existing methods of
measuring and recording impairment losses. First Banks is currently in the
process of completing the transitional goodwill impairment test required under
SFAS No. 142, to determine the potential impact, if any, on the consolidated
financial statements. However, First Banks does not believe the results of the
transitional goodwill impairment testing will identify significant impairment
losses or have a material effect on the consolidated financial statements.
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at March 31, 2002 and December 31,
2001:
March 31, 2002 December 31, 2001
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles........... $ 12,506 (446) 9,580 --
Goodwill associated with
purchases of branch offices...... 2,210 (612) 2,210 (576)
---------- ------- -------- -------
Total......................... $ 14,716 (1,058) 11,790 (576)
========== ======= ======== =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries......... $ 127,071 114,226
========== ========
Amortization of intangibles associated with the purchase of subsidiaries
was $482,000 and $1.9 million for the three months ended March 31, 2002 and
2001, respectively, and $8.2 million for the year ended December 31, 2001.
Amortization of intangibles associated with the purchase of subsidiaries,
including amortization of core deposit intangibles and branch purchases, has
been estimated through 2007 in the following table, and does not take into
consideration any potential future acquisitions or branch purchases.
(dollars expressed in thousands)
Year ending December 31:
2002............................................ $ 1,928
2003............................................ 1,928
2004............................................ 1,928
2005............................................ 1,928
2006............................................ 1,928
2007............................................ 1,928
---------
Total........................................ $ 11,568
=========
Changes in the carrying amount of goodwill for the three months ended March
31, 2002 were as follows:
Three Months Ended March 31, 2002
-------------------------------------------
First Bank FB&T Total
---------- ---- -----
(dollars expressed in thousands)
Balance, beginning of period....................... $ 19,165 96,695 115,860
Goodwill acquired during period.................... 12,577 -- 12,577
Acquisition-related adjustments.................... 170 99 269
Amortization - purchases of branch offices......... -- (36) (36)
--------- ------ --------
Balance, end of period........................... $ 31,912 96,758 128,670
========= ====== ========
The following is a reconciliation of reported net income to net income
adjusted to reflect the adoption of SFAS No. 142, as if it had been implemented
on January 1, 2001:
Three Months Ended
March 31,
----------------------
2002 2001
---- ----
(dollars expressed
in thousands)
Net income:
Reported net income................................................. $ 8,000 12,352
Add back - goodwill amortization.................................... -- 1,805
---------- --------
Adjusted net income............................................... $ 8,000 14,157
========== ========
Basic earnings per share:
Reported net income................................................. $ 329.84 513.78
Add back - goodwill amortization.................................... -- 76.29
---------- --------
Adjusted net income............................................... $ 329.84 590.07
========== ========
Diluted earnings per share:
Reported net income................................................. $ 328.30 502.93
Add back - goodwill amortization.................................... -- 73.51
---------- --------
Adjusted net income............................................... $ 328.30 576.44
========== ========
In August 2001, the FASB issued SFAS No. 144 -- Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 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. On January 1, 2002, First Banks
implemented SFAS No. 144, which did not have a material effect on the
consolidated financial statements.
(4) MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are amortized in proportion to the related
estimated net servicing income on a disaggregated, discounted basis over the
estimated lives of the related mortgages considering the level of current and
anticipated repayments, which range from five to 10 years. The weighted average
amortization period of the mortgage servicing rights is seven years.
Changes in mortgage servicing rights, net of amortization, for the periods
indicated were as follows:
Three Months Ended
March 31,
--------------------
2002 2001
---- ----
(dollars expressed in thousands)
Balance, beginning of period......................................... $ 10,125 7,048
Originated mortgage servicing rights................................. 2,438 1,034
Amortization......................................................... (817) (824)
--------- --------
Balance, end of period............................................... $ 11,746 7,258
========= ========
Amortization of mortgage servicing rights was $817,000 and $824,000 for the
three months ended March 31, 2002 and 2001, respectively, and $3.7 million for
the year ended December 31, 2001.
Amortization of mortgage servicing rights has been estimated through 2007
in the following table.
(dollars expressed in thousands)
Year ending December 31:
2002.......................................... $ 3,268
2003.......................................... 3,268
2004.......................................... 3,268
2005.......................................... 3,268
2006.......................................... 3,268
2007.......................................... 3,268
---------
Total...................................... $ 19,608
=========
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations for the periods
indicated:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except per share data)
Three months ended March 31, 2002:
Basic EPS - income before cumulative effect..................... $ 7,804 23,661 $ 329.84
Cumulative effect of change in accounting principle, net of tax. -- -- --
-------- ------- --------
Basic EPS - income available to common stockholders............. 7,804 23,661 329.84
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 696 (1.54)
-------- ------- --------
Diluted EPS - income available to common stockholders........... $ 7,996 24,357 $ 328.30
======== ======= ========
Three months ended March 31, 2001:
Basic EPS - income before cumulative effect..................... $ 13,532 23,661 $ 571.94
Cumulative effect of change in accounting principle, net of tax. (1,376) -- (58.16)
-------- ------- --------
Basic EPS - income available to common stockholders............. 12,156 23,661 513.78
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 893 (10.85)
-------- ------- --------
Diluted EPS - income available to common stockholders........... $ 12,348 24,554 $ 502.93
======== ======= ========
(6) TRANSACTIONS WITH RELATED PARTIES
First Brokerage America, L.L.C., a limited liability corporation which is
indirectly owned by First Banks' Chairman and members of his immediate family,
received approximately $757,000 and $731,000 for the three months ended March
31, 2002 and 2001, respectively, in commissions paid by unaffiliated third-party
companies. The commissions received were primarily in connection with the sales
of annuities, securities and other insurance products to customers of the
Subsidiary Banks.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and his adult children, provides information technology and
various related services to First Banks, Inc. and its Subsidiary Banks. Fees
paid under agreements with First Services, L.P. were $6.7 million and $5.3
million for the three months ended March 31, 2002, and 2001, respectively.
During the three months ended March 31, 2002 and 2001, First Services, L.P. paid
First Banks $898,000 and $486,000, respectively, in rental fees for the use of
data processing and other equipment owned by First Banks.
(7) 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 March 31, 2002, First Banks and the Subsidiary Banks were each
well capitalized under the applicable regulations.
As of March 31, 2002, 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 March 31, 2002 and December 31, 2001, First Banks' and the Subsidiary
Banks' required and actual capital ratios were as follows:
Actual To Be Well
--------------------------- For Capital Capitalized Under
March 31, December 31, Adequacy Prompt Corrective
2002 2001 Purposes Action Provisions
---- ---- -------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.32% 10.53% 8.0% 10.0%
First Bank.............................. 10.46 10.14 8.0 10.0
FB&T.................................... 11.06 11.27 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 7.40 7.57 4.0 6.0
First Bank.............................. 9.20 8.89 4.0 6.0
FB&T.................................... 9.81 10.02 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 6.60 7.25 3.0 5.0
First Bank.............................. 7.88 8.67 3.0 5.0
FB&T.................................... 9.18 9.47 3.0 5.0
(8) 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, safe deposit boxes, escrow and bankruptcy deposit services, stock
option services, 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 FB&T
--------------------------- ---------------------------
March 31, December 31, March 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities........................................... $ 321,577 245,365 298,028 368,207
Loans, net of unearned discount................................. 3,158,581 3,086,023 2,293,477 2,323,263
Total assets.................................................... 3,883,449 3,707,081 2,983,675 3,057,920
Deposits........................................................ 3,377,273 3,142,676 2,477,316 2,555,396
Stockholders' equity............................................ 352,296 321,336 384,170 398,713
========== ========= ========= =========
First Bank FB&T
-------------------------- ----------------------
Three Months Ended Three Months Ended
March 31, March 31,
-------------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Income statement information:
Interest income................................................. $ 59,742 61,595 46,866 54,739
Interest expense................................................ 22,420 31,176 13,671 22,340
---------- --------- -------- --------
Net interest income........................................ 37,322 30,419 33,195 32,399
Provision for loan losses....................................... 5,300 3,300 7,700 90
---------- --------- -------- --------
Net interest income after provision for loan losses........ 32,022 27,119 25,495 32,309
Noninterest income.............................................. 13,872 12,432 5,535 4,510
Noninterest expense............................................. 35,005 24,306 20,676 20,792
---------- --------- -------- --------
Income before provision for income taxes,
minority interest in income of subsidiary and cumulative
of change in accounting principle....................... 10,889 15,245 10,354 16,027
Provision for income taxes..................................... 3,566 5,327 3,902 6,284
---------- --------- -------- --------
Income before minority interest in income of
subsidiary and cumulative effect of change in
accounting principle..................................... 7,323 9,918 6,452 9,743
Minority interest in income of subsidiary....................... -- -- -- --
---------- --------- -------- --------
Income before cumulative effect of change in
accounting principle..................................... 7,323 9,918 6,452 9,743
Cumulative effect of change in accounting principle, net of tax. -- (917) -- (459)
---------- --------- -------- --------
Net income................................................. $ 7,323 9,001 6,452 9,284
========== ========= ======== ========
- ---------------------------
(1) Corporate and other includes $6.2 million and $4.5 million of guaranteed preferred debentures expense for the three months
ended March 31, 2002 and 2001, respectively. The applicable income tax benefit associated with he guaranteed preferred
debentures expense was $2.2 million and $1.6 million for the three months ended March 31, 2002 and 2001, respectively. In
addition, corporate and other includes FCG and holding company expenses.
Corporate, Other and
Intercompany Reclassifications (2) Consolidated Totals
---------------------------------- ----------------------------------
March 31, December 31, March 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
(dollars expressed in thousands)
21,557 17,496 641,162 631,068
(417) (417) 5,451,641 5,408,869
17,668 13,450 6,884,792 6,778,451
(16,020) (14,168) 5,838,569 5,683,904
(286,619) (271,392) 449,847 448,657
========= ======== ========= =========
Corporate, Other and
Intercompany Reclassifications (2) Consolidated Totals
---------------------------------- ----------------------------------
Three Months Ended Three Months Ended
March 31, March 31,
--------------------------------- ----------------------------------
2002 2001 2002 2001
---- ---- ---- ----
4 (297) 106,612 116,037
6,399 5,113 42,490 58,629
--------- -------- --------- ----------
(6,395) (5,410) 64,122 57,408
-- -- 13,000 3,390
--------- -------- --------- ----------
(6,395) (5,410) 51,122 54,018
(572) (468) 18,835 16,474
1,177 2,031 56,858 47,129
--------- -------- --------- ----------
(8,144) (7,909) 13,099 23,363
(2,697) (2,487) 4,771 9,124
--------- -------- --------- ----------
(5,447) (5,422) 8,328 14,239
328 511 328 511
--------- -------- --------- ----------
(5,775) (5,933) 8,000 13,728
-- -- -- (1,376)
--------- -------- --------- ----------
(5,775) (5,933) 8,000 12,352
========= ======== ========= ==========
(9) SUBSEQUENT EVENT
On April 10, 2002, First Bank Capital Trust (FBCT), a newly-formed Delaware
business trust subsidiary of First Banks, issued 25,000 shares of variable rate
cumulative trust preferred securities at $1,000 per share in a private placement
offering, and issued 774 shares of common securities to First Banks at $1,000
per share. First Banks owns all of the common securities of FBCT. The gross
proceeds of the offering were used by FBCT to purchase $25.8 million of variable
rate junior subordinated debentures from First Banks, maturing on April 22,
2032. The maturity date of the subordinated debentures may be shortened to a
date not earlier than April 22, 2007, if certain conditions are met. The
subordinated debentures are the sole asset of FBCT. In connection with the
issuance of the FBCT preferred securities, First Banks made certain guarantees
and commitments that, in the aggregate, constitute a full and unconditional
guarantee by First Banks of the obligations of FBCT under the FBCT preferred
securities. First Banks' proceeds from the issuance of the subordinated
debentures to FBCT, net of offering expenses, were $24.2 million, and were used
to reduce indebtedness currently outstanding under First Banks' revolving credit
line with a group of unaffiliated banks. The distribution rate on the FBCT
securities is equivalent to the six-month London Interbank Offering Rate plus
387.5 basis points, and is payable semi-annually in arrears on April 22 and
October 22, beginning on October 22, 2002.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to fluctuations in interest
rates and in the economy, including the negative impact on the economy resulting
from the events of September 11, 2001 in New York City and Washington D.C. and
the national response to those events; 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 152 branch
offices throughout California, Illinois, Missouri and Texas. At March 31, 2002,
we had total assets of $6.88 billion, loans, net of unearned discount, of $5.45
billion, total deposits of $5.84 billion and total stockholders' equity of
$449.8 million.
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 include mortgage banking, debit cards, brokerage services,
credit-related insurance, internet banking, automated teller machines, telephone
banking, safe deposit boxes, escrow and bankruptcy deposit services, stock
option services and trust, private banking and institutional money management
services.
We operate through two subsidiary banks, three subsidiary bank holding
companies, and through our subsidiary leasing company, as follows:
Union Financial Group, Ltd., or UFG, headquartered in Swansea, Illinois,
and its wholly owned subsidiary:
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 subsidiaries:
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 93.69% of FBA at March 31, 2002 and December 31, 2001.
Primary responsibility for managing our subsidiary banking units rests with
the officers and directors of each unit. However, in keeping with our policy, 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 $6.88 billion and $6.78 billion at March 31, 2002 and
December 31, 2001, respectively. The increase in total assets is primarily
attributable to our acquisition of Plains Financial Corporation, or PFC, in
January 2002, which provided total assets of $256.3 million, partially offset by
lower loan demand and an anticipated level of attrition associated with our
acquisitions of Charter Pacific Bank, BYL Bancorp and UFG, completed during the
fourth quarter of 2001, and of PFC. Federal funds sold increased by $67.6
million due to the investment of excess funds resulting from reduced loan
demand. Loans, net of unearned discount, increased by $42.8 million, which is
further discussed under "--Loans and Allowance for Loan Losses." In addition,
investment securities increased $10.1 million to $641.2 million at March 31,
2002 from $631.1 million at December 31, 2001. We attribute the increase to the
purchase of available-for-sale investment securities of $123.2 million as well
as the $81.0 million of investments acquired in conjunction with our acquisition
of PFC, offset by maturities of available-for-sale investment securities of
$194.9 million. The net proceeds associated with the decline in investment
securities, exclusive of the PFC securities, were utilized primarily to fund our
reduction in total deposits (as further discussed below). Intangibles associated
with the purchase of subsidiaries increased $15.3 million, which primarily
reflects core deposit intangibles of $2.9 million and goodwill of $12.6 million
associated with our acquisition of PFC. The overall increase in assets was
offset by a decrease of $12.8 million in derivative instruments due to
mark-to-market adjustments required under Statement of Financial Accounting
Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging
Activities, which was implemented in January 2001, offset by the market value of
two interest rate swap agreements purchased in March 2002. See further
discussion under "--Interest Rate Risk Management." Total deposits increased by
$154.7 million to $5.84 billion at March 31, 2002 from $5.68 billion at December
31, 2001. The increase primarily reflects deposits of $213.4 million acquired in
our PFC acquisition offset by an anticipated level of attrition associated with
our acquisitions in the fourth quarter of 2001 and the first quarter of 2002,
normal cyclical trends typically experienced during the first quarter of each
calendar year and continued aggressive competition within our market areas.
Short-term borrowings decreased $53.4 million to $189.7 million at March 31,
2002 from $243.1 million at December 31, 2001, primarily due to a $70.0 million
reduction in federal funds purchased. Our note payable increased by $15.5
million to $43.0 million at March 31, 2002 from $27.5 million at December 31,
2001 due to a $36.5 million advance utilized to fund the acquisition of PFC
offset by repayments during the period. Furthermore, accrued expenses and other
liabilities decreased $13.6 million to $47.9 million at March 31, 2002 from
$61.5 million at December 31, 2001. We attribute this decrease primarily to the
timing of certain payments.
Results of Operations
Net Income
Net income was $8.0 million for the three months ended March 31, 2002, in
comparison to $12.4 million for the comparable period in 2001. 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 for 2001. Excluding this item, net
income was $13.7 million for the three months ended March 31, 2001. The
accounting for derivatives under the requirements of SFAS No. 133 will continue
to have an impact on future financial results as further discussed above and
under "--Noninterest Income." The decline in earnings for the three months ended
March 31, 2002, as compared to the three months ended March 31, 2001, primarily
reflects higher operating expenses and increased provisions for loan losses
associated with the increased charge-off, delinquency and nonperforming trends
we are experiencing as a result of current economic conditions. The overall
increase in operating expenses (as discussed below) was partially offset by the
discontinuation of the amortization of certain intangibles associated with the
purchase of subsidiaries in accordance with the implementation of SFAS No. 142,
on January 1, 2002. Amortization of intangibles for the three months ended March
31, 2002 and 2001 was $482,000 and $1.9 million, respectively. If we had
implemented SFAS No. 142 at the beginning of 2001, net income for the three
months ended March 31, 2001, would have increased $1.8 million, to $14.2
million, or $576.44 per share on a fully diluted basis. See Note 3 to our
consolidated financial statements. The higher operating expenses and increased
provisions for loan losses were partially offset by increases in net interest
income and noninterest income as further discussed under "--Net Interest Income"
and "--Noninterest Income."
Operating expenses increased to $56.9 million for the three months ended
March 31, 2002, compared to $47.1 million for the comparable period in 2001. As
further discussed under "--Noninterest Expense," the increased operating
expenses, offset by the decline in amortization of intangibles associated with
the purchase of subsidiaries previously discussed above, are primarily
attributable to:
>> the operating expenses of the aforementioned acquisitions subsequent
to their respective acquisition dates, including certain nonrecurring
expenditures;
>> increased salaries and employee benefit expenses;
>> increased information technology fees; and
>> a $1.3 million charge to other expense on an operating lease
associated with our commercial leasing business.
These higher operating expenses, exclusive of the operating lease, are
reflective of recently completed acquisitions and 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.
Net Interest Income
Net interest income (expressed on a tax equivalent basis) increased to
$64.4 million, or 4.20% of interest-earning assets, for the three months ended
March 31, 2002, from $57.6 million, or 4.41% of interest-earning assets, for the
comparable period in 2001, respectively. We credit the increased net interest
income for the three months ended March 31, 2002 primarily to the net
interest-earning assets provided by our acquisitions completed during 2001 and
in January 2002, internal loan growth and earnings on our interest rate swap
agreements that we entered into in conjunction with our interest rate risk
management program. The increase in net interest income, however, was partially
offset by reductions in prevailing interest rates during 2001 and overall
economic conditions, resulting in the decline in our net interest margin. In
addition, guaranteed preferred debentures expense was $6.2 million and $4.5
million for the three months ended March 31, 2002 and 2001, respectively. The
increase for 2002 is primarily attributable to the issuance of $55.2 million of
additional trust preferred securities in November 2001 by our financing
subsidiary, First Preferred Capital Trust III, and a change in estimate
regarding the amortization period over which the deferred issuance costs are
being amortized.
Average loans, net of unearned discount, were $5.50 billion for the three
months ended March 31, 2002, in comparison to $4.80 billion for the comparable
period in 2001. The yield on our loan portfolio, however, decreased to 7.32% for
the three months ended March 31, 2002, in comparison to 9.06% for the comparable
period in 2001. This was a major contributor to the decline in our net interest
margin of 21 basis points for the three months ended March 31, 2002 from the
comparable period in 2001. We attribute the decline in yields and our net
interest margin primarily to the decreases in prevailing interest rates
throughout 2001. During the period from March 31, 2001 through March 31, 2002,
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 8.0% to 4.75%. This is reflected not only in the rate of
interest earned on loans that are indexed to the prime rate, but also in other
assets and liabilities which either have variable or adjustable rates, or which
matured or repriced during this period. As further discussed under "--Interest
Rate Risk Management," the reduced level of interest income earned on our loan
portfolio as a result of declining interest rates was partially mitigated by the
earnings associated with our interest rate swap agreements. For the three months
ended March 31, 2002 and 2001, these agreements provided net interest income of
$11.2 million and $973,000, respectively. In addition, increased competition
within our market areas led to reduced lending rates.
For the three months ended March 31, 2002, the aggregate weighted average
rate paid on our deposit portfolio decreased to 2.89%, compared to 4.90% for the
comparable period in 2001. We attribute the decline primarily to rates paid on
savings and time deposits, which have continued to decline in conjunction with
the interest rate reductions previously discussed. The overall decrease in rates
paid for the three months ended March 31, 2002, is a result of generally
decreasing interest rates during 2001. However, the competitive pressures on
deposits within our market areas precluded us from fully reflecting the general
interest rate decreases in our deposit pricing and still providing an adequate
funding source for loans.
The aggregate weighted average rate paid on our note payable decreased
significantly to 3.07% for the three months ended March 31, 2002, compared to
7.25% for the comparable period in 2001. Amounts outstanding under our $120.0
million line of credit with a group of unaffiliated financial institutions bear
interest at the lead bank's corporate base rate or, at our option, at the
Eurodollar rate plus a margin determined by the outstanding balance and our
profitability. Thus, our revolving credit line represents a relatively high-cost
funding source as increased advances have the effect of increasing the weighted
average rate of non-deposit liabilities. The overall cost of this funding
source, however, has been significantly mitigated by the reductions in the prime
lending rate during 2001. During 2001, our note payable was fully repaid from
the proceeds of the trust preferred securities issued by First Preferred Capital
Trust III. However, on December 31, 2001, we obtained a $27.5 million advance to
fund our acquisition of UFG and in January 2002, we utilized the note payable to
fund our acquisition of PFC. The aggregate weighted average rate paid on our
short-term borrowings also declined for the three months ended March 31, 2002 as
compared to the comparable period in 2001, reflecting 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
months ended March 31, 2002 and 2001:
Three Months Ended March 31,
------------------------------------------------------
2002 2001
------------------------ ------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ------
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1) (2) (3)(4) ................................. $5,495,047 99,122 7.32% $4,797,109 107,138 9.06%
Investment securities (4) ............................ 657,997 7,517 4.63 469,178 8,606 7.44
Federal funds sold.................................... 66,747 263 1.60 29,257 428 5.93
Other................................................. 7,307 26 1.44 3,133 67 8.67
---------- -------- ---------- --------
Total interest-earning assets.................. 6,227,098 106,928 6.96 5,298,677 116,239 8.90
-------- --------
Nonearning assets......................................... 672,056 500,953
---------- ----------
Total assets................................... $6,899,154 $5,799,630
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand deposits................... $ 660,288 1,672 1.03% $ 454,497 1,673 1.49%
Savings deposits................................... 1,913,728 9,169 1.94 1,425,876 14,183 4.03
Time deposits of $100 or more...................... 505,237 5,290 4.25 519,358 7,876 6.15
Other time deposits (3)............................ 1,829,492 18,881 4.19 1,812,460 27,189 6.08
---------- -------- ---------- --------
Total interest-bearing deposits................ 4,908,745 35,012 2.89 4,212,191 50,921 4.90
Short-term borrowings................................. 175,869 917 2.11 158,773 1,989 5.08
Notes payable......................................... 46,063 349 3.07 68,806 1,230 7.25
Guaranteed preferred debentures....................... 236,081 6,212 10.67 182,797 4,489 9.96
---------- -------- ---------- --------
Total interest-bearing liabilities............. 5,366,758 42,490 3.21 4,622,567 58,629 5.14
-------- --------
Noninterest-bearing liabilities:
Demand deposits....................................... 938,796 711,523
Other liabilities..................................... 142,829 105,011
---------- ----------
Total liabilities.............................. 6,448,383 5,439,101
Stockholders' equity...................................... 450,771 360,529
---------- ----------
Total liabilities and stockholders' equity..... $6,899,154 $5,799,630
========== ==========
Net interest income....................................... 64,438 57,610
======== ========
Interest rate spread...................................... 3.75% 3.76%
Net interest margin (5)................................... 4.20 4.41
===== =====
- ------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $316,000 and $202,000 for the three months ended March 31, 2002 and 2001, respectively.
(5) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning
assets.
Provision for Loan Losses
The provision for loan losses was $13.0 million for the three months ended
March 31, 2002, compared to $3.4 million for the comparable period in 2001. 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. We attribute the increase in the provision for
loan losses primarily to the overall growth in our loan portfolio, both internal
and through acquisitions, a general increase in risk associated with the
continued changing composition of our loan portfolio and a significant increase
in loan charge-offs and delinquent loans, largely resulting from the slowdown in
economic conditions prevalent within our markets. Loan charge-offs were $16.4
million for the three months ended March 31, 2002, in comparison to $8.9 million
for the comparable period in 2001. The increase in loan charge-offs reflects the
general slowdown in economic conditions prevalent within our markets as well as
an aggregate of $11.0 million of charge-offs on three large credit
relationships. Loan recoveries were $4.6 million for the three months ended
March 31, 2002, in comparison to $1.9 million for the comparable period in 2001.
Although nonperforming assets and past-due loans have declined to $73.8 million
at March 31, 2002 from $86.8 million at December 31, 2001, our overall
nonperforming and past-due trends are at higher than historical levels and are
expected to remain at these levels in the near future. However, we believe these
trends represent normal cyclical trends experienced within the banking industry
during times of economic slowdown. 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 $18.8 million and $16.5 million for the three months
ended March 31, 2002 and 2001, 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 in
2001 and other income.
Service charges on deposit accounts and customer service fees were $6.5
million and $5.2 million for the three months ended March 31, 2002 and 2001,
respectively. We attribute the increase in service charges and customer service
fees to:
>> increased deposit balances provided by internal growth;
>> our acquisitions completed during 2001 and, to a lesser degree, 2002;
>> additional products and services available and utilized by our
expanding base of retail and commercial customers;
>> increased fee income resulting from revisions of our customer service
charge rates, effective 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 $5.2 million and $3.5
million for the three months ended March 31, 2002 and 2001, respectively. The
overall increase is primarily attributable to a significant increase in the
volume of loans originated and sold commensurate with the reductions in mortgage
loan rates experienced in 2001 as well as the continued expansion of our
mortgage banking activities into new and existing markets.
During the three months ended March 31, 2001, we recorded a $2.3 million
pre-tax gain on the sale of our credit card portfolio. The sale of this
portfolio was consistent with our strategic decision to exit this product line
and enter into an agent relationship with a larger credit card service provider.
Noninterest income for the three months ended March 31, 2002 included a net
gain on the sale of available-for-sale investment securities of $92,000, in
comparison to a net loss on the sale of available-for-sale investment securities
of $174,000 for the comparable period in 2001. The net gain for 2002 resulted
primarily from the sales of certain investment securities held by acquired
institutions that did not meet our overall investment objectives. The loss in
2001 results from the liquidation of certain investment securities held by FBA.
The net loss on derivative instruments of $339,000 for the three months
ended March 31, 2002, in comparison to the net gain of $497,000 for the three
months ended March 31, 2001, results from changes in the fair value of our
interest rate cap agreements and fair value hedges.
Other income was $6.1 million and $4.1 million for the three months ended
March 31, 2002 and 2001, respectively. We attribute the primary components of
the increase to:
>> our acquisitions completed during 2001 and, to a lesser extent, 2002;
>> increased portfolio management fee income associated with our
Institutional Money Management division;
>> increased rental income associated with our commercial leasing
activities; and
>> a gain of approximately $448,000 on the sale of certain operating
lease equipment 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 $56.9 million and $47.1 million for the three
months ended March 31, 2002 and 2001, respectively. The increase reflects:
>> the noninterest expense of our acquisitions completed during 2001 and,
to a lesser extent, 2002, including certain nonrecurring expenses
associated with those acquisitions;
>> increased salaries and employee benefit expenses;
>> increased information technology fees; and
>> increased other expense, including a $1.3 million charge to other
expense on an operating lease associated with our commercial leasing
business.
Salaries and employee benefits were $27.3 million and $22.5 million for the
three months ended March 31, 2002 and 2001, respectively. We primarily associate
the increase with our 2001 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 2001 to
enhance 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 $8.8 million and $7.3 million for the three months ended March 31, 2002
and 2001, 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 associated with our continued expansion and renovation of various
corporate and branch offices, including our facility that houses various
centralized operations and certain corporate administrative functions.
Information technology fees were $8.1 million and $6.5 million for the
three months ended March 31, 2002 and 2001, respectively. As more fully
described in Note 6 to our consolidated financial statements, First Services,
L.P. provides information technology and operational support services to our
subsidiaries and us. We attribute the increased fees to growth and technological
advancements consistent with our product and service offerings, continued
expansion and upgrades to technological equipment, networks and communication
channels, and certain nonrecurring expenses associated with the data processing
conversions of UFG and PFC, completed in the first quarter of 2002.
Legal, examination and professional fees were $1.5 million and $1.7 million
for the three months ended March 31, 2002 and 2001, respectively. We primarily
attribute the decrease in these fees to the settlement of certain litigation
during 2001 offset by the continued expansion of overall corporate activities,
the ongoing professional services utilized by certain of our acquired entities
and increased legal fees associated with commercial loan documentation,
collection efforts, expanded corporate activities and certain defense
litigation.
Amortization of intangibles associated with the purchase of subsidiaries
was $482,000 and $1.9 million for the three months ended March 31, 2002 and
2001, respectively. The significant decrease for 2002 is attributable to the
implementation of SFAS No. 142 in January 2002. See Note 3 to our consolidated
financial statements.
Other expense was $6.9 million and $3.8 million for the three months ended
March 31, 2002 and 2001, respectively. Other expense encompasses numerous
general and administrative expenses including travel, meals and entertainment,
insurance, freight and courier services, correspondent bank charges, advertising
and business development, miscellaneous losses and recoveries, memberships and
subscriptions and transfer agent fees. We attribute the majority of the increase
in other expense to:
>> our acquisitions completed during 2001 and, to a lesser extent, 2002;
>> increased advertising and business development expenses associated
with various product and service initiatives and enhancements;
>> a $1.3 million charge on an operating lease associated with our
commercial leasing business; and
>> overall continued growth and expansion of our banking franchise.
Provision for Income Taxes
The provision for income taxes was $4.8 million and $9.1 million for the
three months ended March 31, 2002 and 2001, representing an effective income tax
rate of 36.4% and 39.1%, respectively. The decrease in the effective income tax
rate for the three months ended March 31, 2002 reflects the significant decline
in amortization of intangibles associated with the purchase of subsidiaries, in
accordance with the requirements of SFAS No. 142, which is not deductible for
tax purposes.
Interest Rate Risk Management
We utilize derivative financial instruments to assist in our management of
interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The derivative financial
instruments we hold are summarized as follows:
March 31, 2002 December 31, 2001
----------------------- ---------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $1,050,000 2,024 900,000 1,764
Fair value hedges.................................... 200,000 5,012 200,000 6,962
Interest rate cap agreements......................... 450,000 1,243 450,000 2,063
Interest rate lock commitments....................... 52,000 -- 88,000 --
Forward commitments to sell
mortgage-backed securities......................... 152,000 -- 209,000 --
========== ===== ======= =====
The notional amounts of derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a measure of our credit
exposure through our use of these instruments. The credit exposure represents
the accounting loss we would incur in the event the counterparties failed
completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value.
During the three months ended March 31, 2002 and 2001, the net interest
income realized on our derivative financial instruments was $11.2 million and
$973,000, respectively. In addition, we realized a net loss on derivative
instruments, which is included in noninterest income, of $339,000 for the three
months ended March 31, 2002, in comparison to a net gain of $497,000 for the
comparable period in 2001.
Cash Flow Hedges
We entered into the following interest rate swap agreements, designated as
cash flow hedges, to effectively lengthen the repricing characteristics of
certain interest-earning assets to correspond more closely with their funding
source with the objective of stabilizing cash flow, and accordingly, net
interest income over time:
>> During 1998, we entered into $280.0 million notional amount of
interest rate swap agreements that provided for us to receive a fixed
rate of interest and pay an adjustable rate of interest equivalent to
the daily weighted average prime lending rate minus 2.705%. The terms
of the swap agreements provided for us to pay quarterly and receive
payment semiannually. In June 2001 and November 2001, we terminated
$205.0 million and $75.0 million notional amount, respectively, of
these swap agreements, which would have expired in 2002, in order to
appropriately modify our overall hedge position in accordance with our
interest rate risk management program. In conjunction with these
terminations, we recorded pre-tax gains of $2.8 million and $1.7
million, respectively.
>> During September 1999, we entered into $175.0 million notional amount
of interest rate swap agreements that provided for us to receive a
fixed rate of interest and pay an adjustable rate 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, and replaced them with similar swap
agreements with extended maturities in order to lengthen the period
covered by the swaps. In conjunction with the termination of these
swap agreements, we recorded a pre-tax gain of $985,000.
>> During September 2000, March 2001, April 2001 and March 2002 we
entered into $600.0 million, $200.0 million, $175.0 million and $150.0
million notional amount, respectively, of interest rate swap
agreements that provide for us to receive a fixed rate of interest and
pay an adjustable rate equivalent to the weighted average prime
lending rate minus 2.70%, 2.82%, 2.82% and 2.80%, respectively. The
terms of the swap agreements provide for us to pay and receive
interest on a quarterly basis. In November 2001, we terminated $75.0
million notional amount of the swap agreements originally entered into
in April 2001, which would have expired in April 2006, in order to
appropriately modify our overall hedge position in accordance with our
interest rate risk management program. We recorded a pre-tax gain of
$2.6 million in conjunction with the termination of these swap
agreements. The amount receivable by us under the swap agreements was
$3.2 million and $2.9 million at March 31, 2002 and December 31, 2001,
respectively, and the amount payable by us was $1.2 million and $1.1
million at March 31, 2002 and December 31, 2001, respectively.
The maturity dates, notional amounts, interest rates paid and received and
fair value of our interest rate swap agreements designated as cash flow hedges
as of March 31, 2002 and December 31, 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
March 31, 2002:
March 14, 2004.................................. $ 150,000 1.95% 3.93% $ (408)
September 20, 2004.............................. 600,000 2.05 6.78 32,995
March 21, 2005.................................. 200,000 1.93 5.24 3,007
April 2, 2006................................... 100,000 1.93 5.45 1,224
---------- ---------
$1,050,000 2.00 5.95 $ 36,818
========== ===== ===== =========
December 31, 2001:
September 20, 2004.............................. $ 600,000 2.05% 6.78% $ 40,980
March 21, 2005.................................. 200,000 1.93 5.24 4,951
April 2, 2006................................... 100,000 1.93 5.45 2,305
---------- ---------
$ 900,000 2.01 6.29 $ 48,236
========== ===== ===== =========
Fair Value Hedges
We entered into the following interest rate swap agreements, designated as
fair value hedges, to effectively shorten the repricing characteristics of
certain interest-bearing liabilities to correspond more closely with their
funding source with the objective of stabilizing net interest income over time:
>> During September 2000, we entered into $25.0 million notional amount
of one-year interest rate swap agreements and $25.0 million notional
amount of five and one-half year interest rate swap agreements that
provided for us to receive fixed rates of interest ranging from 6.60%
to 7.25% and pay an adjustable rate equivalent to the three-month
London Interbank Offering Rate minus rates ranging from 0.02% to
0.11%. The terms of the swap agreements provided for us to pay
interest on a quarterly basis and receive interest on either a
semiannual basis or an annual basis. In September 2001, the one-year
interest rate swap agreements matured, and we terminated the five and
one-half year interest rate swap agreements because the underlying
interest-bearing liabilities had either matured or been called by
their respective counterparties. There was no gain or loss recorded as
a result of the terminations.
>> During January 2001, we entered into $50.0 million notional amount of
three-year interest rate swap agreements and $150.0 million notional
amount of five-year interest rate swap agreements that provide for us
to receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the three-month London Interbank Offering Rate.
The terms of the swap agreements provide for us to pay interest on a
quarterly basis and receive interest on a semiannual basis. The amount
receivable by us under the swap agreements was $2.5 million and $5.2
million at March 31, 2002 and December 31, 2001, respectively, and the
amount payable by us under the swap agreements was $852,000 and $1.2
million at March 31, 2002 and December 31, 2001, respectively.
The maturity dates, notional amounts, interest rates paid and received and
fair value of our interest rate swap agreements designated as fair value hedges
as of March 31, 2002 and December 31, 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
March 31, 2002:
January 9, 2004................................. $ 50,000 1.87% 5.37% $ 1,301
January 9, 2006................................. 150,000 1.87 5.50 2,464
---------- ---------
$ 200,000 1.87 5.47 $ 3,765
========== ===== ===== =========
December 31, 2001:
January 9, 2004................................. $ 50,000 2.48% 5.37% $ 1,761
January 9, 2006................................. 150,000 2.48 5.50 3,876
---------- ---------
$ 200,000 2.48 5.47 $ 5,637
========== ===== ===== =========
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 March
31, 2002 and December 31, 2001, the carrying value of these interest rate cap
agreements, which is included in derivative instruments in the consolidated
balance sheets, was $1.2 million and $2.1 million, respectively.
Pledged Collateral
At March 31, 2002 and December 31, 2001, we had pledged investment
securities available for sale with a carrying value of $1.1 million in
connection with our interest rate swap agreements. In addition, at March 31,
2002, and December 31, 2001, we had accepted, as collateral in connection with
our interest rate swap agreements, cash of $41.8 million and $4.9 million,
respectively. At December 31, 2001, we had also accepted investment securities
with a fair value of $53.9 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 March 31, 2002 and
December 31, 2001, we had not done so.
Interest Rate Lock Commitments/Forward Commitments to Sell Mortgage-Backed
Securities
Derivative financial instruments issued by us consist of interest rate lock
commitments to originate fixed-rate loans. Commitments to originate fixed-rate
loans consist primarily of residential real estate loans. These net loan
commitments and loans held for sale are hedged with forward contracts to sell
mortgage-backed securities.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source of
income for our subsidiary banks. Interest and fees on loans were 92.9% and 92.3%
of total interest income for the three months ended March 31, 2002 and 2001,
respectively. Total loans, net of unearned discount, increased $42.8 million to
$5.45 billion, or 79.2% of total assets, at March 31, 2002, compared to $5.41
billion, or 79.8% of total assets, at December 31, 2001. The increase in loans,
as reflected on our consolidated balance sheets, is primarily attributable to
our acquisition of PFC, which provided loans, net of unearned discount, of
$150.4 million, and an increase in our real estate mortgage portfolio due to a
higher volume of residential mortgage loans originated, including both new
fundings as well as refinancings, as a result of reduced interest rates. The
overall increase in loans is offset by declines in our commercial, financial and
agricultural and loans held for sale portfolios due to an anticipated amount of
attrition associated with our acquisitions completed during the fourth quarter
of 2001 and the first quarter of 2002, as well as current economic conditions
prevalent in our markets, resulting in lower loan demand. In addition, our
consumer and installment portfolio, net of unearned discount, decreased to
$116.6 million at March 31, 2002 from $122.1 million at December 31, 2001. This
decrease reflects continued 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.
Nonperforming assets include nonaccrual loans, restructured loans and other
real estate. The following table presents the categories of nonperforming assets
and certain ratios as of the dates indicated:
March 31, December 31,
2002 2001
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual..................................................... $ 19,615 19,326
Real estate construction and development:
Nonaccrual..................................................... 3,951 3,270
Real estate mortgage:
Nonaccrual..................................................... 36,917 41,898
Restructured terms............................................. 1,999 2,013
Consumer and installment:
Nonaccrual..................................................... 755 794
Restructured terms............................................. -- 7
---------- ---------
Total nonperforming loans.................................. 63,237 67,308
Other real estate................................................... 4,534 4,316
---------- ---------
Total nonperforming assets................................. $ 67,771 71,624
========== =========
Loans, net of unearned discount..................................... $5,451,641 5,408,869
========== =========
Loans past due 90 days or more and still accruing................... $ 6,014 15,156
========== =========
Ratio of:
Allowance for loan losses to loans.............................. 1.83% 1.80%
Nonperforming loans to loans.................................... 1.16 1.24
Allowance for loan losses to nonperforming loans................ 157.63 144.36
Nonperforming assets to loans and other real estate............. 1.24 1.32
========== =========
Nonperforming loans, consisting of loans on nonaccrual status and certain
restructured loans, were $63.2 million at March 31, 2002, in comparison to $67.3
million at December 31, 2001. While nonperforming loans have decreased at March
31, 2002 compared to December 31, 2002, loan charge-offs increased significantly
from $8.9 million for the three months ended March 31, 2001 to $16.4 million for
the three months ended March 31, 2002. We attribute the higher trends in
nonperforming and past-due loans to be reflective of cyclical trends experienced
within the banking industry as a result of economic slowdown. Consistent with
the general economic slowdown experienced within our primary markets, we
anticipate these trends will continue in the upcoming months.
The following table is a summary of our loan loss experience for the
periods indicated:
Three Months Ended
March 31,
---------------------------
2002 2001
---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of period......................... $ 97,164 81,592
Acquired allowances for loan losses............................... 1,366 --
--------- -------
98,530 81,592
--------- -------
Loans charged-off................................................. (16,408) (8,903)
Recoveries of loans previously charged-off........................ 4,561 1,917
--------- -------
Net loan charge-offs.............................................. (11,847) (6,986)
--------- -------
Provision for loan losses......................................... 13,000 3,390
--------- -------
Allowance for loan losses, end of period............................... $ 99,683 77,996
========= =======
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 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
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 $721.8 million and $754.8
million at March 31, 2002 and December 31, 2001, 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 March 31, 2002:
(dollars expressed in thousands)
Three months or less............................ $372,227
Over three months through six months............ 143,252
Over six months through twelve months........... 97,460
Over twelve months.............................. 108,812
--------
Total....................................... $721,751
========
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 March 31, 2002 and December 31, 2001, the borrowing
capacity of our subsidiary banks under these agreements was approximately $1.30
billion and $1.21 billion, respectively. In addition, our subsidiary banks'
borrowing capacity through their relationships with the Federal Home Loan Banks
was approximately $232.0 million and $234.6 million at March 31, 2002 and
December 31, 2001, 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,
First Preferred Capital Trust III and First Bank Capital Trust, and FBA's
financing subsidiary, First America Capital Trust.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2001, 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 6.1% of net interest income,
based on assets and liabilities at December 31, 2001. At March 31, 2002, we
remain in an "asset-sensitive" position and thus, remain subject to a higher
level of risk in a declining interest rate environment. Although we do not
anticipate that instantaneous shifts in the yield curve as projected in our
simulation model are likely, these are indications of the effects that changes
in interest rates would have over time. Our asset-sensitive position, coupled
with reductions in prevailing interest rates throughout 2001, is reflected in
our reduced net interest margin for the three months ended March 31, 2002 as
compared to the comparable period in 2001 and further discussed under "--Results
of Operations." During the three months ended March 31, 2002, our
asset-sensitive position and overall susceptibility to market risks have not
changed materially.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
Exhibit Number Description
-------------- -----------
None Not Applicable
(b) We filed a current report on Form 8-K on January 29, 2002. Item 5 of
the report references a press release announcing our financial results
for the three months and year ended December 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANKS, INC.
May 13, 2002 By: /s/ James F. Dierberg
----------------------------------------
James F. Dierberg
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
May 13, 2002 By: /s/ Allen H. Blake
----------------------------------------
Allen H. Blake
President, Chief Operating Officer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)