UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 Number - 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 Number)
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)
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
9.25% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust and guaranteed
by its parent, First Banks, Inc.)
(Title of class)
8.50% Cumulative Trust Preferred Securities
(issued by First America Capital Trust and guaranteed by
its parent, First Banks, Inc.)
(Title of class)
10.24% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust II and guaranteed
by its parent, First Banks, Inc.)
(Title of class)
9.00% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust III and guaranteed
by its parent, First Banks, Inc.)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ X ]
None of the voting stock of the Company is held by nonaffiliates. All
of the voting stock of the Company is owned by various trusts, which were
created by and for the benefit of Mr. James F. Dierberg, the Company's Chairman
of the Board of Directors and Chief Executive Officer, and members of his
immediate family.
At March 25, 2003, there were 23,661 shares of the registrant's common
stock outstanding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause our actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and the economy, including the negative impact on the economy resulting
from the events of September 11, 2001 in New York City and Washington, D.C. and
the national response to those events as well as the threat of future terrorist
activities, potential wars and/or military actions related thereto, and domestic
responses to terrorism or threats of terrorism; the impact of laws and
regulations applicable to us and changes therein; the impact of accounting
pronouncements applicable to us and changes therein; competitive conditions in
the markets in which we conduct our operations, including competition from
banking and non-banking companies with substantially greater resources than us,
some of which may offer and develop products and services not offered by us; our
ability to control the composition of our loan portfolio without adversely
affecting interest income; the credit risk associated with consumers who may not
repay loans; the geographic dispersion of our offices; the impact our hedging
activities may have on our operating results; the highly regulated environment
in which we operate; and our ability to respond to changes in technology. With
regard to our efforts to grow through acquisitions, factors that could affect
the accuracy or completeness of forward-looking statements contained herein
include the competition of larger acquirers with greater resources; fluctuations
in the prices at which acquisition targets may be available for sale; the impact
of making acquisitions without using our common stock; and possible asset
quality issues, unknown liabilities or integration issues with the businesses
that we have acquired. We do not have a duty to and will not update these
forward-looking statements. Readers of this report should therefore not place
undue reliance on forward-looking statements.
FIRST BANKS, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business...................................................................... 1
Item 2. Properties.................................................................... 16
Item 3. Legal Proceedings............................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........................... 16
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..... 17
Item 6. Selected Financial Data....................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................... 48
Item 8. Financial Statements and Supplementary Data................................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................. 48
Part III
Item 10. Directors and Executive Officers of the Registrant............................ 49
Item 11. Executive Compensation........................................................ 51
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 53
Item 13. Certain Relationships and Related Transactions................................ 54
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 55
Signatures............................................................................. 99
Certifications......................................................................... 103
PART I
Item 1. Business
General. We are a registered bank holding company incorporated in Missouri and
headquartered in St. Louis County, Missouri. Through our subsidiaries, we offer
a broad array of financial services to consumer and commercial customers. Since
1994, our organization has grown significantly, primarily as a result of our
acquisition strategy, as well as through internal growth. We currently have
banking operations in California, Illinois, Missouri and Texas. At December 31,
2002, we had total assets of $7.34 billion, total loans, net of unearned
discount, of $5.43 billion, total deposits of $6.17 billion and total
stockholders' equity of $519.0 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 and a subsidiary bank holding
company, all of which are wholly owned, as follows:
The San Francisco Company, or SFC, headquartered in San Francisco,
California, and its wholly owned subsidiaries:
First Bank, headquartered in St. Louis County, Missouri; and
First Bank & Trust, or FB&T, headquartered in San Francisco,
California.
The following table summarizes selected data about our subsidiaries at
December 31, 2002:
Loans, Net of
Number of Total Unearned Total
Name Locations Assets Discount Deposits
---- --------- ------ -------- --------
(dollars expressed in thousands)
First Bank.................................. 94 $ 4,187,958 3,128,677 3,551,533
FB&T ....................................... 57 3,169,197 2,303,912 2,638,395
We anticipate merging our bank subsidiaries on March 31, 2003, to allow
certain administrative and operational economies not available while the two
banks maintain separate charters.
Primary responsibility for managing our subsidiary banking units rests
with the officers and directors of each unit, but we centralize overall
corporate policies, procedures and administrative functions and provide
centralized operational support functions for our subsidiaries. This practice
allows us to achieve various operating efficiencies while allowing our
subsidiary banking units to focus on customer service.
In February 1997, our initial financing subsidiary, First Preferred
Capital Trust, issued $86.25 million of 9.25% trust preferred securities, and,
in July 1998, our second financing subsidiary, First America Capital Trust,
issued $46.0 million of 8.50% trust preferred securities. In October 2000, our
third financing subsidiary, First Preferred Capital Trust II, issued $57.5
million of 10.24% trust preferred securities, and, in November 2001, our fourth
financing subsidiary, First Preferred Capital Trust III, issued $55.2 million of
9.00% trust preferred securities. On April 10, 2002, First Bank Capital Trust,
our fifth financing subsidiary, issued $25.0 million of variable rate cumulative
trust preferred securities. Each of these financing subsidiaries operates as a
Delaware business trust. The trust preferred securities issued by First
Preferred Capital Trust, First Preferred Capital Trust II and First Preferred
Capital Trust III are publicly held and traded on the Nasdaq Stock Market's
National Market system. The trust preferred securities issued by First Bank
Capital Trust were issued in a private placement and rank equal to the trust
preferred securities issued by our other three financing subsidiaries and junior
to the trust preferred securities issued by First Preferred Capital Trust III.
The trust preferred securities issued by First America Capital Trust are
publicly held and traded on the New York Stock Exchange. These trust preferred
securities have no voting rights except in certain limited circumstances. With
the exception of the First Bank Capital Trust preferred securities, we pay
distributions on these trust preferred securities quarterly in arrears on March
31st, June 30th, September 30th, and December 31st of each year. Distributions
on the First Bank Capital Trust preferred securities are payable semi-annually
in arrears on April 22nd and October 22nd of each year. The distributions
payable on all issues of trust preferred securities are included in interest
expense in the consolidated statements of income.
Various trusts, which were created by and are administered by and for
the benefit of Mr. James F. Dierberg, our Chairman of the Board and Chief
Executive Officer, and members of his immediate family, own all of our voting
stock. Mr. Dierberg and his family, therefore, control our management and
policies.
At December 31, 2002, we, Mr. Dierberg and an affiliate of Mr. Dierberg
owned 7.47%, 0.08% and 1.75%, respectively, of the outstanding shares of common
stock of Allegiant Bancorp, Inc., or Allegiant, located in St. Louis, Missouri.
Strategy. In the development of our banking franchise, we acquire other
financial institutions as one means of achieving our growth objectives.
Acquisitions may serve to enhance our presence in a given market, to expand the
extent of our market area or to enable us to enter new or noncontiguous markets.
Due to the nature of our ownership, we have elected to only engage in those
acquisitions that can be accomplished for cash. However, by using cash in our
acquisitions, the characteristics of the acquisition arena may, at times, place
us at a competitive disadvantage relative to other acquirers offering stock
transactions. This results from the market attractiveness of other financial
institutions' stock and the advantages of tax-free exchanges to the selling
shareholders. Our acquisition activities are generally somewhat sporadic because
we may consummate multiple transactions in a particular period, followed by a
substantially less active acquisition period. Furthermore, the intangible assets
recorded in conjunction with these acquisitions create an immediate reduction in
regulatory capital. This reduction, as required by regulatory policy, provides
further financial disincentives to paying large premiums in cash acquisitions.
Recognizing these facts, we follow certain patterns in our
acquisitions. First, we typically acquire several smaller institutions,
sometimes over an extended period of time, rather than a single larger one. We
attribute this approach to the constraints imposed by the amount of funds
required for a larger transaction, as well as the opportunity to minimize the
aggregate premium required through smaller individual transactions. Secondly, in
some acquisitions, we may acquire institutions having significant asset-quality,
ownership, regulatory or other problems. We seek to address the risks of these
issues by adjusting the acquisition pricing, accompanied by appropriate remedial
attention after consummation of the transaction. In these institutions, these
issues may diminish their attractiveness to other potential acquirers, and
therefore may reduce the amount of acquisition premium required. Finally, we may
pursue our acquisition strategy in other geographic areas, or pursue internal
growth more aggressively because cash transactions may not be economically
viable in extremely competitive acquisition markets.
During the five years ended December 31, 2002, we primarily
concentrated our acquisitions in California, completing 13 acquisitions of banks
and four purchases of branch offices, which provided us with an aggregate of
$2.21 billion in total assets and 48 banking locations as of the dates of the
acquisitions. More recent acquisitions have occurred in our other geographic
markets. In 2001, we completed our acquisition of a bank holding company in
Swansea, Illinois, and in 2002, we completed our acquisition of a bank holding
company in Des Plaines, Illinois, as well as the purchase of two branch offices
in Denton and Garland, Texas. We are also planning to further expand our Midwest
banking franchise with an acquisition in the Ste. Genevieve, Missouri market,
which is expected to be completed on March 31, 2003. These acquisitions have
allowed us to significantly expand our presence throughout our geographic areas,
improve operational efficiencies, convey a more consistent image and quality of
service and more cohesively market and deliver our products and services.
Management continues to meld the acquired entities into our operations, systems
and culture.
Following our acquisitions, various tasks are necessary to effectively
integrate the acquired entities into our business systems and culture. While the
activities required are specifically dependent upon the individual circumstances
surrounding each acquisition, the majority of our efforts have been concentrated
in various areas including, but not limited to:
>> improving asset quality;
>> reducing unnecessary, duplicative and/or excessive expenses
including personnel, information technology and certain other
operational and administrative expenses;
>> maintaining, repairing and, in some cases, refurbishing bank
premises necessitated by the deferral of such projects by some of
the acquired entities;
>> renegotiating long-term leases which provide space in excess of
that necessary for banking activities and/or rates in excess of
current market rates, or subleasing excess space to third
parties;
>> relocating branch offices which are not adequate, conducive or
convenient for banking operations; and
>> managing actual or potential litigation that existed with respect
to acquired entities to minimize the overall costs of
negotiation, settlement or litigation.
The post-acquisition process also includes the combining of separate
and distinct entities together to form a cohesive organization with common
objectives and focus. We invest significant resources to reorganize staff,
recruit personnel where needed, and establish the direction and focus necessary
for the combined entity to take advantage of the opportunities available to it.
This investment contributed to the increases in noninterest expense during the
five years ended December 31, 2002, and resulted in the creation of new banking
entities, which conveyed a more consistent image and quality of service. The new
banking entities provide a broad array of banking products to their customers
and compete effectively in their marketplaces, even in the presence of other
financial institutions with much greater resources. While some of these
modifications did not contribute to reductions of noninterest expense, they
contributed to the commercial and retail business development efforts of the
banks, and ultimately to their prospects for improving future profitability.
In conjunction with our acquisition strategy, we have also focused on
building and reorganizing the infrastructure necessary to accomplish our
objectives for internal growth. This process has required significant increases
in the resources dedicated to commercial and consumer business development,
financial service product line and delivery systems, branch development and
training, advertising and marketing programs, and administrative and operational
support. In addition, during 1999, we began an internal restructuring process
designed to better position us for future growth and opportunities expected to
become available as consolidation and changes continue in the delivery of
financial services. The magnitude of this project was extensive and covered
almost every area of our organization. We continue to focus on modifying and
effectively repositioning our internal and external resources to better serve
the markets in which we operate. Although these efforts have primarily led to
increased capital expenditures and noninterest expenses, we anticipate they will
lead to additional internal growth, more efficient operations and improved
profitability over the long term.
Lending Activities. Our enhanced business development resources assisted in the
realignment of certain acquired loan portfolios, which were skewed toward loan
types that reflected the abilities and experiences of the management of the
acquired entities. In order to achieve a more diversified portfolio, to address
asset-quality issues in the portfolios and to achieve a higher interest yield on
our loan portfolio, we reduced a substantial portion of the loans which were
acquired during this time through payments, refinancing with other financial
institutions, charge-offs, and, in certain instances, sales of loans. As a
result, our portfolio of one-to-four family residential real estate loans, after
reaching a high of $1.20 billion at December 31, 1995, has decreased to $694.6
million at December 31, 2002. Similarly, our portfolio of consumer and
installment loans, net of unearned discount, decreased significantly from $279.3
million at December 31, 1997 to $79.1 million at December 31, 2002. The decrease
reflects the reduction in new consumer and installment loan volumes and the
repayment of principal on our existing consumer and installment loan portfolio,
all of which are consistent with our objectives of expanding commercial lending
and reducing the amount of less profitable loan types. The decline also reflects
the sale of our student loan and credit card portfolios in 2001, which totaled
approximately $16.9 million and $13.5 million, respectively, at the time of
sale. We recorded gains of $1.9 million and $229,000 on the sale of the credit
card portfolio and the student loan portfolio, respectively, and we do not have
any continuing involvement in the transferred assets.
As these components of our loan portfolio decreased, we replaced them
with higher yielding loans that were internally generated by our business
development function. With our acquisitions, we expanded our business
development function into the new market areas in which we were then operating.
Consequently, in spite of relatively large reductions in acquired portfolios,
our aggregate loan portfolio, net of unearned discount, increased from $3.00
billion at December 31, 1997 to $5.43 billion at December 31, 2002.
Our business development efforts are focused on the origination of
loans in three general types: (a) commercial, financial and agricultural loans,
which totaled $1.44 billion at December 31, 2002; (b) commercial real estate
mortgage loans, which totaled $1.64 billion at December 31, 2002; and (c)
construction and land development loans, which totaled $989.7 million at
December 31, 2002.
The primary component of commercial, financial and agricultural loans
is commercial loans which are made based on the borrowers' general credit
strength and ability to generate cash flows for repayment from income sources.
Most of these loans are made on a secured basis, most often involving the use of
company equipment, inventory and/or accounts receivable as collateral. For
reporting purposes, this category of loans includes only those commercial loans
that do not include real estate as collateral. Regardless of collateral,
substantial emphasis is placed on the borrowers' ability to generate cash flow
sufficient to operate the business and provide coverage of debt servicing
requirements. Commercial loans are frequently renewable annually, although some
terms may be as long as three years. These loans typically require the borrower
to maintain certain operating covenants appropriate for the specific business,
such as profitability, debt service coverage and current asset and leverage
ratios, which are generally reported and monitored on a quarterly basis and
subject to more detailed annual reviews. Commercial loans are made to customers
primarily located in the geographic trade areas of our subsidiary banks in
Missouri, Illinois, Texas and California, and who are engaged in manufacturing,
retailing, wholesaling and other service businesses. This portfolio is not
concentrated in large specific industry segments that are characterized by
sufficient homogeneity that would result in significant concentrations of credit
exposure. Rather, it is a highly diversified portfolio that encompasses many
industry segments. The largest general concentration in this portfolio, which is
not homogeneous in nature, is agricultural which totals approximately $37.3
million, representing approximately 3% of the commercial, financial and
agricultural portfolio. This portfolio, however, is diverse in geography and
collateral, secured by a mixture of agricultural equipment, livestock and crop
production. The largest homogeneous industry segment included within this
portfolio is the fast-food restaurant segment, in which we had total loans
outstanding of approximately $50.0 million, representing approximately 3% of
this portfolio at December 31, 2002. Diversity in this segment of the portfolio
is represented by both geography and a mixture of loans to both franchisees and
franchisors, with approximately 80% of the portfolio involving loans to
franchisees and 20% to franchisors. Within both real estate and commercial
lending portfolios, we strive for the highest degree of diversity that is
practicable. We also emphasize the development of other service relationships
with our commercial borrowers, particularly deposit accounts.
Commercial real estate loans include loans for which the intended
source of repayment is the rental and other income from the real estate,
including both commercial real estate developed for lease and owner occupied
commercial real estate. The underwriting of owner occupied commercial real
estate loans generally follows the procedures for commercial lending described
above, except that the collateral is real estate, and the loan term may be
longer. The primary emphasis in underwriting loans for which the primary source
of repayment is the performance of the collateral is the projected cash flow
from the real estate and its adequacy to cover the operating costs of the
project and the debt service requirements. Secondary emphasis is placed on the
appraised value of the real estate, although the appraised liquidation value of
the collateral must be adequate to repay the debt and related interest in the
event the cash flow becomes insufficient to service the debt. Generally,
underwriting terms require the loan principal not to exceed 75% of the appraised
value of the collateral and the loan maturity not to exceed seven years.
Commercial real estate loans are made for commercial office space, retail
properties, hospitality, industrial and warehouse facilities and recreational
properties. We rarely finance commercial real estate or rental properties that
do not have lease commitments from substantial tenants.
Construction and land development loans include commitments for
construction of both residential and commercial properties. Commercial real
estate projects require commitments for permanent financing from other lenders
upon completion of the project or, more typically, include a short-term
amortizing component of the financing from the bank. Commitments for
construction of multi-tenant commercial and retail projects require lease
commitments from a substantial primary tenant or tenants prior to commencement
of construction. We finance some projects for borrowers whose home office is
within our trade area for which the particular project may be outside our normal
trade area. We do not, however, engage in developing commercial and residential
construction lending business outside of our trade area. Residential real estate
construction and development loans are made based on the cost of land
acquisition and development, as well as the construction of the residential
units. Although we finance the cost of display units and units held for sale,
approximately 40% of the loans for individual residential units have purchase
commitments prior to funding.
In addition to underwriting based on estimates and projection of
financial strength, collateral values and future cash flows, most loans to
borrowing entities other than individuals require the personal guarantees of the
principals of the borrowing entity.
Our commercial leasing portfolio totaled $126.7 million and $149.0
million at December 31, 2002 and 2001, respectively. This portfolio consists of
leases originated by our former subsidiary, First Capital Group, Inc.,
Albuquerque, New Mexico, primarily through third parties, on commercial
equipment including aircraft parts and equipment. During 2002, we changed the
nature of this business, resulting in the discontinuation of the operations of
First Capital Group, Inc. and the transfer of all responsibilities for the
existing portfolio to a new leasing staff in St. Louis, Missouri.
At December 31, 2001, within the commercial leasing portfolio, there
were approximately $60.1 million of leases of parts and equipment to the
commercial airline industry and related aircraft service providers. This
equipment consisted primarily of engines, landing gear and replacement parts,
most of which is used in maintenance operations by commercial airlines or by
third party vendors performing maintenance for the airlines. In addition, there
were several leases for smaller aircraft used by charter services. Earlier in
2001, it became apparent that the airline industry in general was experiencing
problems with overcapacity, and as a result, had begun reducing its requirements
for new and replacement aircraft. This was evidenced by airlines taking portions
of their fleets, particularly older less efficient aircraft, out of service and
reducing orders for new equipment. This affected maintenance operations because
as the usage of aircraft decreased, the maintenance requirements were also
reduced. Consequently, by late 2001, we discontinued new leases of equipment
related to the airline industry.
While some of the leases in our portfolio had evidenced problems by
early 2001, overcapacity problems and resulting financial distress in the
commercial airline industry became more critical after the terrorist attacks of
September 11, 2001. Following these events, we re-evaluated our aviation related
lease portfolio to examine our overall exposure to the industry, the effects of
recent trends on valuations of equipment and the financial strength of our
lessees. As a result of our review, for the year ended December 31, 2001, we
incurred $4.5 million of charge-offs in connection with the aircraft leasing
portfolio and had $2.6 million of nonperforming aviation related leases at
December 31, 2001. The evaluation process has evolved into an ongoing monitoring
of this portfolio through continuous communication with lessees to establish
information concerning their use of equipment under lease, monitoring the use of
that equipment, and tracking of changes in equipment and related residual
valuations. When problems are detected, we obtain new valuations of the
equipment, and recognize any impairment in valuation by adjustments to reserves
or income as appropriate depending upon the type of lease. Sources of
information for valuing our leased assets include the Aircraft Bluebook, other
public information from a variety of sources, consultation with other lessors
and brokers of aviation equipment and specific engagement of an independent
asset management company for equipment valuation as well as management of
repossessed assets. Specifically with respect to residual values, and to
establish formality in our process, we have also arranged for appraisal of
leased assets that involve residual risk by an International Society of
Transport Aircraft Trading certified appraiser of aviation assets. The
information received from these various specialized sources assists us in
valuing our lease portfolio and recognizing any impairment on these assets. By
December 31, 2002, the portfolio of leases on commercial aircraft and parts and
equipment had been reduced to $46.5 million, with $8.6 million of nonperforming
aviation related leases, and $619,000 of charge-offs in connection with the
aircraft leasing portfolio for the year ended December 31, 2002.
Our expanded level of commercial lending carries with it greater credit
risk, which we manage through uniform loan policies, procedures, underwriting
and credit administration. As a consequence of such greater risk, the growth of
the loan portfolio must also be accompanied by adequate allowances for loan
losses. We associate the increased level of commercial lending activities and
our acquisitions with the increases of $7.9 million and $14.1 million in
nonperforming loans for the years ended December 31, 2002 and 2001,
respectively. In addition, the loan portfolios of Millennium Bank and Union
Financial Group, Ltd., or Union, which we acquired in 2000 and 2001,
respectively, exhibited significant distress, which further contributed to the
overall increase in nonperforming loans.
Millennium Bank, which we acquired on December 29, 2000, operated a
factoring business for doctors, hospitals and other health care professionals.
This business had been started by Millennium Bank the year before our
acquisition, and had approximately $11.0 million of receivables at the time of
our acquisition. Due to the relatively short life of this operation, the
portfolio did not exhibit signs of problems at that time. Consequently, we
allowed the business to continue after the acquisition to determine whether it
would be an appropriate line of business in the future. However, in late 2001,
the factoring receivables began to exhibit signs of problems, and in early 2002,
we determined one of the larger borrowers was incorrectly accounting for its
receivables, causing the factored balance to be substantially overfunded. After
this, other asset quality issues arose, causing us to discontinue this business
in June 2002. During 2002, we charged-off approximately $2.6 million, or 24.8%,
of the health care factoring portfolio. At December 31, 2002, we had
approximately $10.2 million of factoring business receivables, which are
expected to decline over time given the discontinuation of this line of
business. Since no value was assigned to goodwill or other intangible assets of
this line of business in the acquisition, and the problems appeared to arise
subsequent to the acquisition, we determined that this did not create an
impairment of the goodwill that we recorded in connection with the acquisition.
In evaluating the loan portfolios of Union's two subsidiary banks prior
to its acquisition, it was clear that substantial problems existed in those
portfolios. Generally, credit documentation was poor, underwriting standards
were lax and loan terms were aggressive. As we conducted our due diligence
review, we applied the same asset quality standards, risk rating system and
allowance methodology that we apply to our own loan portfolio. Based on this
review, and to address concerns we had regarding Union's loan portfolios and the
level of its allowance for loan and lease losses, an escrow account of
approximately $1.6 million was established by withholding that amount from the
purchase price. This escrow account was available to absorb losses during the
two-year period following the acquisition from the Union Bank loan portfolio
that were in excess of Union Bank's allowance for loan and lease losses at the
time of the due diligence review. Union's consolidated allowance for loan losses
was $8.6 million relative to an aggregate loan portfolio of $262.3 million at
December 31, 2001, the date of acquisition.
While we believed there were substantial problems with the Union
portfolios, few of these had been identified or addressed by Union as of
December 31, 2001. Consequently, when we assimilated these loans into our
systems and procedures, the problems in the portfolio surfaced, causing an
increase in the amount of problem assets, as well as contributing to the level
of loans charged-off during 2002. For the year ended December 31, 2002, loan
charge-offs from the Union portfolios were $5.2 million, including an amount
within the Union Bank portfolio that was in excess of the allowance at the date
of our due diligence review and the entire $1.6 million escrow account.
Furthermore, at December 31, 2002, nonperforming loans in the Union portfolios
were $6.9 million. Because these problems had been anticipated in negotiating
the acquisition price, they did not affect the amount of goodwill recorded in
connection with this acquisition.
For the years ended December 31, 2002 and 2001, our nonperforming loans
increased $7.9 million and $14.1 million, respectively. The increase in
nonperforming loans in 2001 and 2002 is primarily attributable to general
economic conditions, additional problems identified in the acquired loan
portfolios, continuing deterioration in the portfolio of leases to the airline
industry and the addition of a $16.1 million borrowing relationship to
nonaccrual real estate construction and development loans during the second
quarter of 2002. This relationship relates to a residential and recreational
development project that had significant financial difficulties and experienced
inadequate project financing, project delays and weak project management. This
relationship had previously been on nonaccrual status and was removed from
nonaccrual status during the third quarter of 2001 due to financing being recast
with a new borrower, who appeared able to meet ongoing developmental
expectations. Subsequent to that time, the new borrower encountered internal
management problems, which negatively impacted and further delayed development
of the project. We believe these increases, while partially attributable to the
overall risk in our loan portfolio, are reflective of cyclical trends
experienced within the banking industry as a result of the economic slow down.
During 2001 and 2002, the nation generally experienced a relatively
mild, but prolonged economic slow down that has affected much of the banking
industry, including us. This was exacerbated by the terrorist attacks in
September 2001 and the effects the attacks and related governmental responses
had on economic activity. The effects of the downturn have been inconsistent
between various geographic areas of the country, as well as different segments
of the economy. To us, the effects of the downturn can be observed in generally
lower interest rates, which have a negative impact on our net interest income,
and on the performance of our loan portfolio, which is reflected in higher
delinquencies, nonperforming assets, charge-offs and provisions for loan losses,
as well as reduced loan demand from customers. The impact of lower interest
rates has been significantly reduced through the use of various financial
derivative instruments to provide hedges of this interest rate risk. See
"--Interest Rate Risk Management." However, during 2001 and 2002, we incurred
increasing asset quality issues that were at least partially attributable to
economic conditions.
Within our market areas, the impact of the economy has become evident
at different times. In our midwestern markets, a perceptible increase in loan
delinquencies began in late 2000 and continued throughout 2001. The increase in
delinquencies was primarily focused in commercial, financial and agricultural
loans, lease financing loans and, to a lesser extent, commercial real estate
loans, and initially involved borrowers that had already encountered some
operating problems that continued to deteriorate as the economy became weaker.
Included in this were loans on hotels and leases to the commercial airline
industry. In both instances, the industry had been suffering from overcapacity
prior to 2001, which then became much worse with the economic downturn and the
events of September 11, 2001. As the recession continued, the effects expanded
to companies that had been stronger, but succumbed to the ongoing effects of
slowed economic activity. First Bank, our midwestern subsidiary bank, incurred
net loan charge-offs of $16.3 million for the year ended December 31, 2001, and
had nonperforming loans and leases of $47.7 million at December 31, 2001. In
comparison, for the year ended December 31, 2002, net loan charge-offs had
increased to $22.1 million, while nonperforming loans had increased to $50.5
million at December 31, 2002. The increase in nonperforming loans primarily
reflects the single real estate construction and development relationship of
$16.1 million that became nonperforming during the second quarter of 2002, as
previously discussed.
Generally, the effects on us of the economic downturn in California
have been limited to the San Francisco Bay area, including the area known as
"Silicon Valley." Although we have a substantial banking presence in the San
Francisco Bay area, we have relatively little direct exposure to the high
technology companies. Consequently, the decline in that industry beginning in
2000 had little direct effect on our California operations. However, as the
magnitude of the problems in the high technology sector increased, the effects
spread to companies that were suppliers and servicers of the high technology
sector, and to commercial real estate in the area. As a result, our asset
quality issues in California have been concentrated within the San Francisco Bay
area, and generally do not involve Southern California or the
Sacramento-Roseville area in Northern California. Furthermore, these issues have
primarily arisen during 2002. Consequently, while our California banking
operation incurred net loan charge-offs of $5.4 million in 2001, and had
nonperforming loans of $14.1 million at December 31, 2001, during the year ended
December 31, 2002, these increased to $27.6 million and $17.2 million,
respectively, most of which related to the San Francisco Bay area.
Our Texas banking operation represents a somewhat smaller portion of
our overall lending function. However, the Texas economy has generally continued
to be fairly strong, resulting in relatively few asset quality issues.
Consequently, we had loan charge-offs of $5.6 million and loan recoveries of
$751,000 for the year ended December 31, 2002, which included a charge-off of
$5.3 million on a single loan to a company engaged in leasing equipment,
primarily to manufacturers. This company encountered significant operating
problems from rapid expansion, principally through acquisition, accompanied by
the economic downturn, which particularly affected the manufacturing sector.
Total nonperforming loans were $5.5 million and $3.5 million at December 31,
2002 and 2001, respectively, including the remaining balance on the loan to the
leasing company referred to above of $1.5 million.
In addition to restructuring our loan portfolio, we also have changed
the composition of our deposit base. The majority of our deposit development
programs are now directed toward increased transaction accounts, such as demand
and savings accounts, rather than time deposits, and have emphasized attracting
more than one account relationship with customers. This growth is accomplished
by cross-selling various products and services, packaging account types and
offering incentives to deposit customers on other deposit or non-deposit
services. In addition, commercial borrowers are encouraged to maintain their
operating deposit accounts with us. At December 31, 1997, total time deposits
were $1.90 billion, or 51.7% of total deposits. Although time deposits have
increased to $2.19 billion at December 31, 2002, they represented only 35.5% of
total deposits, reflecting our continued focus on transactional accounts and
full service deposit relationships with our customers.
Despite the significant expenses we incurred in the amalgamation of the
acquired entities into our corporate culture and systems, and in the expansion
of our organizational capabilities, the earnings of the acquired entities and
the increased net interest income resulting from the transition in the
composition of our loan and deposit portfolios have contributed to improving net
income. For the years ended December 31, 2002 and 2001, net income was $45.2
million and $64.5 million, respectively, compared with $56.1 million, $44.2
million and $33.5 million in 2000, 1999 and 1998, respectively. The factors that
led to the decline in our earnings for 2002 include the current interest rate
environment, asset quality issues requiring additional provisions for loan
losses, and increased operating expenses. The increased provisions for loan
losses reflect the current economic environment and significantly increased loan
charge-off, delinquency and nonperforming trends as further discussed under
"--Comparison of Results of Operations for 2002 and 2001." Although we
anticipate certain short-term adverse effects on our operating results
associated with acquisitions, we believe the long-term benefits of our
acquisition program will exceed the short-term issues encountered with some
acquisitions. As such, in addition to concentrating on internal growth through
continued efforts to further develop our corporate infrastructure and product
and service offerings, we expect to continue to identify and pursue
opportunities for growth through acquisitions.
Acquisitions. In the development of our banking franchise, we emphasize
acquiring other financial institutions as one means of achieving our growth
objectives. Acquisitions may serve to enhance our presence in a given market, to
expand the extent of our market area or to enable us to enter new or
noncontiguous market areas. After we consummate an acquisition, we expect to
enhance the franchise of the acquired entity by supplementing the marketing and
business development efforts to broaden the customer bases, strengthening
particular segments of the business or filling voids in the overall market
coverage. We have primarily utilized cash, borrowings and the issuance of trust
preferred securities to meet our growth objectives under our acquisition
program.
During the three years ended December 31, 2002, we completed nine
acquisitions of banks, two branch office purchases and the acquisition of
certain assets and assumption of certain liabilities of a leasing company. As
demonstrated in the following table, our acquisitions during the three years
ended December 31, 2002 have primarily served to increase our presence in the
California markets that we originally entered during 1995 and to further augment
our existing markets and our Midwest banking franchise. Additionally, we
currently have one pending acquisition that will further expand our Midwest
banking franchise. These transactions are summarized as follows:
Number
Loans, Net of of
Total Unearned Investment Banking
Entity Closing Date Assets (1) Discount (1) Securities (1) Deposits (1) Locations (1)
------ ------------ ---------- ------------- -------------- ----------- -------------
(dollars expressed in thousands)
Pending Acquisition
-------------------
Bank of Ste. Genevieve
Ste. Genevieve, Missouri -- $ 108,800 57,500 40,600 88,300 2
========= ======== ======= ======== ====
2002
----
Union Planters Bank, N.A.
Denton and Garland, Texas
branch offices June 22, 2002 $ 63,700 600 -- 64,900 2
Plains Financial Corporation
Des Plaines, Illinois January 15, 2002 256,300 150,400 81,000 213,400 4
--------- -------- ------- -------- ----
$ 320,000 151,000 81,000 278,300 6
========= ======== ======= ======== ====
2001
----
Union Financial Group, Ltd.
Swansea, Illinois December 31, 2001 $ 360,000 263,500 1,150 283,300 9
BYL Bancorp
Orange, California October 31, 2001 281,500 175,000 12,600 251,800 7
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 70,200 7,500 89,000 2
--------- -------- ------- -------- ----
$ 743,000 508,700 21,250 624,100 18
========= ======== ======= ======== ====
2000
----
The San Francisco Company
San Francisco, California December 31, 2000 $ 183,800 115,700 38,300 137,700 1
Millennium Bank
San Francisco, California December 29, 2000 117,000 81,700 21,100 104,200 2
Commercial Bank of San Francisco
San Francisco, California October 31, 2000 155,600 97,700 45,500 109,400 1
Bank of Ventura
Ventura, California August 31, 2000 63,800 39,400 15,500 57,300 1
First Capital Group, Inc.
Albuquerque, New Mexico February 29, 2000 64,600 64,600 -- -- 1
Lippo Bank
San Francisco, California February 29, 2000 85,300 40,900 37,400 76,400 3
--------- -------- ------- -------- -----
$ 670,100 440,000 157,800 485,000 9
========= ======== ======= ======== =====
- --------------------------
(1) For our pending acquisition that is expected to close on March 31, 2003,
amounts are as of December 31, 2002. For closed acquisitions, amounts are
as of the respective closing dates.
We funded the completed acquisitions from available cash reserves,
proceeds from the sales and maturities of available-for-sale investment
securities, borrowings under our revolving credit line with a group of
unaffiliated banks and proceeds from the issuance of trust preferred securities.
Pending Acquisition
On September 17, 2002, First Banks and Allegiant Bancorp, Inc., or
Allegiant, signed an agreement and plan of exchange that provides for First
Banks to acquire Allegiant's wholly owned banking subsidiary, Bank of Ste.
Genevieve. Bank of Ste. Genevieve operates two locations in Ste. Genevieve,
Missouri, and reported total assets of $108.8 million and total deposits of
$88.3 million at December 31, 2002. Under the terms of the agreement, First
Banks will acquire Bank of Ste. Genevieve in exchange for approximately 974,150
shares of Allegiant common stock that are currently held by First Banks. The
value of $18.375 per share assigned to each share of Allegiant common stock to
be exchanged in the transaction was determined by the parties based upon the
existing market price of the shares and detailed negotiations. The transaction
is expected to be completed on March 31, 2003. First Banks will continue to own
approximately 232,000 shares of Allegiant common stock subsequent to completion
of the transaction.
Closed Acquisitions and Other Corporate Transactions
On January 15, 2002, we completed our acquisition of Plains Financial
Corporation, or Plains, and its wholly owned banking subsidiary, PlainsBank of
Illinois, National Association, Des Plaines, Illinois, in exchange for $36.5
million in cash. Plains operated a total of three banking facilities in Des
Plaines, Illinois, and one banking facility in Elk Grove Village, Illinois. At
the time of the transaction, Plains had $256.3 million in total assets, $150.4
million in loans, net of unearned discount, $81.0 million in investment
securities and $213.4 million in deposits. This transaction was accounted for
using the purchase method of accounting. Goodwill was approximately $12.6
million and will not be amortized, but instead will be periodically tested for
impairment in accordance with Statement of Financial Accounting Standards, or
SFAS, No. 142, Goodwill and Other Intangible Assets. The core deposit
intangibles were approximately $2.9 million and are being amortized over seven
years utilizing the straight-line method. Plains was merged with and into Union
and PlainsBank of Illinois was merged with and into First Bank.
On June 22, 2002, FB&T completed its assumption of the deposits and
certain liabilities and the purchase of certain assets of the Garland and
Denton, Texas branch offices of Union Planters Bank, National Association, or UP
branches. The transaction resulted in the acquisition of $15.3 million in
deposits and one branch office in Garland and $49.6 million in deposits and one
branch office and a detached drive-thru facility, in Denton. The core deposit
intangibles associated with the branch purchases were $1.4 million and are being
amortized over seven years utilizing the straight-line method.
On December 31, 2002, we completed our acquisition of all of the
outstanding capital stock of First Banks America, Inc., or FBA, San Francisco,
California, that we did not already own for a price of $40.54 per share, or
approximately $32.4 million. At December 31, 2002, prior to consummation of this
transaction, there were 798,753 shares, or approximately 6.22% of our former
majority-owned subsidiary's outstanding stock, held publicly. We owned the other
93.78%. In conjunction with this transaction, FBA was merged with and into First
Banks. This transaction was accounted for using the purchase method of
accounting. Goodwill was approximately $12.4 million and will not be amortized,
but instead will be periodically tested for impairment in accordance with SFAS
No. 142.
Acquisition and Integration Costs
We accrue certain costs associated with our acquisitions as of the
respective consummation dates. Essentially all of these accrued costs relate
either to adjustments to the staffing levels of the acquired entities or to the
anticipated termination of information technology or item processing contracts
of the acquired entities prior to their stated contractual expiration dates. The
most significant costs that we incur relate to salary continuation agreements,
or other similar agreements, of executive management and certain other employees
of the acquired entities that were in place prior to the acquisition dates.
These agreements provide for payments over periods ranging from one to nine
years and are triggered as a result of the change in control of the acquired
entity. Other severance benefits for employees that are terminated in
conjunction with the integration of the acquired entities into our existing
operations are normally paid to the recipients within 90 days of the respective
consummation date. The balance of our accrued severance of $2.4 million
identified in the following table is comprised of contractual obligations under
salary continuation agreements to 13 individuals and have remaining terms
ranging from eight months to approximately 14 years. Payments made under these
agreements are paid from accrued liabilities and consequently, do not have any
impact on our statements of income.
A summary of acquisition and integration costs attributable to the
acquisitions included in the foregoing table, which were accrued as of the
consummation dates of the respective acquisition, is listed below. These
acquisition and integration costs are reflected in accrued and other liabilities
in our consolidated financial statements.
Information
Severance Technology Fees Total
--------- --------------- -----
Balance at December 31, 1998......................... $ 1,100,000 -- 1,100,000
Year Ended December 31, 1999:
Amounts accrued at acquisition date............... 1,633,768 -- 1,633,768
Payments.......................................... (124,742) -- (124,742)
----------- ------------ -----------
Balance at December 31, 1999......................... $ 2,609,026 -- 2,609,026
Year Ended December 31, 2000:
Amounts accrued at acquisition date............... 3,331,600 -- 3,331,600
Reversal to goodwill.............................. (278,974) -- (278,974)
Payments.......................................... (2,492,319) -- (2,492,319)
----------- ------------ -----------
Balance at December 31, 2000......................... $ 3,169,333 -- 3,169,333
Year Ended December 31, 2001:
Amounts accrued at acquisition date............... 3,884,800 515,638 4,400,438
Payments.......................................... (3,119,602) (363,138) (3,482,740)
----------- ------------ -----------
Balance at December 31, 2001......................... $ 3,934,531 152,500 4,087,031
Year Ended December 31, 2002:
Amounts accrued at acquisition date............... 238,712 250,000 488,712
Payments.......................................... (1,821,878) (375,032) (2,196,910)
----------- ------------ -----------
Balance at Decmber 31, 2002.......................... $ 2,351,365 27,468 2,378,833
=========== ============ ===========
As further discussed and quantified under "--Comparison of Results of
Operations for the Nine Months Ended September 30, 2002," "--Comparison of
Results of Operations for 2001 and 2000," and "--Comparison of Results of
Operations for 2000 and 1999," we also incur costs associated with our
acquisitions that are expensed in our statements of income. These costs relate
exclusively to additional costs incurred in conjunction with the data processing
conversions of the respective entities.
Market Area. As of December 31, 2002, our subsidiary banks' 151 banking
facilities were located in California, eastern Missouri, Illinois and Texas. Our
primary market area is the St. Louis, Missouri metropolitan area. Our second and
third largest market areas are southern and northern California and central and
southern Illinois, respectively. We also have locations in the Houston, Dallas,
Irving, McKinney and Denton, Texas metropolitan areas, rural eastern Missouri
and the greater Chicago, Illinois metropolitan area.
The following table lists the market areas in which our subsidiary
banks operate, total deposits, deposits as a percentage of total deposits and
the number of locations as of December 31, 2002:
Total Deposits Number
Deposits as a Percentage of
Geographic Area (in millions) of Total Deposits Locations
--------------- ------------- ----------------- ---------
St. Louis, Missouri metropolitan area (1)............................... $ 1,534.3 24.9% 29
Regional Missouri (1)................................................... 414.0 6.7 14
Central and southern Illinois (1)....................................... 1,055.3 17.1 33
Northern Illinois (1)................................................... 530.8 8.6 18
Texas (2)............................................................... 328.2 5.3 8
Southern California (2)................................................. 1,334.1 21.6 32
Northern California (2)................................................. 976.1 15.8 17
--------- ----- ----
Total deposits..................................................... $ 6,172.8 100.0% 151
========= ===== ====
- ------------------------
(1) First Bank operates in the St. Louis metropolitan area, in regional
Missouri, in central and southern Illinois and in northern Illinois,
including Chicago.
(2) FB&T operates in the greater Los Angeles metropolitan area, including
Ventura County, Riverside and Orange County, California; in Santa Barbara
County, California; in northern California, including the greater San
Francisco, San Jose and Sacramento metropolitan areas; and in the Houston,
Dallas, Irving, McKinney and Denton metropolitan areas.
Competition and Branch Banking. Our subsidiary banks engage in highly
competitive activities. Those activities and the geographic markets served
primarily involve competition with other banks, some of which are affiliated
with large regional or national holding companies. Financial institutions
compete based upon interest rates offered on deposit accounts, interest rates
charged on loans and other credit and service charges, the quality of services
rendered, the convenience of banking facilities and, in the case of loans to
large commercial borrowers, relative lending limits.
Our principal competitors include other commercial banks, savings
banks, savings and loan associations, mutual funds, finance companies, trust
companies, insurance companies, leasing companies, credit unions, mortgage
companies, private issuers of debt obligations and suppliers of other investment
alternatives, such as securities firms and financial holding companies. Many of
our non-bank competitors are not subject to the same degree of regulation as
that imposed on bank holding companies, federally insured banks and national or
state chartered banks. As a result, such non-bank competitors have advantages
over us in providing certain services. We also compete with major multi-bank
holding companies, which are significantly larger than us and have greater
access to capital and other resources.
We believe we will continue to face competition in the acquisition of
independent banks and savings banks from banks and financial holding companies.
We often compete with larger financial institutions that have substantially
greater resources available for making acquisitions.
Subject to regulatory approval, commercial banks operating in
California, Illinois, Missouri and Texas are permitted to establish branches
throughout their respective states, thereby creating the potential for
additional competition in our service areas.
Supervision and Regulation
General. Federal and state laws extensively regulate our subsidiary banks and us
primarily to protect depositors and customers of our subsidiary banks. To the
extent this discussion refers to statutory or regulatory provisions, it is not
intended to summarize all such provisions and is qualified in its entirety by
reference to the relevant statutory and regulatory provisions. Changes in
applicable laws, regulations or regulatory policies may have a material effect
on our business and prospects. We are unable to predict the nature or extent of
the effects on our business and earnings that new federal and state legislation
or regulation may have. The enactment of the legislation described below has
significantly affected the banking industry generally and is likely to have
ongoing effects on us and our subsidiary banks in the future.
We are a registered bank holding company under the Bank Holding Company
Act of 1956. Consequently, the Board of Governors of the Federal Reserve System,
or Federal Reserve, regulates, supervises and examines us. We file annual
reports with the Federal Reserve and provide to the Federal Reserve additional
information as it may require.
Since First Bank is an institution chartered by the State of Missouri
and a member of the Federal Reserve, both the State of Missouri Division of
Finance and the Federal Reserve supervise, regulate and examine First Bank. FB&T
is chartered by the State of California and is subject to supervision,
regulation and examination by the California Department of Financial
Institutions. Our subsidiary banks are also regulated by the Federal Deposit
Insurance Corporation, or FDIC, which provides deposit insurance of up to
$100,000 for each insured depositor.
Bank Holding Company Regulation. Our activities and those of our subsidiary
banks have in the past been limited to the business of banking and activities
"closely related" or "incidental" to banking. Under the Gramm-Leach-Bliley Act,
or GLB Act, which was enacted in November 1999 and is discussed below, bank
holding companies now have the opportunity to seek broadened authority, subject
to limitations on investment, to engage in activities that are "financial in
nature" if all of their subsidiary depository institutions are well capitalized,
well managed and have at least a satisfactory rating under the Community
Reinvestment Act (discussed briefly below).
We are also subject to capital requirements applied on a consolidated
basis, which are substantially similar to those required of our subsidiary banks
(briefly summarized below). The Bank Holding Company Act also requires a bank
holding company to obtain approval from the Federal Reserve before:
>> acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls a majority of such
shares);
>> acquiring all or substantially all of the assets of another bank
or bank holding company; or
>> merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anti-competitive result, unless
the anti-competitive effects of the proposed transaction are clearly outweighed
by a greater public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve also considers capital adequacy and
other financial and managerial factors in reviewing acquisitions and mergers.
Safety and Soundness and Similar Regulations. We are subject to various
regulations and regulatory policies directed at the financial soundness of our
subsidiary banks. These include, but are not limited to, the Federal Reserve's
source of strength policy, which obligates a bank holding company such as us to
provide financial and managerial strength to its subsidiary banks; restrictions
on the nature and size of certain affiliate transactions between a bank holding
company and its subsidiary depository institutions; and restrictions on
extensions of credit by our subsidiary banks to executive officers, directors,
principal stockholders and the related interests of such persons.
Regulatory Capital Standards. The federal bank regulatory agencies have adopted
substantially similar risk-based and leverage capital guidelines for banking
organizations. Risk-based capital ratios are determined by classifying assets
and specified off-balance-sheet obligations and financial instruments into
weighted categories, with higher levels of capital being required for categories
deemed to represent greater risk. Federal Reserve policy also provides that
banking organizations generally, and in particular those that are experiencing
internal growth or actively making acquisitions, are expected to maintain
capital positions that are substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Under the risk-based capital standard, the minimum consolidated ratio
of total capital to risk-adjusted assets required for bank holding companies is
8%. At least one-half of the total capital must be composed of common equity,
retained earnings, qualifying noncumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual preferred stock and minority interests
in the equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets, which amount is referred to as
"Tier I capital." The remainder may consist of qualifying hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier I
capital and a limited amount of loan and lease loss reserves, which amount,
together with Tier I capital, is referred to as "Total Risk-Based Capital."
In addition to the risk-based standard, we are subject to minimum
requirements with respect to the ratio of our Tier I capital to our average
assets less goodwill and certain other intangible assets, or the Leverage Ratio.
Applicable requirements provide for a minimum Leverage Ratio of 3% for bank
holding companies that have the highest supervisory rating, while all other
bankholding companies must maintain a minimum Leverage Ratio of at least 4% to
5%. The Office of the Comptroller of the Currency, or OCC, and the FDIC have
established capital requirements for banks under their respective jurisdictions
that are consistent with those imposed by the Federal Reserve on bank holding
companies. Information regarding our capital levels and our subsidiary banks'
capital levels under the federal capital requirements is contained in Note 21 to
our consolidated financial statements appearing elsewhere in this report.
Prompt Corrective Action. The FDIC Improvement Act requires the federal bank
regulatory agencies to take prompt corrective action in respect to depository
institutions that do not meet minimum capital requirements. A depository
institution's status under the prompt corrective action provisions depends upon
how its capital levels compare to various relevant capital measures and other
factors as established by regulation.
The federal regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. Under the regulations, a
bank will be:
>> "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier I capital ratio of 6% or greater and a
Leverage Ratio of 5% or greater and is not subject to any order
or written directive by any such regulatory authority to meet and
maintain a specific capital level for any capital measure;
>> "adequately capitalized" if it has a total risk-based capital
ratio of 8% or greater, a Tier I capital ratio of 4% or greater
and a Leverage Ratio of 4% or greater (3% in certain
circumstances);
>> "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I capital ratio of less than 4% or a
Leverage Ratio of less than 4% (3% in certain circumstances);
>> "significantly undercapitalized" if it has a total risk-based
capital ratio of less than 6%, a Tier I capital ratio of less
than 3% or a Leverage Ratio of less than 3%; and
>> "critically undercapitalized" if its tangible equity is equal to
or less than 2% of its average quarterly tangible assets.
Under certain circumstances, a depository institution's primary federal
regulatory agency may use its authority to lower the institution's capital
category. The banking agencies are permitted to establish individual minimum
capital requirements exceeding the general requirements described above.
Generally, failing to maintain the status of "well capitalized" or "adequately
capitalized" subjects a bank to restrictions and limitations on its business
that become progressively more severe as the capital levels decrease.
A bank is prohibited from making any capital distribution (including
payment of a dividend) or paying any management fee to its holding company if
the bank would thereafter be "undercapitalized." Limitations exist for
"undercapitalized" depository institutions regarding, among other things, asset
growth, acquisitions, branching, new lines of business, acceptance of brokered
deposits and borrowings from the Federal Reserve System. These institutions are
also required to submit a capital restoration plan that includes a guarantee
from the institution's holding company. "Significantly undercapitalized"
depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
"adequately capitalized," requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. The appointment of a receiver or
conservator may be required for "critically undercapitalized" institutions.
Dividends. Our primary source of funds in the future is the dividends, if any,
paid by our subsidiary banks. The ability of our subsidiary banks to pay
dividends is limited by federal laws, by regulations promulgated by the bank
regulatory agencies and by principles of prudent bank management.
Customer Protection. Our subsidiary banks are also subject to consumer laws and
regulations intended to protect consumers in transactions with depository
institutions, as well as other laws or regulations affecting customers of
financial institutions generally. These laws and regulations mandate various
disclosure requirements and substantively regulate the manner in which financial
institutions must deal with their customers. Our subsidiary banks must comply
with numerous regulations in this regard and are subject to periodic
examinations with respect to their compliance with the requirements.
Community Reinvestment Act. The Community Reinvestment Act of 1977 requires
that, in connection with examinations of financial institutions within their
jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered in evaluating
mergers, acquisitions and other applications to expand.
The Gramm-Leach-Bliley Act. The GLB Act, enacted in 1999, amended and repealed
portions of the Glass-Steagall Act and other federal laws restricting the
ability of bank holding companies, securities firms and insurance companies to
affiliate with each other and to enter new lines of business. The GLB Act
established a comprehensive framework to permit financial companies to expand
their activities, including through such affiliations, and to modify the federal
regulatory structure governing some financial services activities. This
authority of financial firms to broaden the types of financial services offered
to customers and to affiliates with other types of financial services companies
may lead to further consolidation in the financial services industry. However,
it may lead to additional competition in the markets in which we operate by
allowing new entrants into various segments of those markets that are not the
traditional competitors in those segments. Furthermore, the authority granted by
the GLB Act may encourage the growth of larger competitors.
The GLB Act also adopted consumer privacy safeguards requiring
financial services providers to disclose their policies regarding the privacy of
customer information to their customers and, subject to some exceptions,
allowing customers to "opt out" of policies permitting such companies to
disclose confidential financial information to non-affiliated third parties.
Final regulations implementing the new privacy standards became effective in
2001.
The Sarbanes-Oxley Act. On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act imposes a myriad of corporate
governance and accounting measures designed to ensure that the shareholders of
corporate America are treated fairly and have full and accurate information
about the public companies in which they invest. All public companies, including
companies that file periodic reports with the Securities and Exchange
Commission, or SEC, such as First Banks, are affected by the Sarbanes-Oxley Act.
Certain provisions of the Sarbanes-Oxley Act became effective
immediately, while other provisions will become effective as the SEC adopts
rules to implement those provisions. Some of the principal provisions of the
Sarbanes-Oxley Act which may affect us include:
>> the creation of an independent accounting oversight board to
oversee the audit of public companies and auditors who perform
such audits;
>> auditor independence provisions which restrict non-audit services
that independent accountants may provide to their audit clients;
>> additional corporate governance and responsibility measures which
(i) require the chief executive officer and chief financial
officer to certify financial statements and to forfeit salary and
bonuses in certain situations, and (ii) protect whistleblowers
and informants;
>> expansion of the audit committee's authority and responsibility
by requiring that the audit committee (i) have direct control of
the outside auditor, (ii) be able to hire and fire the auditor,
and (iii) approve all non-audit services;
>> mandatory disclosure by analysts of potential conflicts of
interest; and
>> enhanced penalties for fraud and other violations.
The Sarbanes-Oxley Act is expected to increase the administrative costs
and burden of doing business for public companies; however, we cannot predict
the significance of any increase at this time.
The USA Patriot Act. In October 2001, the Patriot Act was enacted in response to
the terrorist attacks in New York, Pennsylvania and Washington, D.C. that
occurred on September 11, 2001. The Patriot Act is intended to strengthen the
ability of U.S. law enforcement agencies and the intelligence communities to
work cohesively to combat terrorism on a variety of fronts. The potential impact
of the Patriot Act on financial institutions of all kinds is significant and
wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and imposes various regulations, including standards
for verifying client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering. The Patriot Act is expected to increase the administrative costs and
burden of doing business for financial institutions; however, we cannot predict
the significance of any increase at this time.
Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System.
The Federal Reserve requires all depository institutions to maintain reserves
against their transaction accounts and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements. Institutions are authorized to borrow
from the Federal Reserve Bank "discount window," but Federal Reserve regulations
require institutions to exhaust other reasonable alternative sources of funds,
including advances from Federal Home Loan Banks, before borrowing from the
Federal Reserve Bank.
First Bank is a member of the Federal Reserve System. Both First Bank
and FB&T are members of the Federal Home Loan Bank System. As members, they are
required to hold investments in regional banks within those systems. Our
subsidiary banks were in compliance with these requirements at December 31,
2002, with investments of $9.7 million in stock of the Federal Home Loan Bank of
Des Moines held by First Bank, $450,000 in stock of the Federal Home Loan Bank
of Chicago held by First Bank (associated with the acquisition of Union
completed on December 31, 2001), $2.4 million in stock of the Federal Home Loan
Bank of San Francisco held by FB&T, and $7.5 million in stock of the Federal
Reserve Bank of St. Louis held by First Bank.
Monetary Policy and Economic Control. The commercial banking business is
affected by legislation, regulatory policies and general economic conditions as
well as the monetary policies of the Federal Reserve. The instruments of
monetary policy available to the Federal Reserve include the following:
>> changes in the discount rate on member bank borrowings and the
targeted federal funds rate;
>> the availability of credit at the "discount window;"
>> open market operations;
>> the imposition of changes in reserve requirements against
deposits of domestic banks;
>> the imposition of changes in reserve requirements against
deposits and assets of foreign branches; and
>> the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates.
These monetary policies are used in varying combinations to influence
overall growth and distributions of bank loans, investments and deposits, and
this use may affect interest rates charged on loans or paid on liabilities. The
monetary policies of the Federal Reserve have had a significant effect on the
operating results of commercial banks and are expected to do so in the future.
Such policies are influenced by various factors, including inflation,
unemployment, and short-term and long-term changes in the international trade
balance and in the fiscal policies of the U.S. Government. We cannot predict the
effect that changes in monetary policy or in the discount rate on member bank
borrowings will have on our future business and earnings or those of our
subsidiary banks.
Employees
As of March 25, 2003, we employed approximately 2,200 employees. None
of the employees are subject to a collective bargaining agreement. We consider
our relationships with our employees to be good.
Executive Officers of the Registrant
Information regarding executive officers is contained in Item 10 of
Part III hereof (pursuant to General Instruction G) and is incorporated herein
by this reference.
Item 2. Properties
We own our office building, which houses our principal place of
business, located at 135 North Meramec, Clayton, Missouri 63105. The property is
in good condition and consists of approximately 41,763 square feet, of which
approximately 1,791 square feet is currently leased to others. Of our other 150
offices and two operations and administrative facilities, 91 are located in
buildings that we own and 62 are located in buildings that we lease.
We consider the properties at which we do business to be in good
condition generally and suitable for our business conducted at each location. To
the extent our properties or those acquired in connection with our acquisition
of other entities provide space in excess of that effectively utilized in the
operations of our subsidiary banks, we seek to lease or sub-lease any excess
space to third parties. Additional information regarding the premises and
equipment utilized by our subsidiary banks appears in Note 7 to our consolidated
financial statements appearing elsewhere in this report.
Item 3. Legal Proceedings
In the ordinary course of business, we and our subsidiaries become
involved in legal proceedings. Our management, in consultation with legal
counsel, believes that the ultimate resolution of existing proceedings will not
have a material adverse effect on our business, financial condition or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information. There is no established public trading market for our common
stock. Various trusts, which were created by and are administered by and for the
benefit of Mr. James F. Dierberg, our Chairman of the Board and Chief Executive
Officer, and members of his immediate family, own all of our voting stock.
Dividends. In recent years, we have paid minimal dividends on our Class A
Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible
Adjustable Rate Preferred Stock, and have paid no dividends on our Common Stock.
Our ability to pay dividends is limited by regulatory requirements and by the
receipt of dividend payments from our subsidiary banks, which are also subject
to regulatory requirements. The dividend limitations are included in Note 22 to
our consolidated financial statements appearing elsewhere in this report.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below are derived
from our consolidated financial statements, which have been audited by KPMG LLP.
This information is qualified by reference to our consolidated financial
statements appearing elsewhere in this report. This information should be read
in conjunction with such consolidated financial statements, the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
As of or For the Year Ended December 31, (1)
-----------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars expressed in thousands, except per share data)
Income Statement Data:
Interest income................................... $ 424,910 444,743 422,826 353,082 327,860
Interest expense.................................. 156,740 209,604 200,852 170,751 172,021
---------- ---------- ---------- ---------- ----------
Net interest income............................... 268,170 235,139 221,974 182,331 155,839
Provision for loan losses......................... 55,500 23,510 14,127 13,073 9,000
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses................................. 212,670 211,629 207,847 169,258 146,839
Noninterest income................................ 89,455 98,609 42,778 41,650 36,497
Noninterest expense............................... 232,756 211,671 157,990 138,757 128,862
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes,
minority interest in income of subsidiary
and cumulative effect of change in
accounting principle............................ 69,369 98,567 92,635 72,151 54,474
Provision for income taxes........................ 22,771 30,048 34,482 26,313 19,693
---------- ---------- ---------- ---------- ----------
Income before minority interest in income
of subsidiary and cumulative effect of
change in accounting principle.................. 46,598 68,519 58,153 45,838 34,781
Minority interest in income of subsidiary......... 1,431 2,629 2,046 1,660 1,271
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle............................ 45,167 65,890 56,107 44,178 33,510
Cumulative effect of change in
accounting principle, net of tax................ -- (1,376) -- -- --
---------- ---------- ---------- ---------- ----------
Net income........................................ $ 45,167 64,514 56,107 44,178 33,510
========== ========== ========== ========== ==========
Dividends:
Preferred stock................................... $ 786 786 786 786 786
Common stock...................................... -- -- -- -- --
Ratio of total dividends declared to net income... 1.74% 1.22% 1.40% 1.78% 2.35%
Per Share Data:
Earnings per common share:
Basic:
Income before cumulative effect of change
in accounting principle...................... $ 1,875.69 2,751.54 2,338.04 1,833.91 1,383.04
Cumulative effect of change in
accounting principle, net of tax............. -- (58.16) -- -- --
---------- ---------- ---------- ---------- ----------
Basic.......................................... $ 1,875.69 2,693.38 2,338.04 1,833.91 1,383.04
========== ========== ========== ========== ==========
Diluted:
Income before cumulative effect of change
in accounting principle...................... $ 1,853.64 2,684.93 2,267.41 1,775.47 1,337.09
Cumulative effect of change in accounting
principle, net of tax........................ -- (58.16) -- -- --
---------- ---------- ---------- ---------- ----------
Diluted........................................ $ 1,853.64 2,626.77 2,267.41 1,775.47 1,337.09
========== ========== ========== ========== ==========
Weighted average common stock outstanding....... 23,661 23,661 23,661 23,661 23,661
Balance Sheet Data:
Investment securities............................. $1,137,320 631,068 563,534 451,647 534,796
Loans, net of unearned discount................... 5,432,588 5,408,869 4,752,265 3,996,324 3,580,105
Total assets...................................... 7,342,800 6,778,451 5,876,691 4,867,747 4,554,810
Total deposits.................................... 6,172,820 5,683,904 5,012,415 4,251,814 3,939,985
Notes payable..................................... 7,000 27,500 83,000 64,000 50,048
Guaranteed preferred beneficial interests in
subordinated debentures........................ 270,039 235,881 182,849 127,611 127,443
Common stockholders' equity....................... 505,978 435,594 339,783 281,842 250,300
Total stockholders' equity........................ 519,041 448,657 352,846 294,905 263,363
Earnings Ratios:
Return on average total assets.................... 0.64% 1.08% 1.09% 0.95% 0.78%
Return on average total stockholders' equity...... 9.44 15.96 17.43 15.79 13.64
Efficiency ratio (2).............................. 65.08 63.42 59.67 61.95 67.00
Net interest margin (3)........................... 4.24 4.34 4.65 4.24 3.94
Asset Quality Ratios:
Allowance for loan losses to loans................ 1.83 1.80 1.72 1.72 1.70
Nonperforming loans to loans (4).................. 1.38 1.24 1.12 0.99 1.22
Allowance for loan losses to
nonperforming loans (4)........................ 132.29 144.36 153.47 172.66 140.04
Nonperforming assets to loans and
other real estate (5).......................... 1.52 1.32 1.17 1.05 1.32
Net loan charge-offs to average loans............. 1.01 0.45 0.17 0.22 0.05
Capital Ratios:
Average total stockholders' equity
to average total assets........................ 6.79 6.74 6.25 6.01 5.74
Total risk-based capital ratio.................... 10.68 10.53 10.21 10.05 10.28
Leverage ratio.................................... 6.45 7.24 7.46 7.15 7.78
- --------------------------------
(1) The comparability of the selected data presented is affected by the acquisitions of 13 banks and four branch offices
during the five-year period ended December 31, 2002. These acquisitions were accounted for as purchases and, accordingly,
the selected data includes the financial position and results of operations of each acquired entity only for the periods
subsequent to its respective date of acquisition.
(2) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income.
(3) Net interest rate margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average
interest-earning assets.
(4) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms.
(5) Nonperforming assets consist of nonperforming loans and other real estate.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following presents management's discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. You should read this discussion in conjunction with our
"Selected Financial Data," our consolidated financial statements and the related
notes thereto, and the other financial data contained elsewhere in this report.
This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ significantly from those
anticipated in these forward-looking statements as a result of various factors.
See "Special Note Regarding Forward-Looking Statements" appearing elsewhere in
this report.
RESULTS OF OPERATIONS
Overview
Net income was $45.2 million, $64.5 million and $56.1 million for the
years ended December 31, 2002, 2001 and 2000 respectively. Results for 2002
reflect increased net interest income offset by higher operating expenses
primarily resulting from our acquisitions completed in 2001 and 2002. We also
experienced increased provisions for loan losses, indicative of the current
economic environment, reflected in increased charge-off, past due and
nonperforming trends. For the three months ended December 31, 2002 and 2001, our
net income was $14.8 million and $29.9 million, respectively. Included in our
results for the fourth quarter and year ended December 31, 2001 were a
nonrecurring gain of $12.4 million, net of related income taxes, relating to the
exchange of our investment in an unaffiliated financial institution for cash and
stock in another unaffiliated financial institution, and a nonrecurring
adjustment of our deferred income tax valuation reserve of $8.1 million, both of
which increased net income.
The implementation of Statement of Financial Accounting Standards, or
SFAS, No. 142, Goodwill and Other Intangible Assets, on January 1, 2002,
resulted in the discontinuation of amortization of certain intangibles
associated with the purchase of subsidiaries. If we had implemented SFAS No. 142
at the beginning of 2001, net income for the three months and year ended
December 31, 2001 would have increased $2.6 million and $8.1 million,
respectively. In addition, the implementation of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, on January 1, 2001, resulted in
the recognition of a cumulative effect of change in accounting principle of $1.4
million, net of tax, which reduced net income. Excluding this item, net income
would have been $65.9 million for the year ended December 31, 2001.
The decline in our earnings in 2002 primarily resulted from the reduced
interest rate environment and weak economic conditions within our market areas,
as well as the related decline in asset quality. Throughout 2002, we experienced
higher than normal loan charge-offs, loan delinquencies and nonperforming loans
that led to significant increases in the provision for loan losses, thereby
reducing net income. While we believe we have aggressively addressed the asset
quality problems that have arisen throughout the year, we continue to closely
monitor our operations to address the challenges posed by the current economic
environment, including reduced loan demand and lower prevailing interest rates.
We attribute the improved earnings for 2001 primarily to increased net interest
income and noninterest income, including a gain on the exchange of an equity
investment in an unaffiliated financial institution in October 2001, as well as
a reduced provision for income taxes. The improvement in our earnings for 2001
was significantly offset by reductions in prevailing interest rates throughout
2001, resulting in an overall decline in our net interest rate margin. Our
earnings progress for 2000 was primarily driven by increased net interest income
generated from our acquisitions completed in 1999 and 2000, continued growth and
diversification in the composition of our loan portfolio, and increases in
prevailing interest rates which resulted in increased yields on our
interest-earning assets.
Financial Condition and Average Balances
Our average total assets were $7.05 billion for the year ended December
31, 2002, compared to $5.99 billion and $5.15 billion for the years ended
December 31, 2001 and 2000, respectively. We attribute the increase of $1.06
billion in total average assets for 2002 primarily to our 2002 acquisitions of
Plains and the UP branches, which provided assets of $256.3 million and $63.7
million, respectively, and our acquisitions of Charter Pacific Bank, BYL Bancorp
and Union, completed during the fourth quarter of 2001. The increase in total
assets was partially offset by lower loan demand and an anticipated level of
attrition associated with these acquisitions. We attribute the increase in total
average assets for 2001 primarily to our acquisitions completed during the
fourth quarter of 2000 and in 2001; internal loan growth generated through the
efforts of our business development staff; increased bank premises and equipment
associated with the expansion and renovation of various corporate and branch
offices; and valuation of derivative instruments on the consolidated balances
sheets resulting from a change in accounting principle. The acquisition of
Union, which provided total assets of $360.0 million, was completed on December
31, 2001, and therefore did not have a significant impact on our average total
assets for the year ended December 31, 2001, but has contributed to the overall
increase in average total assets in 2002.
The increase in assets for 2002 was primarily funded by an increase in
average deposits of $867.3 million to $5.96 billion for the year ended December
31, 2002, and an increase of $36.0 million in average short-term borrowings to
$194.1 million for the year ended December 31, 2002. We utilized the majority of
the funds generated from our deposit growth to invest in available-for-sale
investment securities and the remaining funds were temporarily invested in
federal funds sold, resulting in increases in average federal funds sold and
average investment securities of $29.7 million and $362.4 million, respectively,
to $123.3 million and $813.8 million, respectively, for the year ended December
31, 2002. Similarly, we funded the increase in assets for 2001 by an increase in
average deposits of $612.9 million to $5.09 billion for the year ended December
31, 2001, and an increase of $51.9 million in average short-term borrowings to
$158.0 million for the year ended December 31, 2001. We utilized the majority of
the funds generated from our deposit growth to fund a portion of our loan
growth, and the remaining funds were either temporarily invested in federal
funds sold or invested in available-for-sale investment securities, resulting in
increases in average federal funds sold and average investment securities of
$26.1 million and $19.4 million, respectively, to $93.6 million and $451.4
million, respectively, for the year ended December 31, 2001.
Loans, net of unearned discount, averaged $5.42 billion, $4.88 billion
and $4.29 billion for the years ended December 31, 2002, 2001 and 2000,
respectively. The acquisitions we completed during 2001 and 2002 provided loans,
net of unearned discount, of $508.7 million and $151.0 million, respectively.
The increase for 2002 is primarily due to the loans provided by acquisitions as
well as a $36.1 million increase in residential real estate lending, due to
increased volumes resulting from the current interest rate environment. These
increases were offset by a $119.3 million decline in commercial lending,
primarily due to reduced loan demand resulting from current economic conditions
prevalent within our markets. We also experienced continuing reductions in
consumer and installment loans, net of unearned discount, which decreased $44.1
million to $79.1 million at December 31, 2002. This decrease reflects reductions
in new loan volumes and the repayment of principal on our existing portfolio,
and is also consistent with our objectives of de-emphasizing consumer lending
and expanding commercial lending. These changes result from the focus we have
placed on our business development efforts and the portfolio repositioning which
we originally began in the mid-1990s. This repositioning provided for
substantially all of our residential mortgage loan production to be sold in the
secondary mortgage market and the origination of indirect automobile loans to be
substantially reduced.
In addition to the growth provided by acquisitions, for 2001, $174.6
million of net loan growth was provided by corporate banking business
development, consisting of increases of $24.9 million of lease financing, $145.8
million of commercial real estate loans and $8.4 million of real estate
construction and development loans, offset by a decrease of $4.5 million of
commercial, financial and agricultural loans. Furthermore, the increase in loans
is also attributable to an increase in residential real estate lending,
including loans held for sale, of $48.6 million for the year ended December 31,
2001. We primarily attribute this increase to be the result of a significantly
higher volume of residential mortgage loans originated, including both new
fundings and refinancings, as a result of declining interest rates experienced
throughout 2001 as well as an expansion of our mortgage banking activities.
These overall increases were partially offset by continuing reductions in
consumer and installment loans, net of unearned discount, which decreased $75.3
million to $122.1 million at December 31, 2001 due to the sale of our student
loan and credit card portfolios, and is consistent with our objectives of
de-emphasizing consumer lending and expanding commercial lending.
Investment securities averaged $813.8 million, $451.4 million and
$431.9 million for the years ended December 31, 2002, 2001 and 2000,
respectively, reflecting increases of $362.4 million and $19.5 million for the
years ended December 31, 2002 and 2001, respectively. The significant increase
in 2002 is primarily attributable to an increase in purchases of
available-for-sale investment securities due to reduced loan demand and our
acquisition of Plains, which provided us with $81.0 million in investment
securities. The increase for 2001 is primarily associated with investment
securities that we acquired in conjunction with our 2000 and 2001 acquisitions
and the investment of excess funds available due to reduced loan demand. This
increase was partially offset by the liquidation of certain acquired investment
securities, a higher than normal level of calls of investment securities prior
to their normal maturity dates experienced throughout 2001 resulting from the
general decline in interest rates, and sales of certain available-for-sale
investment securities.
Nonearning assets averaged $687.8 million for the year ended December
31, 2002, compared to $562.9 million and $359.2 million for the years ended
December 31, 2001 and 2000, respectively. The increases in average nonearning
assets in 2002 and 2001 are primarily due to additional derivative instruments
associated with three new swap agreements entered into in 2002, and the
implementation of SFAS No. 133 in January 2001, respectively. Bank premises and
equipment, net of depreciation and amortization, was $152.4 million at December
31, 2002, in comparison to $149.6 million and $114.8 million at December 31,
2001 and 2000, respectively. We primarily attribute the increase in bank
premises and equipment to our acquisitions, the purchase and remodeling of a new
operations center and corporate administrative building during 2001, and the
construction and/or renovation of various branch offices. In addition, the
increase in intangibles of $26.7 million from $125.4 million at December 31,
2001 to $152.1 million at December 31, 2002 results from goodwill attributable
to our 2002 acquisitions, including $12.4 million associated with the purchase
of the public shares of FBA.
We use deposits as our primary funding source and acquire them from a
broad base of local markets, including both individual and corporate customers.
Deposits averaged $5.96 billion, $5.09 billion and $4.48 billion for the years
ended December 31, 2002, 2001 and 2000, respectively. Total deposits increased
by $488.9 million to $6.17 billion at December 31, 2002 from $5.68 billion at
December 31, 2001. We credit the increases primarily to our acquisitions
completed during the respective periods and the expansion of our deposit product
and service offerings available to our customer base. The increase for 2002 also
reflects an increase in savings accounts offset by a decline in certain large
commercial accounts due primarily to general economic conditions resulting from
the fact that consumers are generally more inclined to retain a higher level of
liquid assets during times of economic uncertainty. The overall increase for
2001 was partially offset by an anticipated level of account attrition
associated with our acquisitions during the fourth quarter of 2000 and $50.0
million of time deposits of $100,000 or more that either matured or were called
in September 2001.
Short-term borrowings averaged $194.1 million, $158.0 million and
$106.1 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The increase in the average balance for 2002 reflects a $54.1
million increase in securities sold under agreements to repurchase principally
in connection with the cash management activities of our commercial deposit
customers as well as a $15.0 million increase in federal funds purchased, offset
by a $17.0 million decline in Federal Home Loan Bank advances. Short-term
borrowings increased by $102.5 million to $243.1 million at December 31, 2001
from $140.6 million at December 31, 2000. This increase reflects a $17.5 million
increase in securities sold under agreements to repurchase, a $15.1 million
increase in Federal Home Loan Bank advances acquired in conjunction with our
Union acquisition, and a $70.0 million increase in federal funds purchased.
Our note payable averaged $17.9 million, $41.6 million and $51.9
million for the years ended December 31, 2002, 2001 and 2000, respectively. Our
note payable decreased by $20.5 million to $7.0 million at December 31, 2002
from $27.5 million at December 31, 2001 due to repayments funded primarily
through dividends from our subsidiaries and the issuance of additional trust
preferred securities in April 2002, offset by a $36.5 million advance utilized
to fund our acquisition of Plains in January 2002. Similarly, the reduction for
2001 was primarily funded with dividends from our subsidiaries and the issuance
of additional trust preferred securities in November 2001. The balance of our
note payable at December 31, 2002 results from a $7.0 million advance drawn on
December 31, 2002 to partially fund our purchase of the public shares of FBA.
During October 2000, First Preferred Capital Trust II issued $57.5
million of 10.24% trust preferred securities. Proceeds from this offering, net
of underwriting fees and offering expenses, were $55.1 million and were used to
reduce borrowings and subsequently to partially fund our acquisitions of
Commercial Bank of San Francisco in October 2000 and Millennium Bank in December
2000. Distributions payable on these trust preferred securities were $5.9
million for the years ended December 31, 2002 and 2001, and $1.2 million for the
year ended December 31, 2000. During November 2001, First Preferred Capital
Trust III issued $55.2 million of 9.00% trust preferred securities. Proceeds
from this offering, net of underwriting fees and offering expenses, were $52.9
million and were used to reduce borrowings. Distributions payable on these trust
preferred securities were $5.0 million and $634,000 for the years ended December
31, 2002 and 2001, respectively. On April 10, 2002, First Bank Capital Trust
issued $25.0 million of variable rate cumulative trust preferred securities in a
private placement. Proceeds from this offering, net of underwriting fees and
offering expenses, were $24.2 million and were used to reduce borrowings.
Distributions payable on these trust preferred securities were $1.1 million for
the year ended December 31, 2002. The distributions on all issues of our trust
preferred securities are recorded as interest expense in our consolidated
financial statements appearing elsewhere in this report.
Stockholders' equity averaged $478.6 million, $404.1 million and $321.9
million for the years ended December 31, 2002, 2001 and 2000, respectively. We
primarily attribute the increase for 2002 to net income of $45.2 million and an
increase in accumulated other comprehensive income of $26.2 million, offset by
dividends paid on our Class A and Class B preferred stock. The $26.2 million
increase in accumulated other comprehensive income reflects $17.3 million
associated with our derivative financial instruments as accounted for under SFAS
No. 133 and $8.9 million associated with the change in unrealized gains and
losses on available-for-sale investment securities as accounted for under SFAS
No. 115. The increase in 2001 is attributable to net income of $64.5 million and
an increase in accumulated other comprehensive income of $28.3 million, which
reflects $30.1 million associated with our derivative financial instruments
offset by a $1.9 million reduction in other comprehensive income resulting form
the change in unrealized gains and losses on available-for-sale investment
securities. The overall increase in stockholders' equity for 2001 also reflects
an increase of $3.8 million associated with capital stock and certain other
equity transactions of FBA, partially offset by dividends paid on our Class A
and Class B preferred stock.
The following table sets forth, on a tax-equivalent basis, certain
information relating to our average balance sheet, and reflects the average
yield earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting net interest income for the periods indicated.
Years Ended December 31,
-------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- -------------------------- -------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans: (1) (2) (3)
Taxable........................ $5,408,018 389,090 7.19% $4,876,615 411,663 8.44% $4,281,290 389,687 9.10%
Tax-exempt (4)................. 16,490 1,495 9.07 7,684 754 9.81 9,668 992 10.26
Investment securities:
Taxable........................ 765,734 31,034 4.05 433,454 26,244 6.05 412,932 27,331 6.62
Tax-exempt (4)................. 48,078 2,869 5.97 17,910 1,366 7.63 18,996 1,478 7.78
Federal funds sold and other...... 123,285 1,949 1.58 93,561 5,458 5.83 67,498 4,202 6.23
---------- ------- ---------- ------- ---------- -------
Total interest-
earning assets............. 6,361,605 426,437 6.70 5,429,224 445,485 8.21 4,790,384 423,690 8.84
------- ------- -------
Nonearning assets..................... 687,752 562,918 359,196
---------- ---------- ----------
Total assets................. $7,049,357 $5,992,142 $5,149,580
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing
demand deposits.............. $ 755,879 7,551 1.00% $ 507,011 7,019 1.38% $ 421,986 5,909 1.40%
Savings deposits............... 1,991,510 35,668 1.79 1,548,441 50,388 3.25 1,279,378 51,656 4.04
Time deposits (3).............. 2,295,431 85,049 3.71 2,278,263 125,131 5.49 2,139,305 120,257 5.62
---------- ------- ---------- ------- ---------- -------
Total interest-
bearing deposits........... 5,042,820 128,268 2.54 4,333,715 182,538 4.21 3,840,669 177,822 4.63
Short-term borrowings............. 194,077 3,450 1.78 158,047 5,847 3.70 106,123 5,881 5.54
Note payable...................... 17,947 1,032 5.75 41,590 2,629 6.32 51,897 3,976 7.66
Guaranteed preferred
debentures (3)................. 257,366 23,990 9.32 189,440 18,590 9.81 138,605 13,173 9.50
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities................ 5,512,210 156,740 2.84 4,722,792 209,604 4.44 4,137,294 200,852 4.85
------- ------- -------
Noninterest-bearing liabilities:
Demand deposits................... 912,915 754,763 634,886
Other liabilities................. 145,640 110,480 55,473
--------- ---------- ----------
Total liabilities............ 6,570,765 5,588,035 4,827,653
Stockholders' equity.................. 478,592 404,107 321,927
---------- ---------- ----------
Total liabilities and
stockholders' equity....... $7,049,357 $5,992,142 $5,149,580
========== ========== ==========
Net interest income................... 269,697 235,881 222,838
======= ======= =======
Interest rate spread.................. 3.86 3.77 3.99
Net interest margin (5)............... 4.24% 4.34% 4.65%
===== ===== =====
------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense includes the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $1.5 million, $742,000 and $864,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
(5) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning
assets.
The following table indicates, on a tax-equivalent basis, the changes
in interest income and interest expense, which are attributable to changes in
average volume, and changes in average rates, in comparison with the preceding
year. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the dollar amounts of the
change in each.
Increase (Decrease) Attributable to Change in:
------------------------------------------------------------------
December 31, 2002 Compared December 31, 2001 Compared
to December 31, 2001 to December 31, 2000
---------------------------- -------------------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Interest earned on:
Loans: (1) (2) (3)
Taxable............................. $ 42,110 (64,683) (22,573) 51,584 (29,608) 21,976
Tax-exempt (4)...................... 802 (61) 741 (196) (42) (238)
Investment securities:
Taxable............................. 15,461 (10,671) 4,790 1,325 (2,412) (1,087)
Tax-exempt (4)...................... 1,858 (355) 1,503 (84) (28) (112)
Federal funds sold and other........... 1,349 (4,858) (3,509) 1,540 (284) 1,256
-------- ------- ------- ------- ------- -------
Total interest income........... 61,580 (80,628) (19,048) 54,169 (32,374) 21,795
-------- ------- ------- ------- ------- -------
Interest paid on:
Interest-bearing demand deposits....... 2,809 (2,277) 532 1,194 (84) 1,110
Savings deposits....................... 11,866 (26,586) (14,720) 9,818 (11,086) (1,268)
Time deposits (3) ..................... 932 (41,014) (40,082) 7,696 (2,822) 4,874
Short-term borrowings.................. 1,121 (3,518) (2,397) 2,306 (2,340) (34)
Note payable........................... (1,378) (219) (1,597) (716) (631) (1,347)
Guaranteed preferred debentures (3).... 6,369 (969) 5,400 4,974 443 5,417
-------- ------- ------- ------- ------- -------
Total interest expense.......... 21,719 (74,583) (52,864) 25,272 (16,520) 8,752
-------- ------- ------- ------- ------- -------
Net interest income............. $ 39,861 (6,045) 33,816 28,897 (15,854) 13,043
======== ======= ======= ======= ======= =======
------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense includes the effect of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%.
Net Interest Income
The primary source of our income is net interest income, which is the
difference between the interest earned on our interest-earning assets and the
interest paid on our interest-bearing liabilities. Net interest income
(expressed on a tax-equivalent basis) increased to $269.7 million, or 4.24% of
average interest-earning assets, for the year ended December 31, 2002, from
$235.9 million, or 4.34% of interest-earning assets, and $222.8 million, or
4.65% of interest-earning assets, for the years ended December 31, 2001 and
2000, respectively. We credit the increased net interest income primarily to the
net interest-earning assets provided by our acquisitions completed during the
fourth quarter of 2001 and in January 2002 as well as earnings on our interest
rate swap agreements that we entered into in conjunction with our interest rate
risk management program. These agreements provided net interest income of $53.0
million and $23.4 million for the years ended December 31, 2002 and 2001,
respectively. The increase in net interest income, however, was partially offset
by reductions in prevailing interest rates, generally weaker loan demand and
overall economic conditions, resulting in the decline in our net interest rate
margin. Guaranteed preferred debentures expense was $24.0 million for the year
ended December 31, 2002, compared to $18.6 million and $13.2 million for the
comparable periods in 2001 and 2000, respectively. The increase for 2002 is
primarily attributable to the issuance of trust preferred securities by our
financing subsidiaries. In 2001, First Preferred Capital Trust III issued $55.2
million of trust preferred securities and in April 2002, First Bank Capital
Trust issued $25.0 million of trust preferred securities. The overall increase
also reflects a change in estimate reducing the period over which the deferred
issuance costs are being amortized from maturity date to call date. This change
in estimate was deemed necessary as a result of the significant decline in
prevailing interest rates experienced during 2001. Such decline increased the
likelihood that we would redeem certain of our trust preferred securities issues
prior to maturity and obtain replacement regulatory capital, probably through
the issuance of additional trust preferred securities at a lower interest rate.
The increase was partially offset by earnings of $4.5 million associated with
our interest rate swap agreements entered into in May and June 2002. The
increase for 2001 is solely attributable to the issuance of $57.5 million of
trust preferred securities by First Preferred Capital Trust II in October 2000
and the issuance of $55.2 million of trust preferred securities in November 2001
by First Preferred Capital Trust III. We credit the increased net interest
income for 2001 primarily to the net interest-earning assets provided by our
acquisitions completed during 2000 and 2001, internal loan growth and earnings
on our interest rate swap agreements. The overall increase in net interest
income was significantly offset by reductions in prevailing interest rates
throughout 2001, resulting in the overall decline in our net interest margin.
Average total loans, net of unearned discount, were $5.42 billion for
the year ended December 31, 2002, in comparison to $4.88 billion and $4.29
billion for the years ended December 31, 2001 and 2000, respectively. The yield
on our loan portfolio, however, decreased to 7.20% for the year ended December
31, 2002, in comparison to 8.44% for 2001 and 9.10% for 2000. This was a major
contributor to the declines in our net interest rate margin of ten basis points
for 2002 and 31 basis points for 2001. We attribute the decline in yields and
our net interest rate margin primarily to the decreases in prevailing interest
rates. During the period from January 1, 2001 through December 31, 2002, the
Board of Governors of the Federal Reserve System decreased the targeted federal
funds rate 12 times, resulting in 12 decreases in the prime rate of interest
from 9.50% to 4.25%. This is reflected not only in the rate of interest earned
on loans that are indexed to the prime rate, but also in other assets and
liabilities which either have variable or adjustable rates, or which matured or
repriced during this period. As discussed above, the reduced level of interest
income earned on our loan portfolio as a result of declining interest rates and
increased competition within our market areas was partially mitigated by the
earnings associated with our interest rate swap agreements.
For the years ended December 31, 2002, 2001 and 2000, the aggregate
weighted average rate paid on our interest-bearing deposit portfolio was 2.54%,
4.21% and 4.63%, respectively. 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 decrease in rates
paid is a result of generally decreasing interest rates in 2002 and 2001 as
compared to generally increasing rates in 2000. However, the competitive
pressures on deposits within our market areas precluded us from fully reflecting
the general interest rate decreases in our deposit pricing while still providing
an adequate funding source for loan growth.
The aggregate weighted average rate on our note payable decreased to
5.75% for the year ended December 31, 2002, from 6.32% and 7.66% for the years
ended December 31, 2001 and 2000, respectively. The overall changes in the
weighted average rates paid reflect changing market interest rates during these
periods. Amounts outstanding under our $45.0 million revolving line of credit
with a group of unaffiliated financial institutions bear interest at the lead
bank's corporate base rate or, at our option, at the Eurodollar rate plus a
margin determined by the outstanding balance and our profitability. Thus, our
revolving credit line represents a relatively high-cost funding source as
increased advances have the effect of increasing the weighted average rate of
non-deposit liabilities. The overall cost of this funding source, however, has
been significantly mitigated by the reductions in the prime lending rate and in
the outstanding balance of our note payable in 2002. 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 Union and in January
and December 2002, we utilized the note payable to fund our acquisitions of
Plains and the public shares of FBA, respectively. The aggregate weighted
average rate paid on our short-term borrowings also declined to 1.78% for the
year ended December 31, 2002, as compared to 3.70% and 5.54% for 2001 and 2000,
respectively, reflecting reductions in the current interest rate environment.
The aggregate weighted average rate paid on our guaranteed preferred
debentures was 9.32%, 9.81% and 9.50% for the years ended December 31, 2002,
2001 and 2000, respectively. The decreased rate for 2002 primarily reflects the
earnings impact of $4.5 million associated with our interest rate swap
agreements entered into in May and June 2002. The decline was partially offset
by the additional expense of our trust preferred securities issued in November
2001 and April 2002 as well as a change in estimate regarding the period over
which the deferred issuance costs associated with these obligations are being
amortized. As further discussed in Note 12 to our consolidated financial
statements appearing elsewhere in this report, this change in estimate resulted
in a reduction of net income in the amount of $2.8 million for the year ended
December 31, 2002, as compared to what results would have been without the
change. The increase for the year ended December 31, 2001 primarily reflects the
additional expense of our trust preferred securities issued in November 2001.
Comparison of Results of Operations for 2002 and 2001
Net Income. Net income was $45.2 million for the year ended December
31, 2002, compared to $64.5 million for 2001. Results for 2002 reflect increased
net interest income offset by higher operating expenses primarily resulting from
our acquisitions completed in 2001 and 2002. We also experienced increased
provisions for loan losses, indicative of the current economic environment,
reflected in increased loan charge-off, past due and nonperforming trends as
further discussed under "--Provision for Loan Losses." The implementation of
SFAS No. 142 on January 1, 2002, resulted in the discontinuation of amortization
of certain intangibles associated with the purchase of subsidiaries. If we had
implemented SFAS No. 142 at the beginning of 2001, net income for the year ended
December 31, 2001 would have increased $8.1 million. In addition, the
implementation of SFAS No. 133 on January 1, 2001, resulted in the recognition
of a cumulative effect of change in accounting principle of $1.4 million, net of
tax, which reduced net income in 2001. Excluding this item, net income would
have been $65.9 million for the year ended December 31, 2001. The accounting for
derivatives under the requirements of SFAS No. 133 will continue to have an
impact on future financial results as further discussed under "--Noninterest
Income."
The overall increase in operating expenses for 2002, as further
discussed under "--Noninterest Expense," was partially offset by the
discontinuation of amortization of certain intangibles associated with the
purchase of subsidiaries in accordance with the implementation of SFAS No. 142.
Amortization of intangibles for the year ended December 31, 2002 was $2.0
million compared to $8.2 million for 2001. The higher operating expenses and
increased provisions for loan losses were partially offset by increased net
interest income as further discussed under "--Net Interest Income."
Provision for Loan Losses. The provision for loan losses was $55.5
million and $23.5 million for the years ended December 31, 2002 and 2001,
respectively. The significant increase in the provision for loan losses during
2002 reflects the higher level of problem loans and related loan charge-offs and
past due loans experienced during the period. The increase in problem assets is
a result of the economic conditions within our markets, additional problems
identified in acquired loan portfolios and continuing deterioration in the
portfolio of leases to the airline industry as further discussed under
"--Lending Activities" and "Loans and Allowance for Loan Losses." Loan
charge-offs were $70.5 million for the year ended December 31, 2002, in
comparison to $31.5 million for 2001. Included in this were charge-offs
aggregating $38.6 million on ten large credit relationships, representing nearly
55% of loan charge-offs in 2002. Additionally, nonperforming assets increased
$11.2 million to $82.8 million at December 31, 2002 from $71.6 million at
December 31, 2001, further contributing to the need for increased provisions for
loan losses in 2002. Our loan policy requires all loans to be placed on a
nonaccrual status once principal or interest payments become 90 days past due.
Our general procedures for monitoring these loans allow individual loan officers
to submit a written request for approval to continue the accrual of interest on
loans that become 90 days past due. These requests must be submitted for
approval consistent with the authority levels provided in our credit approval
policies, and they are only granted if an expected near term future event, such
as a pending renewal or expected payoff, exists at the time the loan becomes 90
days past due. If the expected near term future event does not occur as
anticipated, the loan is placed on nonaccrual status. Management considered
these trends in its overall assessment of the adequacy of the allowance for loan
losses. In addition, our acquisition of Plains in January 2002 provided $1.4
million in additional allowance for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31, 2002
and 2001:
December 31, Increase (Decrease)
------------------ -------------------
2002 2001 Amount %
---- ---- ------ -
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees..... $ 30,978 22,865 8,113 35.48%
Gain on mortgage loans sold and held for sale..................... 28,415 14,983 13,432 89.65
Gain on sale of credit card portfolio, net of expenses............ -- 1,853 (1,853) (100.00)
Net gain on sales of available-for-sale investment securities..... 90 18,722 (18,632) (99.52)
Bank-owned life insurance investment income....................... 5,928 4,415 1,513 34.27
Net gain on derivative instruments................................ 2,181 18,583 (16,402) (88.26)
Other............................................................. 21,863 17,188 4,675 27.20
--------- -------- --------
Total noninterest income.................................... $ 89,455 98,609 (9,154) (9.28)
========= ======== ======== ========
Noninterest expense:
Salaries and employee benefits.................................... $ 111,513 93,452 18,061 19.33%
Occupancy, net of rental income................................... 21,030 17,432 3,598 20.64
Furniture and equipment........................................... 17,495 12,612 4,883 38.72
Postage, printing and supplies.................................... 5,556 4,869 687 14.11
Information technology fees....................................... 32,135 26,981 5,154 19.10
Legal, examination and professional fees.......................... 9,284 6,988 2,296 32.86
Amortization of intangibles associated with
the purchase of subsidiaries................................... 2,012 8,248 (6,236) (75.61)
Communications.................................................... 3,166 3,247 (81) (2.49)
Advertising and business development.............................. 5,023 5,237 (214) (4.09)
Other............................................................. 25,542 32,605 (7,063) (21.66)
--------- -------- --------
Total noninterest expense................................... $ 232,756 211,671 21,085 9.96
========= ======== ======== ========
Noninterest Income. Noninterest income was $89.5 million for the year
ended December 31, 2002, compared to $98.6 million for 2001. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, bank-owned life insurance investment income,
net gains on derivative instruments and other income.
Service charges on deposit accounts and customer service fees increased
to $31.0 million for 2002, from $22.9 million for 2001. We attribute the
increase in service charges and customer service fees to:
>> our acquisitions completed during 2001 and 2002;
>> additional products and services available and utilized by our
expanding base of retail and commercial customers;
>> increased fee income resulting from revisions of customer service
charge rates effective July 1, 2002, and enhanced control of fee
waivers; and
>> increased income associated with automated teller machine
services and debit cards.
The gain on mortgage loans sold and held for sale increased to $28.4
million from $15.0 million for the years ended December 31, 2002 and 2001,
respectively. The increase is primarily attributable to a significant increase
in the volume of loans originated and sold commensurate with the reductions in
mortgage loan rates experienced in 2001 and 2002 as well as the continued
expansion of our mortgage banking activities.
During 2001, we recorded a $1.9 million gain on the sale, net of
expenses, 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 years ended December 31, 2002 and 2001
includes net gains on the sale of available-for-sale investment securities of
$90,000 and $18.7 million, respectively. The net gain for 2002 resulted
primarily from the sales of certain investment securities held by acquired
institutions that did not meet our overall investment objectives. The net gain
in 2001 results from a $19.1 million gain recognized in conjunction with the
exchange of an equity investment in the common stock of an unaffiliated
publicly-traded financial institution for $10.0 million in cash and a $14.4
million equity investment in the acquiring unaffiliated financial institution.
We owned 7.47% and 7.93% of the outstanding shares of common stock of the
unaffiliated financial institution at December 31, 2002 and 2001, respectively.
This gain was partially offset by a net loss that resulted from the liquidation
of certain equity investment securities.
Bank-owned life insurance income was $5.9 million for the year ended
December 31, 2002, in comparison to $4.4 million for the comparable period in
2001. The increase for 2002 reflects changes in the portfolio mix of the
underlying investments, which improved our return on this product, as well as
the reinvestment of earnings.
The net gain on derivative instruments was $2.2 million for the year
ended December 31, 2002, in comparison to $18.6 million in 2001. The decrease in
income from derivative instruments reflects $4.1 million of gains resulting from
the terminations of certain interest rate swap agreements in 2001, the sale of
our interest rate floor agreements in 2001 and ongoing changes in the fair value
of our interest rate cap agreements and fair value hedges.
Other income was $21.9 million and $17.2 million for the years ended
December 31, 2002 and 2001, respectively. We attribute the primary components of
this increase to:
>> our acquisitions completed during 2001 and 2002;
>> increased portfolio management fee income of $789,000 associated
with our Institutional Money Management Division;
>> increased earnings associated with our international banking
products;
>> increased rental income associated with our commercial leasing
activities;
>> increased rental fees from First Services, L.P. for the use of
data processing and other equipment owned by First Banks; and
>> a gain of approximately $448,000 in March 2002 on the sale of
certain operating lease equipment associated with equipment
leasing activities that we acquired in conjunction with our
acquisition of Bank of San Francisco in December 2000; offset by
>> the write-down of approximately $943,000 on certain aircraft and
aircraft parts equipment associated with our commercial leasing
operation to its estimable recoverable value in June 2002. The
write-down of these assets became necessary as a result of the
continued decline in the airline industry, primarily associated
with the terrorist attacks on September 11, 2001, and the
oversupply in the market for liquidating this type of equipment.
Noninterest Expense. Noninterest expense was $232.8 million for the
year ended December 31, 2002, in comparison to $211.7 million for 2001. The
increase for 2002 reflects the noninterest expense of our acquisitions completed
during 2001 and 2002, particularly information technology fees associated with
integrating the acquired entities' systems, as well as general increases in
salaries and employee benefit expenses, occupancy and furniture and equipment
expenses and information technology fees, offset by a decline in amortization of
intangibles associated with the purchase of subsidiaries and other expense.
We record the majority of integration costs attributable to our
acquisitions as of the consummation date of our purchase business combinations.
These costs include, but are not limited to, items such as:
>> write-downs and impairment of assets of the acquired entities
that will no longer be usable subsequent to the consummation
date, primarily data processing equipment, incompatible hardware
and software, bank signage, etc. These adjustments are generally
recorded as of the consummation date as an allocation of the
purchase price with the offsetting adjustment recorded as an
increase to goodwill. In addition, for all periods presented,
these adjustments are not material to our operations;
>> costs associated with a planned exit of an activity of the
acquired entity that is not associated with or is not expected to
generate revenues after the consummation date (e.g. credit card
lending). These costs are generally recorded as of the
consummation date through the establishment of an accrued
liability with the offsetting adjustment recorded as an increase
to goodwill. These costs are infrequently encountered and, for
all periods presented, are not material to our operations.;
>> planned involuntary employee termination benefits (i.e. severance
costs) as further discussed under "-Acquisitions-Acquisition and
Integration Costs'; and
>> contractual obligations of the acquired entities that existed
prior to the consummation date that either have no economic
benefit to the combined entity or have a penalty that we will
incur to cancel the contractual obligation. These contractual
obligations generally relate to existing data processing
contracts of the acquired entities that include penalties for
early termination. In conjunction with the merger and integration
of our acquisitions, the acquired entities are converted to our
existing data processing and information technology systems.
Consequently, the costs associated with terminating the existing
contracts of the acquired entities are generally recorded as of
the consummation date through the establishment of an accrued
liability with the offsetting adjustment recorded as an increase
to goodwill as further discussed under "-Acquisitions-Acquisition
and Integration Costs."
We make adjustments to the fair value of the acquired entities' assets
and liabilities for these items as of the consummation date and include them in
the allocation of the overall acquisition cost. We also incur costs associated
with our acquisitions that are expensed in our statements of income. These costs
relate specifically to additional costs incurred in conjunction with the data
processing conversions of the acquired entities as further described and
quantified below.
Salaries and employee benefits increased by $18.0 million to $111.5
million from $93.5 million for the years ended December 31, 2002 and 2001,
respectively. We primarily associate the increase with our 2001 and 2002
acquisitions and higher commissions paid to our mortgage loan originators due to
increased loan volume. However, the increase also reflects higher salary and
employee benefit costs associated with employing and retaining qualified
personnel. In addition, the increase includes various additions to staff
throughout 2001 to enhance senior management expertise and expand our product
lines.
Occupancy, net of rental income, and furniture and equipment expense
totaled $38.5 million and $30.0 million for the years ended December 31, 2002
and 2001, respectively. We primarily attribute the increase to our
aforementioned acquisitions, including certain expenses associated with lease
termination obligations, the relocation of certain branches and operational
areas, increased depreciation expense associated with numerous capital
expenditures and the continued expansion and renovation of various corporate and
branch offices, including our facility that houses our centralized operations
and certain corporate and administrative functions.
Information technology fees were $32.1 million and $27.0 million for
the years ended December 31, 2002 and 2001, respectively. First Services, L.P.,
a limited partnership indirectly owned by our Chairman and members of his
immediate family, provides information technology and various operational
support services to our subsidiaries and us under the terms of information
technology agreements. We attribute the increased fees to growth and
technological advancements consistent with our product and service offerings,
continued expansion and upgrades to technological equipment, networks and
communication channels, and expenses of approximately $554,000 associated with
the data processing conversions of Union and Plains, completed in the first
quarter of 2002, and of the Denton and Garland, Texas branch purchases,
completed in the second quarter of 2002.
Legal, examination and professional fees were $9.3 million and $7.0
million for the years ended December 31, 2002 and 2001, respectively. We
primarily attribute the increase in these fees to the continued expansion of
overall corporate activities, the ongoing professional services utilized by
certain of our acquired entities and increased legal fees associated with
commercial loan documentation, collection efforts, expanded corporate activities
and certain defense litigation particularly related to acquired entities.
Amortization of intangibles associated with the purchase of
subsidiaries was $2.0 million and $8.2 million for the years ended December 31,
2002 and 2001, respectively. The significant decrease for 2002 is attributable
to the implementation of SFAS No. 142 in January 2002.
Other expense was $24.5 million and $32.6 million for the years ended
December 31, 2002 and 2001, respectively. Other expense encompasses numerous
general and administrative expenses including travel, meals and entertainment,
insurance, freight and courier services, correspondent bank charges, advertising
and business development, miscellaneous losses and recoveries, memberships and
subscriptions, transfer agent fees and sales taxes.
We attribute the majority of the decrease in other expense for 2002 to
an $11.5 million nonrecurring litigation settlement charge in June 2001. This
litigation was initiated by an unaffiliated bank against one of our subsidiaries
and certain individuals and related to allegations arising from the employment
by our subsidiary of individuals previously employed by the plaintiff bank, as
well as the conduct of those individuals while employed by the plaintiff bank.
The nature of the litigation was not covered under the terms of either our
general liability or directors and officers liability insurance policies.
Consequently, when it became apparent that the trial was not proceeding as we
anticipated, a decision was made to settle the matter to avoid the risk of more
substantial expenses. Because of the uninsured nature of this litigation and the
unique circumstances leading to the litigation, we do not consider this charge
to be a recurring expense.
The decrease in other expense also reflects the establishment of a
specific reserve for an unfunded letter of credit in the amount of $1.8 million
during 2001. The letter of credit was issued in connection with a participation
in a credit for the development of a nuclear waste remediation facility. The
aggregate credit arrangement included a line of credit, in which we
participated, and the sale of bonds to various investors, which were backed by
the letters of credit, in which we also participated. Because the development
failed to meet remediation performance expectations, and consequently the
economic viability required, the bondholders required payment from the issuers
of the letters of credit. Upon funding the letter of credit, the balance became
an addition to the loan principal, which was then fully charged-off.
The overall decrease in other expenses for 2002 was offset by expenses
associated with our acquisitions completed during 2001 and 2002 as well as the
continued growth and expansion of our banking franchise.
Provision for Income Taxes. The provision for income taxes was $22.8
million for the year ended December 31, 2002, representing an effective income
tax rate of 32.8%, in comparison to $30.0 million, representing an effective
income tax rate of 30.5%, for the year ended December 31, 2001. The increase in
the effective income tax rate is primarily attributable to:
>> a reduction of our deferred tax asset valuation allowance of
$13.1 million recorded in December 2001. This reduction, of which
$8.1 million represented a reduction in our provision for income
taxes and $5.0 million represented an increase in capital
surplus, reflects the recognition of deferred tax assets for net
operating loss carryforwards and the expectation of future
taxable income sufficient to realize the net deferred tax assets;
partially offset by
>> the significant decrease in amortization of intangibles
associated with the purchase of subsidiaries in accordance with
the requirements of SFAS No. 142, which is not deductible for tax
purposes.
Comparison of Results of Operations for 2001 and 2000
Net Income. Net income was $64.5 million for the year ended December
31, 2001, compared to $56.1 million for 2000. The implementation of SFAS No. 133
on January 1, 2001, resulted in the recognition of a cumulative effect of change
in accounting principle of $1.4 million, net of tax, which reduced net income.
Excluding this item, net income was $65.9 million for the year ended December
31, 2001. The improved earnings primarily result from increased net interest
income and noninterest income, including a gain on the exchange of an equity
investment in an unaffiliated financial institution in October 2001, as well as
a reduced provision for income taxes. The reduced provision for income taxes
includes the effect of an $8.1 million reduction in our deferred tax asset
valuation allowance that was no longer deemed necessary as our overall net
deferred tax assets are expected to be recoverable through future earnings. The
overall improvement in earnings was partially offset by an increased provision
for loan losses and higher operating expenses, including nonrecurring charges
associated with the establishment of a specific reserve related to a contingent
liability and the settlement of certain litigation.
Net interest income (expressed on a tax-equivalent basis) improved to
$235.9 million for the year ended December 31, 2001, compared to $222.8 million
for 2000. However, our net interest rate margin declined to 4.34% for the year
ended December 31, 2001 from 4.65% for 2000. Net interest income increased
primarily as a result of increased earning assets generated through internal
loan growth along with our acquisitions completed throughout 2000 and 2001.
However, the improvement in net interest income was significantly mitigated by
continued reductions in prevailing interest rates throughout 2001. We funded the
overall loan growth primarily through deposits added through acquisitions and
internal deposit growth. During the year ended December 31, 2001, noninterest
income improved significantly to $98.6 million from $42.8 million for the years
ended December 31, 2001 and 2000, respectively, as further discussed under
"--Noninterest Income."
The improvement in net interest income and noninterest income was
partially offset by a $53.7 million increase in operating expenses to $211.7
million for the year ended December 31, 2001, compared to $158.0 million for
2000. The increased operating expenses are primarily attributable to:
>> the operating expenses of our 2000 and 2001 acquisitions
subsequent to their respective acquisition dates;
>> increased salaries and employee benefit expenses;
>> increased information technology fees;
>> increased legal, examination and professional fees;
>> increased amortization of intangibles associated with the
purchase of subsidiaries;
>> a nonrecurring litigation settlement charge; and
>> a charge to other expense associated with the establishment of a
specific reserve on an unfunded letter of credit.
These higher operating expenses, exclusive of the litigation settlement
and the specific reserve on the unfunded letter of credit, are reflective of
significant investments that we have made in personnel, technology, capital
expenditures and new business lines in conjunction with our overall strategic
growth plan. The payback on these investments is expected to occur over a longer
period of time through higher and more diversified revenue streams.
Provision for Loan Losses. The provision for loan losses was $23.5
million and $14.1 million for the years ended December 31, 2001 and 2000,
respectively. 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 nonperforming
assets and past due loans, which is further discussed under "--Loans and
Allowance for Loan Losses." Loan charge-offs were $31.5 million for the year
ended December 31, 2001, in comparison to $17.1 million for the year ended
December 31, 2000. The increase in loan charge-offs is due to $6.7 million in
charge-offs related to our commercial leasing business, a single loan in the
amount of $4.5 million that was charged-off due to suspected fraud on the part
of the borrower, $3.6 million in charge-offs on a shared national credit
relationship as well as the effects of the general slowdown in economic
conditions prevalent within our markets. Loan recoveries were $9.5 million for
the year ended December 31, 2001, in comparison to $9.8 million for 2000.
Nonperforming assets and past due loans have increased significantly during
2001, and we anticipate these trends will continue in the near future.
Management considered these trends in its overall assessment of the adequacy of
the allowance for loan losses. Our acquisitions during 2000 and 2001 provided
$6.1 million and $14.0 million, respectively, in additional allowance for loan
losses at their respective acquisition dates.
Noninterest Income and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31, 2001
and 2000:
December 31, Increase (Decrease)
-------------------- --------------------
2001 2000 Amount %
---- ---- ------ -
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees..... $ 22,865 19,794 3,071 15.51%
Gain on mortgage loans sold and held for sale..................... 14,983 7,806 7,177 91.94
Gain on sale of credit card portfolio, net of expenses............ 1,853 -- 1,853 100.00
Net gain on sales of available-for-sale investment securities..... 18,722 168 18,554 --
Gain on sales of branches, net of expenses........................ -- 1,355 (1,355) (100.00)
Bank-owned life insurance investment income....................... 4,415 4,314 101 2.34
Gain on derivative instruments, net............................... 18,583 -- 18,583 100.00
Other............................................................. 17,188 9,341 7,847 84.01
--------- ------- -------
Total noninterest income.................................... $ 98,609 42,778 55,831 130.51
========= ======= ======= =======
Noninterest expense:
Salaries and employee benefits.................................... $ 93,452 73,391 20,061 27.33%
Occupancy, net of rental income................................... 17,432 14,675 2,757 18.79
Furniture and equipment........................................... 12,612 11,702 910 7.78
Postage, printing and supplies.................................... 4,869 4,431 438 9.88
Information technology fees....................................... 26,981 22,359 4,622 20.67
Legal, examination and professional fees.......................... 6,988 4,523 2,465 54.50
Amortization of intangibles associated
with the purchase of subsidiaries.............................. 8,248 5,297 2,951 55.71
Communications.................................................... 3,247 2,625 622 23.70
Advertising and business development.............................. 5,237 4,331 906 20.92
Other............................................................. 32,605 14,656 17,949 122.47
--------- ------- -------
Total noninterest expense................................... $ 211,671 157,990 53,681 33.98
========= ======= ======= =======
Noninterest Income. Noninterest income was $98.6 million for the year
ended December 31, 2001, compared to $42.8 million for 2000. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, net gains on sales of available-for-sale
investment securities, net gains on derivative instruments and other income.
Service charges on deposit accounts and customer service fees increased
to $22.9 million for 2001, from $19.8 million for 2000. We attribute the
increase in service charges and customer service fees to:
>> increased deposit balances provided by internal growth;
>> our acquisitions completed during 2000 and, to a lesser degree,
2001;
>> additional products and services available and utilized by our
expanding base of retail and commercial customers;
>> increased fee income resulting from revisions of customer service
charge rates effective September 30, 2000, and July 1, 2001, and
enhanced control of fee waivers; and
>> increased income associated with automated teller machine
services and debit cards.
The gain on mortgage loans sold and held for sale increased to $15.0
million from $7.8 million for the years ended December 31, 2001 and 2000,
respectively. We attribute the increase to a significant increase in the volume
of loans originated and sold commensurate with the continued reductions in
mortgage loan rates experienced during 2001 as well as the continued expansion
of our mortgage banking activities into new and existing markets.
During 2001, we recorded a $1.9 million gain on the sale of our credit
card portfolio, which results from 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 years ended December 31, 2001 and 2000
included net gains on the sale of available-for-sale investment securities of
$18.7 million and $168,000, respectively. The significant increase in 2001
results from a $19.1 million gain recognized in conjunction with the exchange of
an equity investment in the common stock of an unaffiliated publicly-traded
financial institution for $10.0 million in cash and a $14.4 million equity
investment in the acquiring unaffiliated financial institution. In 1993, we
acquired an equity investment in the common stock of Southside Bancshares
Corporation, or Southside, located in St. Louis, Missouri, and we increased our
investment through additional purchases of common stock over time. At December
31, 2000, we owned 18.87% of Southside. In 2001, Southside was acquired by
Allegiant Bancorp, Inc., or Allegiant, located in St. Louis, Missouri. Upon
consummation of that business combination, we exchanged our Southside common
stock for $10.0 million in cash and a $14.4 million equity investment in the
common stock of Allegiant. The $19.1 million gain recorded as a result of this
transaction was measured as the difference between the sum of the fair value of
the equity investment in Allegiant's common stock on the transaction closing
date and the cash received, and our cumulative cost basis in the equity
investment in Southside. We owned 7.93% of the outstanding shares of common
stock of Allegiant at December 31, 2001. This gain was partially offset by a net
loss that resulted from the liquidation of certain equity investment securities.
The net gain for 2000 resulted primarily from the sales of certain investment
securities held by acquired institutions that did not meet our overall
investment objectives.
The gain on sales of branches, net of expenses, was $1.4 million for
the year ended December 31, 2000, and results from the divestiture of one of our
branch locations in central Illinois. In 2001, we did not sell any existing
branches.
The net gain on derivative instruments of $18.6 million for the year
ended December 31, 2001 includes $4.1 million of gains resulting from the
terminations of certain interest rate floor and swap agreements to adjust our
interest rate hedge position consistent with changes in the portfolio structure
and mix. In addition, the net gain reflects changes in the fair value of our
interest rate cap agreements, interest rate floor agreements and fair value
hedges, in accordance with the requirements of SFAS No. 133.
Other income was $17.2 million and $9.3 million for the years ended
December 31, 2001 and 2000, respectively. We attribute the primary components of
this increase to:
>> our acquisitions completed during 2000 and, to a lesser extent,
2001;
>> increased portfolio management fee income of $3.4 million
associated with our Institutional Money Management Division,
which was formed in August 2000;
>> increased brokerage revenue of $1.1 million, which is primarily
associated with the stock option services acquired in conjunction
with our acquisition of Bank of San Francisco in December 2000;
>> increased rental income of $2.1 million associated with our
commercial leasing activities that were acquired in conjunction
with our acquisition of a leasing company in February 2000; and
>> income of approximately $1.1 million associated with equipment
leasing activities that were acquired in conjunction with our
acquisition of Bank of San Francisco.
Noninterest Expense. Noninterest expense was $211.7 million for the
year ended December 31, 2001, in comparison to $158.0 million for 2000. The
increase reflects:
>> the noninterest expense associated with our acquisitions
completed during 2000 and 2001, particularly information
technology fees;
>> increased salaries and employee benefit expenses;
>> increased information technology fees;
>> increased legal, examination and professional fees;
>> increased amortization of intangibles associated with the
purchase of subsidiaries; and
>> increased other expense.
Salaries and employee benefits increased by $20.1 million to $93.5
million from $73.4 million for the years ended December 31, 2001 and 2000,
respectively. We primarily associate the increase with our 2000 and 2001
acquisitions and our Institutional Money Management Division, which was formed
in August 2000. However, the increase also reflects the competitive environment
in the employment market that has resulted in a higher demand for limited
resources, thus escalating industry salary and employee benefit costs associated
with employing and retaining qualified personnel. In addition, the increase
includes various additions to staff throughout 2000 to enhance executive and
senior management expertise, improve technological support, strengthen
centralized operational functions and expand our product lines.
Occupancy, net of rental income, and furniture and equipment expense
totaled $30.0 million and $26.4 million for the years ended December 31, 2001
and 2000, respectively. The increase is attributable to our acquisitions, the
relocation of certain branches and operational areas and increased depreciation
expense associated with numerous capital expenditures, including our new
facility that houses various centralized operations and certain corporate and
administrative functions.
Information technology fees were $27.0 million and $22.4 million for
the years ended December 31, 2001 and 2000, respectively. We attribute the
increased information technology fees to growth and technological advancements
consistent with our product and service offerings, continued expansion and
upgrades to technological equipment, networks and communication channels, and
expenses of approximately $1.8 million associated with the data processing
conversions of Century Bank, Lippo Bank, Commercial Bank of San Francisco, Bank
of San Francisco, Millennium Bank, Charter Pacific Bank and BYL completed in
2001.
Legal, examination and professional fees were $7.0 million and $4.5
million for the years ended December 31, 2001 and 2000, respectively. We
primarily attribute the increase in these fees to the ongoing professional
services utilized by certain of our acquired entities, increased professional
fees associated with our Institutional Money Management Division 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 $8.2 million and $5.3 million for the years ended December 31,
2001 and 2000, respectively. The increase for 2001 is primarily attributable to
amortization of the cost in excess of the fair value of the net assets acquired
for the nine acquisitions that we completed during 2000.
Other expense was $32.6 million and $14.7 million for the years ended
December 31, 2001 and 2000, respectively. Other expense encompasses numerous
general and administrative expenses including travel, meals and entertainment,
insurance, freight and courier services, correspondent bank charges, advertising
and business development, miscellaneous losses and recoveries, memberships and
subscriptions, transfer agent fees and sales taxes. We attribute the majority of
the increase in other expense to:
>> our acquisitions completed during 2000 and 2001;
>> increased advertising and business development expenses
associated with various product and service initiatives and
enhancements;
>> increased travel expenses primarily associated with business
development efforts and the ongoing integration of the recently
acquired entities into our corporate culture and systems;
>> a nonrecurring litigation settlement charge in the amount of
$11.5 million associated with a lawsuit brought by an
unaffiliated bank against one of our subsidiaries and certain
individuals related to allegations arising from the employment by
our subsidiary of individuals previously employed by the
plaintiff bank, as well as the conduct of those individuals while
employed by the plaintiff bank;
>> the establishment of a $1.8 million specific reserve on an
unfunded letter of credit; and
>> overall continued growth and expansion of our banking franchise.
Provision for Income Taxes. The provision for income taxes was $30.0
million for the year ended December 31, 2001, representing an effective income
tax rate of 30.5%, in comparison to $34.5 million, representing an effective
income tax rate of 37.2%, for the year ended December 31, 2000. The decrease in
the effective income tax rate is primarily attributable to:
>> a reduction of our deferred tax asset valuation allowance of
$13.1 million recorded in December 2001. This reduction, of which
$8.1 million represented a reduction in our provision for income
taxes and $5.0 million represented an increase in capital
surplus, reflects the recognition of deferred tax assets for net
operating loss carryforwards and the expectation of future
taxable income sufficient to realize the net deferred tax assets;
partially offset by
>> the increase in amortization of intangibles associated with the
purchase of subsidiaries, which is not deductible for tax
purposes.
Interest Rate Risk Management
For financial institutions, the maintenance of a satisfactory level of
net interest income is a primary factor in achieving acceptable income levels.
However, the maturity and repricing characteristics of the institution's loan
and investment portfolios may differ significantly from those within its deposit
structure. The nature of the loan and deposit markets within which a financial
institution operates, and its objectives for business development within those
markets at any point in time, influence these characteristics. In addition, the
ability of borrowers to repay loans and depositors to withdraw funds prior to
stated maturity dates introduces divergent option characteristics that operate
primarily as interest rates change. These factors cause various elements of the
institution's balance sheet to react in different manners and at different times
relative to changes in interest rates, thereby leading to increases or decreases
in net interest income over time. Depending upon the direction and velocity of
interest rate movements and their effect on the specific components of the
institution's balance sheet, the effects on net interest income can be
substantial. Consequently, managing a financial institution requires
establishing effective control over the exposure of the institution to changes
in interest rates.
We strive to manage our interest rate risk by:
>> maintaining an Asset Liability Committee, or ALCO, responsible to
our Board of Directors, to review the overall interest rate risk
management activity and approve actions taken to reduce risk;
>> maintaining an effective simulation model to determine our
exposure to changes in interest rates;
>> coordinating the lending, investing and deposit-generating
functions to control the assumption of interest rate risk; and
>> employing various financial instruments, including derivatives,
to offset inherent interest rate risk when it becomes excessive.
The objective of these procedures is to limit the adverse impact that
changes in interest rates may have on our net interest income.
The ALCO has overall responsibility for the effective management of
interest rate risk and the approval of policy guidelines. The ALCO includes our
Chairman and Chief Executive Officer, President and Chief Financial Officer,
Chief Operating Officer and the senior executives of investments, credit,
finance, and certain other officers. The Asset Liability Management Group, which
monitors interest rate risk, supports the ALCO, prepares analyses for review by
the ALCO and implements actions that are either specifically directed by the
ALCO or established by policy guidelines.
In managing sensitivity, we strive to reduce the adverse impact on
earnings by managing interest rate risk within internal policy constraints. Our
policy is to manage exposure to potential risks associated with changing
interest rates by maintaining a balance sheet posture in which annual net
interest income is not significantly impacted by reasonably possible near-term
changes in interest rates. To measure the effect of interest rate changes, we
project our net income over two one-year horizons on a pro forma basis. The
analysis assumes various scenarios for increases and decreases in interest rates
including both instantaneous and gradual, and parallel and non-parallel shifts
in the yield curve, in varying amounts. For purposes of arriving at reasonably
possible near-term changes in interest rates, we include scenarios based on
actual changes in interest rates, which have occurred over a two-year period,
simulating both a declining and rising interest rate scenario. We are
"asset-sensitive," indicating that our assets would generally reprice with
changes in rates more rapidly than our liabilities, and our simulation model
indicates a loss of projected net interest income should interest rates decline.
While a decline in interest rates of less than 100 basis points has a relatively
minimal impact on our net interest income, an instantaneous parallel decline in
the interest yield curve of 100 basis points indicates a pre-tax projected loss
of approximately 7.3% of net interest income, based on assets and liabilities at
December 31, 2002. Although we do not anticipate that instantaneous shifts in
the yield curve as projected in our simulation model are likely, these are
indications of the effects that changes in interest rates would have over time.
We also prepare and review a more traditional interest rate sensitivity
position in conjunction with the results of our simulation model. The following
table presents the projected maturities and periods to repricing of our rate
sensitive assets and liabilities as of December 31, 2002, adjusted to account
for anticipated prepayments:
Over Over
three six Over
Three through through one Over
months six twelve through five
or less months months five years years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
Loans (1)...................................... $4,166,669 503,365 448,380 311,668 2,506 5,432,588
Investment securities.......................... 438,563 135,762 140,917 396,173 25,905 1,137,320
Federal funds sold and other................... 8,732 -- -- -- -- 8,732
---------- --------- --------- --------- --------- ---------
Total interest-earning assets.............. 4,613,964 639,127 589,297 707,841 28,411 6,578,640
Effect of interest rate swap agreements........ (1,050,000) -- -- 1,050,000 -- --
---------- --------- --------- --------- --------- ---------
Total interest-earning assets
after the effect
of interest rate swap agreements......... $3,563,964 639,127 589,297 1,757,841 28,411 6,578,640
========== ========= ========= ========= ========= =========
Interest-bearing liabilities:
Interest-bearing demand accounts............... $ 303,189 188,469 122,914 90,137 114,720 819,429
Money market demand accounts................... 1,698,541 -- -- -- -- 1,698,541
Savings accounts............................... 81,273 66,930 57,369 81,273 191,230 478,075
Time deposits.................................. 477,797 441,899 549,888 720,117 400 2,190,101
Note payable................................... -- -- 7,000 -- -- 7,000
Other borrowed funds........................... 251,644 2,000 5,000 4,000 3,000 265,644
---------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities......... 2,812,444 699,298 742,171 895,527 309,350 5,458,790
Effect of interest rate swap agreements........ 200,000 -- -- (200,000) -- --
---------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities
after the effect of interest rate
swap agreements.......................... $3,012,444 699,298 742,171 695,527 309,350 5,458,790
========== ========= ========= ========= ========= =========
Interest-sensitivity gap:
Periodic....................................... $ 551,520 (60,171) (152,874) 1,062,314 (280,939) 1,119,850
=========
Cumulative..................................... 551,520 491,349 338,475 1,400,789 1,119,850
========== ========= ========= ========= =========
Ratio of interest-sensitive assets to
interest-sensitive liabilities:
Periodic..................................... 1.18 0.91 0.79 2.53 0.09 1.21
=========
Cumulative................................... 1.18 1.13 1.08 1.27 1.21
========== ========= ========= ========= =========
- ---------------------------
(1) Loans are presented net of unearned discount.
Management made certain assumptions in preparing the foregoing table.
These assumptions included:
>> loans will repay at projected repayment rates;
>> mortgage-backed securities, included in investment securities,
will repay at projected repayment rates;
>> interest-bearing demand accounts and savings accounts are
interest-sensitive at rates ranging from 11% to 37% and 12% to
40%, respectively, of the remaining balance for each period
presented; and
>> fixed maturity deposits will not be withdrawn prior to maturity.
A significant variance in actual results from one or more of these
assumptions could materially affect the results reflected in the table.
At December 31, 2002, our asset-sensitive position on a cumulative
basis through the twelve-month time horizon was $338.5 million, or 4.61% of
total assets, in comparison to our asset-sensitive position on a cumulative
basis through the twelve-month time horizon of $313.8 million, or 4.63% of total
assets at December 31, 2001. We attribute the change for 2002 to changes in
customer preferences related to the current low interest rate environment and
economic conditions. This is observed in the shifting of deposits from time
deposits to money market deposits and in relatively small loan growth resulting
in increases in the amount of short-term investment securities. This was
partially offset by our interest rate swap agreements entered into in
conjunction with our interest rate risk management program during 2002.
The interest-sensitivity position is one of several measurements of the
impact of interest rate changes on net interest income. Its usefulness in
assessing the effect of potential changes in net interest income varies with the
constant change in the composition of our assets and liabilities and changes in
interest rates. For this reason, we place greater emphasis on our simulation
model for monitoring our interest rate risk exposure.
As previously discussed, we utilize derivative financial instruments to
assist in our management of interest rate sensitivity by modifying the
repricing, maturity and option characteristics of certain assets and
liabilities. The derivative financial instruments we hold are summarized as
follows:
December 31, 2002 December 31, 2001
----------------------- ----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................ $1,050,000 2,179 900,000 1,764
Fair value hedges........................... 301,200 11,449 200,000 6,962
Interest rate cap agreements................ 450,000 94 450,000 2,063
Interest rate lock commitments.............. 89,000 -- 88,000 --
Forward commitments to sell
mortgage-backed securities................ 235,000 -- 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 2002 and 2001, we realized net interest income on derivative
financial instruments of $53.0 million and $23.4 million, respectively, in
comparison to net interest expense of $4.7 million in 2000. The increase in 2002
is primarily due to interest income associated with the additional swap
agreements entered into during May and June 2002 as well as the decline in
prevailing interest rates. In addition, we recorded a net gain on derivative
instruments, which is included in noninterest income in the consolidated
statements of income, of $2.2 million and $18.6 million for the years ended
December 31, 2002 and 2001, respectively. The net decrease in income from 2001
reflects $8.1 million of gains resulting from the termination of certain
interest rate swap agreements in 2001, the sale of our interest rate floor
agreements in 2001 and changes in the fair value of our interest rate cap
agreements and fair value hedges.
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 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 of
interest equivalent to the weighted average prime lending rate
minus 2.70%. The terms of the swap agreements provided for us to
pay and receive interest on a quarterly basis. In April 2001, we
terminated these swap agreements, which would have expired in
September 2001, and replaced them with similar swap agreements
with extended maturities in order to lengthen the period covered
by the swaps. In conjunction with the termination of these swap
agreements, we recorded a gain of $985,000.
>> During September 2000, March 2001, April 2001 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. The underlying hedged assets are certain loans
within our commercial loan portfolio. The swap agreements provide
for us to receive a fixed rate of interest and pay an adjustable
rate of interest equivalent to the weighted average prime lending
rate minus 2.70%, 2.82%, 2.82% 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 gain of $2.6 million in conjunction with the
termination of these swap agreements. The amount receivable by us
under the swap agreements was $3.1 million and $2.9 million at
December 31, 2002 and 2001, respectively, and the amount payable
by us was $888,000 and $1.1 million at December 31, 2002 and
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 December 31, 2002 and 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ---------- ------------- ------------- ---------
(dollars expressed in thousands)
December 31, 2002:
March 14, 2004.......................... $ 150,000 1.45% 3.93% $ 4,130
September 20, 2004...................... 600,000 1.55 6.78 48,891
March 21, 2005.......................... 200,000 1.43 5.24 13,843
April 2, 2006........................... 100,000 1.43 5.45 9,040
---------- --------
$1,050,000 1.50 5.95 $ 75,904
========== ===== ===== ========
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 underlying hedged
liabilities are a portion of our other time deposits. The terms
of the swap agreements provide for us to pay interest on a
quarterly basis and receive interest on a semiannual basis. The
amount receivable by us under the swap agreements was $5.2
million at December 31, 2002 and 2001, and the amount payable by
us under the swap agreements was $821,000 and $1.2 million at
December 31, 2002 and 2001, respectively.
>> During May 2002 and June 2002, we entered into $55.2 million and
$86.3 million notional amount, respectively, of interest rate
swap agreements that provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
three-month London Interbank Offering Rate plus 2.30% and 2.75%,
respectively. In addition, during June 2002, we entered into
$46.0 million notional amount of interest rate swap agreements
that provide for us to receive a fixed rate of interest and pay
an adjustable rate of interest equivalent to the three-month
London Interbank Offering Rate plus 1.97%. The underlying hedged
liabilities are our guaranteed preferred beneficial interests in
our subordinated debentures. The terms of the swap agreements
provide for us to pay and receive interest on a quarterly basis.
There were no amounts receivable or payable by us at December 31,
2002. The $86.3 million notional amount interest rate swap
agreement was called by its counterparty on November 8, 2002
resulting in final settlement of this interest rate swap
agreement on December 18, 2002. There was no gain or loss
recorded as a result of this transaction.
The maturity dates, notional amounts, interest rates paid and received
and fair value of our interest rate swap agreements designated as fair value
hedges as of December 31, 2002 and 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2002:
January 9, 2004......................... $ 50,000 1.76% 5.37% $ 1,972
January 9, 2006......................... 150,000 1.76 5.51 13,476
June 30, 2028........................... 46,000 3.77 8.50 495
December 31, 2031....................... 55,200 4.10 9.00 4,688
--------- --------
$ 301,200 2.49 6.58 $ 20,631
========= ===== ===== ========
December 31, 2001:
January 9, 2004......................... $ 50,000 2.48% 5.37% $ 1,761
January 9, 2006......................... 150,000 2.48 5.51 3,876
--------- --------
$ 200,000 2.48 5.47 $ 5,637
========= ===== ===== ========
Interest Rate Floor Agreements. During January 2001 and March 2001, we
entered into $200.0 million and $75.0 million notional amount, respectively, of
four-year interest rate floor agreements to further stabilize net interest
income in the event of a falling rate scenario. The interest rate floor
agreements provided for us to receive a quarterly adjustable rate of interest
equivalent to the differential between the three-month London Interbank Offering
Rate and the strike prices of 5.50% or 5.00%, respectively, should the
three-month London Interbank Offering Rate fall below the respective strike
prices. In November 2001, we terminated these interest rate floor agreements in
order to appropriately modify our overall hedge position in accordance with our
interest rate risk management program. In conjunction with the termination, we
recorded an adjustment of $4.0 million representing the decline in fair value
from our previous month-end measurement date. These agreements provided net
interest income of $2.1 million for the year ended December 31, 2001.
Interest Rate Cap Agreements. In conjunction with the interest rate
swap agreements designated as cash flow hedges that mature on September 20,
2004, we also entered into $450.0 million notional amount of four-year interest
rate cap agreements to limit the net interest expense associated with our
interest rate swap agreements in the event of a rising rate scenario. The
interest rate cap agreements provide for us to receive a quarterly adjustable
rate of interest equivalent to the differential between the three-month London
Interbank Offering Rate and the strike price of 7.50% should the three-month
London Interbank Offering Rate exceed the strike price. At December 31, 2002 and
2001, the carrying value of these interest rate cap agreements, which is
included in derivative instruments in the consolidated balance sheets, was
$94,000 and $2.1 million, respectively.
Pledged Collateral. At December 31, 2002 and 2001, we had pledged
investment securities available for sale with a carrying value of $5.8 million
and $1.1 million, respectively, in connection with our interest rate swap
agreements. In addition, at December 31, 2002 and 2001, we had accepted, as
collateral in connection with our interest rate swap agreements, cash of $99.1
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 December 31, 2002 and 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.
Mortgage Banking Activities
Our mortgage banking activities consist of the origination, purchase
and servicing of residential mortgage loans. The purchase of loans to be held
for sale is limited to loans held for sale that we acquire in conjunction with
our acquisition of other financial institutions. Exclusive of these acquired
loans, we do not purchase loans to be held for sale. Generally, we sell our
production of residential mortgage loans in the secondary loan markets.
Servicing rights are retained with respect to conventional FHA and VA conforming
fixed-rate and conventional adjustable rate residential mortgage loans. We sell
other nonconforming residential mortgage loans on a servicing released basis.
For the three years ended December 31, 2002, 2001 and 2000, we
originated and purchased loans for resale totaling $1.95 billion, $1.52 billion
and $532.2 million and sold loans totaling $1.62 billion, $1.35 billion and
$413.2 million, respectively. The origination and purchase of residential
mortgage loans and the related sale of the loans provides us with additional
sources of income including the gain or loss realized upon sale, the interest
income earned while the loan is held awaiting sale and the ongoing loan
servicing fees from the loans sold with servicing rights retained. Mortgage
loans serviced for investors aggregated $1.29 billion, $1.07 billion and $957.2
million at December 31, 2002, 2001 and 2000, respectively.
The gain on mortgage loans originated for resale, including loans sold
and held for sale, was $28.4 million, $15.0 million and $7.8 million for the
years ended December 31, 2002, 2001 and 2000, respectively. We determine these
gains, net of losses, on a lower of cost or market basis. These gains are
realized at the time of sale. The cost basis reflects: (1) adjustments of the
carrying values of loans held for sale to the lower of cost, adjusted to include
the cost of hedging the loans held for sale, or current market values; and (2)
adjustments for any gains or losses on loan commitments for which the interest
rate has been established, net of anticipated underwriting "fallout," (loans not
funded due to issues discovered during the underwriting process) adjusted for
the cost of hedging these loan commitments. The increases for 2002 and 2001 are
primarily attributable to a significant increase in the volume of loans
originated and sold commensurate with the prevailing interest rate environment
experienced throughout 2001, including continued reductions in mortgage interest
rates and our growth in mortgage banking activities.
The interest income on loans held for sale was $15.1 million for the
year ended December 31, 2002, in comparison to $11.1 million and $3.5 million
for the years ended December 31, 2001 and 2000, respectively. The amount of
interest income realized on loans held for sale is a function of the average
balance of loans held for sale, the period for which the loans are held and the
prevailing interest rates when the loans are made. The average balance of loans
held for sale was $206.0 million, $150.8 million and $47.0 million for the years
ended December 31, 2002, 2001 and 2000, respectively. On an annualized basis,
our yield on the portfolio of loans held for sale was 7.32%, 7.38% and 7.49% for
the years ended December 31, 2002, 2001 and 2000, respectively. This compares
with our cost of funds, as a percentage of average interest-bearing liabilities,
of 2.84%, 4.44% and 4.85% for the years ended December 31, 2002, 2001 and 2000,
respectively.
We report mortgage loan servicing fees net of amortization of mortgage
servicing rights, interest shortfall and mortgage-backed security guarantee fee
expense. Interest shortfall equals the difference between the interest collected
from a loan-servicing customer upon prepayment of the loan and a full month's
interest that is required to be remitted to the security owner. Loan servicing
fees, net, which are included in other noninterest income in the statements of
operations, were $321,000, $222,000 and $486,000 for the years ended December
31, 2002, 2001 and 2000, respectively. The increase in loan servicing fees in
2002 primarily reflects the significant increase in the volume of loans
originated and sold commensurate with the reductions in mortgage interest rates
experienced in 2001. We attribute the decrease in loan servicing fees for 2001
primarily to increased amortization of mortgage servicing rights, reduced late
charge fees and a higher level of interest shortfall. Amortization of mortgage
servicing rights was $3.8 million, $3.7 million and $3.1 million for the years
ended December 31, 2002, 2001 and 2000, respectively.
Our interest rate risk management policy provides certain hedging
parameters to reduce the interest rate risk exposure arising from changes in
loan prices from the time of commitment until the sale of the security or loan.
To reduce this exposure, we use forward commitments to sell fixed-rate
mortgage-backed securities at a specified date in the future. At December 31,
2002, 2001 and 2000, we had $232.5 million, $197.5 million and $37.6 million,
respectively, of loans held for sale and related commitments, net of committed
loan sales and estimated underwriting fallout, of which $234.6 million, $209.9
million and $32.0 million, respectively, were hedged through the use of such
forward commitments.
Investment Securities
We classify the securities within our investment portfolio as held to
maturity or available for sale. We do not engage in the trading of investment
securities. Our investment security portfolio consists primarily of securities
designated as available for sale. The investment security portfolio was $1.14
billion and $631.1 million at December 31, 2002 and 2001, respectively, compared
to $563.5 million at December 31, 2000. We attribute the increase in investment
securities to securities acquired through acquisitions and the overall level of
loan demand within our market areas, which affects the amount of funds available
for investment. In addition, the increase for 2001 was partially offset by the
liquidation of certain investment securities and a significant increase in calls
of investment securities prior to their normal maturity dates resulting from the
general decline in interest rates during 2001.
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 91.8%, 92.7%
and 92.3% of total interest income for the years ended December 31, 2002, 2001
and 2000, respectively. We recognize interest and fees on loans as income using
the interest method of accounting. Loan origination fees are deferred and
accreted to interest income over the estimated life of the loans using the
interest method of accounting. The accrual of interest on loans is discontinued
when it appears that interest or principal may not be paid in a timely manner in
the normal course of business. We generally record payments received on
nonaccrual and impaired loans as principal reductions, and defer the recognition
of interest income on loans until all principal has been repaid or an
improvement in the condition of the loan has occurred which would warrant the
resumption of interest accruals.
Loans, net of unearned discount, represented 74.0% of total assets as
of December 31, 2002, compared to 79.8% of total assets at December 31, 2001.
Total loans, net of unearned discount, increased $23.7 million to $5.43 billion
for the year ended December 31, 2002, and $656.6 million to $5.41 billion for
the year ended December 31, 2001. Exclusive of our acquisition of Plains, which
provided loans, net of unearned discount, of $150.4 million, loans decreased
$126.7 million in 2002. The decrease primarily results from:
>> Weaker loan demand from our commercial customers, which is
indicative of the current economic conditions prevalent within
most of our markets;
>> Continued reductions in new consumer and installment loan volumes
and the repayment of principal on our existing portfolio
consistent with our objectives of de-emphasizing consumer lending
and expanding commercial lending; and
>> Declines in our commercial, financial and agricultural portfolio
due to an anticipated amount of attrition associated with our
acquisitions completed during the fourth quarter of 2001 and the
first quarter of 2002.
In our evaluation of acquisitions, it is anticipated that as we apply
our standards for credit structuring, underwriting, documentation and approval,
a portion of the existing borrowers will elect to refinance with another
financial institution, because there may be an aggressive effort by other
financial institutions to attract them, because they do not accept the changes
involved, or because they are unable to meet our credit requirements. In
addition, another portion of the portfolio may either enter our remedial
collection process to reduce undue credit exposure or improve problem loans, or
may be charged-off. The amount of this attrition will vary substantially among
acquisitions depending on: (a) the strength and discipline within the credit
function of the acquired institution; (b) the magnitude of problems contained in
the acquired portfolio; (c) the aggressiveness of competing institutions to
attract business; and (d) the significance of the acquired institution to the
overall banking market. Typically, in acquisitions of institutions that have
strong credit cultures prior to their acquisitions and operate in relatively
large markets, there is relatively little attrition that occurs after the
acquisition. However, in those acquisitions in which the credit discipline has
been weak, and particularly those in small metropolitan or rural areas, in our
experience substantially greater attrition can occur. Generally, this process
occurs within approximately three to six months after completion of the
acquisition.
The decrease in loans was offset by a $145.8 million increase in loans
held for sale, which is primarily attributable to increased volumes of
residential mortgage loans resulting from the current interest rate environment
and the continuing expansion of our mortgage banking business.
During the five years ended December 31, 2002, total loans, net of
unearned discount, increased significantly from $3.00 billion at December 31,
1997 to $5.43 billion at December 31, 2002. Throughout this period, we have
substantially enhanced our capabilities for achieving and managing internal
growth. A key element of this process has been the expansion of our corporate
business development staff, which is responsible for the internal development
and management of both loan and deposit relationships with commercial customers.
While this process was occurring, in an attempt to achieve more diversification,
a higher level of interest yield and a reduction in interest rate risk within
our loan portfolio, we also focused on repositioning our portfolio. As the
corporate business development effort continued to originate a substantial
volume of new loans, substantially all of our conforming residential mortgage
loan production has been sold in the secondary mortgage market. We have also
substantially reduced our consumer lending by discontinuing the origination of
indirect automobile loans and the sale of our student loan and credit card loan
portfolios. This allowed us to fund part of the growth in corporate lending
through reductions in residential real estate, indirect automobile and other
consumer-related loans.
In addition, our acquisitions added substantial portfolios of new
loans. Some of these portfolios contained significant loan problems, which we
had anticipated and considered in our acquisition pricing. As we resolved the
asset quality issues, the portfolios of the acquired entities tended to decline
due to the elimination of problem loans and because many of the resources that
would otherwise be directed toward generating new loans were concentrated on
improving or eliminating existing relationships. We continue to experience this
trend as a result of our acquisitions of Millennium Bank and Union completed in
December 2000 and 2001, respectively.
The following table summarizes the effects of these factors on our loan
portfolio for the five years ended December 31, 2002:
Increase (Decrease) For the Year Ended December 31,
----------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars expressed in thousands)
Internal loan volume (decrease) increase:
Commercial lending................................ $ (119,295) 174,568 360,410 363,486 633,660
Residential real estate lending (1) .............. 36,074 48,616 20,137 (126,418) (152,849)
Consumer lending, net of unearned discount........ (44,060) (75,280) (64,606) (56,349) (30,506)
Loans provided by acquisitions........................ 151,000 508,700 440,000 235,500 127,600
---------- --------- --------- --------- ---------
Total increase in loans, net of unearned discount. $ 23,719 656,604 755,941 416,219 577,905
========== ========= ========= ========= =========
-------------------------
(1) Includes loans held for sale, which increased $145.8 million for the year ended December 31, 2002.
Our lending strategy emphasizes quality, growth and diversification.
Throughout our organization, we employ a common credit underwriting policy. Our
commercial lenders focus principally on small to middle-market companies.
Consumer lenders focus principally on residential loans, including home equity
loans, automobile financing and other consumer financing opportunities arising
out of our branch banking network.
Commercial, financial and agricultural loans include loans that are
made primarily based on the borrowers' general credit strength and ability to
generate cash flows for repayment from income sources even though such loans may
also be secured by real estate or other assets. Real estate construction and
development loans, primarily relating to residential properties and commercial
properties, represent financing secured by real estate under construction. Real
estate mortgage loans consist primarily of loans secured by single-family,
owner-occupied properties and various types of commercial properties on which
the income from the property is the intended source of repayment. Consumer and
installment loans are loans to individuals and consist primarily of loans
secured by automobiles. Loans held for sale are primarily fixed and adjustable
rate residential mortgage loans pending sale in the secondary mortgage market in
the form of a mortgage-backed security, or to various private third-party
investors.
The following table summarizes the composition of our loan portfolio by
major category and the percent of each category to the total portfolio as of the
dates presented:
December 31,
-----------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- --------------- -------------- ------------- --------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
(dollars expressed in thousands)
Commercial, financial
and agricultural............. $1,443,016 28.4% $1,532,875 29.5% $1,372,196 29.3% $1,086,919 27.4% $ 920,007 26.7%
Real estate construction
and development.............. 989,650 19.5 954,913 18.4 809,682 17.3 795,081 20.1 720,910 20.9
Real estate mortgage:
One-to-four-family
residential loans.......... 694,604 13.7 798,089 15.3 726,474 15.5 720,630 18.2 739,442 21.5
Multi-family
residential loans.......... 112,517 2.2 148,684 2.9 80,220 1.7 73,864 1.9 63,679 1.8
Commercial real
estate loans............... 1,637,001 32.2 1,499,074 28.8 1,396,163 29.8 1,057,075 26.7 726,056 21.1
Lease financing.................. 126,738 2.5 148,971 2.8 124,088 2.7 -- -- -- --
Consumer and installment, net of
unearned discount............ 79,097 1.5 122,057 2.3 174,337 3.7 225,343 5.7 274,392 8.0
---------- ----- ---------- ------ ---------- ----- ---------- ----- ---------- -----
Total loans, excluding
loans held for sale... 5,082,623 100.0% 5,204,663 100.0% 4,683,160 100.0% 3,958,912 100.0% 3,444,486 100.0%
===== ===== ===== ===== =====
Loans held for sale.............. 349,965 204,206 69,105 37,412 135,619
---------- ---------- ---------- ---------- ----------
Total loans.............. $5,432,588 $5,408,869 $4,752,265 $3,996,324 $3,580,105
========== ========== ========== ========== ==========
Loans at December 31, 2002 mature as follows:
Over One Year
Through Five
Years Over Five Years
------------------ -----------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
Commercial, financial and agricultural.................... $ 1,365,060 33,042 22,062 22,852 -- 1,443,016
Real estate construction and development.................. 860,481 113,452 12,602 3,115 -- 989,650
Real estate mortgage...................................... 1,378,941 714,169 217,712 130,122 3,178 2,444,122
Lease financing........................................... 13,776 109,086 -- 3,876 -- 126,738
Consumer and installment, net of unearned discount........ 32,772 40,515 593 5,217 -- 79,097
Loans held for sale....................................... 349,965 -- -- -- -- 349,965
----------- --------- -------- ------- ------- ---------
Total loans......................................... $ 4,000,995 1,010,264 252,969 165,182 3,178 5,432,588
=========== ========= ======== ======= ======= =========
Nonperforming assets include nonaccrual loans, restructured loans and
other real estate. The following table presents the categories of nonperforming
assets and certain ratios as of the dates indicated:
December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual...................................... $ 15,787 17,141 21,424 18,397 15,385
Restructured terms.............................. -- -- 22 29 --
Real estate construction and development:
Nonaccrual...................................... 23,378 3,270 11,068 1,886 3,858
Real estate mortgage:
One-to-four family residential loans:
Nonaccrual...................................... 14,833 20,780 5,645 7,703 9,929
Restructured terms.............................. 15 20 28 18 50
Multi-family residential loans:
Nonaccrual...................................... 772 476 593 722 2,706
Restructured terms.............................. -- -- 908 923 1,562
Commercial real estate loans:
Nonaccrual...................................... 8,890 20,642 10,286 7,989 6,223
Restructured terms.............................. 1,907 1,993 2,016 2,038 3,609
Lease financing:
Nonaccrual...................................... 8,723 2,185 1,013 -- --
Consumer and installment:
Nonaccrual...................................... 860 794 155 32 216
Restructured terms.............................. -- 7 8 -- --
---------- --------- --------- --------- ---------
Total nonperforming loans................ 75,165 67,308 53,166 39,737 43,538
Other real estate................................... 7,609 4,316 2,487 2,129 3,709
---------- --------- --------- --------- ---------
Total nonperforming assets............... $ 82,774 71,624 55,653 41,866 47,247
========== ========= ========= ========= =========
Loans, net of unearned discount..................... $5,432,588 5,408,869 4,752,265 3,996,324 3,580,105
========== ========= ========= ========= =========
Loans past due 90 days or more and still accruing... $ 4,635 15,156 3,009 5,844 4,674
========== ========= ========= ========= =========
Ratio of:
Allowance for loan losses to loans.............. 1.83% 1.80% 1.72% 1.72% 1.70%
Nonperforming loans to loans.................... 1.38 1.24 1.12 0.99 1.22
Allowance for loan losses to
nonperforming loans........................... 132.29 144.36 153.47 172.66 140.04
Nonperforming assets to loans
and other real estate......................... 1.52 1.32 1.17 1.05 1.32
=========== ========= ========= ========= =========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $75.2 million at December 31, 2002, in
comparison to $67.3 million and $53.2 million at December 31, 2001 and 2000,
respectively. As further discussed under "--Lending Activities," the increase in
nonperforming loans in 2002 is primarily attributable to the economic slowdown
previously discussed, additional problems identified in acquired loan
portfolios, continuing deterioration in the portfolio of leases to the airline
industry and the addition of a $16.1 million borrowing relationship to
nonaccrual real estate construction and development loans during the second
quarter of 2002. The relationship relates to a residential and recreational
development project that had significant financial difficulties and experienced
inadequate project financing, project delays and weak project management. This
relationship had previously been on nonaccrual status and was removed from
nonaccrual status during the third quarter of 2001 due to financing being recast
with a new borrower, who appeared able to meet ongoing developmental
expectations. Subsequent to that time, the new borrower encountered internal
management problems, which negatively impacted and further delayed development
of the project. Loan charge-offs also increased significantly to $70.5 million
for the year ended December 31, 2002, from $31.5 million for 2001. Included in
this were charge-offs aggregating $38.6 million on ten large credit
relationships, representing nearly 55% of loan charge-offs in 2002. We
anticipate this trend of higher nonperforming and delinquent loans will continue
in the near future. The increase in nonperforming loans for 2001 reflects
cyclical trends experienced within the banking industry as a result of economic
slowdown, as well as the asset quality of acquired institutions. Our Union
acquisition, completed in December 2001, resulted in the addition of
approximately $8.9 million of nonperforming loans and $3.6 million of loans past
due 90 days or more. The increase in nonperforming loans in 2000 reflected a
small number of credit relationships that were placed on nonaccrual during the
year and the overall growth of the loan portfolio. These nonperforming loans
were symptomatic of circumstances specific to those borrower relationships.
As of December 31, 2002, 2001 and 2000, $173.3 million, $123.2 million
and $50.2 million, respectively, of loans not included in the table above were
identified by management as having potential credit problems (problem loans).
The significant increase in problem loans for the year ended December 31, 2002
is primarily due to problem loans included in the acquisitions of Millenium Bank
and Union, completed in December 2000 and 2001, respectively, continuing
deterioration of leases to the airline industry, portfolio growth (both internal
and external) and the gradual slow down and uncertainties that have recently
occurred in the economy surrounding the markets in which we operate. As
previously discussed under "--Lending Activities," certain acquired loan
portfolios exhibited varying degrees of distress prior to their acquisition.
While these problems had been identified and considered in our acquisition
pricing, the acquisitions led to an increase in nonperforming assets and problem
loans. As of December 31, 1999, 1998 and 1997, problem loans totaled $36.3
million, $21.3 million and $27.9 million, respectively.
Our credit management policies and procedures focus on identifying,
measuring and controlling credit exposure. These procedures employ a
lender-initiated system of rating credits, which is ratified in the loan
approval process and subsequently tested in internal loan reviews, external
audits and regulatory bank examinations. The system requires rating all loans at
the time they are originated, except for homogeneous categories of loans, such
as residential real estate mortgage loans and consumer loans. These homogeneous
loans are assigned an initial rating based on our experience with each type of
loan. We adjust these ratings based on payment experience subsequent to their
origination.
We include adversely rated credits, including loans requiring close
monitoring which would not normally be considered criticized credits by
regulators, on a monthly loan watch list. Loans may be added to our watch list
for reasons that are temporary and correctable, such as the absence of current
financial statements of the borrower or a deficiency in loan documentation.
Other loans are added whenever any adverse circumstance is detected which might
affect the borrower's ability to meet the terms of the loan. The delinquency of
a scheduled loan payment, deterioration in the borrower's financial condition
identified in a review of periodic financial statements, a decrease in the value
of the collateral securing the loan, or a change in the economic environment
within which the borrower operates could initiate the addition of a loan to the
list. Loans on the watch list require periodic detailed loan status reports
prepared by the responsible officer, which are discussed in formal meetings with
loan review and credit administration staff members. Downgrades of loan risk
ratings may be initiated by the responsible loan officer at any time. However,
upgrades of risk ratings may only be made with the concurrence of selected loan
review and credit administration staff members generally at the time of the
formal watch list review meetings.
Each month, the credit administration department provides management
with detailed lists of loans on the watch list and summaries of the entire loan
portfolio 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 losses. In its analysis, management considers the change in
the portfolio, including growth, composition and the ratio of net loans to total
assets, and the economic conditions of the regions in which we operate. Based on
this quantitative and qualitative analysis, provisions are made to the allowance
for loan losses. Such provisions are reflected in our consolidated statements of
income.
The allocation of the allowance for loan losses by loan category is a
result of the application of our risk rating system. As such, the same
procedures we employ to determine the overall risk in our loan portfolio and our
requirements for the allowance for loan losses determines the distribution of
the allowance by loan category. Consequently, the distribution of the allowance
will change from period to period due to:
>> Changes in the aggregate loan balances by loan category;
>> Changes in the identified risk in each loan in the portfolio over
time, excluding those homogeneous categories of loans such as
consumer and installment loans and residential real estate loans
for which risk ratings are changed based on payment performance;
and
>> Changes in loan concentrations by borrower.
Since the methods of calculating the allowance requirements have not
changed over time, the reallocations among different categories of loans that
appear between periods are the result of the redistribution of the individual
loans that comprise the aggregate portfolio due to the factors listed above.
However, the perception of risk with respect to particular loans within the
portfolio will change over time as a result of the characteristics and
performance of those loans, as well as the overall economic trends and market
trends, including our actual and expected trends in nonperforming loans.
Consequently, while there are no specific allocations of the allowance resulting
from economic or market conditions or actual or expected trends in nonperforming
loans, these factors are considered in the initial assignment of risk ratings to
loans and in subsequent changes to those risk ratings.
The following table is a summary of loan loss experience for the five
years ended December 31, 2002:
As of or For the Years Ended December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of year......... $ 97,164 81,592 68,611 60,970 50,509
Acquired allowances for loan losses.................. 1,366 14,046 6,062 3,008 3,200
---------- ---------- ---------- --------- ----------
98,530 95,638 74,673 63,978 53,709
---------- ---------- ---------- --------- ----------
Loans charged-off:
Commercial, financial and agricultural........... (45,697) (21,085) (9,690) (10,855) (3,908)
Real estate construction and development......... (7,778) (108) (2,229) (577) (185)
Real estate mortgage:
One-to-four family residential loans.......... (2,697) (802) (452) (1,010) (1,786)
Multi-family residential loans................ (109) (4) -- (19) (78)
Commercial real estate loans.................. (2,747) (1,012) (1,761) (1,532) (525)
Lease financing.................................. (8,426) (6,749) (78) -- --
Consumer and installment......................... (3,070) (1,693) (2,840) (3,728) (3,701)
---------- ---------- ---------- --------- ----------
Total...................................... (70,524) (31,453) (17,050) (17,721) (10,183)
---------- ---------- ---------- --------- ----------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural........... 8,331 4,015 5,556 3,602 3,417
Real estate construction and development......... 631 1,171 319 849 342
Real estate mortgage:
One-to-four family residential loans.......... 628 755 536 407 564
Multi-family residential loans................ 792 15 93 286 45
Commercial real estate loans.................. 3,491 1,332 1,308 1,664 1,420
Lease financing.................................. 494 435 65 -- --
Consumer and installment......................... 1,566 1,746 1,965 2,473 2,656
---------- ---------- ---------- --------- ----------
Total...................................... 15,933 9,469 9,842 9,281 8,444
---------- ---------- ---------- --------- ----------
Net loans charged-off...................... (54,591) (21,984) (7,208) (8,440) (1,739)
---------- ---------- ---------- --------- ----------
Provision for loan losses............................ 55,500 23,510 14,127 13,073 9,000
---------- ---------- ---------- --------- ----------
Allowance for loan losses, end of year............... $ 99,439 97,164 81,592 68,611 60,970
========== ========== ========== ========= ==========
Loans outstanding, net of unearned discount:
Average.......................................... $5,424,508 4,884,299 4,290,958 3,812,508 3,250,719
End of year...................................... 5,432,588 5,408,869 4,752,265 3,996,324 3,580,105
End of year, excluding loans held for sale....... 5,082,623 5,204,663 4,683,160 3,958,912 3,444,486
========== ========== ========== ========= ==========
Ratio of allowance for loan losses to
loans outstanding:
Average.......................................... 1.83% 1.99% 1.90% 1.80% 1.88%
End of year...................................... 1.83 1.80 1.72 1.72 1.70
End of year, excluding loans held for sale....... 1.96 1.87 1.74 1.73 1.77
Ratio of net charge-offs to
average loans outstanding........................ 1.01 0.45 0.17 0.22 0.05
Ratio of current year recoveries to
preceding year's total charge-offs............... 50.66 55.54 55.54 91.14 50.17
========== ========== ========== ========= ==========
The following table is a summary of the allocation of the allowance for
loan losses for the five years ended December 31, 2002:
2002 2001 2000 1999 1998
--------------- ---------------- --------------- ---------------- -----------------
Percent Percent Percent Percent Percent
of of of of of
Category Category Category Category Category
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial, financial
and agricultural................. $34,915 26.56% $40,161 28.34% $32,130 28.87% $24,898 27.20% $19,239 25.70%
Real estate construction
and development.................. 22,667 18.22 21,598 17.65 14,667 17.04 13,264 19.90 15,073 20.14
Real estate mortgage:
One-to-four family
residential loans.............. 7,913 12.79 5,349 14.76 4,334 15.29 3,449 18.03 5,037 20.65
Multi-family residential loans... 32 2.07 81 2.75 12 1.69 3 1.85 5 1.78
Commercial real estate loans..... 28,477 30.13 25,167 27.71 20,345 29.38 17,138 26.45 13,193 20.28
Lease financing..................... 3,649 2.33 3,062 2.75 1,114 2.61 -- -- -- --
Consumer and installment............ 703 1.46 937 2.26 2,028 3.67 4,390 5.64 5,180 7.66
Loans held for sale................. 1,083 6.44 809 3.78 222 1.45 160 0.93 539 3.79
Unallocated (1)..................... -- -- -- -- 6,740 -- 5,309 -- 2,704 --
------ ------ ------- ------ ------- ------ ------- ------ ------- ------
Total.......................... $99,439 100.00% $97,164 100.00% $81,592 100.00% $68,611 100.00% $60,970 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
- ----------------------
(1) During 2001, we reviewed our practice of maintaining unallocated reserves in
light of continuing refinement in our loss estimation processes. We
concluded the use of unallocated reserves would be discontinued.
Consequently, reserves were aligned with their respective portfolios.
Deposits
Deposits are the primary source of funds for our subsidiary banks. Our
deposits consist principally of core deposits from each bank's local market
areas, including individual and corporate customers.
The following table sets forth the distribution of our average deposit
accounts for the years indicated and the weighted average interest rates on each
category of deposits:
Year Ended December 31,
-----------------------------------------------------------------------------------
2002 2001 2000
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of of of
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(dollars expressed in thousands)
Noninterest-bearing
demand deposits.............. $ 912,915 15.33% --% $ 754,763 14.83% --% $ 634,886 14.18% --%
Interest-bearing
demand deposits.............. 755,879 12.69 1.00 507,011 9.97 1.38 421,986 9.43 1.40
Savings deposits................ 1,991,510 33.44 1.79 1,548,441 30.43 3.25 1,279,378 28.59 4.04
Time deposits .................. 2,295,431 38.54 3.71 2,278,263 44.77 5.49 2,139,305 47.80 5.62
---------- ------ ==== ---------- ------ ==== ---------- ------ ======
Total average deposits.... $5,955,735 100.00% $5,088,478 100.00% $4,475,555 100.00%
========== ====== ========== ====== ========== ======
Capital and Dividends
Historically, we have accumulated capital to support our acquisitions
by retaining most of our earnings. We pay relatively small dividends on our
Class A convertible, adjustable rate preferred stock and our Class B adjustable
rate preferred stock, totaling $786,000 for the years ended December 31, 2002,
2001 and 2000. We have never paid, and have no present intention to pay,
dividends on our common stock.
Management believes as of December 31, 2002 and 2001, our subsidiary
banks and we were "well capitalized," as defined by the Federal Deposit
Insurance Corporation Improvement Act of 1991.
In December 1996, we formed our initial financing subsidiary, First
Preferred Capital Trust, for the purpose of issuing $86.25 million of trust
preferred securities, and in June 1998, we formed our second financing
subsidiary, First America Capital Trust, for the purpose of issuing $46.0
million of trust preferred securities. In October 2000, we formed our third
financing subsidiary, First Preferred Capital Trust II, for the purpose of
issuing $57.5 million of trust preferred securities, and in November 2001, we
formed our fourth financing subsidiary, First Preferred Capital Trust III, for
the purpose of issuing $55.2 million of trust preferred securities. On April 10,
2002, we formed First Bank Capital Trust and issued $25.0 million of trust
preferred securities in a private placement. For regulatory reporting purposes,
these preferred securities are eligible for inclusion, subject to certain
limitations, in our Tier 1 capital. Because of these limitations, as of December
31, 2002, $117.1 million of these preferred securities were not includable in
our Tier I capital, although this amount was included in our total risk-based
capital.
Liquidity
Our liquidity and the liquidity of our subsidiary banks is the ability
to maintain a cash flow that is adequate to fund operations, service debt
obligations and meet obligations and other commitments on a timely basis. 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
$742.5 million and $754.8 million at December 31, 2002 and 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 note payable, at December 31, 2002:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less..................................... $ 134,875 251,644 386,519
Over three months through six months..................... 95,169 2,000 97,169
Over six months through twelve months.................... 105,939 12,000 117,939
Over twelve months....................................... 133,921 7,000 140,921
----------- --------- ---------
Total............................................... $ 469,904 272,644 742,548
=========== ========= =========
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 December 31, 2002 and 2001, the borrowing capacity
of our subsidiary banks under these agreements was approximately $1.22 billion
and $1.21 billion, respectively. In addition, our subsidiary banks' borrowing
capacity through their relationships with the Federal Home Loan Banks was
approximately $223.6 million and $234.6 million at December 31, 2002 and 2001,
respectively. Exclusive of the Federal Home Loan Bank advances outstanding at
First Bank of $9.0 million and $20.1 million at December 31, 2002 and 2001,
respectively, our subsidiary banks had no amounts outstanding under either of
these agreements at December 31, 2002 and 2001. Under a separate Federal Home
Loan Bank agreement, FB&T had advances outstanding of $5.0 million and $10.5
million at December 31, 2002 and 2001, respectively.
In addition to our owned banking facilities, we have entered into
long-term leasing arrangements to support our ongoing activities. The required
payments under such commitments and other obligations at December 31, 2002 are
as follows:
Over 1 Year
Less than But Less Than Over
1 Year 5 Years 5 Years Total
------ --------- ------- -----
(dollars expressed in thousands)
Operating leases.................................... $ 8,913 22,126 21,708 52,747
Certificates of deposit............................. 1,472,401 717,301 399 2,190,101
Note payable........................................ 7,000 -- -- 7,000
Guaranteed preferred beneficial interest
in subordinated debentures..................... -- -- 270,039 270,039
Federal Home Loan Bank advances..................... 7,000 4,000 3,000 14,000
========== ======= ======= =========
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, First America Capital Trust, First
Preferred Capital Trust II, First Preferred Capital Trust III and First Bank
Capital Trust.
Critical Accounting Policies
Our financial condition and results of operations presented in the
consolidated financial statements, accompanying notes to the consolidated
financial statements, selected consolidated and other financial data appearing
elsewhere in this report, and management's discussion and analysis of financial
condition and results of operations are, to large degree, dependent upon our
accounting policies. The selection and application of our accounting policies
involve judgments, estimates and uncertainties that are susceptible to change.
We have identified the following accounting policies that we believe
are the most critical to the understanding of our financial condition and
results of operations. These critical accounting policies require management's
most difficult, subjective and complex judgments about matters that are
inherently uncertain. In the event that different assumptions or conditions were
to prevail, and depending upon the severity of such changes, the possibility of
a materially different financial condition and/or results of operations could be
a reasonable likelihood. The impact and any associated risks related to our
critical accounting policies on our business operations is discussed throughout
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations," where such policies affect our reported and expected financial
results. For a detailed discussion on the application of these and other
accounting policies, see Note 1 to our consolidated financial statements
appearing elsewhere in this report.
Loans and Allowance for Loan Losses. We maintain an allowance for loan
losses at a level we consider adequate to provide for probable losses in our
loan portfolio. The determination of our allowance for loan losses requires
management to make significant judgments and estimates based upon a periodic
analysis of our loans held for portfolio and held for sale considering, among
other factors, current economic conditions, loan portfolio composition, past
loan loss experience, independent appraisals, the fair value of underlying loan
collateral, our customers' ability to pay and selected key financial ratios. If
actual events prove the estimates and assumptions we used in determining our
allowance for loan losses were incorrect, we may need to make additional
provisions for loan losses. See further discussion under "--Loans and Allowance
for Loan Losses" and Note 4 to our consolidated financial statements appearing
elsewhere in this report.
Derivative Financial Instruments. We utilize derivative financial
instruments to assist in our management of interest rate sensitivity by
modifying the repricing, maturity and option characteristics of certain assets
and liabilities. The judgments and assumptions that are most critical to the
application of this critical accounting policy are those affecting the
estimation of fair value and hedge effectiveness. Fair value is based on quoted
market prices where available. If quoted market prices are unavailable, fair
value is based upon quoted market prices of comparable derivative instruments.
Factors that affect hedge effectiveness include the initial selection of the
derivative that will be used as a hedge and how well changes in its cash flow or
fair value have correlated and are expected to correlate with changes in the
cash flow or fair value of the underlying hedged asset or liability. Past
correlation is easy to demonstrate, but expected correlation depends upon
projections and trends that may not always hold true within acceptable limits.
Changes in assumptions and conditions could result in greater than expected
inefficiencies that, if large enough, could reduce or eliminate the economic
benefits anticipated when the hedges were established and/or invalidate
continuation of hedge accounting. Greater inefficiency and/or discontinuation of
hedge accounting are likely to result in increased volatility to reported
earnings. For cash flow hedges, this would result as more or all of the change
in the fair value of the affected derivative being reported in noninterest
income. For fair value hedges, this would result as less or none as the change
in the fair value of the affected derivative would be offset by changes in the
fair value of the underlying hedged asset or liability. See further discussion
under "--Interest Rate Risk Management" and Note 5 to our consolidated financial
statements appearing elsewhere in this report.
Deferred Tax Assets. We recognize deferred tax assets and liabilities
for the estimated future tax effects of temporary differences, net operating
loss carryforwards and tax credits. We recognize deferred tax assets subject to
management's judgment based upon available evidence that realization is more
likely than not. Our deferred tax assets are reduced, if necessary, by a
deferred tax asset valuation allowance. In the event that we determine we would
not be able to realize all or part of our net deferred tax assets in the future,
we would need to adjust the recorded value of our deferred tax assets, which
would result in a direct charge to our provision for income taxes in the period
in such determination is made. See further discussion under "--Comparison of
Results of Operations for 2001 and 2000 - Provision for Income Taxes" and Note
13 to our consolidated financial statements appearing elsewhere in this report.
Business Combinations. We emphasize acquiring other financial
institutions as one means of achieving our growth objectives. The determination
of the fair value of the assets and liabilities acquired in these transactions
as well as the returns on investment that may be achieved requires management to
make significant judgments and estimates based upon detailed analyses of the
existing and future economic value of such assets and liabilities and/or the
related income steams, including the resulting intangible assets. If actual
events prove the estimates and assumptions we used in determining the fair
values of the acquired assets and liabilities or the projected income were
incorrect, we may need to make additional adjustments to the recorded values of
such assets and liabilities, which could result in increased volatility to
reported earnings. In addition, we may need to make additional adjustments to
the recorded value of our intangible assets, which directly impact our
regulatory capital levels. See further discussion under "--Acquisitions,"
"--Effects of New Accounting Standards," and Note 2, Note 8 and Note 21 to our
consolidated financial statements appearing elsewhere in this report.
Effects of New Accounting Standards
In July 2001, the Financial Accounting Standards Board, or FASB, issued
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, we adopted SFAS No. 142. At the date of adoption,
we 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, we continue to amortize, on a straight-line basis, our core
deposit intangibles and goodwill associated with purchases of branch offices.
Goodwill associated with the purchase of subsidiaries is no longer amortized,
but instead, is tested annually for impairment following our existing methods of
measuring and recording impairment losses as described in Note 1 to our
consolidated financial statements appearing elsewhere in this report.
We completed the transitional goodwill impairment test required under
SFAS No. 142, to determine the potential impact, if any, on our consolidated
financial statements. The results of our transitional goodwill impairment
testing did not identify any goodwill impairment losses.
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, we implemented
SFAS No. 144, which did not have a material effect on our consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146 -- Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 nullifies Emerging
Issues Task Force, or EITF, Issue No. 94-3 -- Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. We are currently evaluating the
requirements of SFAS No. 146 and do not believe they will have a material effect
on our consolidated financial statements.
On October 1, 2002, the FASB issued SFAS No. 147 -- Acquisitions of
Certain Financial Institutions, an amendment of SFAS No. 72 -- Accounting for
Certain Acquisitions of Banking or Thrift Institutions and SFAS No. 144 --
Accounting for the Impairment or Disposal of Long-Lived Assets and FASB
Interpretation No. 9 -- Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution is Acquired in a Business Combination
Accounted for by the Purchase Method. SFAS No. 147 addresses the financial
accounting and reporting for the acquisition of all or part of a financial
institution, except for transactions between two or more mutual enterprises.
SFAS No. 147 removes acquisitions of financial institutions, other than
transactions between two or more mutual enterprises, from the scope of SFAS No.
72. SFAS No. 147 also provides guidance on the accounting for impairment or
disposal of acquired long-term customer-relationship intangible assets,
including those acquired in transactions between two or more mutual enterprises.
The provisions of SFAS No. 147 are effective for acquisitions on or after
October 1, 2002. On October 1, 2002, we implemented SFAS No. 147, which did not
have a material effect on our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 --
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. We have evaluated the requirements of FASB Interpretation No. 45 and
believe they will not have a material effect on our consolidated financial
statements other than the additional disclosure requirements included in Note 24
to our consolidated financial statements appearing elsewhere in this report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The quantitative and qualitative disclosures about market risk are
included under "Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Interest Rate Risk Management" appearing
on pages 33 through 37 of this report.
Effects of Inflation
Inflation affects financial institutions less than other types of
companies. Financial institutions make relatively few significant asset
acquisitions that are directly affected by changing prices. Instead, the assets
and liabilities are primarily monetary in nature. Consequently, interest rates
are more significant to the performance of financial institutions than the
effect of general inflation levels. While a relationship exists between the
inflation rate and interest rates, we believe this is generally manageable
through our asset-liability management program.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data appear on pages 57
through 95 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Board of Directors
Our Board of Directors, consisting of eight members, is identified in
the following table. Each of our directors was elected or appointed to serve a
one-year term and until his successor has been duly qualified for office.
Director Principal Occupation(s) During Last Five Years
Name Age Since and Directorships of Public Companies
---- --- ----- -------------------------------------
James F. Dierberg (1) 65 1979 Chairman of the Board of Directors and Chief Executive Officer of
First Banks, Inc. since 1988; President of First Banks, Inc. from
1979 to 1992 and from 1994 to October 1999; Chairman of the Board
of Directors, President and Chief Executive Officer of FBA from
1994 until its merger with First Banks on December 31, 2002;
Trustee of First Preferred Capital Trust, First America Capital
Trust, First Preferred Capital Trust II and First Preferred Capital
Trust III since 1997, 1998, May 2001 and October 2001, respectively.
Allen H. Blake 60 1988 President of First Banks, Inc. since October 1999; Chief Financial
Officer of First Banks, Inc. from 1984 to September 1999 and since
May 2001; Chief Operating Officer of First Banks, Inc. from 1998
to June 2002; Director and Secretary of First Banks, Inc. since
1988; Director, Executive Vice President, Chief Operating Officer
and Secretary of FBA from 1998 until its merger with First Banks
on December 31, 2002; Chief Financial Officer of FBA from 1994 to
September 1999 and from May 2001 until December 2002; Vice
President and Secretary of FBA from 1994 to 1998; Trustee of First
Preferred Capital Trust, First America Capital Trust, First
Preferred Capital Trust II and First Preferred Capital Trust III
since 1997, 1998, 2000 and 2001, respectively.
Donald W. Williams 55 2001 Senior Executive Vice President and Chief Credit Officer of First
Banks, Inc. since 2000; Executive Vice President and Chief Credit
Officer of First Banks, Inc. since 1996; Executive Vice President
and Chief Credit Officer of FBA until its merger with First Banks
on December 31, 2002; Chairman of the Board of Directors of First
Bank since 2000 and Chief Executive Officer of First Bank from
2000 to January 2003.
Michael J. Dierberg (1) 31 2001 General Counsel of First Banks, Inc. since June 2002; Senior Vice
President (Northern California Region) of First Bank & Trust from
July 2001 to June 2002. Prior to joining First Banks, Inc., Mr.
Dierberg served as an attorney for the Office of the Comptroller
of the Currency in Washington, D.C. from 1998 to July 2001.
Gordon A. Gundaker (2) 69 2001 President and Chief Executive Officer of Coldwell Banker Gundaker,
a full-service real estate brokerage company, in St. Louis,
Missouri.
David L. Steward (2) 51 2000 Chairman of the Board of Directors, President and Chief Executive
Officer of World Wide Technology, Inc., an electronic procurement
and logistics company in the information technology industry, in
St. Louis, Missouri; Chairman of the Board of Directors of
Telcobuy.com (an affiliate of World Wide Technology, Inc.);
Director of the 21st Century Workforce, Civic Progress, the St.
Louis Regional Commerce and Growth Association, Missouri
Technology Corporation, Webster University, BJC Health System,
Union Memorial Outreach Center, St. Louis Science Center, the
United Way of Greater St. Louis, Greater St. Louis Area Council -
Boy Scouts of America, INROADS and New Cornerstone.
Hal J. Upbin (2) 64 2001 Director of Kellwood Company, a manufacturer and marketer of
apparel and related soft goods, in St. Louis, Missouri since 1995;
Chairman of the Board of Directors, President and Chief Executive
Officer of Kellwood Company since 1997; President and Chief
Operating Officer of Kellwood Company from 1994 to 1997;
Executive Vice President Corporate Development from 1992 to 1994;
Vice President Corporate Development from 1990 to 1992.
Douglas H. Yaeger (2) 54 2000 Chairman of the Board of Directors, President and Chief Executive
Officer of The Laclede Group, Inc., a provider of natural gas
service through its regulated core utility operations in St.
Louis, Missouri since 2001; Chairman of the Board of Directors,
President and Chief Executive Officer of Laclede Gas Company since
1999; President of Laclede Gas Company since 1997; Director and
Chief Operating Officer of Laclede Gas Company from 1997 to 1999;
Executive Vice President - Operations and Marketing of Laclede Gas
Company from 1995 to 1997; Chairman of the Board of Directors of
the St. Louis Regional Commerce and Growth Association; Director
of Southern Gas Association, the St. Louis Science Center, Civic
Progress, Greater St. Louis Area Council - Boy Scouts of America,
the United Way of Greater St. Louis, The Municipal Theatre
Association of St. Louis and Webster University.
- ----------------------------------
(1) Mr. Michael J. Dierberg is the son of Mr. James F. Dierberg. See Item 12. Security Ownership of Certain Beneficial
Owners and Management.
(2) Member of the Audit Committee.
Executive Officers
Our executive officers, each of whom was elected to the office(s)
indicated by the Board of Directors, as of March 25, 2003, were as follows:
Current First Banks Principal Occupation(s)
Name Age Office(s) Held During Last Five Years
---- --- -------------- ----------------------
James F. Dierberg 65 Chairman of the Board of Directors See Item 10 - "Directors and Executive
and Chief Executive Officer. Officers of the Registrant - Board of
Directors."
Allen H. Blake 60 President, Chief Financial Officer, See Item 10 - "Directors and Executive
Secretary and Director. Officers of the Registrant - Board of
Directors."
Donald W. Williams 55 Senior Executive Vice President, See Item 10 - "Directors and Executive
Chief Credit Officer and Director. Officers of the Registrant - Board of
Directors."
Terrance M. McCarthy 48 Senior Executive Vice President and Mr. McCarthy has been employed in
Chief Operating Officer; Chairman various executive capacities with First
of the Board of Directors, Banks, Inc. since 1995.
President and Chief Executive
Officer of FB&T; President and
Chief Executive Officer of First
Bank.
Mark T. Turkcan 46 Executive Vice President - Mortgage Mr. Turkcan has been employed in
Banking; Director and Executive Vice various executive capacities with First
Vice President of First Bank; Banks, Inc. since 1990.
Chairman of the Board of Directors,
President and Chief Executive
Officer of First Banc Mortgage, Inc.
Section 16(a) Beneficial Ownership Reporting Compliance
To our knowledge, our directors, executive officers or shareholders,
who are subject, in their capacity as such, to the reporting obligations set
forth in Section 16 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, filed on a timely basis reports required by Section 16(a) of the
Exchange Act during the year ended December 31, 2002.
Item 11. Executive Compensation
The following table sets forth certain information regarding
compensation earned by the named executive officers for the years ended December
31, 2002, 2001 and 2000:
SUMMARY COMPENSATION TABLE
--------------------------
All Other
Name and Principal Position(s) Year Salary Bonus Compensation (1)
------------------------------ ---- ------ ----- ----------------
James F. Dierberg 2002 $ 605,000 35,000 5,500
Chairman of the Board of Directors 2001 585,000 100,000 2,850
and Chief Executive Officer 2000 560,000 90,000 5,250
Allen H. Blake 2002 360,500 45,000 5,500
President and Chief Financial Officer 2001 343,700 58,000 2,590
2000 282,900 45,000 6,150
Donald W. Williams 2002 311,000 35,000 5,500
Senior Executive Vice President 2001 297,000 48,000 5,250
and Chief Credit Officer 2000 241,250 40,000 6,450
Terrance M. McCarthy 2002 269,000 50,000 3,200
Senior Executive Vice President and 2001 220,000 38,000 5,200
Chief Operating Officer; 2000 180,000 25,000 6,650
Chairman of the Board of Directors, President
and Chief Executive Officer of FB&T; and
President and Chief Executive Officer of First Bank
Mark T. Turkcan 2002 188,000 35,000 5,500
Executive Vice President - Mortgage Banking; 2001 177,500 22,500 5,250
Director and Executive Vice President of First Bank; 2000 167,500 15,000 6,570
and Chairman of the Board of Directors, President
and Chief Executive Officer of First Banc Mortgage, Inc.
- -----------------------
(1) All other compensation reported includes matching contributions to our 401(k) Plan for the year indicated
and ownership interests granted in units of Star Lane Trust, our unit investment trust that was created on
January 21, 2000.
Employment Agreement. Mr. Williams is a party to an employment agreement with
First Bank and us. The term of his contract is one year, and it is automatically
renewable for additional one-year periods. As part of the annual renewal
process, the base salary payable under the employment agreement is reviewed and
may be adjusted at the discretion of our Board of Directors. The base salary
paid to Mr. Williams pursuant to his employment agreement is set forth in the
salary column of the Summary Compensation Table.
Mr. Williams' employment contract provides for a bonus of up to twenty
percent (20%) of his annual base salary, with the exact percentage to be
determined by our Chairman of the Board if Mr. Williams meets the criteria set
by First Bank and us at the beginning of each contract year. The annual bonus is
payable within ninety (90) days after the close of the year to which it relates.
In addition, Mr. Williams is entitled to participate in our 401(k) Plan, our
health insurance plan and in other additional benefit plans that we may adopt
for our employees.
Under the terms of his employment contract, if Mr. Williams is
terminated for a reason other than retirement, death, "disability" or for
"cause," as those terms are defined in the employment agreement, or is
terminated due to a change in our control, Mr. Williams will be entitled to
receive two years' base salary. Should Mr. Williams voluntarily terminate his
employment with First Bank and us, he would be entitled to receive the balance
of his base salary for that year or a minimum of six months salary, provided
that he would not be permitted to accept a position with any bank or trust
company for the duration of that year. Finally, in the event of the death of Mr.
Williams, his employment agreement provides that his estate would be entitled to
receive compensation that would have been payable to him during the month of his
death, and his monthly salary for the twelve-month period following the date of
his death.
Compensation of Directors. Only those directors who are neither our employees
nor employees of any of our subsidiaries receive remuneration for their services
as directors. Such non-employee directors (currently Messrs. Gordon Gundaker,
David Steward, Hal Upbin and Douglas Yaeger) received a fee of $3,000 for each
Board meeting attended and $1,000 for each Audit Committee meeting attended in
2002. The Audit Committee is currently the only committee of our Board of
Directors. Messrs. Gundaker and Upbin each received $17,000 in director's fees
during 2002, and Messrs. Steward and Yaeger received $16,000 and $18,000,
respectively, in director's fees during 2002.
Our executive officers who are also directors do not receive
remuneration other than salaries and bonuses for serving on our Board of
Directors.
Compensation Committee Interlocks and Insider Participation. Messrs. Dierberg,
Blake, Williams and McCarthy who are executive officers, were also members of
the Board of Directors and/or executive officers of FBA prior to its merger with
and into First Banks on December 31, 2002. FBA did not have a compensation
committee, but its Board of Directors performed the functions of such a
committee. Except for the foregoing, none of our executive officers served
during 2002 as a member of the compensation committee, or any other committee
performing similar functions, or as a director of another entity, any of whose
executive officers or directors served on our Board of Directors.
See further information regarding transactions with related parties in
Note 19 to our consolidated financial statements appearing on page 88 and page
89 of this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 25, 2003, certain
information with respect to the beneficial ownership of all classes of our
voting capital stock by each person known to us to be the beneficial owner of
more than five percent of the outstanding shares of the respective classes of
our stock:
Percent of
Number of Total
Title of Class Shares Percent Voting
and Name of Owner Owned of Class Power
----------------- ----- -------- -----
Common Stock ($250.00 par value)
- --------------------------------
James F. Dierberg II Family Trust (1)........................ 7,714.677 (2) 32.605% *
Ellen C. Dierberg Family Trust (1)........................... 7,714.676 (2) 32.605 *
Michael J. Dierberg Family Trust (1)......................... 4,255.319 (2) 17.985 *
Michael J. Dierberg Irrevocable Trust (1).................... 3,459.358 (2) 14.621 *
First Trust (Mary W. Dierberg and First Bank, Trustees) (1).. 516.830 (3) 2.184 *
Class A Convertible Adjustable Rate Preferred Stock
- ---------------------------------------------------
($20.00 par value)
- ------------------
James F. Dierberg, Trustee of the James F. Dierberg
Living Trust (1)......................................... 641,082 (4)(5) 100% 77.7%
Class B Non-Convertible Adjustable Rate Preferred Stock
- -------------------------------------------------------
($1.50 par value)
- -----------------
James F. Dierberg, Trustee of the James F. Dierberg
Living Trust (1)......................................... 160,505 (5) 100% 19.4%
All executive officers and directors
other than Mr. James F. Dierberg
and members of his immediate family........................... 0 0% 0.0%
- --------------------
* Represents less than 1.0%.
(1) Each of the above-named trustees and beneficial owners are United States
citizens, and the business address for each such individual is 135 North
Meramec Avenue, Clayton, Missouri 63105. Mr. James F. Dierberg, our
Chairman of the Board and Chief Executive Officer, and Mrs. Mary W.
Dierberg, are husband and wife, and Messrs. James F. Dierberg II, Michael
J. Dierberg and Mrs. Ellen D. Schepman, formerly Ms. Ellen C. Dierberg, are
their adult children.
(2) Due to the relationship between Mr. James F. Dierberg, his wife and their
children, Mr. Dierberg is deemed to share voting and investment power over
these shares.
(3) Due to the relationship between Mr. James F. Dierberg, his wife and First
Bank, Mr. Dierberg is deemed to share voting and investment power over
these shares.
(4) Convertible into common stock, based on the appraised value of the common
stock at the date of conversion. Assuming an appraised value of the common
stock equal to the book value, the number of shares of common stock into
which the Class A Preferred Stock is convertible at December 31, 2002 is
600, which shares are not included in the above table.
(5) Sole voting and investment power.
Item 13. Certain Relationships and Related Transactions
Outside of normal customer relationships, no directors, executive
officers or shareholders holding over 5% of our voting securities, and no
corporations or firms with which such persons or entities are associated,
currently maintain or have maintained since the beginning of the last full
fiscal year, any significant business or personal relationship with our
subsidiaries or us, other than that which arises by virtue of such position or
ownership interest in our subsidiaries or us, except as set forth in Item 11 -
"Executive Compensation - Compensation of Directors," or as described in the
following paragraphs.
Our subsidiary banks have had in the past, and may have in the future,
loan transactions and related banking services in the ordinary course of
business with our directors or their affiliates. These loan transactions have
been and will be on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unaffiliated
persons and did not involve more than the normal risk of collectibility or
present other unfavorable features. Our subsidiary banks do not extend credit to
our officers or to officers of our subsidiary banks, except extensions of credit
secured by mortgages on personal residences, loans to purchase automobiles and
personal credit card accounts.
Certain of our directors and officers and their respective affiliates
have deposit accounts and related banking services with our subsidiary banks. It
is the policy of our subsidiary banks not to permit any of their officers or
directors or their affiliates to overdraw their respective deposit accounts
unless that person has been previously approved for overdraft protection under a
plan whereby a credit limit has been established in accordance with the standard
credit criteria of our subsidiary banks.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements and Supplementary Data - The
financial statements and supplementary data filed as
part of this Report are included in Item 8.
2. Financial Statement Schedules - These schedules are
omitted for the reason they are not required or are not
applicable.
3. Exhibits - The exhibits are listed in the index of
exhibits required by Item 601 of Regulation S-K at Item
(c) below and are incorporated herein by reference.
(b) Reports on Form 8-K.
We filed no reports on Form 8-K during the quarter ended
December 31, 2002.
(c) The index of required exhibits is included beginning on page
100 of this Report.
THIS PAGE INTENTIONALLY LEFT BLANK
INDEPENDENT AUDITORS' REPORT
[KPMG Letterhead]
The Board of Directors and Stockholders
First Banks, Inc.:
We have audited the accompanying consolidated balance sheets of First Banks,
Inc. and subsidiaries (the Company) as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of First Banks, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities in 2001.
/s/KPMG LLP
--------------
KPMG LLP
St. Louis, Missouri
March 14, 2003
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
December 31,
--------------------
2002 2001
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks....................................................... $ 194,519 181,522
Interest-bearing deposits with other financial institutions
with maturities of three months or less..................................... 832 4,664
Federal funds sold............................................................ 7,900 55,688
----------- ----------
Total cash and cash equivalents..................................... 203,251 241,874
----------- ----------
Investment securities:
Available for sale, at fair value............................................. 1,120,894 610,466
Held to maturity, at amortized cost (fair value of $16,978 and
$20,812 at December 31, 2002 and 2001, respectively)........................ 16,426 20,602
----------- ----------
Total investment securities......................................... 1,137,320 631,068
----------- ----------
Loans:
Commercial, financial and agricultural........................................ 1,443,016 1,532,875
Real estate construction and development...................................... 989,650 954,913
Real estate mortgage.......................................................... 2,444,122 2,445,847
Lease financing............................................................... 126,738 148,971
Consumer and installment...................................................... 86,763 124,542
Loans held for sale........................................................... 349,965 204,206
----------- ----------
Total loans......................................................... 5,440,254 5,411,354
Unearned discount............................................................. (7,666) (2,485)
Allowance for loan losses..................................................... (99,439) (97,164)
----------- ----------
Net loans........................................................... 5,333,149 5,311,705
----------- ----------
Derivative instruments............................................................. 97,887 54,889
Bank premises and equipment, net of accumulated
depreciation and amortization................................................. 152,418 149,604
Goodwill .......................................................................... 140,112 115,860
Bank-owned life insurance.......................................................... 92,616 87,200
Accrued interest receivable........................................................ 35,638 37,349
Deferred income taxes.............................................................. 92,157 94,546
Other assets....................................................................... 58,252 54,356
----------- ----------
Total assets........................................................ $ 7,342,800 6,778,451
=========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(dollars expressed in thousands, except share and per share data)
December 31,
--------------------------
2002 2001
---- ----
LIABILITIES
-----------
Deposits:
Demand:
Non-interest-bearing........................................................ $ 986,674 921,455
Interest-bearing............................................................ 819,429 629,015
Savings....................................................................... 2,176,616 1,832,939
Time:
Time deposits of $100 or more............................................... 469,904 484,201
Other time deposits......................................................... 1,720,197 1,816,294
----------- ----------
Total deposits........................................................... 6,172,820 5,683,904
Short-term borrowings.............................................................. 265,644 243,134
Note payable....................................................................... 7,000 27,500
Guaranteed preferred beneficial interests in
subordinated debentures....................................................... 270,039 235,881
Accrued interest payable........................................................... 11,751 16,006
Deferred income taxes.............................................................. 61,204 43,856
Accrued expenses and other liabilities............................................. 35,301 61,515
Minority interest in subsidiary.................................................... -- 17,998
----------- ----------
Total liabilities........................................................ 6,823,759 6,329,794
----------- ----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued
and outstanding at December 31, 2002 and 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
Additional paid-in capital......................................................... 5,910 6,074
Retained earnings.................................................................. 433,689 389,308
Accumulated other comprehensive income............................................. 60,464 34,297
----------- ----------
Total stockholders' equity............................................... 519,041 448,657
----------- ----------
Total liabilities and stockholders' equity............................... $ 7,342,800 6,778,451
=========== ==========
CONSOLIDATED STATEMENTS OF INCOME
(dollars expressed in thousands, except per share data)
Years Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Interest income:
Interest and fees on loans.............................................. $ 390,062 412,153 390,332
Investment securities:
Taxable............................................................... 31,034 26,244 27,331
Nontaxable............................................................ 1,865 888 961
Federal funds sold and other............................................ 1,949 5,458 4,202
--------- ------- --------
Total interest income.............................................. 424,910 444,743 422,826
--------- ------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................... 7,551 7,019 5,909
Savings............................................................... 35,668 50,388 51,656
Time deposits of $100 or more......................................... 19,047 28,026 20,654
Other time deposits................................................... 66,002 97,105 99,603
Short-term borrowings................................................... 3,450 5,847 5,881
Note payable............................................................ 1,032 2,629 3,976
Guaranteed preferred debentures......................................... 23,990 18,590 13,173
--------- ------- --------
Total interest expense............................................. 156,740 209,604 200,852
--------- ------- --------
Net interest income................................................ 268,170 235,139 221,974
Provision for loan losses.................................................... 55,500 23,510 14,127
--------- ------- --------
Net interest income after provision for loan losses................ 212,670 211,629 207,847
--------- ------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees........... 30,978 22,865 19,794
Gain on mortgage loans sold and held for sale........................... 28,415 14,983 7,806
Gain on sale of credit card portfolio, net of expenses.................. -- 1,853 --
Net gain on sales of available-for-sale investment securities........... 90 18,722 168
Gain on sales of branches, net of expenses.............................. -- -- 1,355
Bank-owned life insurance investment income............................. 5,928 4,415 4,314
Net gain on derivative instruments...................................... 2,181 18,583 --
Other................................................................... 21,863 17,188 9,341
--------- ------- --------
Total noninterest income........................................... 89,455 98,609 42,778
--------- ------- --------
Noninterest expense:
Salaries and employee benefits.......................................... 111,513 93,452 73,391
Occupancy, net of rental income......................................... 21,030 17,432 14,675
Furniture and equipment................................................. 17,495 12,612 11,702
Postage, printing and supplies.......................................... 5,556 4,869 4,431
Information technology fees............................................. 32,135 26,981 22,359
Legal, examination and professional fees................................ 9,284 6,988 4,523
Amortization of intangibles associated with
the purchase of subsidiaries......................................... 2,012 8,248 5,297
Communications.......................................................... 3,166 3,247 2,625
Advertising and business development.................................... 5,023 5,237 4,331
Other................................................................... 25,542 32,605 14,656
--------- ------- --------
Total noninterest expense.......................................... 232,756 211,671 157,990
--------- ------- --------
Income before provision for income taxes,
minority interest in income of subsidiary
and cumulative effect of change in accounting principle.......... 69,369 98,567 92,635
Provision for income taxes................................................... 22,771 30,048 34,482
--------- ------- --------
Income before minority interest in income
of subsidiary and cumulative
effect of change in accounting principle.......................... 46,598 68,519 58,153
Minority interest in income of subsidiary.................................... 1,431 2,629 2,046
--------- ------- --------
Income before cumulative effect of change in accounting principle.. 45,167 65,890 56,107
Cumulative effect of change in accounting principle, net of tax.............. -- (1,376) --
--------- ------- --------
Net income......................................................... 45,167 64,514 56,107
Preferred stock dividends.................................................... 786 786 786
--------- ------- --------
Net income available to common stockholders........................ $ 44,381 63,728 55,321
========= ======= ========
Basic earnings per common share:
Income before cumulative effect of change in accounting principle....... $1,875.69 2,751.54 2,338.04
Cumulative effect of change in accounting principle, net of tax......... -- (58.16) --
------- -------- --------
Basic................................................................... $1,875.69 2,693.38 2,338.04
========= ======== ========
Diluted earnings per common share:
Income before cumulative effect of change in accounting principle....... $1,853.64 2,684.93 2,267.41
Cumulative effect of change in accounting principle, net of tax......... -- (58.16) --
--------- -------- --------
Diluted................................................................. $1,853.64 2,626.77 2,267.41
========= ======== ========
Weighted average shares of common stock outstanding.......................... 23,661 23,661 23,661
========= ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Three Years Ended December 31, 2002
(dollars expressed in thousands, except per share data)
Adjustable Rate Accu-
Preferred Stock mulated
--------------- Other Total
Class A Additional Compre- Compre- Stock-
Conver- Common Paid-in hensive Retained hensive holders'
tible Class B Stock Capital Income Earnings Income Equity
----- ------- ----- ------- ------- -------- ------ ------
Consolidated balances, January 1, 2000........... $12,822 241 5,915 3,318 270,259 2,350 294,905
Year ended December 31, 2000:
Comprehensive income:
Net income................................. -- -- -- -- 56,107 56,107 -- 56,107
Other comprehensive income, net of tax -
unrealized gains on securities, net of
reclassification adjustment (1).......... -- -- -- -- 3,671 -- 3,671 3,671
-------
Comprehensive income....................... 59,778
=======
Class A preferred stock dividends,
$1.20 per share............................ -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share............................ -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- (1,051) -- -- (1,051)
------- ---- ----- ------ ------- ------ -------
Consolidated balances, December 31, 2000......... 12,822 241 5,915 2,267 325,580 6,021 352,846
Year ended December 31, 2001:
Comprehensive income:
Net income................................. -- -- -- -- 64,514 64,514 -- 64,514
Other comprehensive income, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (1,871) -- (1,871) (1,871)
Derivative instruments:
Cumulative effect of change in
accounting principle, net........... -- -- -- -- 9,069 -- 9,069 9,069
Current period transactions............ -- -- -- -- 27,021 -- 27,021 27,021
Reclassification to earnings........... -- -- -- -- (5,943) -- (5,943) (5,943)
-------
Comprehensive income....................... 92,790
=======
Class A preferred stock dividends,
$1.20 per share............................ -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share............................ -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- 3,807 -- -- 3,807
------- ---- ----- ------ ------- ------ -------
Consolidated balances, December 31, 2001......... 12,822 241 5,915 6,074 389,308 34,297 448,657
Year ended December 31, 2002:
Comprehensive income:
Net income................................. -- -- -- -- 45,167 45,167 -- 45,167
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (1)........ -- -- -- -- 8,909 -- 8,909 8,909
Derivative instruments:
Current period transactions............ -- -- -- -- 17,258 -- 17,258 17,258
-------
Comprehensive income....................... 71,334
=======
Class A preferred stock dividends,
$1.20 per share............................ -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share............................ -- -- -- -- (17) -- (17)
Effect of capital stock transactions of
majority-owned subsidiary.................. -- -- -- (164) -- -- (164)
------- ---- ----- ------ ------- ------ -------
Consolidated balances, December 31, 2002......... $12,822 241 5,915 5,910 433,689 60,464 519,041
======= ==== ===== ====== ======= ====== =======
- --------------------------------------
(1) Disclosure of reclassification adjustment:
Years Ended December 31,
-----------------------------
2002 2001 2000
---- ---- ----
Unrealized gains arising during the year............................................ $8,968 10,298 3,780
Less reclassification adjustment for gains included in net income................... 59 12,169 109
------ ------ -----
Unrealized gains (losses) on investment securities.................................. $8,909 (1,871) 3,671
====== ====== =====
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars expressed in thousands)
Years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income............................................................... $ 45,167 64,514 56,107
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........ 18,902 12,713 9,536
Amortization, net of accretion...................................... 17,769 11,203 8,370
Originations and purchases of loans held for sale................... (1,954,346) (1,524,156) (532,178)
Proceeds from sales of loans held for sale.......................... 1,624,444 1,348,772 413,247
Provision for loan losses........................................... 55,500 23,510 14,127
Provision for income taxes.......................................... 22,771 30,048 34,482
Payments of income taxes............................................ (34,287) (19,297) (10,525)
Decrease (increase) in accrued interest receivable.................. 2,206 11,513 (7,338)
Interest accrued on liabilities..................................... 156,740 209,604 200,852
Payments of interest on liabilities................................. (162,023) (218,329) (190,937)
Gain on mortgage loans sold and held for sale....................... (28,415) (14,983) (7,806)
Gain on sale of credit card portfolio, net of expenses.............. -- (1,853) --
Net gain on sales of available-for-sale investment securities....... (90) (18,722) (168)
Gain on sales of branches, net of expenses.......................... -- -- (1,355)
Net gain on derivative instruments.................................. (2,181) (18,583) --
Other operating activities, net..................................... (1,138) 4,690 (3,978)
Minority interest in income of subsidiary........................... 1,431 2,629 2,046
----------- ---------- --------
Net cash used in operating activities.......................... (237,550) (95,351) (15,518)
----------- ---------- --------
Cash flows from investing activities:
Cash received (paid) for acquired entities, net of
cash and cash equivalents received (paid).............................. 11,715 6,351 (86,106)
Proceeds from sales of investment securities............................. 55,130 85,824 46,279
Maturities of investment securities available for sale................... 1,085,993 762,548 347,642
Maturities of investment securities held to maturity..................... 6,829 4,292 1,169
Purchases of investment securities available for sale.................... (1,379,391) (822,593) (289,875)
Purchases of investment securities held to maturity...................... (2,680) (750) (3,806)
Proceeds from terminations of derivative instruments..................... -- 22,203 --
Net decrease (increase) in loans......................................... 199,051 (6,252) (339,575)
Recoveries of loans previously charged-off............................... 15,933 9,469 9,842
Purchases of bank premises and equipment................................. (15,565) (36,452) (30,856)
Other investing activities............................................... 9,672 (331) 5,052
----------- ---------- --------
Net cash (used in) provided by investing activities............ (13,313) 24,309 (340,234)
----------- ---------- --------
Cash flows from financing activities:
Increase in demand and savings deposits.................................. 450,541 299,466 155,058
(Decrease) increase in time deposits..................................... (245,637) (254,748) 129,008
Repayments of Federal Home Loan Bank advances............................ (16,600) (5,000) --
(Decrease) increase in federal funds purchased........................... (26,000) 70,000 (27,100)
Increase in securities sold under agreements to repurchase............... 46,989 8,438 52,015
Advances drawn on note payable........................................... 43,500 69,500 137,000
Repayments of note payable............................................... (64,000) (125,000) (118,000)
Proceeds from issuance of guaranteed preferred subordinated debentures... 24,233 52,767 55,050
Sale of branch deposits.................................................. -- -- 892
Payment of preferred stock dividends..................................... (786) (786) (786)
----------- ---------- --------
Net cash provided by financing activities...................... 212,240 114,637 383,137
----------- ---------- --------
Net (decrease) increase in cash and cash equivalents........... (38,623) 43,595 27,385
Cash and cash equivalents, beginning of year.................................. 241,874 198,279 170,894
----------- ---------- --------
Cash and cash equivalents, end of year........................................ $ 203,251 241,874 198,279
=========== ========== ========
Noncash investing and financing activities:
Reduction of deferred tax asset valuation reserve........................ $ -- 4,971 1,267
Loans transferred to other real estate................................... 7,607 3,493 1,761
Loans exchanged for and transferred to
available-for-sale investment securities............................... -- -- 37,634
Loans held for sale exchanged for and transferred
to available-for-sale investment securities............................ -- -- 19,805
Loans held for sale transferred to loans................................. 3,002 38,343 72,847
=========== ========== ========
The accompanying notes are an integral part of the consolidated financial statements.
Notes To Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies
followed by First Banks, Inc. and subsidiaries (First Banks or the Company):
Basis of Presentation. The accompanying consolidated financial
statements of First Banks have been prepared in accordance with accounting
principles generally accepted in the United States of America and conform to
predominant practices within the banking industry. Management of First Banks has
made a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities to
prepare the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America. Actual results
could differ from those estimates.
Principles of Consolidation. The consolidated financial statements
include the accounts of the parent company and its subsidiaries, net of minority
interest, as more fully described below. All significant intercompany accounts
and transactions have been eliminated. Certain reclassifications of 2001 and
2000 amounts have been made to conform to the 2002 presentation.
First Banks operates through its subsidiary bank holding company and
subsidiary financial institutions (collectively referred to as the Subsidiary
Banks) as follows:
The San Francisco Company, headquartered in San Francisco, California
(SFC), and its wholly owned subsidiaries:
First Bank, headquartered in St. Louis County, Missouri (First
Bank); and
First Bank & Trust, headquartered in San Francisco, California
(FB&T).
The Subsidiary Banks are wholly owned by their respective parent
companies. At December 31, 2001, First Banks owned 93.69% of First Banks
America, Inc., San Francisco, California (FBA). On December 31, 2002, First
Banks completed its acquisition of all of the outstanding capital stock of FBA
that it did not already own for a price of $40.54 per share, or approximately
$32.4 million. At December 31, 2002, prior to consummation of this transaction,
there were 798,753 shares, or approximately 6.22% of FBA's outstanding stock,
held publicly. First Banks owned the other 93.78%. In conjunction with this
transaction, FBA became a wholly owned subsidiary of First Banks, and was merged
with and into First Banks, and FBA's subsidiaries, SFC and FB&T, became wholly
owned subsidiaries of First Banks.
Cash and Cash Equivalents. Cash, due from banks, federal funds sold and
interest-bearing deposits with original maturities of three months or less are
considered to be cash and cash equivalents for purposes of the consolidated
statements of cash flows.
The Subsidiary Banks are required to maintain certain daily reserve
balances on hand in accordance with regulatory requirements. These reserve
balances maintained in accordance with such requirements were $26.5 million and
$24.2 million at December 31, 2002 and 2001, respectively.
Investment Securities. The classification of investment securities
available for sale or held to maturity is determined at the date of purchase.
First Banks does not engage in the trading of investment securities.
Investment securities designated as available for sale, which include
any security that First Banks has no immediate plan to sell but which may be
sold in the future under different circumstances, are stated at fair value.
Realized gains and losses are included in noninterest income upon commitment to
sell, based on the amortized cost of the individual security sold. Unrealized
gains and losses are recorded, net of related income tax effects, in accumulated
other comprehensive income. All previous fair value adjustments included in the
separate component of accumulated other comprehensive income are reversed upon
sale.
Investment securities designated as held to maturity, which include any
security that First Banks has the positive intent and ability to hold to
maturity, are stated at cost, net of amortization of premiums and accretion of
discounts computed on the level-yield method taking into consideration the level
of current and anticipated prepayments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loans Held for Portfolio. Loans held for portfolio are carried at cost,
adjusted for amortization of premiums and accretion of discounts using the
interest method. Interest and fees on loans are recognized as income using the
interest method. Loan origination fees are deferred and accreted to interest
income over the estimated life of the loans using the interest method. Loans
held for portfolio are stated at cost as First Banks has the ability and it is
management's intention to hold them to maturity.
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal course of
business. Generally, payments received on nonaccrual and impaired loans are
recorded as principal reductions. Interest income is recognized after all
principal has been repaid or an improvement in the condition of the loan has
occurred which would warrant resumption of interest accruals.
A loan is considered impaired when it is probable that First Banks will
be unable to collect all amounts due, both principal and interest, according to
the contractual terms of the loan agreement. When measuring impairment, the
expected future cash flows of an impaired loan or lease are discounted at the
loan's effective interest rate. Alternatively, impairment is measured by
reference to an observable market price, if one exists, or the fair value of the
collateral for a collateral-dependent loan. Regardless of the historical
measurement method used, First Banks measures impairment based on the fair value
of the collateral when foreclosure is probable. Additionally, impairment of a
restructured loan is measured by discounting the total expected future cash
flows at the loan's effective rate of interest as stated in the original loan
agreement.
In addition, First Banks monitors the fair value of the underlying
collateral on its lease portfolio to identify any impairment as a result of a
decline in the residual value of the underlying collateral, which may not be
apparent from the payment performance of the lease.
Loans Held for Sale. Loans held for sale are carried at the lower of
cost or market value, which is determined on an individual loan basis. The
amount by which cost exceeds market value is recorded in a valuation allowance
as a reduction of loans held for sale. Changes in the valuation allowance are
reflected as part of the gain on mortgage loans sold and held for sale in the
statements of income in the periods in which the changes occur. Gains or losses
on the sale of loans held for sale are determined on a specific identification
method. Loans held for sale transferred to loans held for portfolio or
available-for-sale investment securities are transferred at fair value.
Loan Servicing Income. Loan servicing income represents fees earned for
servicing real estate mortgage loans owned by investors, net of federal agency
guarantee fees, interest shortfall and amortization of mortgage servicing
rights. Such fees are generally calculated on the outstanding principal balance
of the loans serviced and are recorded as income when earned.
Allowance for Loan Losses. The allowance for loan losses is maintained
at a level considered adequate to provide for probable losses. The provision for
loan losses is based on a periodic analysis of the loans held for portfolio and
held for sale, considering, among other factors, current economic conditions,
loan portfolio composition, past loan loss experience, independent appraisals,
loan collateral, payment experience and selected key financial ratios. As
adjustments become necessary, they are reflected in the results of operations in
the periods in which they become known. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowance for loan losses. Such agencies may require First Banks to increase
its allowance for loan losses based on their judgment about information
available to them at the time of their examination.
Derivative Instruments and Hedging Activities. On January 1, 2001,
First Banks implemented Statement of Financial Accounting Standards (SFAS) No.
133 -- Accounting for Derivative Instruments and Hedging Activities, as amended
by SFAS No. 137 - Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133, and SFAS No. 138 - Accounting for Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended, requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge in one of three categories. The accounting for changes in the fair value
of a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. Under SFAS No. 133, as amended, an
entity that elects to apply hedge accounting is required to establish, at the
inception of the hedge, the method it will use for assessing the effectiveness
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with the
entity's approach to managing risk.
The implementation of SFAS No. 133, as amended, resulted in an increase
in derivative instruments of $12.5 million, an increase in deferred tax
liabilities of $5.1 million and an increase in other comprehensive income of
$9.1 million. In addition, First Banks recorded a cumulative effect of change in
accounting principle of $1.4 million, net of taxes of $741,000, as a reduction
of net income.
First Banks utilizes derivative instruments and hedging activities to
assist in the management of interest rate sensitivity and to modify the
repricing, maturity and option characteristics of certain assets and
liabilities. First Banks uses such derivative instruments solely to reduce its
interest rate risk exposure. First Banks' accounting policies for derivative
instruments and hedging activities under SFAS No. 133, as amended, are as
follows:
>> Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate
swap agreements designated as cash flow hedges are accounted for
at fair value. The effective portion of the change in the cash
flow hedge's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into
noninterest income when the underlying transaction affects
earnings. The ineffective portion of the change in the cash flow
hedge's gain or loss is recorded in noninterest income on each
monthly measurement date. The net interest differential is
recognized as an adjustment to interest income or interest
expense of the related asset or liability being hedged. In the
event of early termination, the net proceeds received or paid on
the interest rate swap agreements are recognized immediately in
noninterest income.
>> Interest Rate Swap Agreements - Fair Value Hedges. Interest rate
swap agreements designated as fair value hedges are accounted for
at fair value. Changes in the fair value of the swap agreements
are recognized currently in noninterest income. The change in the
fair value of the underlying hedged item attributable to the
hedged risk adjusts the carrying amount of the underlying hedged
item and is also recognized currently in noninterest income. All
changes in fair value are measured on a monthly basis. The net
interest differential is recognized as an adjustment to interest
income or interest expense of the related asset or liability. In
the event of early termination, the net proceeds received or paid
are recognized immediately in noninterest income. The cumulative
change in the fair value of the underlying hedged item is
deferred and amortized or accreted to noninterest income over the
weighted average life of the related asset or liability. If,
however, the underlying hedged item is repaid, the cumulative
change in the fair value of the underlying hedged item is
recognized immediately in noninterest income.
>> Interest Rate Cap and Floor Agreements. Interest rate cap and
floor agreements are accounted for at fair value. Changes in the
fair value of interest rate cap and floor agreements are
recognized in noninterest income on each monthly measurement
date.
>> Interest Rate Lock Commitments. Commitments to originate loans
(interest rate lock commitments), which primarily consist of
commitments to originate fixed rate residential mortgage loans,
are recorded at fair value. Changes in the fair value are
recognized in noninterest income on a monthly basis.
>> Forward Contracts to Sell Mortgage-Backed Securities. Forward
commitments to sell mortgage-backed securities are recorded at
fair value. Changes in the fair value of forward contracts to
sell mortgage-backed securities are recognized in noninterest
income on a monthly basis.
Prior to the implementation of SFAS No. 133, interest rate swap, floor
and cap agreements were accounted for on an accrual basis with the net interest
differential being recognized as an adjustment to interest income or interest
expense of the related asset or liability. Premiums and fees paid upon the
purchase of interest rate swap, floor and cap agreements were amortized over the
life of the agreements using the straight-line method. In the event of early
termination of the derivative financial instruments, the net proceeds received
or paid were deferred and amortized over the shorter of the remaining contract
life of the derivative financial instrument or the maturity of the related asset
or liability. If, however, the amount of the underlying asset or liability was
repaid, then the gains or losses on the agreements were recognized immediately
in the consolidated statements of income. The unamortized premiums and fees paid
were included in derivative instruments in the accompanying consolidated balance
sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, interest rate lock commitments represented
off-balance-sheet items and, therefore, were not reflected in the consolidated
balance sheets. Gains and losses on forward contracts to sell mortgage-backed
securities, which qualified as hedges, were deferred. The net unamortized
balance of such deferred gains and losses was applied to the carrying value of
the loans held for sale as part of the lower of cost or market valuation.
Bank Premises and Equipment. Bank premises and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the useful life of the improvement or
term of the lease. Bank premises and improvements are depreciated over five to
40 years and equipment over three to seven years.
Intangibles Associated With the Purchase of Subsidiaries. Intangibles
associated with the purchase of subsidiaries include goodwill and core deposit
intangibles.
On January 1, 2002, First Banks adopted SFAS No. 142 -- Goodwill and
Other Intangible Assets, and SFAS No 144 -- Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 142 requires goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at lease 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. The amortization of goodwill ceased upon adoption of SFAS No. 142. 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.
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 continues
to amortize, on a straight-line basis, its core deposit intangibles and goodwill
associated with the purchase of branch offices. Core deposit intangibles are
amortized over the estimated periods to be benefited, which has been estimated
at seven years, and goodwill associated with the purchase of branch offices is
amortized over the estimated periods to be benefited, which has been estimated
at 15 years. Goodwill associated with the purchase of subsidiaries is no longer
amortized, but instead, is tested annually for impairment following First Banks'
existing methods of measuring and recording impairment losses, as described
below. Prior to January 1, 2002, goodwill was amortized using the straight-line
method over the estimated periods to be benefited, which ranged from 10 to 15
years.
First Banks completed the transitional goodwill impairment test
required under SFAS No. 142, to determine the potential impact, if any, on the
consolidated financial statements. The results of the transitional goodwill
impairment testing did not identify any goodwill impairment losses.
First Banks reviews intangible assets for impairment whenever events or
changes in circumstances indicate the carrying value of an underlying asset may
not be recoverable. First Banks measures recoverability based upon the future
cash flows expected to result from the use of the underlying asset and its
eventual disposition. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying value of the underlying
asset, First Banks recognizes an impairment loss. The impairment loss recognized
represents the mount by which the carrying value of the underlying asset exceeds
the fair value of the underlying asset. If an asset being tested for
recoverability was acquired in a business combination accounted for using the
purchase method, goodwill that arose in the transaction is included as part of
the asset grouping in determining recoverability. If some but not all of the
assets acquired in that transaction are being tested, goodwill is allocated to
the assets being tested for recoverability on a pro rata basis using the
relative fair values of the long-lived assets and identifiable intangibles
acquired at the acquisition dates. In instances where goodwill is identified
with assets that are subject to an impairment loss, the carrying amount of the
identified goodwill is eliminated before reducing the carrying amounts of
impaired long-lived assets and identifiable intangibles. As such adjustments
become necessary, they are reflected in the results of operations in the periods
in which they become known.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage Servicing Rights. Mortgage servicing rights are amortized in
proportion to the related estimated net servicing income on a disaggregated,
discounted basis over the estimated lives of the related mortgages considering
the level of current and anticipated repayments, which range from five to ten
years. The value of mortgage servicing rights is adversely affected when
mortgage interest rates decline and/or mortgage loan prepayments increase. First
Banks assesses impairment using stratifications based on the predominant risk
characteristics of the underlying mortgage loans, including size, interest rate,
weighted average original term, weighted average remaining term and estimated
prepayment speeds. The amount by which the carrying value of the mortgage
servicing rights for each stratum exceeds the fair value is recorded in a
valuation allowance as a reduction of mortgage servicing rights. Changes in the
valuation allowance are reflected in the statements of income in the periods in
which the change occurs.
Other Real Estate. Other real estate, consisting of real estate
acquired through foreclosure or deed in lieu of foreclosure, is stated at the
lower of cost or fair value less applicable selling costs. The excess of cost
over fair value of the property at the date of acquisition is charged to the
allowance for loan losses. Subsequent reductions in carrying value, to reflect
current fair value or costs incurred in maintaining the properties, are charged
to expense as incurred.
Income Taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in the tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
First Banks, Inc. and its eligible subsidiaries file a consolidated
federal income tax return and unitary or consolidated state income tax returns
in all applicable states.
Financial Instruments. A financial instrument is defined as cash,
evidence of an ownership interest in an entity, or a contract that conveys or
imposes on an entity the contractual right or obligation to either receive or
deliver cash or another financial instrument.
Financial Instruments With Off-Balance-Sheet Risk. First Banks utilizes
financial instruments to reduce the interest rate risk arising from its
financial assets and liabilities. These instruments involve, in varying degrees,
elements of interest rate risk and credit risk in excess of the amount
recognized in the consolidated balance sheets. "Interest rate risk" is defined
as the possibility that interest rates may move unfavorably from the perspective
of First Banks. The risk that a counterparty to an agreement entered into by
First Banks may default is defined as "credit risk."
First Banks is party to commitments to extend credit and commercial and
standby letters of credit in the normal course of business to meet the financing
needs of its customers. These commitments involve, in varying degrees, elements
of interest rate risk and credit risk in excess of the amount recognized in the
consolidated balance sheets.
Earnings Per Common Share. Basic earnings per share (EPS) are computed
by dividing the income available to common stockholders (the numerator) by the
weighted average number of common shares outstanding (the denominator) during
the year. The computation of dilutive EPS is similar except the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential shares had been issued. In addition, in
computing the dilutive effect of convertible securities, the numerator is
adjusted to add back: (a) any convertible preferred dividends and (b) the
after-tax amount of interest recognized in the period associated with any
convertible debt.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DIVESTITURES
During the three years ended December 31, 2002, First Banks completed
the following acquisitions:
Total Purchase
Entity Date Assets Price Goodwill
------ ---- ------ ----- --------
(dollars expressed in thousands)
2002
----
Union Planters Bank N.A.
Denton and Garland, Texas
branch offices June 22, 2002 $ 63,700 65,100 --
Plains Financial Corporation
Des Plaines, Illinois January 15, 2002 256,300 36,500 12,600
--------- ------- --------
$ 320,000 101,600 12,600
========= ======= ========
2001
----
Union Financial Group, Ltd.
Swansea, Illinois December 31, 2001 $ 360,000 26,700 11,500
BYL Bancorp
Orange, California October 31, 2001 281,500 49,000 19,000
Charter Pacific Bank
Agoura Hills, California October 16, 2001 101,500 18,900 6,300
--------- ------- --------
$ 743,000 94,600 36,800
========= ======= ========
2000
----
The San Francisco Company
San Francisco, California December 31, 2000 $ 183,800 62,200 16,300
Millennium Bank
San Francisco, California December 29, 2000 117,000 20,700 8,700
Commercial Bank of San Francisco
San Francisco, California October 31, 2000 155,600 26,400 9,300
Bank of Ventura
Ventura, California August 31, 2000 63,800 14,200 7,200
First Capital Group, Inc.
Albuquerque, New Mexico February 29, 2000 64,600 66,100 1,500
Lippo Bank
San Francisco, California February 29, 2000 85,300 17,200 4,800
--------- ------- --------
$ 670,100 206,800 47,800
========= ======= ========
Goodwill associated with the acquisitions included in the table above
is not expected to be deductible for tax purposes. For 2002, 2001 and 2000
acquisitions, goodwill in the amounts of $12.6 million, $11.5 million and $1.5
million, respectively, was assigned to First Bank. In 2001 and 2000, goodwill in
the amounts of $25.3 million and $46.3 million, respectively, was assigned to
FB&T.
The aforementioned transactions were accounted for using the purchase
method of accounting and, accordingly, the consolidated financial statements
include the financial position and results of operations for the periods
subsequent to the respective acquisition dates, and the assets acquired and
liabilities assumed were recorded at fair value at the acquisition dates. These
acquisitions were funded from available cash reserves, proceeds from sales and
maturities of available-for-sale investment securities, borrowings under First
Banks' revolving credit agreement and proceeds from the issuance of trust
preferred securities. Due to the immaterial effect on previously reported
financial information, pro forma disclosures have not been prepared for the
aforementioned transactions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, as previously discussed, on December 31, 2002, First Banks
completed its acquisition of all of the outstanding capital stock of FBA that it
did not already own. This transaction was accounted for using the purchase
method of accounting, and goodwill in the amount of $12.4 million was recorded
and assigned to FB&T. The goodwill is not expected to be deductible for tax
purposes.
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities Available for Sale. The amortized cost, contractual
maturity, gross unrealized gains and losses and fair value of investment
securities available for sale at December 31, 2002 and 2001 were as follows:
Maturity
---------------------------------------- Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized --------------- Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2002:
Carrying value:
U.S. Treasury.................. $149,963 -- -- -- 149,963 -- (65) 149,898 1.12%
U.S. Government agencies
and corporations:
Mortgage-backed.......... 797 10,841 37,617 494,832 544,087 8,632 (145) 552,574 4.55
Other.................... 223,106 81,774 2,340 -- 307,220 3,509 (37) 310,692 2.45
State and political
subdivisions............... 1,605 7,946 17,487 5,655 32,693 592 (38) 33,247 3.78
Corporate debt securities...... 5,012 20,847 -- -- 25,859 514 (8) 26,365 5.76
Equity investments in other
financial institutions
(no stated maturity) ....... 15,434 -- -- 5,000 20,434 7,880 (307) 28,007 3.89
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)........ 20,111 -- -- -- 20,111 -- -- 20,111 4.45
-------- ------- ------ ------- --------- ------ ----- ---------
Total................... $416,028 121,408 57,444 505,487 1,100,367 21,127 (600) 1,120,894 3.49
======== ======= ====== ======= ========= ====== ===== ========= =====
Fair value:
Debt securities................ $381,224 125,038 58,291 508,223
Equity securities.............. 42,952 -- -- 5,166
-------- ------- ------ -------
Total................... $424,176 125,038 58,291 513,389
======== ======= ====== =======
Weighted average yield............ 1.77% 4.58% 4.17% 4.57%
======== ======= ====== =======
December 31, 2001:
Carrying value:
U.S. Treasury.................. $136,326 -- -- -- 136,326 3 (39) 136,290 1.76%
U.S. Government agencies
and corporations:
Mortgage-backed.......... 88 21,650 18,224 262,846 302,808 2,422 -- 305,230 6.00
Other.................... 22,284 99,353 6,612 974 129,223 2,235 (16) 131,442 4.58
State and political
subdivisions................ 317 1,191 46 -- 1,554 -- -- 1,554 3.92
Corporate debt securities...... -- 1,985 -- -- 1,985 107 -- 2,092 6.76
Equity investments in other
financial institutions
(no stated maturity)........ 15,916 -- -- -- 15,916 2,171 (272) 17,815 8.55
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)........ 16,043 -- -- -- 16,043 -- -- 16,043 6.49
-------- ------- ------ ------- --------- ------ ----- ---------
Total................... $190,974 124,179 24,882 263,820 603,855 6,938 (327) 610,466 4.75
======== ======= ====== ======= ========= ====== ===== ========= =====
Fair value:
Debt securities................ $159,303 126,673 25,378 265,254
Equity securities.............. 33,858 -- -- --
-------- ------- ------ -------
Total................... $193,161 126,673 25,378 265,254
======== ======= ====== =======
Weighted average yield............ 3.25% 4.67% 5.76% 5.92%
======== ======= ====== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Securities Held to Maturity. The amortized cost, contractual maturity,
gross unrealized gains and losses and fair value of investment securities held
to maturity at December 31, 2002 and 2001 were as follows:
Maturity
---------------------------------------- Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized -------------- Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2002:
Carrying value:
Mortgage-backed securities..... $ -- -- -- 2,203 2,203 66 -- 2,269 6.69%
State and political
subdivisions................. 2,472 6,313 5,438 -- 14,223 487 (1) 14,709 4.88
-------- ------- ------ ------- ------ ----- ----- -------
Total...................... $ 2,472 6,313 5,438 2,203 16,426 553 (1) 16,978 5.12
======== ======= ====== ======= ====== ===== ===== ======= =====
Fair value:
Debt securities................ $ 2,517 6,581 5,611 2,269
======== ======= ====== =======
Weighted average yield............ 4.76% 4.93% 4.88% 6.69%
======== ======= ====== =======
December 31, 2001:
Carrying value:
Mortgage-backed securities..... $ -- -- -- 4,051 4,051 67 (10) 4,108 6.83%
State and political
subdivisions................. 1,943 8,802 5,806 -- 16,551 300 (147) 16,704 4.93
-------- ------- ------ ------- ------ ----- ----- -------
Total...................... $ 1,943 8,802 5,806 4,051 20,602 367 (157) 20,812 5.25
======== ======= ====== ======= ====== ===== ===== ======= =====
Fair value:
Debt securities................ $ 1,930 9,071 5,703 4,108
======== ======= ====== =======
Weighted average yield............ 4.58% 4.98% 4.98% 6.83%
======== ======= ====== =======
Proceeds from sales of available-for-sale investment securities were
$55.1 million, $85.8 million and $46.3 million for the years ended December 31,
2002, 2001 and 2000, respectively. Gross gains of $91,000, $19.1 million and
$565,000 were realized on these sales during the years ended December 31, 2002,
2001 and 2000, respectively. Gross losses of $1,600, $384,000 and $396,000 were
realized on these sales during the years ended December 31, 2002, 2001 and 2000,
respectively.
Proceeds from calls of investment securities were $64.0 million, $121.8
million and $111,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Gross gains of $6,800 and $300 were realized on these called
securities during the years ended December 31, 2001 and 2000, respectively.
There were no gross gains on called securities in 2002. Gross losses of $1,400
and $1,800 were realized on these called securities during the years ended
December 31, 2001 and 2000, respectively. There were no gross losses on called
securities in 2002.
The Subsidiary Banks maintain investments in the Federal Home Loan Bank
(FHLB) and/or the Federal Reserve Bank (FRB). These investments are recorded at
cost, which represents redemption value. The investment in FHLB stock is
maintained at a minimum amount equal to the greater of 1% of the aggregate
outstanding balance of the applicable Subsidiary Bank's loans secured by
residential real estate, or 5% of advances from the FHLB to each Subsidiary
Bank. First Bank and FB&T are members of the FHLB system. The investment in FRB
stock is maintained at a minimum of 6% of the applicable Subsidiary Bank's
capital stock and capital surplus. First Bank is a member of the FRB system.
Investment securities with a carrying value of approximately $313.0
million and $300.0 million at December 31, 2002 and 2001, respectively, were
pledged in connection with deposits of public and trust funds, securities sold
under agreements to repurchase and for other purposes as required by law.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December
31 were as follows:
2002 2001 2000
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year..................................... $ 97,164 81,592 68,611
Acquired allowances for loan losses............................ 1,366 14,046 6,062
-------- -------- --------
98,530 95,638 74,673
-------- -------- --------
Loans charged-off.............................................. (70,524) (31,453) (17,050)
Recoveries of loans previously charged-off..................... 15,933 9,469 9,842
-------- -------- --------
Net loans charged-off....................................... (54,591) (21,984) (7,208)
-------- -------- --------
Provision charged to operations................................ 55,500 23,510 14,127
-------- -------- --------
Balance, end of year........................................... $ 99,439 97,164 81,592
======== ======== ========
At December 31, 2002 and 2001, First Banks had $75.2 million and $67.3
million of impaired loans, including $73.2 million and $65.3 million,
respectively, of loans on nonaccrual status. At December 31, 2002 and 2001,
impaired loans also include $2.0 million of restructured loans. Interest on
nonaccrual loans, which would have been recorded under the original terms of the
loans, was $7.1 million, $8.2 million and $5.8 million for the years ended
December 31, 2002, 2001 and 2000, respectively. Of these amounts, $2.2 million,
$2.9 million and $1.9 million was actually recorded as interest income on such
loans in 2002, 2001 and 2000, respectively. The allowance for loan losses
includes an allocation for each impaired loan. The aggregate allocation of the
allowance for loan losses related to impaired loans was approximately $14.8
million and $16.5 million at December 31, 2002 and 2001, respectively. The
average recorded investment in impaired loans was $78.1 million, $62.4 million
and $45.1 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The amount of interest income recognized using a cash basis method
of accounting during the time these loans were impaired was $4.6 million, $5.8
million and $2.2 million in 2002, 2001 and 2000, respectively. At December 31,
2002 and 2001, First Banks had $4.6 million and $15.2 million, respectively, of
loans past due 90 days or more and still accruing interest.
First Banks' primary market areas are the states of Missouri, Illinois,
Texas and California. At December 31, 2002 and 2001, approximately 92% of the
total loan portfolio and 78% and 80% of the commercial, financial and
agricultural loan portfolio, respectively, were made to borrowers within these
states.
Real estate lending constituted the only significant concentration of
credit risk. Real estate loans comprised approximately 70% and 67% of the loan
portfolio at December 31, 2002 and 2001, respectively, of which 28% was made to
consumers in the form of residential real estate mortgages and home equity lines
of credit.
First Banks is, in general, a secured lender. At December 31, 2002 and
2001, 98% and 96%, respectively, of the loan portfolio was secured. Collateral
is required in accordance with the normal credit evaluation process based upon
the creditworthiness of the customer and the credit risk associated with the
particular transaction.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) DERIVATIVE INSTRUMENTS
First Banks utilizes derivative financial instruments to assist in the
management of interest rate sensitivity by modifying the repricing, maturity and
option characteristics of certain assets and liabilities. Derivative financial
instruments held by First Banks are summarized as follows:
December 31,
------------------------------------------------
2002 2001
---------------------- ----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges.............................. $1,050,000 2,179 900,000 1,764
Fair value hedges............................. 301,200 11,449 200,000 6,962
Interest rate cap agreements.................. 450,000 94 450,000 2,063
Interest rate lock commitments................ 89,000 -- 88,000 --
Forward commitments to sell
mortgage-backed securities.................. 235,000 -- 209,000 --
========== ====== ======== ======
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
First Banks' credit exposure through its use of these instruments. The credit
exposure represents the accounting loss First Banks would incur in the event the
counterparties failed completely to perform according to the terms of the
derivative financial instruments and the collateral held to support the credit
exposure was of no value.
During 2002 and 2001, First Banks realized net interest income on
derivative financial instruments of $53.0 million and $23.4 million,
respectively, in comparison to net interest expense of $4.7 million in 2000. In
addition, First Banks recorded a net gain on derivative instruments, which is
included in noninterest income in the consolidated statements of income, of $2.2
million and $18.6 million for the years ended December 31, 2002 and 2001,
respectively.
Cash Flow Hedges
First Banks entered into the following interest rate swap agreements,
designated as cash flow hedges, to effectively lengthen the repricing
characteristics of certain interest-earning assets to correspond more closely
with their funding source with the objective of stabilizing cash flow, and
accordingly, net interest income over time:
>> During 1998, First Banks entered into $280.0 million notional
amount of interest rate swap agreements that provided for First
Banks to receive a fixed rate of interest and pay an adjustable
rate of interest equivalent to the daily weighted average prime
lending rate minus 2.705%. The terms of the swap agreements
provided for First Banks to pay quarterly and receive payment
semiannually. In June 2001 and November 2001, First Banks
terminated $205.0 million and $75.0 million notional amount,
respectively, of these swap agreements, which would have expired
in 2002, in order to appropriately modify its overall hedge
position in accordance with its interest rate risk management
program. In conjunction with these terminations, First Banks
recorded gains of $2.8 million and $1.7 million, respectively.
>> During September 1999, First Banks entered into $175.0 million
notional amount of interest rate swap agreements that provided
for First Banks to receive a fixed rate of interest and pay an
adjustable rate of interest equivalent to the weighted average
prime lending rate minus 2.70%. The terms of the swap agreements
provided for First Banks to pay and receive interest on a
quarterly basis. In April 2001, First Banks terminated these swap
agreements, which would have expired in September 2001, and
replaced them with similar swap agreements with extended
maturities in order to lengthen the period covered by the swaps.
In conjunction with the termination of these swap agreements,
First Banks recorded a gain of $985,000.
>> During September 2000, March 2001, April 2001 and March 2002,
First Banks entered into $600.0 million, $200.0 million, $175.0
million and $150.0 million notional amount, respectively, of
interest rate swap agreements. The underlying hedged assets are
certain loans within the commercial loan portfolio. The swap
agreements provide for First Banks to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
weighted average prime lending rate minus 2.70%, 2.82%, 2.82% and
2.80%, respectively. The terms of the swap agreements provide for
First Banks to pay and receive interest on a quarterly basis. In
November 2001, First Banks terminated $75.0 million notional
amount of the swap agreements originally entered into in April
2001, which would have expired in April 2006, in order to
appropriately modify its overall hedge position in accordance
with its interest rate risk management program. First Banks
recorded a gain of $2.6 million in conjunction with the
termination of these swap agreements. The amount receivable under
the swap agreements was $3.1 million and $2.9 million at December
31, 2002 and 2001, respectively, and the amount payable was
$888,000 and $1.1 million at December 31, 2002 and 2001,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The maturity dates, notional amounts, interest rates paid and received
and fair value of First Banks' interest rate swap agreements designated as cash
flow hedges as of December 31, 2002 and 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ----------- ------------- ------------- -----
(dollars expressed in thousands)
December 31, 2002:
March 14, 2004........................ $ 150,000 1.45% 3.93% $ 4,130
September 20, 2004.................... 600,000 1.55 6.78 48,891
March 21, 2005........................ 200,000 1.43 5.24 13,843
April 2, 2006......................... 100,000 1.43 5.45 9,040
---------- --------
$1,050,000 1.50 5.95 $ 75,904
========== ===== ===== ========
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
First Banks entered into the following interest rate swap agreements,
designated as fair value hedges, to effectively shorten the repricing
characteristics of certain interest-bearing liabilities to correspond more
closely with their funding source with the objective of stabilizing net interest
income over time:
>> During September 2000, First Banks entered into $25.0 million
notional amount of one-year interest rate swap agreements and
$25.0 million notional amount of five and one-half year interest
rate swap agreements that provided for First Banks to receive
fixed rates of interest ranging from 6.60% to 7.25% and pay an
adjustable rate equivalent to the three-month London Interbank
Offering Rate minus rates ranging from 0.02% to 0.11%. The terms
of the swap agreements provided for First Banks to pay interest
on a quarterly basis and receive interest on either a semiannual
basis or an annual basis. In September 2001, the one-year
interest rate swap agreements matured, and First Banks terminated
the five and one-half year interest rate swap agreements because
the underlying 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, First Banks entered into $50.0 million
notional amount of three-year interest rate swap agreements and
$150.0 million notional amount of five-year interest rate swap
agreements that provide for First Banks to receive a fixed rate
of interest and pay an adjustable rate of interest equivalent to
the three-month London Interbank Offering Rate. The underlying
hedged liabilities are a portion of our other time deposits. The
terms of the swap agreements provide for First Banks to pay
interest on a quarterly basis and receive interest on a
semiannual basis. The amount receivable under the swap agreements
was $5.2 million at December 31, 2002 and 2001, and the amount
payable under the swap agreements was $821,000 and $1.2 million
at December 31, 2002 and 2001, respectively.
>> During May 2002 and June 2002, First Banks entered into $55.2
million and $86.3 million notional amount, respectively, of
interest rate swap agreements that provide for First Banks to
receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the three-month London Interbank Offering
Rate plus 2.30% and 2.75%, respectively. In addition, during June
2002, First Banks entered into $46.0 million notional amount of
interest rate swap agreements that provide for First Banks to
receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the three-month London Interbank Offering
Rate plus 1.97%. The underlying hedged liabilities are First
Banks' guaranteed preferred beneficial interests in its
subordinated debentures. The terms of the swap agreements provide
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for First Banks to pay and receive interest on a quarterly basis.
The $86.3 million notional amount interest rate swap agreement
was called by its counterparty on November 8, 2002 resulting in
final settlement of this interest rate swap agreement on December
18, 2002. There was no gain or loss recorded as a result of this
transaction. There were no amounts receivable or payable under
the remaining swap agreements at December 31, 2002.
The maturity dates, notional amounts, interest rates paid and received
and fair value of First Banks' interest rate swap agreements designated as fair
value hedges as of December 31, 2002 and 2001 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2002:
January 9, 2004.......................... $ 50,000 1.76% 5.37% $ 1,972
January 9, 2006.......................... 150,000 1.76 5.51 13,476
June 30, 2028............................ 46,000 3.77 8.50 495
December 31, 2031........................ 55,200 4.10 9.00 4,688
-------- --------
$301,200 2.49 6.58 $20,631
======== ===== ===== ========
December 31, 2001:
January 9, 2004.......................... $ 50,000 2.48% 5.37% $ 1,761
January 9, 2006.......................... 150,000 2.48 5.51 3,876
-------- --------
$200,000 2.48 5.47 $ 5,637
======== ===== ===== ========
Interest Rate Floor Agreements
During January 2001 and March 2001, First Banks entered into $200.0
million and $75.0 million notional amount, respectively, of four-year interest
rate floor agreements to further stabilize net interest income in the event of a
falling rate scenario. The interest rate floor agreements provided for First
Banks to receive a quarterly adjustable rate of interest equivalent to the
differential between the three-month London Interbank Offering Rate and the
strike prices of 5.50% or 5.00%, respectively, should the three-month London
Interbank Offering Rate fall below the respective strike prices. In November
2001, First Banks terminated these interest rate floor agreements in order to
appropriately modify its overall hedge position in accordance with its interest
rate risk management program. In conjunction with the termination, First Banks
recorded an adjustment of $4.0 million representing a decline in the fair value
from the previous month-end measurement date. These agreements provided net
interest income of $2.1 million for the year ended December 31, 2001.
Interest Rate Cap Agreements
In conjunction with the interest rate swap agreements designated as
cash flow hedges that mature on September 2004, First Banks also entered into
$450.0 million notional amount of four-year interest rate cap agreements to
limit the net interest expense associated with the interest rate swap agreements
in the event of a rising rate scenario. The interest rate cap agreements provide
for First Banks to receive a quarterly adjustable rate of interest equivalent to
the differential between the three-month London Interbank Offering Rate and the
strike price of 7.50% should the three-month London Interbank Offering Rate
exceed the strike price. At December 31, 2002 and 2001, the carrying value of
these interest rate cap agreements, which is included in derivative instruments
in the consolidated balance sheets, was $94,000 and $2.1 million, respectively.
Pledged Collateral
At December 31, 2002 and 2001, First Banks had pledged investment
securities available for sale with a carrying value of $5.8 and $1.1 million,
respectively, in connection with the interest rate swap agreements. In addition,
at December 31, 2002 and 2001, First Banks had accepted, as collateral in
connection with the interest rate swap agreements, cash of $99.1 million and
$4.9 million, respectively. At December 31, 2001, First Banks had also accepted
investment securities with a fair value of $53.9 million as collateral in
connection with the interest rate swap agreements. First Banks is permitted by
contract to sell or repledge the collateral accepted from counterparties;
however, at December 31, 2002 and 2001, First Banks had not done so.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest Rate Lock Commitments / Forward Commitments to Sell
Mortgage-Backed Securities
Derivative financial instruments issued by First Banks consist of
interest rate lock commitments to originate fixed-rate loans. Commitments to
originate fixed-rate loans consist primarily of residential real estate loans.
These net loan commitments and loans held for sale are hedged with forward
contracts to sell mortgage-backed securities.
(6) MORTGAGE BANKING ACTIVITIES
At December 31, 2002 and 2001, First Banks serviced loans for others
amounting to $1.29 billion and $1.07 billion respectively. Borrowers' escrow
balances held by First Banks on such loans were $517,000 and $485,000 at
December 31, 2002 and 2001, respectively.
Changes in mortgage servicing rights, net of amortization, for the
years ended December 31 were as follows:
2002 2001
---- ----
(dollars expressed in thousands)
Balance, beginning of year........................................... $ 10,125 7,048
Originated mortgage servicing rights................................. 8,566 6,802
Amortization......................................................... (3,809) (3,725)
--------- --------
Balance, end of year................................................. $ 14,882 10,125
========= ========
The fair value of mortgage servicing rights was $17.2 million and $15.8
million at December 31, 2002 and 2001, respectively. The predominant risk
characteristics of the underlying mortgage loans used to stratify mortgage
servicing rights for purposes of measuring impairment include size, interest
rate, weighted average original term, weighted average remaining term and
estimated prepayment speeds.
First Banks did not incur any impairment of mortgage servicing rights
during the years ended December 31, 2002, 2001 and 2000, respectively. First
Banks capitalizes its mortgage servicing rights by allocating the total cost of
the mortgage loans to mortgage servicing rights and the loans (without mortgage
servicing rights) based on the relative fair values of the two components. Upon
capitalizing the mortgage servicing rights, they are amortized, in proportion to
the related estimated net servicing income on a disaggregated, discounted basis,
over the expected lives of the related loans, which averages approximately seven
years. When loans are prepaid or refinanced, the related unamortized balance of
the mortgage servicing rights is charged to amortization expense. The
determination of the fair value of the mortgage servicing rights is performed
internally each quarter, with an independent valuation completed annually. Based
on these analyses, a comparison of the fair value of the mortgage servicing
rights with the carrying value of the mortgage servicing rights is made
quarterly, with impairment, if any, recognized at that time. The internal and
external impairment analyses are prepared using stratifications of the mortgage
servicing rights based on the predominant risk characteristics of the underlying
mortgage loans, including size, interest rate, weighed average original term,
weighted average term and estimated prepayment speeds. As part of these
analyses, the fair value of the mortgage servicing rights for each stratum is
compared to the carrying value of the mortgage servicing rights for each
stratum. To the extent the carrying value of the mortgaging servicing rights
exceeds the fair value of the mortgage servicing rights for a stratum, First
Banks recognizes impairment equal to the amount by which the carrying value of
the mortgage servicing rights for a stratum exceeds their fair value. Impairment
is recognized through a valuation allowance that is recorded as a reduction of
mortgage servicing rights. Changes in the valuation allowance are reflected in
the statements of income in the periods in which the change occurs. First Banks
does not, however, recognize fair value of the mortgage servicing rights in
excess of the carrying value of mortgage servicing rights for any stratum.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2002 and 2001, the excess of the fair value of mortgage
servicing rights over the carrying value was $2.3 million and $5.7 million,
respectively. The decline in the fair value represents the declining mortgage
interest rate environment in 2001 that resulted in a significant increase in the
number of mortgages being prepaid or refinanced. In addition, the increased
prepayment experience that occurred as a result of the reduced mortgage interest
rate environment during 2002 and 2001 resulted in a decline in the fair value of
the remaining mortgage servicing rights. However, the decline in the fair value
of the mortgage servicing rights did not result in the fair value being reduced
below the carrying value.
Amortization of mortgage servicing rights, as it relates to the balance
at December 31, 2002 of $14.9 million, has been estimated through 2006 in the
following table:
(dollars expressed
in thousands)
Year ending December 31:
2003........................................... $ 3,946
2004........................................... 3,746
2005........................................... 3,677
2006........................................... 3,513
---------
Total....................................... $ 14,882
=========
(7) BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following at December
31:
2002 2001
---- ----
(dollars expressed in thousands)
Land................................................................ $ 23,175 22,063
Buildings and improvements........................................... 100,787 87,372
Furniture, fixtures and equipment.................................... 114,910 95,626
Leasehold improvements............................................... 28,006 28,400
Construction in progress............................................. 4,134 13,865
--------- ---------
Total............................................................ 271,012 247,326
Less accumulated depreciation and amortization....................... 118,594 97,722
--------- ---------
Bank premises and equipment, net................................. $ 152,418 149,604
========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Depreciation and amortization expense for the years ended December 31,
2002, 2001 and 2000 totaled $18.9 million, $12.7 million and $9.5 million,
respectively.
First Banks leases land, office properties and equipment under
operating leases. Certain of the leases contain renewal options and escalation
clauses. Total rent expense was $13.9 million, $12.9 million and $10.7 million
for the years ended December 31, 2002, 2001 and 2000, respectively. Future
minimum lease payments under noncancellable operating leases extend through 2084
as follows:
(dollars expressed in thousands)
Year ending December 31:
2003.................................................................. $ 8,913
2004................................................................... 7,223
2005................................................................... 6,148
2006................................................................... 5,055
2007................................................................... 3,700
Thereafter............................................................. 21,708
--------
Total future minimum lease payments................................ $ 52,747
========
First Banks leases to unrelated parties a portion of its banking
facilities. Total rental income was $5.8 million, $4.8 million and $2.6 million
for the years ended December 31, 2002, 2001 and 2000, respectively.
(8) INTANGIBLE ASSETS ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES, NET OF
AMORTIZATION
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at December 31, 2002 and 2001:
2002 2001
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles.............. $ 13,871 (1,869) 9,580 --
Goodwill associated with
purchases of branch offices......... 2,210 (718) 2,210 (576)
--------- ------- ------- -------
Total............................ $ 16,081 (2,587) 11,790 (576)
========= ======= ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 138,620 114,226
========= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $2.0 million, $8.3 million and $5.3 million
for the years ended December 31, 2002, 2001 and 2000, respectively. 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:
2003............................... $ 2,129
2004............................... 2,129
2005............................... 2,129
2006............................... 2,129
2007............................... 2,129
--------
Total............................ $ 10,645
========
Changes in the carrying amount of goodwill for the year ended December
31, 2002 were as follows:
Year Ended December 31, 2002
---------------------------------------
First Bank FB&T Total
---------- ---- -----
(dollars expressed in thousands)
Balance, beginning of year...................... $ 19,165 96,695 115,860
Goodwill acquired during year................... 12,577 12,386 24,963
Acquisition-related adjustments................. (569) -- (569)
Amortization - purchases of branch offices...... -- (142) (142)
-------- ------- --------
Balance, end of year............................ $ 31,173 108,939 140,112
======== ======= ========
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:
Year Ended December 31,
-----------------------------------------
2002 2001 2000
---- ---- ----
(dollars expressed in thousands)
Net income:
Reported net income...................................... $ 45,167 64,514 56,107
Add back - goodwill amortization......................... -- 8,078 4,957
--------- -------- --------
Adjusted net income.................................... $ 45,167 72,592 61,064
========= ======== ========
Basic earnings per share:
Reported net income...................................... $1,875.69 2,693.38 2,338.04
Add back - goodwill amortization......................... -- 341.14 209.51
--------- -------- --------
Adjusted net income.................................... $1,875.69 3,034.52 2,547.55
========= ======== ========
Diluted earnings per share:
Reported net income...................................... $1,853.64 2,626.77 2,267.41
Add back - goodwill amortization......................... -- 328.99 200.39
--------- -------- --------
Adjusted net income.................................... $1,853.64 2,955.76 2,467.80
========= ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) MATURITIES OF TIME DEPOSITS
A summary of maturities of time deposits of $100,000 or more and other
time deposits as of December 31, 2002 is as follows:
Time deposits of Other time
$100,000 or more deposits Total
---------------- -------- -----
(dollars expressed in thousands)
Year ending December 31:
2003............................................... $ 335,983 1,136,418 1,472,401
2004............................................... 54,117 271,764 325,881
2005............................................... 43,018 187,989 231,007
2006............................................... 9,792 40,083 49,875
2007............................................... 26,994 83,544 110,538
Thereafter......................................... -- 399 399
--------- --------- ---------
Total........................................... $ 469,904 1,720,197 2,190,101
========= ========= =========
(10) SHORT-TERM BORROWINGS
Short-term borrowings were comprised of the following at December 31:
2002 2001
---- ----
(dollars expressed in thousands)
Securities sold under agreements to repurchase....................... $ 196,644 142,534
Federal funds purchased.............................................. 55,000 70,000
FHLB borrowings...................................................... 14,000 30,600
--------- --------
Total short-term borrowings...................................... $ 265,644 243,134
========= ========
The average balance of short-term borrowings was $194.1 million and
$158.0 million, respectively, and the maximum month-end balance of short-term
borrowings was $265.6 million and $243.1 million, respectively, for the years
ended December 31, 2002 and 2001. The average rates paid on short-term
borrowings during the years ended December 31, 2002, 2001 and 2000 were 1.78%,
3.70% and 5.54%, respectively. The assets underlying the securities sold under
agreements to repurchase and FHLB borrowings are under First Banks' physical
control.
(11) NOTE PAYABLE
First Banks has a revolving credit line with a group of unaffiliated
financial institutions (Credit Agreement) that initially provided a $90 million
revolving credit line and a $20 million letter of credit. The Credit Agreement,
dated August 22, 2002, replaced a similar revolving credit agreement dated
August 23, 2001. On December 31, 2002, the Credit Agreement was amended, at the
request of First Banks, to provide a $45 million revolving credit line and a $20
million letter of credit. Additionally, the Credit Agreement was amended to
reduce from 0.70% to 0.60% the minimum return on average assets ratio that First
Banks is required to meet for the year ended December 31, 2002 and to add a
covenant providing that for the quarter ending December 31, 2002 and each
following quarter, First Banks is required to maintain a minimum return on
average assets ratio, computed with respect to the current quarter annualized,
of at least 0.80%. The Credit Agreement defines return on average assets as the
percentage determined by dividing First Banks' net income for the immediately
preceding four calendar quarters by total average assets as reflected on First
Banks' balance sheet at the end of the most recently completed calendar quarter.
Interest is payable, on outstanding principal loan balances at a floating rate
equal to, either the lender's prime rate or, at First Banks' option, the
Eurodollar rate plus a margin determined by the outstanding loan balances and
First Banks' net income, for the preceding four calendar quarters. If the loan
balances outstanding under the revolving credit line are accruing at the prime
rate, interest is to be paid monthly. If the loan balances outstanding under the
revolving credit line are accruing at the London InterBank Offering Rate,
interest is payable based on the one, two, three or six-month London Interbank
Offering Rate, as selected by First Banks. The interest rate for borrowings
under the Credit Agreement was 2.44% at December 31, 2002, and was based on the
applicable Eurodollar Rate plus a margin of 1.00%. Amounts may be borrowed under
the Credit Agreement until August 21, 2003, at which time the principal and
interest is due and payable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Credit Agreement requires maintenance of certain minimum capital
ratios for First Banks and each of the Subsidiary Banks, certain maximum
nonperforming assets ratios for First Banks and each of the Subsidiary Banks and
a minimum return on assets ratio for First Banks and the Subsidiary Banks. In
addition, it prohibits the payment of dividends on First Banks' common stock. At
December 31, 2002 and 2001, First Banks and the Subsidiary Banks were in
compliance with all restrictions and requirements of the respective credit
agreements.
Loans under the Credit Agreement are secured by First Banks' ownership
interest in the capital stock of its Subsidiary Banks. Under the Credit
Agreement, there were outstanding borrowings of $7.0 million at December 31,
2002. At December 31, 2001, there were outstanding borrowings of $27.5 million
under the previous credit agreement.
The average balance and maximum month-end balance of borrowings
outstanding under the Credit Agreement during the years ended December 31 were
as follows:
2002 2001
---- ----
(dollars expressed in thousands)
Average balance........................... $ 17,947 41,590
Maximum month-end balance................. 64,000 66,500
======== =======
The average rates paid on the outstanding borrowings during the years
ended December 31, 2002, 2001 and 2000 were 5.75%, 6.32% and 7.66%,
respectively.
(12) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBENTURES
In February 1997, First Preferred Capital Trust (First Preferred I), a
newly formed Delaware business trust subsidiary of First Banks, issued 3.45
million shares of 9.25% cumulative trust preferred securities at $25 per share
in an underwritten public offering, and issued 106,702 shares of common
securities to First Banks at $25 per share. First Banks owns all of First
Preferred I's common securities. The gross proceeds of the offering were used by
First Preferred I to purchase $88.9 million of 9.25% subordinated debentures
from First Banks, maturing on March 31, 2027. The maturity date may be shortened
to a date not earlier than March 31, 2002 or extended to a date not later than
March 31, 2046 if certain conditions are met. The subordinated debentures are
the sole asset of First Preferred I. In connection with the issuance of the
preferred securities, First Banks made certain guarantees and commitments that,
in the aggregate, constitute a full and unconditional guarantee by First Banks
of the obligations of First Preferred I under the First Preferred I preferred
securities. First Banks' proceeds from the issuance of the subordinated
debentures to First Preferred I, net of underwriting fees and offering expenses,
were $83.1 million. Distributions on First Preferred I's preferred securities,
which are payable quarterly in arrears, were $8.0 million for the years ended
December 31, 2002, 2001 and 2000.
In July 1998, First America Capital Trust (FACT), a newly formed
Delaware business trust subsidiary of First Banks, issued 1.84 million shares of
8.50% cumulative trust preferred securities at $25 per share in an underwritten
public offering, and issued 56,908 shares of common securities to First Banks at
$25 per share. First Banks owns all of FACT's common securities. The gross
proceeds of the offering were used by FACT to purchase $47.4 million of 8.50%
subordinated debentures from First Banks, maturing on June 30, 2028. The
maturity date may be shortened to a date not earlier than June 30, 2003 or
extended to a date not later than June 30, 2037 if certain conditions are met.
The subordinated debentures are the sole asset of FACT. In connection with the
issuance of the FACT preferred securities, First Banks made certain guarantees
and commitments that, in the aggregate, constitute a full and unconditional
guarantee by First Banks of the obligations of FACT under the FACT preferred
securities. First Banks' proceeds from the issuance of the subordinated
debentures to FACT, net of underwriting fees and offering expenses, were $44.0
million. Distributions payable on the FACT preferred securities, which are
payable quarterly in arrears, were $3.9 million for years ended December 31,
2002, 2001 and 2000.
In October 2000, First Preferred Capital Trust II (First Preferred II),
a newly formed Delaware business trust subsidiary of First Banks, issued 2.3
million shares of 10.24% cumulative trust preferred securities at $25 per share
in an underwritten public offering, and issued 71,135 shares of common
securities to First Banks at $25 per share. First Banks owns all of First
Preferred II's common securities. The gross proceeds of the offering were used
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by First Preferred II to purchase $59.3 million of 10.24% subordinated
debentures from First Banks, maturing on September 30, 2030. The maturity date
may be shortened to a date not earlier than September 30, 2005, if certain
conditions are met. The subordinated debentures are the sole asset of First
Preferred II. In connection with the issuance of the preferred securities, First
Banks made certain guarantees and commitments that, in the aggregate, constitute
a full and unconditional guarantee by First Banks of the obligations of First
Preferred II under the First Preferred II preferred securities. First Banks'
proceeds from the issuance of the subordinated debentures to First Preferred II,
net of underwriting fees and offering expenses, were $55.1 million.
Distributions on First Preferred II's preferred securities, which are payable
quarterly in arrears, were $5.9 million, $5.9 million and $1.2 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
In November, 2001, First Preferred Capital Trust III (First Preferred
III), a newly formed Delaware business trust subsidiary of First Banks, issued
2.2 million shares of 9.00% cumulative trust preferred securities at $25 per
share in an underwritten public offering, and issued 68,290 shares of common
securities to First Banks at $25 per share. First Banks owns all of First
Preferred III's common securities. The gross proceeds of the offering were used
by First Preferred III to purchase $56.9 million of 9.00% subordinated
debentures from First Banks, maturing on September 30, 2031. The maturity date
may be shortened to a date not earlier than September 30, 2006, if certain
conditions are met. The subordinated debentures are the sole asset of First
Preferred III. In connection with the issuance of the preferred securities,
First Banks made certain guarantees and commitments that, in the aggregate,
constitute a full and unconditional guarantee by First Banks of the obligations
of First Preferred III under the First Preferred III preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to First
Preferred III, net of underwriting fees and offering expenses, were $52.9
million. Distributions on First Preferred III's preferred securities, which are
payable quarterly in arrears, were $5.0 million and $634,000 for the years ended
December 31, 2002 and 2001, respectively.
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, 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. 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. Distributions
on FBCT's preferred securities were $1.1 million for the year ended December 31,
2002.
The distributions payable on all issues of First Banks' trust preferred
securities are included in interest expense in the consolidated statements of
income.
First Banks has followed the practice of amortizing its deferred
issuance costs associated with its guaranteed preferred beneficial interests in
its subordinated debentures over the 30-year period through the respective
maturity date of each issue. In 2002, First Banks reviewed this practice
relative to the significant decline in prevailing interest rates experienced in
2001 and continuing in 2002 and determined that it was probable that some or all
of the existing issues would be called by First Banks prior to their stated
maturity date. Therefore, First Banks decided to change the period over which
its deferred issuance costs are amortized to the five-year period ending on the
respective dates the issues become callable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the effect of this change in accounting estimate on the
results of operations for the year ended December 31, 2002 with what the results
would have been without the change is as follows:
Year Ended December 31, 2002
--------------------------------
(dollars expressed in thousands,
except per share data)
Net income, as reported...................................................... $ 45,167
Change in accounting estimate - amortization period.......................... 4,363
Change in accounting estimate - tax effect................................... (1,527)
------------
Net income, as adjusted...................................................... $ 48,003
============
Earnings per common share:
Basic.................................................................... $ 1,875.69
Change in accounting estimate............................................ 119.86
------------
Basic, as adjusted....................................................... $ 1,995.55
============
Diluted.................................................................. $ 1,853.64
Change in accounting estimate............................................ 116.44
------------
Diluted, as adjusted..................................................... $ 1,970.08
============
(13) INCOME TAXES
Income tax expense attributable to income from continuing operations
for the years ended December 31 consists of:
2002 2001 2000
---- ---- ----
(dollars expressed in thousands)
Current income tax expense:
Federal.................................................... $15,210 22,252 28,215
State...................................................... 3,510 1,583 2,731
------- ------ ------
18,720 23,835 30,946
------- ------ ------
Deferred income tax expense:
Federal.................................................... 4,020 13,691 4,001
State...................................................... 31 626 (60)
------- ------ ------
4,051 14,317 3,941
------- ------ ------
Reduction in deferred valuation allowance...................... -- (8,104) (405)
------- ------ ------
Total.................................................. $22,771 30,048 34,482
======= ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effective rates of federal income taxes for the years ended
December 31 differ from statutory rates of taxation as follows:
Years Ended December 31,
-----------------------------------------------------------
2002 2001 2000
----------------- ---------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Income before provision for income taxes,
minority interest in income
of subsidiary and cumulative effect of
change inaccounting principle................ $69,369 $98,567 $ 92,635
======= ======= ========
Provision for income taxes calculated
at federal statutory income tax rates........ $24,279 35.0% $34,498 35.0% $ 32,422 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income, net of
tax preference adjustment................ (972) (1.4) (539) (0.5) (587) (0.6)
State income taxes........................... 2,302 3.3 1,436 1.5 1,736 1.8
Amortization of intangibles associated
with the purchase of subsidiaries........ -- -- 2,827 2.9 1,567 1.7
Reduction in deferred valuation allowance.... -- -- (8,104) (8.2) (405) (0.4)
Bank owned life insurance, net of premium.... (1,957) (2.8) (1,431) (1.5) (1,410) (1.5)
Other, net................................... (881) (1.3) 1,361 1.3 1,159 1.2
------- ----- ------- ------ -------- ------
Provision for income taxes............. $22,771 32.8% $30,048 30.5% $ 34,482 37.2%
======= ===== ======= ====== ======== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
December 31,
---------------------------
2002 2001
---- ----
(dollars expressed in thousands)
Deferred tax assets:
Net operating loss carryforwards................................ $ 38,666 44,100
Allowance for loan losses....................................... 37,730 36,000
Alternative minimum tax credits................................. 2,773 2,841
Disallowed losses on investment securities...................... -- 1,287
Quasi-reorganization adjustment of bank premises................ 1,126 1,176
Interest on non-accrual loans................................... 3,354 2,084
Mortgage servicing rights....................................... 5,549 4,161
Deferred compensation........................................... 2,112 2,418
Other real estate............................................... 118 184
Other........................................................... 729 295
-------- --------
Deferred tax assets......................................... 92,157 94,546
-------- --------
Deferred tax liabilities:
Depreciation on bank premises and equipment..................... 7,457 6,936
Net fair value adjustment for investment securities
available for sale............................................ 7,184 2,314
Net fair value adjustment for derivative instruments............ 26,566 16,883
Unrealized gains on investment securities....................... 2,276 --
Operating leases................................................ 6,808 6,424
Core deposit intangibles........................................ 3,460 2,777
Discount on loans............................................... 1,654 2,900
Equity investments in other financial institutions.............. 3,656 3,656
FHLB stock dividends............................................ 407 462
State taxes..................................................... 797 766
Other........................................................... 939 738
-------- --------
Deferred tax liabilities.................................... 61,204 43,856
-------- --------
Net deferred tax assets..................................... $ 30,953 50,690
======== ========
The realization of First Banks' net deferred tax assets is based on the
availability of carrybacks to prior taxable periods, the expectation of future
taxable income and the utilization of tax planning strategies. Based on these
factors, management believes it is more likely than not that First Banks will
realize the recognized net deferred tax assets of $30.9 million.
Changes to the deferred tax asset valuation allowance for the years
ended December 31 were as follows:
2002 2001 2000
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year......................................... $ -- 13,075 14,746
Current year deferred provision, change in
deferred tax valuation allowance............................... -- (8,104) (405)
Reduction attributable to utilization of deferred tax assets:
Adjustment to additional paid-in capital........................ -- (4,971) --
Adjustment to intangibles associated with the
purchase of subsidiaries..................................... -- -- (1,266)
-------- ------- -------
Balance, end of year............................................... $ -- -- 13,075
======== ======= =======
The valuation allowances were established by First Banks in connection
with three separate acquisitions that occurred in 1994 and 1995. First Banks
acquired BancTEXAS Group, Inc. in 1994 and CCB Bancorp, Inc. and First
Commercial Bancorp, Inc. in 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The ability to utilize the deferred tax assets recorded in connection
with these acquisitions was subject to a number of limitations. Among these
limitations was the restriction that net operating losses and other attributes
can only be used against income generated by the acquired subsidiaries and,
also, limitations were placed on the amount of net operating losses utilized
during a specified period. The requirement that BancTEXAS Group, Inc. file
separate Federal income tax returns placed further limitations on the ability to
utilize the deferred tax assets. The prior operating history of the three
acquired entities did not provide First Banks with adequate assurances to
conclude at the time of the acquisition that it was more likely than not that
the deferred tax assets would be realized.
During the years 1995 through 2000 to the extent that certain of the
deferred tax assets were realized, the valuation allowances were reduced
accordingly.
During 2001, based on management's analysis, it was determined that the
remaining valuation allowances were no longer needed. The reversal of the
valuation allowances that were established in connection with the acquisition of
BancTEXAS Group, Inc. and First Commercial Bancorp, Inc. were credited to
additional paid-in capital as a result of the entities' implementation of
quasi-reorganizations in 1994 and 1996. The reversal of the valuation allowance
established as a result of the acquisition of CCB Bancorp, Inc. was credited to
the provision for income taxes as there was no positive goodwill or other
intangibles associated with the purchase of CCB Bancorp, Inc.
The valuation allowance for deferred tax assets at December 31, 1999
included $1.3 million that was recognized in 2000 and credited to intangibles
associated with the purchase of subsidiaries. In addition, the valuation
allowance for deferred tax assets at December 31, 2000 included $5.0 million,
which was credited to additional paid-in capital in 2001 under the terms of the
quasi-reorganizations implemented for BancTEXAS Group, Inc. and First Commercial
Bancorp, Inc. as of December 31, 1994 and 1996, respectively.
At December 31, 2002 and 2001, the accumulation of prior years'
earnings representing tax bad debt deductions were approximately $30.8 million.
If these tax bad debt reserves were charged for losses other than bad debt
losses, First Bank and FB&T would be required to recognize taxable income in the
amount of the charge. It is not contemplated that such tax-restricted retained
earnings will be used in a manner that would create federal income tax
liabilities.
At December 31, 2002 and 2001, for federal income taxes purposes, First
Banks had net operating loss carryforwards of approximately $110.5 million and
$126.0 million, respectively. The net operating loss carryforwards for First
Banks expire as follows:
(dollars expressed
in thousands)
Year ending December 31:
2003......................................... $ 1,362
2004......................................... 856
2005......................................... 13,303
2006......................................... 3,412
2007......................................... 10,289
2008 - 2020.................................. 81,253
---------
Total.................................... $ 110,475
=========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations for the periods indicated:
Income Shares Per Share
(numerator) denominator) Amount
----------- ------------ ------
(dollars in thousands, except per share data)
Year ended December 31, 2002:
Basic EPS - income available to common stockholders............. $ 44,381 23,661 $1,875.69
Effect of dilutive securities:
Class A convertible preferred stock........................... 769 696 (22.05)
--------- ------- ---------
Diluted EPS - income available to common stockholders........... $ 45,150 24,357 $1,853.64
========= ======= =========
Year ended December 31, 2001:
Basic EPS - income before cumulative effect..................... $ 65,104 23,661 $2,751.54
Cumulative effect of change in accounting principle, net of tax. (1,376) -- (58.16)
--------- ------- ---------
Basic EPS - income available to common stockholders............. 63,728 23,661 2,693.38
Effect of dilutive securities:
Class A convertible preferred stock........................... 769 893 (66.61)
--------- ------- ---------
Diluted EPS - income available to common stockholders........... $ 64,497 24,554 $2,626.77
========= ======= =========
Year ended December 31, 2000:
Basic EPS - income available to common stockholders............. $ 55,321 23,661 $2,338.04
Effect of dilutive securities:
Class A convertible preferred stock........................... 769 1,076 (70.63)
--------- ------- ---------
Diluted EPS - income available to common stockholders........... $ 56,090 24,737 $2,267.41
========= ======= =========
(15) CREDIT COMMITMENTS
First Banks is a party to commitments to extend credit and commercial
and standby letters in credit in the normal course of business to meet the
financing needs of its customers. These instruments involve, in varying degrees,
elements of credit risk and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The interest rate risk associated
with these credit commitments relates primarily to the commitments to originate
fixed-rate loans. As more fully discussed in Note 5 to the accompanying
consolidated financial statements, the interest rate risk of the commitments to
originate fixed-rate loans has been hedged with forward contracts to sell
mortgage-backed securities. The credit risk amounts are equal to the contractual
amounts, assuming the amounts are fully advanced and the collateral or other
security is of no value. First Banks uses the same credit policies in granting
commitments and conditional obligations as it does for on-balance-sheet items.
At December 31, 2002, no amounts have been accrued for any estimated losses for
these financial instruments.
Commitments to extend credit at December 31 were as follows:
December 31,
-------------------------
2002 2001
---- ----
(dollars expressed in thousands)
Commitments to extend credit.......................................... $ 1,921,896 1,723,568
Commercial and standby letters of credit.............................. 188,567 137,345
----------- ---------
$ 2,110,463 1,860,913
=========== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The standby letters of credit at Decembr 31,
2002 expire within 14 years. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, income-producing commercial properties or
single family residential properties. In the event of nonperformance, First
Banks may obtain and liquidate the collateral to recover amounts paid under its
guarantees on these financial instruments.
Commercial and standby letters of credit are conditional commitments
issued to guarantee the performance of a customer to a third party. The letters
of credit are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. Most letters of credit extend for less than one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Upon issuance of the
commitments, First Banks typically holds marketable securities, certificates of
deposit, inventory, real property or other assets as collateral supporting those
commitments for which collateral is deemed necessary.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is management's estimate of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including the mortgage
banking operation, deferred tax assets, bank premises and equipment and
intangibles associated with the purchase of subsidiaries. Further, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on the fair value estimates and have not been
considered in any of the estimates.
The estimated fair value of First Banks' financial instruments at
December 31 were as follows:
2002 2001
------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(dollars expressed in thousands)
Financial Assets:
Cash and cash equivalents.......................... $ 203,251 203,251 241,874 241,874
Investment securities:
Available for sale............................... 1,120,894 1,120,894 610,466 610,466
Held to maturity................................. 16,426 16,978 20,602 20,812
Net loans.......................................... 5,333,149 5,355,838 5,311,705 5,346,853
Derivative instruments............................. 97,887 97,887 54,889 54,889
Accrued interest receivable........................ 35,638 35,638 37,349 37,349
Interest rate lock commitments..................... 1,258 1,258 (1,048) (1,048)
Forward contracts to sell mortgage-backed
securities....................................... (2,752) (2,752) 545 545
========== ========== ========== ==========
Financial Liabilities:
Deposits:
Demand:
Non-interest-bearing........................... $ 986,674 986,674 921,455 921,455
Interest-bearing............................... 819,429 819,429 629,015 629,015
Savings and money market......................... 2,176,616 2,176,616 1,832,939 1,832,939
Time deposits.................................... 2,190,101 2,239,882 2,300,495 2,342,892
Short-term borrowings............................ 265,644 265,644 243,134 243,134
Note payable..................................... 7,000 7,000 27,500 27,500
Accrued interest payable......................... 11,751 11,751 16,006 16,006
Guaranteed preferred beneficial interests
in subordinated debentures..................... 270,039 284,696 235,881 256,278
========== ========== ========== ==========
Off-Balance Sheet - Credit commitments............... $ -- -- -- --
========== ========== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following methods and assumptions were used in estimating the fair
value of financial instruments:
Financial Assets:
Cash and cash equivalents and accrued interest receivable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Investment securities: The fair value of investment securities
available for sale is the amount reported in the consolidated balance sheets.
The fair value of investment securities held to maturity is based on quoted
market prices where available. If quoted market prices were not available, the
fair value was based upon quoted market prices of comparable instruments.
Net loans: The fair value of most loans held for portfolio was
estimated utilizing discounted cash flow calculations that applied interest
rates currently being offered for similar loans to borrowers with similar risk
profiles. The fair value of loans held for sale, which is the amount reported in
the consolidated balance sheets, is based on quoted market prices where
available. If quoted market prices were not available, the fair value was based
upon quoted market prices of comparable instruments. The carrying value of loans
is net of the allowance for loan losses and unearned discount.
Derivative instruments: The fair value of derivative instruments is
based on quoted market prices where available. If quoted market prices were not
available, the fair value was based upon quoted market prices of comparable
instruments.
Forward contracts to sell mortgage-backed securities: The fair value of
forward contracts to sell mortgage-backed securities is based upon quoted market
prices. The fair value of these contracts has been reflected in the consolidated
balance sheets in the carrying value of the loans held for sale portfolio.
Financial Liabilities:
Deposits: The fair value disclosed for deposits generally payable on
demand (i.e., non-interest-bearing and interest-bearing demand, savings and
money market accounts) is considered equal to their respective carrying amounts
as reported in the consolidated balance sheets. The fair value disclosed for
demand deposits does not include the benefit that results from the low-cost
funding provided by deposit liabilities compared to the cost of borrowing funds
in the market. The fair value disclosed for certificates of deposit was
estimated utilizing a discounted cash flow calculation that applied interest
rates currently being offered on similar certificates to a schedule of
aggregated monthly maturities of time deposits.
Short-term borrowings, note payable, accrued interest payable and
interest rate lock commitments: The carrying values reported in the consolidated
balance sheets approximate fair value.
Guaranteed preferred beneficial interests in subordinated debentures:
The fair value is based on quoted market prices.
Off-Balance-Sheet:
Credit commitments: The majority of the commitments to extend credit
and commercial and standby letters of credit contain variable interest rates and
credit deterioration clauses and, therefore, the carrying value of these credit
commitments reported in the consolidated balance sheets approximates fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) EMPLOYEE BENEFITS
First Banks' 401(k) plan is a self-administered savings and incentive
plan covering substantially all employees. Under the plan, employer-matching
contributions are determined annually by First Banks' Board of Directors.
Employee contributions are limited to 15% of the employee's annual compensation,
not to exceed $12,000 for 2002. Total employer contributions under the plan were
$1.7 million, $1.3 million and $1.1 million for the years ended December 31,
2002, 2001 and 2000, respectively. The plan assets are held and managed under a
trust agreement with First Bank's trust department.
(18) PREFERRED STOCK
First Banks has two classes of preferred stock outstanding. The Class A
preferred stock is convertible into shares of common stock at a rate based on
the ratio of the par value of the preferred stock to the current market value of
the common stock at the date of conversion, to be determined by independent
appraisal at the time of conversion. Shares of Class A preferred stock may be
redeemed by First Banks at any time at 105.0% of par value. The Class B
preferred stock may not be redeemed or converted. The redemption of any issue of
preferred stock requires the prior approval of the Federal Reserve Board.
The holders of the Class A and Class B preferred stock have full voting
rights. Dividends on the Class A and Class B preferred stock are adjustable
quarterly based on the highest of the Treasury Bill Rate or the Ten Year
Constant Maturity Rate for the two-week period immediately preceding the
beginning of the quarter. This rate shall not be less than 6.0% nor more than
12.0% on the Class A preferred stock, or less than 7.0% nor more than 15.0% on
the Class B preferred stock. The annual dividend rates for the Class A and Class
B preferred stock were 6.0% and 7.0%, respectively, for the years ended December
31, 2002, 2001 and 2000.
In addition to the Class A and Class B preferred stock, First Banks has
five issues of trust preferred securities outstanding. The structure of the
trust preferred securities, as further described in Note 12, satisfies the
regulatory requirements for inclusion, subject to certain limitation, in First
Banks' capital base.
(19) TRANSACTIONS WITH RELATED PARTIES
Outside of normal customer relationships, no directors or officers of
First Banks, no shareholders holding over 5% of First Banks' voting securities
and no corporations or firms with which such persons or entities are associated
currently maintain or have maintained, since the beginning of the last full
fiscal year, any significant business or personal relationships with First Banks
or its subsidiaries, other than that which arises by virtue of such position or
ownership interest in First Banks or its subsidiaries, except as described in
the following paragraphs.
During 2001 and 2000, Tidal Insurance Limited (Tidal), a former
corporation owned indirectly by First Banks' Chairman and members of his
immediate family, received approximately $132,000 and $212,000, respectively, in
insurance premiums for accident, health and life insurance policies purchased by
loan customers of First Banks. The insurance policies were issued by an
unaffiliated company and subsequently ceded to Tidal. First Banks believes the
premiums paid by the loan customers of First Banks were comparable to those that
such loan customers would have paid if the premiums were subsequently ceded to
an unaffiliated third-party insurer.
During 2002, 2001 and 2000, First Title Guarantee LLC (First Title), a
corporation established and administered by and for the benefit of First Banks'
Chairman and members of his immediate family, received approximately $412,000,
$316,000 and $235,000, respectively, in commissions for policies purchased by
First Banks or customers of the Subsidiary Banks from unaffiliated, third-party
insurors. The insurance premiums on which the aforementioned commissions were
earned were competitively bid, and First Banks deems the commissions First Title
earned from unaffiliated third-party companies to be comparable to those that
would have been earned by an unaffiliated third-party agent.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $3.3 million, $3.0 million and $2.1 million for
the years ended December 31, 2002, 2001 and 2000, 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 members of his immediate family, 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 $26.8 million,
$23.1 million and $19.3 million for the years ended December 31, 2002, 2001 and
2000, respectively. During 2002, 2001 and 2000, First Services, L.P. paid First
Banks $3.9 million, $2.0 million and $1.8 million, respectively, in rental fees
for the use of data processing and other equipment owned by First Banks.
During 2002, First Capital America, Inc., a corporation owned by First
Banks' Chairman and members of his immediate family, received approximately $1.0
million of origination and servicing fees associated with commercial leases
originated and serviced for the Subsidiary Banks by the employees of First
Capital America, Inc.
First Banks' subsidiary banks have had in the past, and may have in the
future, loan transactions in the ordinary course of business with their
directors or their affiliates. These loan transactions have been and will be on
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unaffiliated persons and did not
involve more than the normal risk of collectibility or present other unfavorable
features. Loans to directors, their affiliates and executive officers of First
Banks, Inc., were approximately $12.8 million at December 31, 2002. First
Banks', susidiary banks do not extend credit to their officers or to officers of
First Banks, Inc., except extensions of credit secured by mortgages on personal
residences, loans to purchase automobiles and personal credit accounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) 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.
First Bank FB&T
--------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $ 648,732 245,365 214,005 465,747 368,207 330,478
Loans, net of unearned discount......... 3,128,677 3,086,023 2,694,005 2,303,912 2,323,263 2,058,628
Goodwill................................ 31,173 19,165 9,281 108,939 96,695 74,609
Total assets............................ 4,187,958 3,707,081 3,152,885 3,169,197 3,057,920 2,733,545
Deposits................................ 3,551,533 3,142,676 2,729,489 2,638,395 2,555,396 2,306,469
Note payable............................ -- -- -- -- -- --
Stockholders' equity.................... 375,521 321,336 273,848 402,027 398,713 333,186
========== ========== ========= ========= ========= =========
Income statement information:
Interest income......................... $ 235,727 236,889 247,290 188,631 208,291 176,902
Interest expense........................ 82,033 111,410 115,421 50,007 78,547 71,167
---------- ---------- --------- --------- --------- ---------
Net interest income................ 153,694 125,479 131,869 138,624 129,744 105,735
Provision for loan losses............... 23,900 18,500 12,250 31,600 5,010 1,877
---------- ---------- --------- --------- --------- ---------
Net interest income after
provision for loan losses........ 129,794 106,979 119,619 107,024 124,734 103,858
Noninterest income...................... 67,806 53,623 32,152 23,493 27,469 12,343
Noninterest expense..................... 143,416 105,550 90,746 86,104 89,112 65,567
---------- ---------- --------- --------- --------- ---------
Income before provision for
income taxes, minority
interest in income of
subsidiary and cumulative
effect of change in
accounting principle............. 54,184 55,052 61,025 44,413 63,091 50,634
Provision for income taxes.............. 18,056 19,246 20,889 17,276 16,972 20,064
---------- ---------- --------- --------- --------- ---------
Income before minority interest
in income of subsidiary
cumulative effect of change
in accounting principle.......... 36,128 35,806 40,136 27,137 46,119 30,570
Minority interest in
income of subsidiary............. -- -- -- -- -- --
---------- ---------- --------- --------- --------- ---------
Income before cumulative
effect of change in
accounting principle............ 36,128 35,806 40,136 27,137 46,119 30,570
Cumulative effect of change in
accounting principle, net of tax..... -- (917) -- -- (459) --
---------- ---------- --------- --------- --------- ---------
Net income......................... $ 36,128 34,889 40,136 27,137 45,660 30,570
========== ========== ========= ========= ========= =========
- ------------------------
(1) Corporate and other includes $15.6 million, $12.1 million and $8.6 million of guaranteed preferred debentures expense,
after applicable income tax benefit of $8.4 million, $6.5 million and $4.6 million, for the years ended December 31,
2002, 2001 and 2000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 generally accepted
accounting principles and practices predominant in the banking industry. Such
principles and practices are summarized in Note 1 to the consolidated financial
statements.
Corporate, Other and
Total Segments Intercompany Reclassifications (1) Consolidated Totals
-------------------------------------- ------------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
1,114,479 613,572 544,483 22,841 17,496 19,051 1,137,320 631,068 563,534
5,432,589 5,409,286 4,752,633 (1) (417) (368) 5,432,588 5,408,869 4,752,265
140,112 115,860 83,890 -- -- 1,131 140,112 115,860 85,021
7,357,155 6,765,001 5,886,430 (14,355) 13,450 (9,739) 7,342,800 6,778,451 5,876,691
6,189,928 5,698,072 5,035,958 (17,108) (14,168) (23,543) 6,172,820 5,683,904 5,012,415
-- -- -- 7,000 27,500 83,000 7,000 27,500 83,000
777,548 720,049 607,034 (258,507) (271,392) (254,188) 519,041 448,657 352,846
========== ========== ========== ========= ======== ======== ========== ========= =========
424,358 445,180 424,192 552 (437) (1,366) 424,910 444,743 422,826
132,040 189,957 186,588 24,700 19,647 14,264 156,740 209,604 200,852
---------- ---------- ---------- --------- -------- -------- ---------- --------- ---------
292,318 255,223 237,604 (24,148) (20,084) (15,630) 268,170 235,139 221,974
55,500 23,510 14,127 -- -- -- 55,500 23,510 14,127
---------- ---------- ---------- --------- -------- -------- ---------- --------- ---------
236,818 231,713 223,477 (24,148) (20,084) (15,630) 212,670 211,629 207,847
91,299 81,092 44,495 (1,844) 17,517 (1,717) 89,455 98,609 42,778
229,520 194,662 156,313 3,236 17,009 1,677 232,756 211,671 157,990
---------- ---------- ---------- --------- -------- -------- ---------- --------- ---------
98,597 118,143 111,659 (29,228) (19,576) (19,024) 69,369 98,567 92,635
35,332 36,218 40,953 (12,561) (6,170) (6,471) 22,771 30,048 34,482
---------- ---------- ---------- --------- -------- -------- ---------- --------- ---------
63,265 81,925 70,706 (16,667) (13,406) (12,553) 46,598 68,519 58,153
-- -- -- 1,431 2,629 2,046 1,431 2,629 2,046
---------- ---------- ---------- --------- -------- -------- ---------- --------- ---------
63,265 81,925 70,706 (18,098) (16,035) (14,599) 45,167 65,890 56,107
-- (1,376) -- -- -- -- -- (1,376) --
---------- ---------- ---------- --------- -------- -------- ---------- --------- ---------
63,265 80,549 70,706 (18,098) (16,035) (14,599) 45,167 64,514 56,107
========== ========== ========== ========= ======== ======== ========== ========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) 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 1 capital (as defined in the regulations)
to risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 2002, First Banks and the Subsidiary Banks were
each well capitalized.
As of December 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 1 risk-based and Tier 1 leverage ratios
as set forth in the table below.
At December 31, 2002 and 2001, First Banks' and the Subsidiary Banks'
required and actual capital ratios were as follows:
To be Well
Actual Capitalized Under
------------------ For Capital Prompt Corrective
2002 2001 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.68% 10.53% 8.0% 10.0%
First Bank.............................. 10.75 10.14 8.0 10.0
FB&T.................................... 10.18 11.27 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 7.47 7.57 4.0 6.0
First Bank.............................. 9.49 8.89 4.0 6.0
FB&T.................................... 8.93 10.02 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 6.45 7.24 3.0 5.0
First Bank.............................. 7.79 8.67 3.0 5.0
FB&T.................................... 8.26 9.47 3.0 5.0
(22) DISTRIBUTION OF EARNINGS OF THE SUBSIDIARY BANKS
The Subsidiary Banks are restricted by various state and federal
regulations, as well as by the terms of the Credit Agreement described in Note
11, as to the amount of dividends that are available for payment to First Banks,
Inc. Under the most restrictive of these requirements, the future payment of
dividends from the Subsidiary Banks is limited to approximately $31.3 million at
December 31, 2002, unless prior permission of the regulatory authorities and/or
the lending banks is obtained.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(23) PARENT COMPANY ONLY FINANCIAL INFORMATION
Following are condensed balance sheets of First Banks, Inc. as of
December 31, 2002 and 2001, and condensed statements of income and cash flows
for the years ended December 31, 2002, 2001 and 2000:
CONDENSED BALANCE SHEETS
December 31,
------------
2002 2001
---- ----
(dollars expressed in thousands)
Assets
------
Cash deposited in subsidiary banks........................................... $ 4,469 4,894
Investment securities........................................................ 22,841 17,497
Investment in subsidiaries................................................... 786,870 594,152
Advances to subsidiaries..................................................... -- 71,000
Other assets................................................................. 12,321 10,232
---------- --------
Total assets........................................................... $ 826,501 697,775
========== ========
Liabilities and Stockholders' Equity
------------------------------------
Note payable................................................................ $ 7,000 27,500
Subordinated debentures..................................................... 283,483 205,103
Accrued expenses and other liabilities...................................... 16,977 16,515
---------- --------
Total liabilities..................................................... 307,460 249,118
Stockholders' equity........................................................ 519,041 448,657
---------- --------
Total liabilities and stockholders' equity............................ $ 826,501 697,775
========== ========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
(dollars expressed in thousands)
Income:
Dividends from subsidiaries........................................ $ 28,000 53,500 43,000
Management fees from subsidiaries.................................. 21,754 20,443 17,325
Gain on sale of securities......................................... 97 19,134 --
Other.............................................................. 3,383 6,008 1,956
--------- ------ ------
Total income................................................... 53,234 99,085 62,281
--------- ------ ------
Expense:
Interest........................................................... 21,855 17,759 13,511
Salaries and employee benefits..................................... 15,726 13,309 12,180
Legal, examination and professional fees........................... 2,824 2,895 2,031
Other.............................................................. 7,917 20,339 4,422
--------- ------ ------
Total expense.................................................. 48,322 54,302 32,144
--------- ------ ------
Income before income tax benefit and equity
in undistributed earnings of subsidiary..................... 4,912 44,783 30,137
Income tax benefit................................................... (10,502) (2,418) (3,922)
--------- ------ ------
Income before equity in undistributed earnings of subsidiary... 15,414 47,201 34,059
Equity in undistributed earnings of subsidiary....................... 29,753 17,313 22,048
--------- ------ ------
Net income..................................................... $ 45,167 64,514 56,107
========= ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------
2002 2001 2000
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
Net income...................................................... $ 45,167 64,514 56,107
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income of subsidiaries.................................. (57,753) (70,730) (64,937)
Dividends from subsidiaries................................. 28,000 53,500 43,000
Other, net.................................................. 2,599 (3,875) 272
-------- -------- --------
Net cash provided by operating activities................ 18,013 43,409 34,442
-------- -------- -------
Cash flows from investing activities:
(Increase) decrease in investment securities.................... 261 (9,382) (860)
Investment in common securities of FBCT,
First Preferred III and First Preferred II.................... (774) (1,707) (1,778)
Acquisitions of subsidiaries.................................... (56,334) (63,767) --
Capital contributions to subsidiaries........................... (70) (5,900) (6,100)
Decrease (increase) in advances to subsidiary................... 34,000 27,000 (98,000)
Other, net...................................................... (9) 6,540 (1,464)
-------- -------- --------
Net cash used in investing activities.................... (22,926) (47,216) (108,202)
-------- -------- --------
Cash flows from financing activities:
Advances drawn on note payable.................................. 43,500 69,500 137,000
Repayments of note payable...................................... (64,000) (125,000) (118,000)
Proceeds from issuance of FBCT, First Preferred III and
First Preferred II subordinated debentures.................... 25,774 56,908 59,278
Payment of preferred stock dividends............................ (786) (786) (786)
-------- -------- --------
Net cash provided by financing activities................ 4,488 622 77,492
-------- -------- --------
Net (decrease) increase in cash
deposited in subsidiary banks.......................... (425) (3,185) 3,732
Cash deposited in subsidiary banks, beginning of year............. 4,894 8,079 4,347
-------- -------- --------
Cash deposited in subsidiary banks, end of year................... $ 4,469 4,894 8,079
======== ======== ========
Noncash investing activities:
Cash paid for interest.......................................... $ 21,855 21,068 10,410
Reduction of deferred tax valuation reserve..................... -- 636 --
======== ======== ========
(24) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty
contracts. For value received, and for the purpose of inducing a pension fund
and its trustees and a welfare fund and its trustees (the Funds) to conduct
business with Missouri Valley Partners, Inc. (MVP), First Bank's institutional
investment management subsidiary, First Banks irrevocably and unconditionally
guaranteed payment of and promised to pay to each of the Funds any amounts up to
the sum of $5,000,000 to the extent MVP is liable to the Funds for a breach of
the Investment Management Agreements (including the Investment Policy Statement
and Investment Guidelines), by and between MVP and the Funds and/or any
violation of the Employee Retirement Income Security Act by MVP resulting in
liability to the Funds. The guaranties are continuing guaranties of all
obligations that may arise for transactions occurring prior to termination of
the Investment Management Agreements and are co-existent with the term of the
Investment Management Agreements. The Investment Management Agreements have no
specified term but may be terminated at any time upon written notice by the
Trustees or, at First Banks' option, upon thirty days written notice to the
Trustees. In the event of termination of the Investment Management Agreements,
such termination shall have no effect on the liability of First Banks with
respect to obligations incurred before such termination. The obligations of
First Banks are joint and several with those of MVP. First Banks does not have
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
any recourse provisions that would enable it to recover from third parties any
amounts paid under the contracts nor does First Banks hold any assets as
collateral that, upon occurrence of a required payment under the contract, could
be liquidated to recover all or a portion of the amount(s) paid. At December 31,
2002, First Banks had not recorded a liability for the obligations associated
with these guaranty contracts as the likelihood that First Banks will be
required to make payments under the contracts is remote.
In the ordinary course of business, First Banks and its subsidiaries
become involved in legal proceedings. Management, in consultation with legal
counsel, believes the ultimate resolution of these proceedings will not have a
material adverse effect on the financial condition or results of operations of
First Banks and/or its subsidiaries.
(25) SUBSEQUENT EVENTS
On January 16, 2003, First Banks filed a Registration Statement on Form
S-2 (Registration Statement) with the Securities and Exchange Commission for the
registration of additional trust preferred securities. Under the terms of the
Registration Statement, First Banks formed First Preferred Capital Trust IV
(First Preferred IV), a Delaware business trust subsidiary. FPCT IV will issue
1.6 million shares (prior to the underwriters' over-allotment, which allows for
the issuance of up to 240,000 additional shares) of fixed rate cumulative trust
preferred securities at $25 per share in an underwritten public offering, and
will issue approximately 49,485 shares of common securities (prior to the
underwriters' over-allotment, which allows for the issuance of up to 7,423
additional common securities) to First Banks at $25 per share. First Banks will
own all of First Preferred IV's common securities. The gross proceeds of the
offering will be used by First Preferred IV to purchase approximately $41.2
million of fixed rate subordinated debentures (prior to the underwriters'
over-allotment, which allows for the purchase of up to $6.2 million of
additional subordinated debentures) from First Banks, maturing on June 30, 2033.
The maturity date may be shortened to a date not earlier than June 30, 2033, if
certain conditions are met. The subordinated debentures will be the sole asset
of First Preferred IV. In connection with the issuance of the preferred
securities, First Banks will make certain guarantees and commitments that, in
the aggregate, constitute a full and unconditional guarantee by First Banks of
the obligations of First Preferred IV under the First Preferred IV preferred
securities. First Banks' proceeds from the issuance of the subordinated
debentures to First Preferred IV, net of underwriting fees and offering
expenses, are expected to be approximately $38.4 million. Distributions on First
Preferred IV's preferred securities will be payable quarterly in arrears,
beginning on June 30, 2003, and will be included in interest expense in the
consolidated statements of income. First Banks expects to use the entire net
proceeds of the offering to redeem the subordinated debentures associated with
the 9.25% trust preferred securities issued by First Preferred Capital Trust, in
1997. Currently, there is approximately $88.9 million in principal amount of
such subordinated debentures. The remaining funds necessary to complete this
redemption of $50.5 million will be provided from available cash of
approximately $10.4 million, the issuance of $25.0 million of additional trust
preferred securities in a private placement to qualified institutional buyers,
as described below, and borrowings under First Banks' revolving credit line with
a group of unaffiliated financial institutions, as described in Note 11. First
Banks expects this transaction to be completed during the second quarter of
2003.
On March 20, 2003, First Bank Statutory Trust (FBST), a newly formed
Connecticut statutory trust subsidiary of First Banks, issued 25,000 shares of
8.10% cumulative trust preferred securities at $1,000 per share in a private
placement, and issued 774 shares of common securities to First Banks at $1,000
per share. First Banks owns all of the common securities of FBST. The gross
proceeds of the offering were used by FBST to purchase $25.0 million of 8.10%
junior subordinated debentures from First Banks, maturing on March 20, 2033. The
maturity date of the subordinated debentures may be shortened to a date not
earlier than March 20, 2008, if certain conditions are met. The subordinated
debentures are the sole asset of FBST. In connection with the issuance of the
FBST preferred securities, First Banks made certain guarantees and commitments
that, in the aggregate, constitute a full and unconditional guarantee by First
Banks of the obligations of FBST under the FBST preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to FBST, net of
offering expenses, were $24.5 million. Distributions on FBST's preferred
securities are payable quarterly in arrears, beginning March 31, 2003, and will
be included in interest expense in the consolidated statements of income.
QUARTERLY CONDENSED FINANCIAL DATA -- UNAUDITED
2002 Quarter Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands)
Interest income.............................................. $ 106,612 107,303 105,811 105,184
Interest expense............................................. 42,490 41,615 37,630 35,005
--------- -------- ------- --------
Net interest income...................................... 64,122 65,688 68,181 70,179
Provision for loan losses.................................... 13,000 12,000 13,700 16,800
--------- -------- ------- --------
Net interest income after provision for loan losses...... 51,122 53,688 54,481 53,379
Noninterest income........................................... 18,835 20,529 25,476 24,615
Noninterest expense.......................................... 56,858 59,220 59,154 57,524
--------- -------- ------- --------
Income before provision for income taxes and
minority interest in income of subsidiary.............. 13,099 14,997 20,803 20,470
Provision for income taxes................................... 4,771 5,328 7,372 5,300
--------- -------- ------- --------
Income before minority interest in
income of subsidiary................................... 8,328 9,669 13,431 15,170
Minority interest in income of subsidiary.................... 328 301 437 365
--------- -------- ------- --------
Net income............................................... $ 8,000 9,368 12,994 14,805
========= ======== ======= ========
Earnings per common share:
Basic.................................................... $ 329.84 390.35 540.87 614.64
========= ======== ======= ========
Diluted.................................................. $ 328.30 384.48 534.32 609.63
========= ======== ======= ========
2001 Quarter Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
--------- ------- ------------ -----------
(dollars expressed in thousands)
Interest income.............................................. $ 116,037 113,356 110,724 104,626
Interest expense............................................. 58,629 55,261 50,950 44,764
--------- -------- ------- --------
Net interest income...................................... 57,408 58,095 59,774 59,862
Provision for loan losses.................................... 3,390 3,720 6,800 9,600
--------- -------- ------- --------
Net interest income after provision for loan losses...... 54,018 54,375 52,974 50,262
Noninterest income........................................... 16,474 19,424 21,846 40,865
Noninterest expense.......................................... 47,129 59,909 50,323 54,310
--------- -------- ------- --------
Income before provision for income taxes, minority
interest in income of subsidiary and cumulative
effect of change in accounting principle................ 23,363 13,890 24,497 36,817
Provision for income taxes................................... 9,124 5,457 9,539 5,928
--------- -------- ------- --------
Income before minority interest in income
of subsidiary and cumulative effect
of change in accounting principle...................... 14,239 8,433 14,958 30,889
Minority interest in income of subsidiary.................... 511 534 577 1,007
--------- -------- ------- --------
Income before cumulative effect of change in
accounting principle................................... 13,728 7,899 14,381 29,882
Cumulative effect of change in accounting
principle, net of tax.................................... (1,376) -- -- --
--------- -------- ------- --------
Net income............................................... $ 12,352 7,899 14,381 29,882
========= ======== ======= ========
Earnings per common share:
Basic:
Income before cumulative effect of change in
accounting principle................................. $ 571.94 328.27 599.47 1,251.86
Cumulative effect of change in accounting principle.... (58.16) -- -- --
--------- -------- ------- --------
Basic.................................................. $ 513.78 328.27 599.47 1,251.86
========= ======== ======= ========
Diluted:
Income before cumulative effect of change in
accounting principle................................. $ 561.09 322.78 587.93 1,225.79
Cumulative effect of change in accounting principle.... (58.16) -- -- --
--------- -------- ------- --------
Diluted................................................ $ 502.93 322.78 587.93 1,225.79
========= ======== ======= ========
INVESTOR INFORMATION
FIRST BANKS, INC. PREFERRED SECURITIES
- --------------------------------------
The preferred securities of First Preferred Capital Trust, First
Preferred Capital Trust II and First Preferred Capital Trust III are traded on
the Nasdaq National Market System with the ticker symbols "FBNKO," "FBNKN" and
"FBNKM," respectively. As of March 25, 2003, there were approximately 370 record
holders of First Preferred Capital Trust. This number does not include any
persons or entities that hold their preferred securities in nominee or "street"
name through various brokerage firms. The preferred securities of First
Preferred Capital Trust II and First Preferred Capital Trust III are represented
by a global security that has been deposited with and registered in the name of
The Depository Trust Company, New York, New York (DTC). The beneficial ownership
interests of these preferred securities are recorded through the DTC book-entry
system. The high and low preferred securities prices and the dividends declared
for 2002 and 2001 are summarized as follows:
FIRST PREFERRED CAPITAL TRUST (ISSUE DATE - FEBRUARY 1997) - FBNKO
2002 2001 Dividend
-------------- --------------
High Low High Low Declared
---- --- ---- --- --------
First quarter............................................ $26.25 25.20 26.25 24.38 $ 0.578125
Second quarter........................................... 27.24 25.15 27.35 25.00 0.578125
Third quarter............................................ 26.49 25.00 27.25 25.00 0.578125
Fourth quarter........................................... 26.50 25.20 26.90 25.02 0.578125
FIRST PREFERRED CAPITAL TRUST II (ISSUE DATE - OCTOBER 2000) - FBNKN
2002 2001 Dividend
-------------- -----------------
High Low High Low Declared
---- --- ---- --- ---------
First quarter............................................ $28.50 27.55 27.75 26.38 $ 0.640000
Second quarter........................................... 28.40 26.85 27.40 26.25 0.640000
Third quarter............................................ 28.65 27.85 28.50 26.95 0.640000
Fourth quarter........................................... 28.25 27.30 28.30 27.00 0.640000
FIRST PREFERRED CAPITAL TRUST III (ISSUE DATE - NOVEMBER 2001) - FBNKM
2002 Dividend 2001 Dividend
--------------- ---------------
High Low Declared High Low Declared
---- --- --------- ---- --- ---------
First quarter................................. $26.75 25.90 $ 0.562500 -- -- $ --
Second quarter................................ 27.22 26.25 0.562500 -- -- --
Third quarter................................. 27.00 26.50 0.562500 -- -- --
Fourth quarter................................ 27.05 26.50 0.562500 26.10 25.25 0.281250
The preferred securities of First America Capital Trust are traded on
the New York Stock Exchange with the ticker symbol "FBAPrT." As of March 25,
2003, there were approximately 180 record holders of preferred securities. This
number does not include any persons or entities that hold their preferred
securities in nominee or "street" name through various brokerage firms. The high
and low preferred securities prices and the dividends declared for 2002 and 2001
are summarized as follows:
FIRST AMERICA CAPITAL TRUST (ISSUE DATE - JULY 1998) - FBAPRT
2002 2001 Dividend
-------------- -----------------
High Low High Low Declared
---- --- ---- --- --------
First quarter............................................ $25.90 24.70 25.00 21.63 $ 0.531250
Second quarter........................................... 25.38 24.75 25.05 23.95 0.531250
Third quarter............................................ 25.65 24.85 25.80 24.80 0.531250
Fourth quarter........................................... 25.75 24.80 25.67 24.75 0.531250
INVESTOR INFORMATION (CONTINUED)
FOR INFORMATION CONCERNING FIRST BANKS, PLEASE CONTACT:
Allen H. Blake Lisa K. Vansickle
President and Chief Financial Officer Senior Vice President and Controller
600 James S. McDonnell Boulevard 600 James S. McDonnell Boulevard
Mail Code - M1-199-014 Mail Code - M1-199-014
Hazelwood, Missouri 63042 Hazelwood, Missouri 63042
Telephone - (314) 592-5000 Telephone - (314) 592-5000
www.firstbanks.com www.firstbanks.com
TRANSFER AGENT:
U. S. Bank Corporate Trust Services
One Federal Street, Third Floor
Boston, Massachusetts 02110
Telephone - (800) 934-6802
www.usbank.com
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANKS, INC.
By: /s/ James F. Dierberg
------------------------------------------
James F. Dierberg
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: March 28, 2003
By: /s/ Allen H. Blake
-------------------------------------------
Allen H. Blake
President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
Signatures Title Date
- -------------------------------------------------------------------------------------------------------------------
/s/ James F. Dierberg Director March 28, 2003
------------------------------------------
James F. Dierberg
/s/ Allen H. Blake Director March 28, 2003
------------------------------------------
Allen H. Blake
/s/ Donald W. Williams Director March 28, 2003
------------------------------------------
Donald W. Williams
/s/ Michael J. Dierberg Director March 28, 2003
------------------------------------------
Michael J. Dierberg
/s/ Gordon A. Gundaker Director March 28, 2003
------------------------------------------
Gordon A. Gundaker
/s/ David L. Steward Director March 28, 2003
------------------------------------------
David L. Steward
/s/ Hal J. Upbin Director March 28, 2003
------------------------------------------
Hal J. Upbin
/s/ Douglas H. Yaeger Director March 28, 2003
------------------------------------------
Douglas H. Yaeger
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3(i) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993).
3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 3.2
to Amendment No. 2 to the Company's Registration Statement on Form
S-1, File No. 33-50576, dated September 15, 1992).
4.1 Reference is made to Article III of the Company's Restated Articles of
Incorporation (incorporated herein by reference to Exhibit 3.1 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1997).
4.2 The Company agrees to furnish to the Securities and Exchange
Commission upon request pursuant to Item 601(b)(4)(iii) of Regulation
S-K, copies of instruments defining the rights of holders of long term
debt of the Company and its subsidiaries.
4.3 Agreement as to Expenses and Liabilities (relating to First Preferred
Capital Trust ("First Preferred I") (incorporated herein by reference
to Exhibit 4(a) to the Company's Report on Form 10-Q for the quarter
ended March 31, 1997).
4.4 Agreement as to Expenses and Liabilities dated October 19, 2000
(relating to First Preferred Capital Trust II ("First Preferred II")
(filed as Exhibit 4.8 to the Company's Registration Statement on Form
S-2, File No. 333-46270, dated September 20, 2000).
4.5 Agreement as to Expenses and Liabilities between First Banks, Inc. and
First Preferred Capital Trust III, dated November 15, 2001 (relating
to First Preferred Capital Trust III ("First Preferred III") (filed as
Exhibit 4.8 to the Company's Registration Statement on Form S-2, File
No. 333-71652, dated October 15, 2001).
4.6 Preferred Securities Guarantee Agreement (relating to First Preferred
I) (incorporated herein by reference to Exhibit 4(b) to the Company's
Report on Form 10-Q for the quarter ended March 31, 1997).
4.7 Preferred Securities Guarantee Agreement by and between First Banks,
Inc. and State Street Bank and Trust Company of Connecticut, National
Association, dated October 19, 2000 (relating to First Preferred II)
(filed as Exhibit 4.7 to the Company's Registration Statement on Form
S-2, File No. 333-46270, dated September 20, 2000).
4.8 Preferred Securities Guarantee Agreement by and between First Banks,
Inc. and State Street Bank and Trust Company of Connecticut, National
Association, dated November 15, 2001 (relating to First Preferred III)
(filed as Exhibit 4.7 to the Company's Registration Statement on Form
S-2, File No. 333-71652, dated October 15, 2001).
4.9 Indenture (relating to First Preferred I) (incorporated herein by
reference to Exhibit 4(c) to the Company's Report on Form 10-Q for the
quarter ended March 31, 1997).
4.10 Indenture between First Banks, Inc. and State Street Bank and Trust
Company of Connecticut, National Association, as Trustee, dated
October 19, 2000 (relating to First Preferred II) (filed as Exhibit
4.1 to the Company's Registration Statement on Form S-2, File No.
333-46270, dated September 20, 2000).
4.11 Indenture between First Banks, Inc. and State Street Bank and Trust
Company of Connecticut, National Association, as Trustee, dated
November 15, 2001 (relating to First Preferred III) (filed as Exhibit
4.1 to the Company's Registration Statement on Form S-2, File No.
333-71652, dated October 15, 2001).
4.12 Amended and Restated Trust Agreement (relating to First Preferred I)
(incorporated herein by reference to Exhibit 4(d) to the Company's
Report on Form 10-Q for the quarter ended March 31, 1997).
4.13 Amended and Restated Trust Agreement among First Banks, Inc., as
Depositor, State Street Bank and Trust Company of Connecticut,
National Association, as Property Trustee, Wilmington Trust Company,
as Delaware Trustee, and the Administrative Trustees, dated October
19, 2000 (relating to First Preferred II) (filed as Exhibit 4.5 to the
Company's Registration Statement on Form S-2, File No. 333-46270,
dated September 20, 2000).
4.14 Amended and Restated Trust Agreement among First Banks, Inc., as
Depositor, State Street Bank and Trust Company of Connecticut,
National Association, as Property Trustee, Wilmington Trust Company,
as Delaware Trustee, and the Administrative Trustees, dated November
15, 2001 (relating to First Preferred III) (filed as Exhibit 4.5 to
the Company's Registration Statement on Form S-2, File No. 333-71652,
dated October 15, 2001).
4.15 Indenture between First Banks, Inc. as Issuer, and Wilmington Trust
Company, as Trustee, dated as of April 10, 2002 (incorporated herein
by reference to Exhibit 4.15 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002).
4.16 Guarantee Agreement for First Bank Capital Trust, dated as of April
10, 2002 (incorporated herein by reference to Exhibit 4.16 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
4.17 Amended and Restated Declaration of Trust of First Bank Capital Trust,
dated as of April 10, 2002 (incorporated herein by reference to
Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
4.18 Floating Rate Junior Subordinated Debt Security Certificate of First
Banks, Inc., dated April 10, 2002 (incorporated herein by reference to
Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
4.19 Capital Security Certificate of First Bank Capital Trust, dated as of
April 10, 2002 (incorporated herein by reference to Exhibit 4.19 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002).
10.1 Shareholders' Agreement by and among James F. Dierberg II and Mary W.
Dierberg, Trustees under the Living Trust of James F. Dierberg II,
dated July 24, 1989, Michael James Dierberg and Mary W. Dierberg,
Trustees under the Living Trust of Michael James Dierberg, dated July
24, 1989; Ellen C. Dierberg and Mary W. Dierberg, Trustees under the
Living Trust of Ellen C. Dierberg dated July 17, 1992, and First
Banks, Inc. (incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, File No 33-50576, dated
August 6, 1992).
10.2 Comprehensive Banking System License and Service Agreement dated as of
July 24, 1991, by and between the Company and FiServ CIR, Inc.
(incorporated herein by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1, File No. 33-50576, dated August 6,
1992).
10.3* Employment Agreement by and among the Company, First Bank and Donald
W. Williams, dated March 22, 1993 (incorporated herein by reference to
Exhibit 10(iii)(A) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
10.4 $110,000,000 Secured Credit Agreement, dated as of August 22, 2002,
among First Banks, Inc. and Wells Fargo Bank Minneapolis, National
Association, American National Bank & Trust Company of Chicago, The
Northern Trust Company, Union Bank of California N.A., SunTrust Bank,
Nashville and Fifth Third Bank (incorporated herein by reference to
Exhibit B to the Company's Schedule 13-E, dated October 8, 2002).
10.5 First Amendment to Secured Credit Agreement, dated as of December 31,
2002, by and among First Banks, Inc. and Wells Fargo Bank Minneapolis,
National Association, American National Bank & Trust Company of
Chicago, The Northern Trust Company, Union Bank of California N.A.,
SunTrust Bank, Nashville and Fifth Third Bank (incorporated herein by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-2, File No. 333-102549, dated January 16, 2003).
10.6 Stock Purchase and Operating Agreement by and between the Company and
BancTEXAS Group, Inc., dated May 19, 1994 (incorporated herein by
reference to Exhibit 2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994).
10.7* Service Agreement by and between First Services, L.P. and First
Banks, Inc., dated October 15, 2001 (incorporated herein by reference
to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.8* Service Agreement by and between First Services, L.P. and First Bank,
dated October 15, 2001 (incorporated herein by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.9* Service Agreement by and between First Services, L.P. and First Banc
Mortgage, Inc., dated October 15, 2001 (incorporated herein by
reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).
10.10* Service Agreement by and between First Services, L.P. and First Bank
& Trust, dated October 15, 2001 (incorporated herein by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001).
21.1 Subsidiaries of the Company - filed herewith.
99.1 Certification of Periodic Report - Chief Executive Officer - filed
herewith.
99.2 Certification of Periodic Report - Chief Financial Officer - filed
herewith.
- --------------------------
* Exhibits designated by an asterisk in the Index to Exhibits relate to
management contracts and/or compensatory plans or arrangements.
CERTIFICATION
REQUIRED BY RULES 13A-14 AND 15D-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, James F. Dierberg, certify that:
1. I have reviewed this annual report on Form 10-K of First Banks, Inc. (the
"registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "evaluation date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the evaluation date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data, and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
FIRST BANKS, INC.
By:/s/ James F. Dierberg
-------------------------------------------
James F. Dierberg
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
REQUIRED BY RULES 13A-14 AND 15D-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Allen H. Blake, certify that:
1. I have reviewed this annual report on Form 10-K of First Banks, Inc. (the
"registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "evaluation date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the evaluation date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data, and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
FIRST BANKS, INC.
By:/s/ Allen H. Blake
-------------------------------------------
Allen H. Blake
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
EXHIBIT 21.1
FIRST BANKS, INC.
Subsidiaries
The following is a list of our subsidiaries and the jurisdiction of
incorporation or organization.
Jurisdiction of Incorporation
Name of Subsidiary of Organization
------------------ ---------------
The San Francisco Company Delaware
First Bank Missouri
First Land Trustee Corp. Missouri
FB Commercial Finance, Inc. Missouri
First Banc Mortgage, Inc. Missouri
Missouri Valley Partners, Inc. Missouri
Star Lane Holdings Trust Statutory Trust Connecticut
Star Lane Trust New York
First Bank & Trust California
Bank of San Francisco Realty Investors, Inc. California
EXHIBIT 99.1
CERTIFICATION OF PERIODIC REPORT
I, James F. Dierberg, Chairman of the Board of Directors and Chief
Executive Officer of First Banks, Inc. (the Company), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the annual period
ended December 31, 2002 (the Report) fully complies with the requirements of
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: March 28, 2003
/s/ James F. Dierberg
-----------------------------------------
James F. Dierberg
Chairman of the Board of Directors
and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to First Banks, Inc. and will be retained by First Banks, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 99.2
CERTIFICATION OF PERIODIC REPORT
I, Allen H. Blake, President and Chief Financial Officer of First
Banks, Inc. (the Company), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the annual period
ended December 31, 2002 (the Report) fully complies with the requirements of
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: March 28, 2003
/s/ Allen H. Blake
-----------------------------------------
Allen H. Blake
President and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to First Banks, Inc. and will be retained by First Banks, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.