10-Q 1 alleg10q.txt FORM 10-Q FOR ALLEGIANT BANCORP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2001 ------------------------------------------------ Commission file number 0-26350 -------------------------------------------------------- ALLEGIANT BANCORP, INC. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MISSOURI 43-1519382 ------------------------------ ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 2122 KRATKY ROAD ST. LOUIS, MISSOURI 63114 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (314) 692-8200 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No Number of shares Title of class outstanding as of August 1, 2001 ------------------------------------ ----------------------------------------- Common stock, $0.01 par value 9,000,395 ALLEGIANT BANCORP, INC. FORM 10-Q INDEX Page PART 1. FINANCIAL INFORMATION................................................1 ITEM 1. FINANCIAL STATEMENTS...............................................1 CONDENSED CONSOLIDATED BALANCE SHEETS - JUNE 30, 2001 AND 2000 (UNAUDITED) AND DECEMBER 31, 2000...............................1 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000..............................2 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) - SIX MONTHS ENDED JUNE 30, 2001.........................................3 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - SIX MONTHS ENDED JUNE 30, 2001............................................................4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.......................5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................8 DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST RATES - THREE MONTHS ENDED JUNE 30, 2001...................11 DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST RATES - SIX MONTHS ENDED JUNE 30, 2001 AND 2000............12 RATE/VOLUME ANALYSIS - QUARTER AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000................................................................13 INVESTMENT SECURITIES PORTFOLIO...........................................15 LENDING AND CREDIT MANAGEMENT.............................................16 RISK ELEMENTS - NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS..............17 SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION...................19 DEPOSIT LIABILITY COMPOSITION - JUNE 30, 2001 AND 2000, AND DECEMBER 31, 2000.......................................................20 LIQUIDITY MANAGEMENT AND CAPITAL RESOURCES................................21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........23 PART II. OTHER INFORMATION..................................................23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................24 SIGNATURES................................................................25 EXHIBIT INDEX.............................................................26 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALLEGIANT BANCORP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS

1 ALLEGIANT BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

2 ALLEGIANT BANCORP, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

3 ALLEGIANT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

4 ALLEGIANT BANCORP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of Allegiant Bancorp, Inc. and our subsidiaries. The terms "Allegiant," "company," "we" and "our" as used in this report refer to Allegiant Bancorp, Inc. and our subsidiaries as a consolidated entity, except where it is made clear that it means only the parent holding company. Also, sometimes we refer to Allegiant Bank, our bank subsidiary, as the "bank." The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2000. Comprehensive Income During the second quarter of 2001 and 2000, total comprehensive income amounted to $2.8 million and $1.6 million, respectively. Year-to-date comprehensive income for the first half of 2001 and 2000 was $6.7 million and $3.2 million, respectively. Acquisitions In November 2000, we acquired Equality Bancorp, Inc. Equality Bancorp was the parent company of Equality Savings Bank, a Missouri state-chartered savings bank headquartered in St. Louis with seven locations, primarily in the Southern half of the greater St. Louis, Missouri metropolitan area. We exchanged approximately 2.7 million shares of our common stock for all of the outstanding common stock of Equality Bancorp. At closing, Equality Bancorp reported total assets of $300 million. On April 30, 2001, we entered into a definitive agreement for a merger with Southside Bancshares Corp. ("Southside"). Southside is a bank holding company with four subsidiary banks in and around St. Louis, Missouri and at June 30, 2001, reported consolidated total assets of $775 million. The merger, which is subject to shareholder and regulatory approval, is expected to close late in the third quarter or early in the fourth quarter of this year. Under the terms of the agreement, Southside shareholders will receive cash in the amount of $14 for 50% of their shares and 1.39 shares of the surviving company for each share of Southside stock for the other 50% of their common shares. Each Southside shareholder will be entitled to elect the 5 form of consideration to be received, subject to proration of the oversubscribed pool of consideration. Under the terms of the agreement, we expect to exchange a total of approximately 5.8 million shares of the surviving company common stock plus $59 million in cash for all of the outstanding common stock of Southside. In order to finance the cash consideration to be paid in the merger and related costs of approximately $6 million, we intend, immediately prior to the effective time of the merger, to issue approximately $30 to $35 million of trust preferred securities and to borrow up to $35 million from a bank. The merger with Southside will be accounted for in accordance with Statements of Accounting Standards No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets, which are discussed under "Recently Issued Accounting Standards." Derivative Financial Instruments. Our Company uses off-balance sheet derivatives as part of the overall asset and liability management process and to manage risk related to changes in interest rates. These financial derivatives consist of interest rate swaps. As of January 1, 2001, we adopted Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was issued in June 1998, and its amendments, Statement 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 and Statement 138, Accounting for Derivative Instruments and Certain Hedging Activities issued in June 1999 and June 2000, respectively (collectively referred to as "Statement 133"). The adoption of Statement 133 is applicable to our derivative financial instruments which include five interest rate swap contracts. The interest rate swaps hedge certificate of deposits (CD's) and are matched with the CD's as to final maturity, interest payment dates and call features. The interest rate swaps are a floating pay-fixed instrument and as such, they convert the fixed rate payment on the CD's to a floating rate and thus hedge the fair value of the CD's from changes in interest rates. Upon adoption of Statement 133, the cumulative effect of an accounting change in an amount equal to the accounting effects of the statement as of the beginning of the fiscal year was immaterial. During the three-month and six-month periods ended June 30, 2001, our Company recorded the effects of the ineffectiveness of all hedge transactions as part of the income statement line pertaining to each item. The after-tax effect of the changes was immaterial to our June 30, 2001 consolidated financial statements. 6 Recently Issued Accounting Standards Statement of Financial Accounting Standards No. 140 ("SFAS 140"), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued September 2000 and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities after March 31, 2001. Also, it is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management has not yet quantified the effect, if any, of this new standard on the consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairments tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $948,000 ($0.11 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of those tests will be on the earnings and financial position of the Company. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains certain forward-looking statements with respect to the financial condition, results of operations and business of Allegiant and our subsidiaries. These forward-looking statements involve certain risks and uncertainties. For example, by accepting deposits at fixed rates, at different times and for different terms, and lending funds at fixed rates for fixed periods, we accept the risk that the cost of funds may rise and interest on loans and investment securities may be at a fixed rate. Similarly, the cost of funds may fall, but we may have committed by virtue of the term of a deposit to pay what becomes an above-market rate. Investments may decline in value in a rising interest rate environment. Loans have the risk that the borrower will not repay all funds in a timely manner, as well as the risk of total loss. Collateral may or may not have the value attributed to it. The loan loss reserve, while believed adequate, may prove inadequate if one or more large borrowers, or numerous smaller borrowers, or a combination of both, experience financial difficulty for individual, national or international reasons. Because the business of banking is highly regulated, decisions of governmental authorities, such as the rate of deposit insurance, can have a major effect on operating results. All of these uncertainties, as well as others, are present in a banking operation and shareholders are cautioned that management's view of the future on which it prices our products, evaluates collateral, sets loan reserves and estimates costs of operation and regulation may prove to be other than anticipated. OVERVIEW The profitability of our operations depends on our net interest income, provision for loan losses, non-interest income and non-interest expense. Net interest income is the difference between the income we receive on our loan and investment portfolios and our cost of funds, which consists of interest paid on deposits and borrowings. The provision for loan losses reflects the cost of credit risk in our loan portfolio. Non-interest income consists primarily of service charges on deposit accounts and fees for ancillary banking services and, to a lesser extent, revenues generated from our mortgage banking, securities brokerage, insurance brokerage and trust operations. Non-interest expense includes salaries and employee benefits as well as occupancy, data processing, marketing, professional fees, insurance and other expenses. Net interest income is dependent on the amounts and yields of interest earning assets compared to the amounts and rates on interest bearing liabilities. Net interest income is sensitive to changes in market rates of interest and our asset/liability management procedures in managing those changes. The provision for loan losses is dependent on increases in the loan portfolio, management's assessment of the collectibility of the loan portfolio and loss experience, as well as economic and market factors. In order to improve the profitability of our banking operations, we have reduced the amount of one- to four-family mortgages we hold in our loan portfolio, while increasing the amount of higher yielding commercial loans. We also have hired several experienced banking professionals with experience in the St. Louis metropolitan area. We have concentrated our focus exclusively on opportunities in the higher-growth St. Louis metropolitan area and, accordingly, have opened new branches, acquired Equality and have entered into an agreement of merger with Southside. We also have implemented company-wide cost-control efforts to enhance efficiencies at our entire operations. 8 Our primary financial objectives are to continue to grow our loan portfolio while maintaining high asset quality, expand our core deposit base to provide a cost-effective and stable source of funding our loan portfolio and increase non-interest income while maintaining strong expense controls. We have sought to maintain high asset quality while managing growth both internally and by acquisition. RESULTS OF OPERATIONS Net income for the three months ended June 30, 2001 was $2.8 million, a 75% increase over the $1.6 million earned for the second quarter of 2000. Basic and diluted earnings per share increased 19% to $0.31 for the second quarter of 2001 compared to $0.26 for the second quarter of 2000. The annualized return on average assets for the second quarter of 2001 was 0.98% compared to 0.79% reported for the second quarter of 2000. The return on average equity on an annualized basis was 14% for the second quarter of 2001 compared to 13% for the second quarter of 2000. Net income for the six-month period ended June 30, 2001 was $5.4 million, a 69% increase over the $3.2 million earned for the six-month period ended June 30, 2000. Basic earnings per share increased 13% to $0.60 from $0.53, and diluted earnings per share increased 15% to $0.60 from $0.52 in the respective six-month periods. The annualized return on average assets was 0.95% and the annualized return on average equity was 13% for the six months ended June 30, 2001. This compares to, on an annualized basis, a return on average assets of 0.83% and a return on average equity of 13% for the corresponding period in 2000. We have utilized the purchase method of accounting to reflect our business combinations. The purchase method results in the recording of goodwill that is amortized as a non-cash charge included in operating expenses. Goodwill amortization included as an operating expense totaled $237,000 and $475,000, respectively, for both of the three- and six-month periods ended June 30, 2001 and 2000. Cash net income, which adjusts earnings to exclude goodwill amortization, was $3.0 million and $5.8 million, respectively, for the three and six months ended June 30, 2001, and $1.8 million and $3.7 million, respectively, for the three and six months ended June 30, 2000, respectively. Diluted cash earnings per share increased 13% to $0.34 in the second quarter of 2001 from $0.30 in the second quarter of 2000. Diluted cash earnings per share increased 8% to $0.65 for the six months ended June 30, 2001 from $0.60 in the 2000 period. Total assets at June 30, 2001 increased to $1.2 billion from $1.1 billion at December 31, 2000. Asset growth during the period was primarily in loans which, before the allowance for loan losses, increased $71 million, or 9% and investment securities which increased $29 million or 22%. Deposit balances increased $14 million, or 2%, during the first six months of 2001. Certificates of deposit decreased $17 million or 3% as we lowered our certificate of deposit rates. Money market deposits increased $17 million or 10% and savings deposits grew $8 million or 29% as we promoted these lower cost deposit products. Non-interest bearing deposits also increased $4 million or 5% during the first six months of 2001. Net Interest Income. Net interest income for the three months ended June 30, 2001 was $8.7 million, a 16% increase compared to $7.5 million reported for the second quarter of 2000. This $1.2 million increase was attributable to an increase of $314 million in average earning assets partially offset by a 101 basis point decrease in the yield on earning assets. The $4.5 million increase in interest income was partially offset by a $3.3 million increase in interest expense. The increase in interest expense was the result of a $277 million increase in average 9 interest bearing liabilities offset by a decrease of 25 basis points in the average interest rate paid between the periods. Net interest margin for the second quarter of 2001 decreased 72 basis points compared to the second quarter of 2000. The earning assets yield decreased 101 basis points and the overall interest rate paid on interest bearing deposits decreased 23 basis points. Accordingly, the net interest spread decreased 76 basis points in the second quarter of 2001 compared to the second quarter of 2000. Interest expense on deposits increased $2.7 million due to a $236 million increase in average interest bearing deposits, offset by a decrease in the rate paid on deposits from 5.30% in the second quarter of 2000 to 5.07% for the comparable quarter in 2001. The increase in interest expense on deposits consisted primarily of a $2.6 million increase in interest expense on certificates of deposit. The average balance of certificates of deposit increased by $178 million from the second quarter of 2001 to the second quarter of 2000. We have continued to build our deposit base while maintaining our focus on personal service. The growth in average balance of certificates of deposit was the result of special promotions of these products during 2000. Interest expense on other interest bearing liabilities increased $0.6 million in the second quarter of 2001 compared to the second quarter of 2000. Average short- and long-term borrowings also increased $41 million in the second quarter of 2001 compared to the second quarter of the prior year. The average rate on short-term borrowings decreased 19 basis points, while the rate paid on long-term borrowings in the second quarter of 2001 decreased 25 basis points compared to the second quarter of 2000. Net interest income for the six months ended June 30, 2001 was $17.7 million, a 20% increase compared to the $14.7 million reported for the corresponding period in 2000. This $3.0 million increase was attributable to an increase of $327 million in average earning assets and a 59 basis point decrease in the yield on earning assets. The $11.4 million increase in interest income was partially offset by a $8.4 million increase in interest expense. The increase in interest expense was the result of a $299 million increase in average interest bearing liabilities and an increase of 6 basis points in the average interest rate paid. Gross income was primarily attributable to the acquisition of Equality in November 2000, as well as internally generated growth. Net interest margin for the first six months of 2001 decreased 66 basis points compared to the corresponding period in 2000. The earning assets yield decreased 59 basis points primarily due to the effect of a decrease in the yield on floating interest rate loans. The overall interest rate paid on interest bearing deposits increased 10 basis points primarily due to the rates paid on certificates of deposit in the first six months of 2001 compared to 2000. Accordingly, the net interest spread decreased 65 basis points comparing the first six months of 2001 to the first six months of 2000. 10 The following tables set forth the condensed average balance sheets for the periods reported. Also shown is the average yield on each category of interest earning assets and the average rate paid on interest bearing liabilities for each of the periods reported. DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST RATES

11 DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY AND INTEREST RATES

12 The following table sets forth for the periods indicated the changes in interest income and interest expense which were attributable to changes in average volume and changes in average rates. Volume variances are computed using the change in volume multiplied by the previous year's rate. Rate variances are computed using the changes in rate multiplied by the previous year's volume. The change in interest due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each. RATE/VOLUME ANALYSIS

13 Other Income. Other income increased $1.8 million, or 109%, to $3.4 million for the three months ended June 30, 2001 compared to the second quarter of 2000. Service charge and other fee income for the three-month period ended June 30, 2001 increased $232,000, or 31%, compared to the second quarter of 2000. This increase was attributable to an increased deposit base and our focus on revenue enhancement programs. In March 2000, we made an investment in bank-owned life insurance that resulted in $213,000 of income for the second quarter of 2000 and $286,000 in the same period of 2001. For the quarter ended June 30, 2001, mortgage banking revenue was $1.1 million compared to $57,000 for the quarter ended June 30, 2000. The change was the result of an increase in mortgage refinancings as a result of lower overall market interest rates and from the acquisition of Equality's mortgage operations in November 2000. Other income increased $3.2 million, or 110%, from $2.9 million to $6.1 million for the six months ended June 30, 2000 and 2001, respectively. The reasons underlying the variations in other income categories discussed above for the three-month periods also were applicable to the year-to-date amounts. Other Expenses. For the three months ended June 30, 2001 compared to the second quarter of 2000, other expenses increased $1.4 million, or 25%, to $7.0 million from $5.6 million. The increase in other expenses includes increased salaries and benefit expense and the costs associated with operating the branches acquired from Equality in November 2000. Salaries and employee benefits increased 34% to $3.9 million for the three months ended June 30, 2001 compared to $2.9 million for the three months ended June 30, 2000. We had 318 full-time equivalent employees at June 30, 2001 compared to 219 full-time equivalent employees at June 30, 2000. Total annualized cost per full-time equivalent employee was $49,094 for the three months ended June 30, 2001 compared to $52,384 for the corresponding period of 2000. Expenses associated with premises and equipment also increased for the quarter ended June 30, 2001 compared to the second quarter of 2000, with occupancy expense increasing $212,000, or 47%, and furniture and equipment increasing $87,000, or 10%. The increases in these expense categories were directly related to additional costs associated with the former Equality branches. Our efficiency ratio was 57% for the quarter ended June 30, 2001 compared to 61% for the second quarter of 2000. This improvement reflected our commitment to improving our overall efficiency by continuing to emphasize revenue growth, while maintaining control over our operating costs as we continue to expand our banking franchise. For the six months ended June 30, 2001, other expenses increased $3.0 million, or 29%, to $13.5 million from $10.5 million for the corresponding period in 2000. The variances in expense categories discussed above for the three-month periods also applicable to the year-to-date amounts. Our efficiency ratio was 56% for the first six months of 2001 compared to 60% for the six months ended June 30, 2000. 14 Securities Portfolio. Our securities portfolio consists of securities classified as held-to-maturity and available-for-sale. We designate these securities upon purchase into one of these two categories. At June 30, 2001, held-to-maturity securities amounted to $5 million, representing those securities we intend to hold to maturity. Securities designated as available-for-sale totaled $158 million, representing securities which we may sell to meet liquidity needs or in response to significant changes in interest rates or prepayment patterns. For purposes of this discussion, held-to-maturity and available-for-sale securities are described as the securities portfolio. At June 30, 2001, the securities portfolio totaled $162 million, an increase of $28 million from December 31, 2000. We maintain a conventional short-term laddered portfolio investment strategy to afford adequate liquidity while minimizing interest rate risk. The carrying values of the securities portfolio at the dates indicated were as follows: INVESTMENT SECURITIES PORTFOLIO

Loans. Loans historically have been the primary component of earning assets. At June 30, 2001, loans totaled $885 million, an increase of 9% from year-end 2000. Substantially all of these loans were originated in our market area. At June 30, 2001, we had no foreign loans and only a minimal amount of participations purchased. Multi-family and commercial real estate mortgage loans increased $61 million, or 21%, during the first six months of 2001 while commercial loans increased $16 million or 10%. The increase in these loans reflected our continued efforts to grow our commercial loan portfolio, including loans originated by our expanded commercial lending staff. Real estate construction loans decreased $11 million, or 9%, at June 30, 2001 compared to December 31, 2000 as several construction projects were completed and the related loans originated in 2000 were paid down. Real estate construction loans comprised 13% of the loan portfolio at June 30, 2001, compared to 15% at December 31, 2000. Multi-family and commercial real estate mortgage loans comprised 40% of the portfolio at June 30, 2001 and 36% at year-end 2000. 15 The following table summarizes the composition of our loan portfolio at the dates indicated: LENDING AND CREDIT MANAGEMENT

Asset Quality. Non-performing assets consist of the following: non-accrual loans on which the ultimate collectibility of the full amount of interest is uncertain; loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial condition of the borrower; loans past due 90 days or more as to principal or interest; and other real estate owned. Non-performing assets increased to $9.3 million at June 30, 2001 compared to $7.8 million at March 31, 2001 and $3.3 million at December 31, 2000. At June 30, 2001, non-performing assets represented 0.80% of total assets compared to 0.69% at March 31, 2001 and 0.29% at December 31, 2000. Non-accrual loans totaled $6.9 million at June 30, 2001 compared to $5.9 million at March 31, 2001 and $814,000 at December 31, 2000. The increase was attributable to two real estate development loans which were transferred into non-performing loans during the first quarter of 2001 and one commercial loan which became non-performing in the second quarter of 2001. The bank is working with these borrowers to liquidate the loans and does not anticipate any loss beyond the specific losses already charged against earnings in addition to the specific reserves of $1.2 million already established. Excluding these three credits, our ratio of non-performing assets to total assets at June 30, 2001 would have been 0.34% compared to 0.29% at December 31, 2000. We continually analyze our loan portfolio to identify potential risk elements. The loan portfolio is reviewed by lending management and the bank's internal loan review staff. As an integral part of their examination process, the various regulatory agencies periodically review our allowance for loan losses. 16 The following table summarizes, at the date presented, non-performing assets by category: RISK ELEMENTS - NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS

17 Allowance for Loan Losses. The provision for loan losses was $1.7 million during the first six months of 2001 compared to $1.6 million for the first six months of 2000. Net charge-offs were $765,000 for the six months ended June 30, 2001 compared to $300,000 for the first six months of 2000. Net charge-offs for the first six months of 2001 represented 0.09% of average loans, compared to 0.05% of average loans for the first six months of 2000. The allowance for loan losses increased to $12.4 million at June 30, 2001 compared to $9.6 million at June 30, 2000. As a percentage of loans outstanding, the allowance represented 1.40% of loans at June 30, 2001 and December 31, 2000 and 1.36% at June 30, 2000. The higher expense provision and the higher allowance percentage were the result of the continuing change in the composition of the loan portfolio and the shift in our lending focus to higher yielding commercial relationships. This shift, while providing higher earnings potential, does entail greater risk than traditional residential mortgage loans. Additional weight has been given to the increased risks associated with the commercial real estate portfolio. Specific allowances have been increased on certain commercial real estate loans based on individual reviews of these loans and an estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow and collection options available to us. The specific review of these commercial real estate loans resulted in the increase in the percentage of allowances allocated to this loan category. The allowance for loan losses is provided at a level considered adequate to provide for potential losses and, among other things, is based on management's evaluation of the anticipated impact on the loan portfolio of current economic conditions, changes in the character and size of the loan portfolio and the evaluation of potential problem loans identified based on existing circumstances known to management. We continually monitor the quality of the loan portfolio to ensure the timely charge-off of problem loans and to determine the adequacy of the level of the allowance for loan losses. We presently believe that our asset quality, as measured by the statistics in the following table, continues to be very high and that our allowance was adequate to absorb potential losses inherent in the portfolio at June 30, 2001. 18 The following table summarizes, for the periods indicated, activity in the allowance for loan losses, including amounts of loans charged off, amounts of recoveries and additions to the allowance charged to operating expense. SUMMARY OF LOAN LOSS EXPERIENCE AND RELATED INFORMATION

19 Deposits. Total deposits increased $14 million, or 2%, during the first six months of 2001. Certificates of deposit decreased $17 million as we lowered rates on these accounts. NOW, savings and money market accounts increased by $27 million, or 12%, during the first six months of 2001 as we promoted these core deposit accounts. Non-interest bearing deposits increased by $4 million, or 5%, to $90 million at June 30, 2001. We have been successful in expanding our deposit base while maintaining our focus on personal service. Our lending officers have increased commercial deposits while our retail banking staff continues efforts to increase our core deposits. The following table summarizes deposits as of the dates indicated: DEPOSIT LIABILITY COMPOSITION

20 LIQUIDITY MANAGEMENT AND CAPITAL RESOURCES Liquidity Management. Long-term liquidity is a function of the core deposit base and an adequate capital base. We are committed to growth of our core deposit base and maintenance of our capital base. The growth of the deposit base has been attributable to acquisitions, as well as internally generated through product pricing and product development. During the six months ended June 30, 2001 and the year ended December 31, 2000, both of these elements contributed to developing and maintaining long-term liquidity. Our capital position has been maintained through earnings retention and raising of capital. See "- Capital Resources." Short-term liquidity needs arise from continuous fluctuations in the flow of funds on both sides of the balance sheet resulting from growth and seasonal and cyclical customer demands. The securities portfolio provides stable long-term earnings, as well as serves as a primary source of liquidity. The designation of securities as available-for-sale and held-to-maturity does not impact the portfolio as a source of liquidity due to the ability to enter into repurchase agreements using those securities. We anticipate continued loan demand in our market area as banking industry consolidation continues. We have utilized, and expect to continue to utilize, Federal Home Loan Bank borrowings to fund a portion of future loan growth. We have a $200 million secured credit facility with the Federal Home Loan Bank, under which $146 million and $143 million was outstanding at June 30, 2001 and December 31, 2000, respectively. Short-term borrowings decreased $31 million during the first half of 2001 while long-term borrowings increased $35 million. We continue to utilize Federal Home Loan Bank borrowings to fund loan growth while systematically building our deposit base. We anticipate similar use of the Federal Home Loan Bank facility in the foreseeable future. We experienced net growth in assets and deposits of 2% during the first six months of 2001. We continue to emphasize growth in stable core deposits while utilizing the Federal Home Loan Bank, federal funds purchased and brokered certificates of deposit as necessary to balance liquidity and cost effectiveness. We closely monitor our level of liquidity in view of expected future needs. Capital Resources. Total shareholders' equity was $84 million at June 30, 2001, compared to $78 million at year-end 2000. The increase in total equity was the result of earnings retention and an increase of $1.4 million in net unrealized gains on available-for-sale securities. Our capital requirements historically have been financed through offerings of debt and equity securities, retained earnings and borrowings from a commercial bank. The principal amount of our term loan was $12.6 million as of June 30, 2001, and matures in November 2001. Allegiant Bank also utilizes its borrowing capacity with the Federal Home Loan Bank. We previously have purchased brokered certificates of deposit in order to fund loan growth and meet other liquidity needs. At June 30, 2001, we had no brokered deposits outstanding. We may use brokered deposits in the future as a source of liquidity. 21 Dividends paid during the second quarter of 2001 were $0.06 per share, an increase of 9% compared to the $0.055 per share paid in April 2001 for the second quarter of 2001. Our dividend payout ratio was 19% for the first half of 2001. We also analyze our capital and the capital position of our bank in terms of regulatory risked-based capital guidelines. This analysis of capital is dependent upon a number of factors, including asset quality, earnings strength, liquidity, economic conditions and combinations thereof. The Federal Reserve Board has issued standards for measuring capital adequacy for bank holding companies. These standards are designed to provide risk-responsive capital guidelines and to incorporate a consistent framework for use by financial institutions. Our management believes that, as of June 30, 2001, we and our subsidiaries met all capital adequacy requirements. We will seek to maintain a strong equity base while executing our controlled expansion plans. As of June 30, 2001, December 31, 2000 and June 30, 2000, Allegiant's and Allegiant Bank's capital ratios were as follows:

In order to finance the cash consideration to be paid in the Southside acquisition and related costs of approximately $6 million, we intend, shortly prior to the merger, to sell approximately $30 to $35 million of trust preferred securities and to borrow up to $35 million from a bank. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2000. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our 2001 annual meeting of shareholders was held on April 19, 2001. Of 8,943,300 shares issued, outstanding and eligible to be voted at the meeting, holders of 7,388,530 shares, constituting a quorum, were represented in person or by proxy at the meeting. One matter was submitted to a vote of the security holders at the meeting. 1. ELECTION OF CLASS I DIRECTORS. The only matter submitted was the election of four Class I director nominees to our board of directors, each to continue in office until the year 2004. Our Articles of Incorporation, as amended, allow cumulative voting in all director elections and all shareholders were accordingly allowed to cumulate their votes for directors if they so desired. Upon tabulation of the votes cast, it was determined that all four director nominees had been elected. The voting results are set forth below:

Because our company has a staggered board, the terms of office of the following named Class II and Class III directors, who were not up for election at the 2001 annual meeting, continued after the meeting: CLASS II (TO CONTINUE IN OFFICE UNTIL 2002) ------------------------------------------- Robert L. Chambers Leland B. Curtis Shaun R. Hayes John L. Weiss CLASS III (TO CONTINUE IN OFFICE UNTIL 2003) -------------------------------------------- Leon A. Felman Michael R. Hogan Marvin S. Wool C. Virginia Kirkpatrick 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: See Exhibit Index attached hereto. b) Reports on Form 8-K: We filed a current report on Form 8-K on May 7, 2001 to report under item 5, our execution of a definitive agreement to merge with Southside Bancshares Corp. 24 SIGNATURES Pursuant to the requirements 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. The undersigned signs this report in his dual capacities as a duly authorized officer of the registrant and also as the registrant's Chief Financial Officer. ALLEGIANT BANCORP, INC. (Registrant) August 14, 2001 By: /s/ Thomas A. Daiber ----------------------------------------- Thomas A. Daiber, Senior Vice President and Chief Financial Officer 25 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 11.1 Computation of Earnings Per Share 26

ALLEGIANT BANCORP INC 10-Q