UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------- ---------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares Outstanding
Class at July 31, 2005
----- ------------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS............................................................... 1
CONSOLIDATED STATEMENTS OF INCOME......................................................... 2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME.............................................................. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................. 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 35
ITEM 4. CONTROLS AND PROCEDURES................................................................... 36
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 37
ITEM 6. EXHIBITS.................................................................................. 38
SIGNATURE............................................................................................. 39
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2005 2004
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks.............................................................. $ 180,355 149,605
Short-term investments............................................................... 48,759 117,505
---------- ---------
Total cash and cash equivalents................................................. 229,114 267,110
---------- ---------
Investment securities:
Available for sale................................................................... 1,723,578 1,788,063
Held to maturity (fair value of $24,823 and $25,586, respectively)................... 24,630 25,286
---------- ---------
Total investment securities..................................................... 1,748,208 1,813,349
---------- ---------
Loans:
Commercial, financial and agricultural............................................... 1,535,085 1,575,232
Real estate construction and development............................................. 1,353,589 1,318,413
Real estate mortgage................................................................. 3,182,089 3,061,581
Consumer and installment............................................................. 57,008 54,546
Loans held for sale.................................................................. 187,028 133,065
---------- ---------
Total loans..................................................................... 6,314,799 6,142,837
Unearned discount.................................................................... (5,119) (4,869)
Allowance for loan losses............................................................ (140,164) (150,707)
---------- ---------
Net loans....................................................................... 6,169,516 5,987,261
---------- ---------
Bank premises and equipment, net of accumulated depreciation and amortization............. 143,607 144,486
Goodwill.................................................................................. 154,664 156,849
Bank-owned life insurance................................................................. 109,168 106,788
Deferred income taxes..................................................................... 122,542 127,397
Other assets.............................................................................. 99,557 129,601
---------- ---------
Total assets.................................................................... $8,776,376 8,732,841
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand........................................................... $1,272,611 1,194,662
Interest-bearing demand.............................................................. 851,892 875,489
Savings.............................................................................. 2,228,140 2,249,644
Time deposits of $100 or more........................................................ 868,478 807,220
Other time deposits.................................................................. 1,989,609 2,024,955
---------- ---------
Total deposits.................................................................. 7,210,730 7,151,970
Other borrowings.......................................................................... 556,291 594,750
Note payable.............................................................................. -- 15,000
Subordinated debentures................................................................... 275,213 273,300
Deferred income taxes..................................................................... 29,159 34,812
Accrued expenses and other liabilities.................................................... 54,409 62,116
Minority interest in subsidiary........................................................... 7,350 --
---------- ---------
Total liabilities............................................................... 8,133,152 8,131,948
---------- ---------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued and outstanding....... -- --
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 5,910
Retained earnings......................................................................... 626,481 577,836
Accumulated other comprehensive loss...................................................... (8,145) (1,831)
---------- ---------
Total stockholders' equity...................................................... 643,224 600,893
---------- ---------
Total liabilities and stockholders' equity...................................... $8,776,376 8,732,841
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2005 2004 2005 2004
---- ---- ---- ----
Interest income:
Interest and fees on loans........................................... $ 99,442 83,755 193,612 167,975
Investment securities................................................ 17,395 12,693 34,944 24,314
Short-term investments............................................... 351 137 860 423
--------- -------- -------- --------
Total interest income........................................... 117,188 96,585 229,416 192,712
--------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................ 932 824 1,820 1,791
Savings............................................................ 6,331 4,593 12,075 9,370
Time deposits of $100 or more...................................... 6,246 3,039 11,600 5,995
Other time deposits................................................ 16,156 8,173 30,135 16,660
Other borrowings..................................................... 4,234 757 7,534 1,401
Note payable......................................................... 103 64 241 169
Subordinated debentures.............................................. 5,365 3,529 10,111 7,067
--------- -------- -------- --------
Total interest expense.......................................... 39,367 20,979 73,516 42,453
--------- -------- -------- --------
Net interest income............................................. 77,821 75,606 155,900 150,259
Provision for loan losses................................................. (8,000) 3,000 (8,000) 15,750
--------- -------- -------- --------
Net interest income after provision for loan losses............. 85,821 72,606 163,900 134,509
--------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees........ 10,177 9,792 19,476 18,741
Gain on loans sold and held for sale................................. 6,844 3,961 11,360 8,190
Gain on sales of branches, net of expenses........................... -- 630 -- 1,020
Bank-owned life insurance investment income.......................... 1,274 1,276 2,534 2,619
Investment management income......................................... 2,220 1,740 4,246 3,284
Other................................................................ 5,288 2,705 9,288 6,809
--------- -------- -------- --------
Total noninterest income........................................ 25,803 20,104 46,904 40,663
--------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits....................................... 34,548 28,203 67,478 55,889
Occupancy, net of rental income...................................... 5,226 4,433 10,465 9,070
Furniture and equipment.............................................. 3,814 4,290 7,838 8,703
Postage, printing and supplies....................................... 1,324 1,221 2,952 2,543
Information technology fees.......................................... 9,395 7,992 17,545 15,988
Legal, examination and professional fees............................. 2,082 1,688 4,453 3,251
Amortization of intangibles associated with
the purchase of subsidiaries....................................... 1,146 658 2,355 1,316
Communications....................................................... 466 399 975 864
Advertising and business development................................. 1,748 1,324 3,395 2,605
Charitable contributions............................................. 1,572 56 1,678 130
Other................................................................ 8,452 5,141 14,394 7,648
--------- -------- -------- --------
Total noninterest expense....................................... 69,773 55,405 133,528 108,007
--------- -------- -------- --------
Income before provision for income taxes........................ 41,851 37,305 77,276 67,165
Provision for income taxes................................................ 15,005 11,302 28,303 22,893
--------- -------- -------- --------
Net income...................................................... 26,846 26,003 48,973 44,272
Preferred stock dividends................................................. 132 132 328 328
--------- -------- -------- --------
Net income available to common stockholders..................... $ 26,714 25,871 48,645 43,944
========= ======== ======== ========
Basic earnings per common share........................................... $1,129.05 1,093.42 2,055.92 1,857.23
========= ======== ======== ========
Diluted earnings per common share......................................... $1,110.42 1,074.06 2,025.30 1,827.13
========= ======== ======== ========
Weighted average common stock outstanding................................. 23,661 23,661 23,661 23,661
========= ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Six Months Ended June 30, 2005 and 2004 and Six Months Ended December 31, 2004
(dollars expressed in thousands, except per share data)
Accu-
Adjustable Rate mulated
Preferred Stock Other
--------------- Compre- Total
Class A Additional hensive Stock-
Conver- Common Paid-In Retained Income holders'
tible Class B Stock Capital Earnings (Loss) Equity
----- ------- ----- ------- -------- ------ ------
Consolidated balances, December 31, 2003............. $12,822 241 5,915 5,910 495,714 29,213 549,815
-------
Six months ended June 30, 2004:
Comprehensive income:(1)
Net income..................................... -- -- -- -- 44,272 -- 44,272
Other comprehensive loss, net of tax:
Unrealized losses on securities.............. -- -- -- -- -- (19,116) (19,116)
Derivative instruments:
Current period transactions................ -- -- -- -- -- (18,695) (18,695)
-------
Total comprehensive income....................... 6,461
Class A preferred stock dividends,
0.50 per share................................. -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share................................ -- -- -- -- (7) -- (7)
------- --- ----- ----- ------- ------- -------
Consolidated balances, June 30, 2004................. 12,822 241 5,915 5,910 539,658 (8,598) 555,948
-------
Six months ended December 31, 2004:
Comprehensive income:
Net income..................................... -- -- -- -- 38,636 -- 38,636
Other comprehensive income (loss),
net of tax:
Unrealized gains on securities............... -- -- -- -- -- 13,405 13,405
Reclassification adjustment for gains
included in net income..................... -- -- -- -- -- (167) (167)
Derivative instruments:
Current period transactions................ -- -- -- -- -- (6,471) (6,471)
-------
Total comprehensive income....................... 45,403
Class A preferred stock dividends,
$0.70 per share................................ -- -- -- -- (448) -- (448)
Class B preferred stock dividends,
$0.07 per share................................ -- -- -- -- (10) -- (10)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2004............. 12,822 241 5,915 5,910 577,836 (1,831) 600,893
-------
Six months ended June 30, 2005:
Comprehensive income:(1)
Net income..................................... -- -- -- -- 48,973 -- 48,973
Other comprehensive loss, net of tax:
Unrealized losses on securities ............. -- -- -- -- -- (3,571) (3,571)
Derivative instruments:
Current period transactions................ -- -- -- -- -- (2,743) (2,743)
-------
Total comprehensive income....................... 42,659
Class A preferred stock dividends,
$0.50 per share................................ -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share................................ -- -- -- -- (7) -- (7)
------- --- ----- ----- ------- ------- -------
Consolidated balances June 30, 2005.................. $12,822 241 5,915 5,910 626,481 (8,145) 643,224
======= === ===== ===== ======= ======= =======
- -------------------------
(1) Disclosure of Comprehensive Income (Loss):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
---- ---- ---- ----
Comprehensive income (loss):
Net income.................................................. $26,846 26,003 48,973 44,272
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities .................. 10,618 (24,607) (3,571) (19,116)
Derivative instruments:
Current period transactions............................. 684 (14,052) (2,743) (18,695)
------- ------- ------ -------
Total comprehensive income (loss)............................. $38,148 (12,656) 42,659 6,461
======= ======= ====== =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Six Months Ended
June 30,
-----------------------
2005 2004
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 48,973 44,272
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of bank premises and equipment..................... 8,591 9,451
Amortization, net of accretion................................................... 7,458 8,708
Originations and purchases of loans held for sale................................ (715,626) (588,123)
Proceeds from sales of loans held for sale....................................... 577,081 461,514
Provision for loan losses........................................................ (8,000) 15,750
Provision for income taxes....................................................... 28,303 22,893
Payments of income taxes......................................................... (32,193) (24,231)
Decrease in accrued interest receivable.......................................... 3,721 595
Interest accrued on liabilities.................................................. 73,516 42,453
Payments of interest on liabilities.............................................. (72,747) (42,699)
Gain on loans sold and held for sale............................................. (11,360) (8,190)
Gain on sales of branches, net of expenses....................................... -- (1,020)
Other operating activities, net.................................................. 8,080 (2,477)
--------- --------
Net cash used in operating activities......................................... (84,203) (61,104)
--------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received......... (3,311) --
Maturities of investment securities available for sale............................. 308,779 250,867
Maturities of investment securities held to maturity............................... 1,130 2,126
Purchases of investment securities available for sale.............................. (219,227) (429,267)
Purchases of investment securities held to maturity................................ (509) (18,523)
Net decrease (increase) in loans................................................... 7,105 (15,809)
Recoveries of loans previously charged-off......................................... 12,059 13,539
Purchases of bank premises and equipment........................................... (6,718) (3,565)
Other investing activities, net.................................................... 9,577 12,513
--------- --------
Net cash provided by (used in) investing activities........................... 108,885 (188,119)
--------- --------
Cash flows from financing activities:
(Decrease) increase in demand and savings deposits................................. (6,397) 23,751
Increase (decrease) in time deposits............................................... 7,306 (2,738)
Decrease in Federal Home Loan Bank advances........................................ (6,000) --
(Decrease) increase in securities sold under agreements to repurchase.............. (42,259) 259,069
Repayments of note payable......................................................... (15,000) (17,000)
Cash paid for sales of branches, net of cash and cash equivalents sold............. -- (19,353)
Payment of preferred stock dividends............................................... (328) (328)
--------- --------
Net cash (used in) provided by financing activities........................... (62,678) 243,401
--------- --------
Net decrease in cash and cash equivalents..................................... (37,996) (5,822)
Cash and cash equivalents, beginning of period.......................................... 267,110 213,537
--------- --------
Cash and cash equivalents, end of period................................................ $ 229,114 207,715
========= ========
Noncash investing and financing activities:
Loans transferred to other real estate............................................. $ 1,247 2,498
========= ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of First Banks, Inc. and
subsidiaries (First Banks or the Company) are unaudited and should be read in
conjunction with the consolidated financial statements contained in the 2004
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles 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
U.S. generally accepted accounting principles. Actual results could differ from
those estimates. In the opinion of management, all adjustments, consisting of
normal recurring accruals considered necessary for a fair presentation of the
results of operations for the interim periods presented herein, have been
included. Operating results for the three and six months ended June 30, 2005 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
The consolidated financial statements include the accounts of the
parent company and its subsidiaries, net of minority interest, as more fully
described below, and in Note 2 and Note 6 to the Consolidated Financial
Statements. All significant intercompany accounts and transactions have been
eliminated. Certain reclassifications of 2004 amounts have been made to conform
to the 2005 presentation.
First Banks operates through its wholly owned subsidiary bank holding
company, The San Francisco Company (SFC), headquartered in San Francisco,
California, and SFC's wholly owned subsidiary bank, First Bank, headquartered in
St. Louis County, Missouri. First Bank operates through its branch banking
offices and subsidiaries, FB Commercial Finance, Inc., Missouri Valley Partners,
Inc. and Small Business Loan Source LLC (SBLS LLC) which, except for SBLS LLC,
are wholly owned.
(2) ACQUISITIONS, INTEGRATION COSTS AND OTHER CORPORATE TRANSACTIONS
On April 29, 2005, First Banks completed its acquisition of FBA
Bancorp, Inc. (FBA) and its wholly owned subsidiary, First Bank of the Americas,
S.S.B. (FBOTA), in exchange for $10.5 million in cash. The acquisition served to
expand First Banks' banking franchise in Chicago, Illinois. The transaction was
funded through internally generated funds. FBA was headquartered in Chicago,
Illinois, and through FBOTA, operated three banking offices in the southwestern
Chicago metropolitan communities of Back of the Yards, Little Village and
Cicero. At the time of the acquisition, FBA had consolidated assets of $73.3
million, loans, net of unearned discount, of $54.3 million, deposits of $55.7
million and stockholders' equity of $7.1 million. The transaction was accounted
for using the purchase method of accounting and accordingly, the assets acquired
and liabilities assumed were recorded at their estimated fair value on the
acquisition date. The fair value adjustments represent current estimates and are
subject to further adjustments as the valuation data is finalized. Preliminary
goodwill, which is not deductible for tax purposes, was approximately $2.2
million, and the core deposit intangibles, which are not deductible for tax
purposes and are being amortized over seven years utilizing the straight-line
method, were approximately $1.7 million. FBA was merged with and into SFC and
FBOTA was merged with and into First Bank.
On April 27, 2005, First Banks executed an Agreement and Plan of
Reorganization providing for the acquisition of Northway State Bank (NSB). NSB
is headquartered in Grayslake, Illinois, and operates one banking office located
in Lake County in the northern Chicago metropolitan area. Under the terms of the
agreement, First Banks will acquire NSB for approximately $10.3 million in cash.
The transaction, which is subject to regulatory approvals and the approval of
NSB's shareholders, is expected to be completed during the fourth quarter of
2005. At June 30, 2005, NSB reported assets of approximately $48.8 million,
loans, net of unearned discount, of approximately $39.7 million, deposits of
approximately $43.3 million and stockholders' equity of approximately $5.1
million
On May 2, 2005, First Banks executed an Agreement and Plan of
Reorganization providing for the acquisition of International Bank of California
(IBOC). IBOC is headquartered in Los Angeles, California, and operates seven
banking offices, including one branch in downtown Los Angeles, four branches in
eastern Los Angeles County, in Alhambra, Arcadia, Artesia and Rowland Heights,
one branch west of downtown Los Angeles, and one branch in downtown San
Francisco. Under the terms of the agreement, First Banks will acquire IBOC for
approximately $33.7 million in cash. The transaction, which is subject to
regulatory approvals and the approval of IBOC's shareholders, is expected to be
completed during the third quarter of 2005. At June 30, 2005, IBOC reported
assets of approximately $158.9 million, loans, net of unearned discount, of
approximately $118.9 million, deposits of approximately $139.3 million and
stockholders' equity of approximately $18.3 million.
SBLS LLC, a newly formed Nevada-based limited liability company and
subsidiary of First Bank, purchased substantially all of the assets and assumed
certain liabilities of Small Business Loan Source, Inc. (SBLS), headquartered in
Houston, Texas, in exchange for cash and certain payments contingent on future
valuations of specifically identified assets, including servicing assets and
retained interests in securitizations, on August 31, 2004. In conjunction with
this transaction, on August 30, 2004, First Bank granted to First Capital
America, Inc. (FCA), a corporation owned by First Banks' Chairman and members of
his immediate family, an option to purchase Membership Interests of SBLS LLC. On
December 31, 2004, First Bank extended the written option under the same terms
through March 31, 2005, and on March 31, 2005, First Bank further extended the
written option under the same terms through June 30, 2005. FCA exercised this
option on June 30, 2005 and paid First Bank $7.35 million in cash. As a result
of this transaction, SBLS LLC became 51.0% owned by First Bank and 49.0% owned
by FCA.
On June 10, 2005, First Bank executed a Purchase and Assumption
Agreement providing for the assumption of certain deposit liabilities of a
branch office of Bank and Trust (B&T), an Illinois commercial bank. Under the
terms of the agreement, First Bank will assume all of the deposit liabilities
maintained at B&T's branch office located in Roodhouse, Illinois, for $100,000
in cash. The transaction is expected to be completed during the third quarter of
2005. At June 30, 2005, the deposit liabilities of the Roodhouse branch office
were approximately $7.1 million.
During the first quarter of 2005, First Banks recorded certain
acquisition-related adjustments pertaining to its acquisition of Hillside
Investors, Ltd. (Hillside) and its wholly owned banking subsidiary, CIB Bank,
which was completed on November 30, 2004. Acquisition-related adjustments
included additional purchase accounting adjustments necessary to appropriately
adjust the preliminary goodwill of $4.3 million recorded at the time of the
acquisition, which was based upon current estimates available at that time, to
reflect the receipt of additional valuation data. The aggregate adjustments
resulted in a purchase price reallocation among goodwill, core deposit
intangibles and bank premises and equipment. The purchase price reallocation
resulted in the reallocation of $3.1 million of negative goodwill to core
deposit intangibles and bank premises and equipment, thereby reducing such
assets by $2.8 million and $2.4 million, net of the related tax effect of $1.1
million and $941,000, respectively. Following the recognition of the
acquisition-related adjustments, goodwill recorded was reduced from $4.3 million
to zero and the core deposit intangibles, which are being amortized over seven
years utilizing the straight-line method, were reduced from $13.4 million to
$10.6 million, net of the related tax effect. The individual components of the
$4.3 million acquisition-related adjustments to goodwill and the $3.1 million
purchase price reallocation recorded in the first quarter of 2005 are summarized
as follows:
>> a $1.6 million increase in goodwill to adjust time deposits, net
of the related tax effect, to their estimated fair value;
>> a $967,000 increase in goodwill to adjust other real estate
owned, net of the related tax effect, to its estimated fair
value;
>> a $10.0 million reduction in goodwill to adjust loans held for
sale, net of the related tax effect, to their estimated fair
value. These adjustments were based upon the receipt of loan
payoffs on certain loans held for sale, in addition to
significantly higher sales prices received over and above the
original third-party bid estimates for certain loans held for
sale. All of the acquired nonperforming loans that had been held
for sale as of December 31, 2004 had either been sold or paid off
as of March 31, 2005, with the exception of one credit
relationship, which was subsequently sold in April 2005;
>> a $1.7 million increase in goodwill, net of the related tax
effect, and a related decrease in core deposit intangibles of
$2.8 million, resulting from the purchase price reallocation; and
>> a $1.4 million increase in goodwill, net of the related tax
effect, and a related decrease in bank premises and equipment of
$2.4 million, resulting from the purchase price reallocation.
First Banks accrues certain costs associated with its acquisitions as
of the respective consummation dates. The accrued costs relate 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 First Banks incurs 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 two to 15 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 First Banks' existing operations are
normally paid to the recipients within 90 days of the respective consummation
date and are expensed in the consolidated statements of income as incurred. The
accrued severance balance of $662,000, as summarized in the following table, is
comprised of contractual obligations under salary continuation agreements to six
individuals with remaining terms ranging from approximately two to 11 years. As
the obligation to make payments under these agreements is accrued at the
consummation date, such payments do not have any impact on the consolidated
statements of income. First Banks also incurs costs associated with acquisitions
that are expensed in the consolidated statements of income. These costs relate
principally to additional costs incurred in conjunction with the information
technology conversions of the respective entities.
A summary of the cumulative acquisition and integration costs
attributable to the Company's acquisitions, 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 the consolidated balance sheets.
Information
Severance Technology Fees Total
--------- --------------- -----
(dollars expressed in thousands)
Balance at December 31, 2004.................................. $ 761 -- 761
Six Months Ended June 30, 2005:
Amounts accrued at acquisition date......................... 526 127 653
Payments.................................................... (625) (127) (752)
----- ----- -----
Balance at June 30, 2005...................................... $ 662 -- 662
===== ===== =====
On January 18, 2005, First Bank opened a de novo branch office in
Farmington, Missouri, and on March 25, 2005, First Bank completed the merger of
two branch offices in Hillside, located in the Chicago, Illinois metropolitan
area.
(3) 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 June 30, 2005 and December 31,
2004:
June 30, 2005 December 31, 2004
-------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles.............. $ 31,784 (9,287) 32,823 (7,003)
Goodwill associated with
purchases of branch offices......... 2,210 (1,074) 2,210 (1,003)
-------- -------- ------- -------
Total............................ $ 33,994 (10,361) 35,033 (8,006)
======== ======== ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $153,528 155,642
======== =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $1.1 million and $2.4 million for the three
and six months ended June 30, 2005, respectively, and $658,000 and $1.3 million
for the comparable periods in 2004. Amortization of intangibles associated with
the purchase of subsidiaries, including amortization of core deposit intangibles
and branch office purchases, has been estimated in the following table, and does
not take into consideration any pending or potential future acquisitions or
branch office purchases.
(dollars expressed in thousands)
Year ending December 31:
2005 remaining...................................................... $ 2,334
2006................................................................ 4,668
2007................................................................ 4,668
2008................................................................ 4,668
2009 ............................................................... 2,765
2010 ............................................................... 2,304
Thereafter.......................................................... 2,226
-------
Total............................................................ $23,633
=======
Changes in the carrying amount of goodwill for the three and six months ended June 30, 2005 and 2004 were
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period......................... $ 152,529 145,513 156,849 145,548
Goodwill acquired during period...................... 2,217 -- 2,217 --
Acquisition-related adjustments (1).................. (46) (222) (4,331) (222)
Amortization - purchases of branch offices........... (36) (36) (71) (71)
--------- -------- -------- --------
Balance, end of period............................... $ 154,664 145,255 154,664 145,255
========= ======== ======== ========
------------------
(1) Acquisition-related adjustments of $4.3 million recorded in the first quarter of 2005 pertain to the
acquisition of CIB Bank, as further described in Note 2 to the Consolidated Financial Statements.
(4) SERVICING RIGHTS
Mortgage Banking Activities. At June 30, 2005 and December 31, 2004,
First Banks serviced mortgage loans for others amounting to $1.07 billion and
$1.06 billion, respectively. Changes in mortgage servicing rights, net of
amortization, for the three and six months ended June 30, 2005 and 2004 were as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $ 9,181 13,960 10,242 15,408
Servicing rights acquired during the period......... 435 -- 435 --
Originated servicing rights......................... 188 465 401 819
Amortization........................................ (1,302) (1,892) (2,576) (3,694)
------- ------ ------- -------
Balance, end of period.............................. $ 8,502 12,533 8,502 12,533
======= ====== ======= =======
The fair value of mortgage servicing rights was approximately $14.0
million and $17.2 million at June 30, 2005 and 2004, respectively, and $14.6
million at December 31, 2004. The excess of the fair value of mortgage servicing
rights over the carrying value was approximately $5.5 million and $4.7 million
at June 30, 2005 and 2004, respectively, and $4.4 million at December 31, 2004.
Amortization of mortgage servicing rights at June 30, 2005 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2005 remaining....................................... $ 1,875
2006................................................. 3,227
2007................................................. 1,936
2008................................................. 751
2009................................................. 713
--------
Total........................................... $ 8,502
========
Other Servicing Activities. At June 30, 2005 and December 31, 2004,
First Banks serviced United States Small Business Administration (SBA) loans for
others amounting to $169.6 million and $174.7 million, respectively. Changes in
SBA servicing rights, net of amortization, for the three and six months ended
June 30, 2005 were as follows:
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------------ ----------------
(dollars expressed in thousands)
Balance, beginning of period....................... $ 12,595 13,013
Originated servicing rights........................ 348 539
Amortization....................................... (592) (1,201)
-------- -------
Balance, end of period............................. $ 12,351 12,351
======== =======
The fair value of SBA servicing rights was approximately $12.7 million
at June 30, 2005 and $13.0 million at December 31, 2004. The excess of the fair
value of SBA servicing rights over the carrying value was approximately $386,000
at June 30, 2005 and zero at December 31, 2004.
Amortization of SBA servicing rights at June 30, 2005 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2005 remaining...................................................... $ 1,126
2006................................................................ 1,974
2007................................................................ 1,663
2008................................................................ 1,397
2009................................................................ 1,171
2010................................................................ 979
Thereafter.......................................................... 4,041
--------
Total.......................................................... $ 12,351
========
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted earnings per
share computations for the three and six months ended June 30, 2005 and 2004:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except share and per share data)
Three months ended June 30, 2005:
Basic EPS - income available to common stockholders............. $ 26,714 23,661 $ 1,129.05
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 512 (18.63)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 26,842 24,173 $ 1,110.42
========= ======= ==========
Three months ended June 30, 2004:
Basic EPS - income available to common stockholders............. $ 25,871 23,661 $ 1,093.42
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 546 (19.36)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 25,999 24,207 $ 1,074.06
========= ======= ==========
Six months ended June 30, 2005:
Basic EPS - income available to common stockholders............. $ 48,645 23,661 $ 2,055.92
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 516 (30.62)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 48,966 24,177 $ 2,025.30
========= ======= ==========
Six months ended June 30, 2004:
Basic EPS - income available to common stockholders............. $ 43,944 23,661 $ 1,857.23
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 565 (30.10)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 44,265 24,226 $ 1,827.13
========= ======= ==========
(6) TRANSACTIONS WITH RELATED PARTIES
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
subsidiaries. Fees paid under agreements with First Services, L.P. were $7.9
million and $14.7 million for the three and six months ended June 30, 2005,
respectively, and $6.6 million and $13.3 million for the comparable periods in
2004. First Services, L.P. leases information technology and other equipment
from First Bank. During each of the three month periods ended June 30, 2005 and
2004, First Services, L.P. paid First Bank $1.1 million, and during each of the
six months ended June 30, 2005 and 2004, First Services, L.P. paid First Banks
$2.2 million in rental fees for the use of that equipment.
First Brokerage America, L.L.C., a limited liability company indirectly
owned by First Banks' Chairman and members of his immediate family, received
approximately $544,000 and $1.2 million for the three and six months ended June
30, 2005, respectively, and $876,000 and $1.8 million for the comparable periods
in 2004, 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 First Bank.
First Title Guaranty LLC (First Title), a limited liability company
established and administered by and for the benefit of First Banks' Chairman and
members of his immediate family, received approximately $96,000 and $183,000 for
the three and six months ended June 30, 2005, respectively, and $105,000 and
$204,000 for the comparable periods in 2004, in commissions for policies
purchased by First Banks or customers of First Bank from unaffiliated,
third-party insurers. 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.
First Bank leases certain of its in-store branch offices and ATM sites
from Dierbergs Markets, Inc., a grocery store chain headquartered in St. Louis,
Missouri that is owned and operated by Robert J. Dierberg and members of his
immediate family. Robert J. Dierberg is the brother of First Banks' Chairman.
Total rent expense incurred by First Bank under the lease obligation contracts
with Dierbergs Markets, Inc. was $86,000 and $165,000 for the three and six
months ended June 30, 2005, respectively, and $75,000 and $146,000 for the
comparable periods in 2004.
First Bank has had in the past, and may have in the future, loan
transactions in the ordinary course of business with its directors or
affiliates. These loan transactions have been 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 $27.7 million and $31.0 million at June 30, 2005 and December 31,
2004, respectively. First Bank does not extend credit to its officers or to
officers of First Banks, Inc., except extensions of credit secured by mortgages
on personal residences, loans to purchase automobiles, personal credit card
accounts and deposit account overdraft protection under a plan whereby a credit
limit has been established in accordance with First Bank's standard credit
criteria.
On August 30, 2004, First Bank granted to FCA, a corporation owned by
First Banks' Chairman and members of his immediate family, a written option to
purchase 735 Membership Interests of SBLS LLC, a newly organized and wholly
owned limited liability company of First Bank, at a price of $10,000 per
Membership Interest, or $7.35 million in aggregate. The option could have been
exercised by FCA at any time prior to December 31, 2004 by written notice to
First Bank of the intention to exercise the option and payment to First Bank of
$7.35 million. On December 31, 2004, First Bank extended the written option
under the same terms through March 31, 2005, and on March 31, 2005, First Bank
further extended the written option under the same terms through June 30, 2005.
On June 30, 2005, FCA exercised this option and paid First Bank $7.35 million in
cash. Consequently, SBLS LLC became 51.0% owned by First Bank and 49% owned by
FCA.
On June 30, 2005, SBLS LLC executed a Multi-Party Agreement by and
among SBLS LLC, First Bank, Colson Services Corp. and the SBA, and a Loan and
Security Agreement by and among First Bank and the SBA (collectively, the
Agreement) that provides a warehouse line of credit for loan funding purposes.
The Agreement provides for a maximum credit line of $50.0 million and has an
initial term of three years with a maturity date of June 30, 2008. At the end of
the first year, First Bank, at its option, may extend the existing maturity date
by one additional year, subject to certain conditions. Interest is payable
monthly, in arrears, on the outstanding balances at a rate equal to First Bank's
prime lending rate. Advances under the Agreement are secured by the assignment
of the majority of the assets of SBLS LLC. The balance outstanding under this
line of credit was $32.7 million at June 30, 2005.
(7) REGULATORY CAPITAL
First Banks and First Bank 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 First Bank 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 First Bank to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of June 30, 2005, First Banks and First Bank were each well
capitalized. As of June 30, 2005, the most recent notification from First Banks'
primary regulator categorized First Banks and First Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, First Banks and First Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table below.
At June 30, 2005 and December 31, 2004, First Banks' and First Bank's
required and actual capital ratios were as follows:
Actual For To Be Well
----------------------- Capital Capitalized Under
June 30, December 31, Adequacy Prompt Corrective
2005 2004 Purposes Action Provisions
---- ---- -------- -----------------
Total capital (to risk-weighted assets):
First Banks..................................... 11.23% 10.61% 8.0% 10.0%
First Bank...................................... 10.90 10.73 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks..................................... 9.29 8.43 4.0 6.0
First Bank...................................... 9.64 9.47 4.0 6.0
Tier 1 capital (to average assets):
First Banks..................................... 8.29 7.89 3.0 5.0
First Bank...................................... 8.62 8.86 3.0 5.0
On March 1, 2005, the Board of Governors of the Federal Reserve System
(Board) adopted a final rule, Risk-Based Capital Standards: Trust Preferred
Securities and the Definition of Capital, which allows for the continued limited
inclusion of trust preferred securities in Tier 1 capital. The Board's final
rule limits restricted core capital elements to 25% of the sum of all core
capital elements, including restricted core capital elements, net of goodwill
less any associated deferred tax liability. Amounts of restricted core capital
elements in excess of these limits may generally be included in Tier 2 capital.
Amounts of qualifying trust preferred securities and cumulative perpetual
preferred stock in excess of the 25% limit may be included in Tier 2 capital,
but limited, together with subordinated debt and limited-life preferred stock,
to 50% of Tier 1 capital. In addition, the final rule provides that in the last
five years before the maturity of the underlying subordinated note, the
outstanding amount of the associated trust preferred securities is excluded from
Tier 1 capital and included in Tier 2 capital, subject to one-fifth amortization
per year. The final rule provides for a five-year transition period, ending
March 31, 2009, for the application of the quantitative limits. Until March 31,
2009, the aggregate amount of qualifying cumulative perpetual preferred stock
and qualifying trust preferred securities that may be included in Tier 1 capital
is limited to 25% of the sum of the following core capital elements: qualifying
common stockholders' equity, qualifying noncumulative and cumulative perpetual
preferred stock, qualifying minority interest in the equity accounts of
consolidated subsidiaries and qualifying trust preferred securities. First Banks
has evaluated the impact of the final rule on the Company's financial condition
and results of operations, and determined the implementation of the Board's
final rule will reduce First Banks' regulatory capital ratios. Upon application
of the final rules that will be in effect in March 2009, First Banks' Tier 1
capital (to risk-weighted assets) and Tier 1 capital (to average assets) would
have been 8.60% and 7.67%, respectively, at June 30, 2005.
(8) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business
segment is consistent with the management structure of First Banks, First Bank
and the internal reporting system that monitors performance. First Bank provides
similar products and services in its defined geographic areas through its branch
network. 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, First Bank markets 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. First Bank also offers 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 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 and trust, private banking and institutional money
management services. The revenues generated by First Bank consist primarily of
interest income, generated from the loan and investment security portfolios, and
service charges and fees, generated from the deposit products and services. The
geographic areas include eastern Missouri, Illinois, including Chicago, southern
and northern California and Houston, Dallas, Irving, McKinney and Denton, Texas.
The products and services are offered to customers primarily within First Banks'
respective geographic areas.
The business segment results are consistent with First Banks' internal
reporting system and, in all material respects, with U.S. generally accepted
accounting principles and practices predominant in the banking industry. The
business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
-------------------------- ------------------------- -----------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $1,736,139 1,803,454 12,069 9,895 1,748,208 1,813,349
Loans, net of unearned discount......... 6,309,680 6,137,968 -- -- 6,309,680 6,137,968
Goodwill................................ 154,664 156,849 -- -- 154,664 156,849
Total assets............................ 8,761,233 8,720,331 15,143 12,510 8,776,376 8,732,841
Deposits................................ 7,238,045 7,161,636 (27,315) (9,666) 7,210,730 7,151,970
Note payable............................ -- -- -- 15,000 -- 15,000
Subordinated debentures................. -- -- 275,213 273,300 275,213 273,300
Stockholders' equity.................... 886,174 877,473 (242,950) (276,580) 643,224 600,893
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------ ------------------------ ----------------------
Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30,
------------------------ ------------------------ ----------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
Income statement information:
Interest income......................... $ 117,008 96,446 180 139 117,188 96,585
Interest expense........................ 33,917 17,399 5,450 3,580 39,367 20,979
---------- --------- -------- -------- --------- ---------
Net interest income................ 83,091 79,047 (5,270) (3,441) 77,821 75,606
Provision for loan losses............... (8,000) 3,000 -- -- (8,000) 3,000
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses........ 91,091 76,047 (5,270) (3,441) 85,821 72,606
---------- --------- -------- -------- --------- ---------
Noninterest income...................... 25,988 20,250 (185) (146) 25,803 20,104
Noninterest expense..................... 69,179 54,388 594 1,017 69,773 55,405
---------- --------- -------- -------- --------- ---------
Income before provision for
income taxes..................... 47,900 41,909 (6,049) (4,604) 41,851 37,305
Provision for income taxes.............. 17,114 15,706 (2,109) (4,404) 15,005 11,302
---------- --------- -------- -------- --------- ---------
Net income......................... $ 30,786 26,203 (3,940) (200) 26,846 26,003
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
----------------------- ------------------------ ----------------------
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
----------------------- ------------------------ ----------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
Income statement information:
Interest income.......................... $ 229,070 192,433 346 279 229,416 192,712
Interest expense......................... 63,196 35,246 10,320 7,207 73,516 42,453
---------- --------- -------- -------- --------- ---------
Net interest income................. 165,874 157,187 (9,974) (6,928) 155,900 150,259
Provision for loan losses................ (8,000) 15,750 -- -- (8,000) 15,750
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses......... 173,874 141,437 (9,974) (6,928) 163,900 134,509
---------- --------- -------- -------- --------- ---------
Noninterest income....................... 47,340 40,969 (436) (306) 46,904 40,663
Noninterest expense...................... 131,243 105,905 2,285 2,102 133,528 108,007
---------- --------- -------- -------- --------- ---------
Income before provision for
income taxes...................... 89,971 76,501 (12,695) (9,336) 77,276 67,165
Provision for income taxes............... 32,734 28,950 (4,431) (6,057) 28,303 22,893
---------- --------- -------- -------- --------- ---------
Net income.......................... $ 57,237 47,551 (8,264) (3,279) 48,973 44,272
========== ========= ======== ======== ========= =========
- ------------------
(1) Corporate and other includes $3.5 million and $2.3 million of interest expense on subordinated debentures, after
applicable income tax benefits of $1.9 million and $1.2 million, for the three months ended June 30, 2005 and 2004,
respectively. For the six months ended June 30, 2005 and 2004, corporate and other includes $6.6 million and
$4.6 million of interest expense on subordinated debentures, after applicable income tax benefits of $3.5 million
and $2.5 million, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at June 30, 2005 and
December 31, 2004:
June 30, December 31,
2005 2004
--------- ------------
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily............................................................... $ 166,847 209,106
Term................................................................ 350,000 350,000
FHLB advances............................................................ 39,444 35,644
--------- -------
Total other borrowings.......................................... $ 556,291 594,750
========= =======
In accordance with the Company's interest rate risk management program,
First Bank modified its term repurchase agreements under master repurchase
agreements with unaffiliated third parties on March 21, 2005 to terminate the
interest rate cap agreements embedded within the agreements and simultaneously
enter into interest rate floor agreements, also embedded within the agreements.
These modifications resulted in adjustments to the interest rate spread to LIBOR
for the agreements, as set forth in the table below. The modified terms of the
repurchase agreements became effective immediately following the respective
quarterly scheduled interest payment dates that occurred during the second
quarter of 2005. First Bank did not incur any costs in conjunction with the
modifications of the agreements.
The maturity dates, par amounts, interest rate spreads and interest
rate floor/cap strike prices on First Bank's term repurchase agreements as of
June 30, 2005 and December 31, 2004 were as follows:
Par Interest Rate Interest Rate Floor/
Maturity Date Amount Spread (1)(2) Cap Strike Price (1)(2)
------------- ------ ------------- -----------------------
(dollars expressed in thousands)
June 30, 2005:
August 15, 2006................................. $ 50,000 LIBOR + 0.4600% 3.00% / Floor
January 12, 2007................................ 150,000 LIBOR + 0.0050% 3.00% / Floor
June 14, 2007................................... 50,000 LIBOR - 0.3300% 3.00% / Floor
June 14, 2007................................... 50,000 LIBOR - 0.3400% 3.00% / Floor
August 1, 2007.................................. 50,000 LIBOR + 0.0800% 3.00% / Floor
---------
$ 350,000
=========
December 31, 2004:
August 15, 2006................................. $ 50,000 LIBOR - 0.8250% 3.00% / Cap
January 12, 2007................................ 150,000 LIBOR - 0.8350% 3.50% / Cap
June 14, 2007................................... 50,000 LIBOR - 0.6000% 5.00% / Cap
June 14, 2007................................... 50,000 LIBOR - 0.6100% 5.00% / Cap
August 1, 2007.................................. 50,000 LIBOR - 0.9150% 3.50% / Cap
---------
$ 350,000
=========
-------------------------
(1) As of June 30, 2005, the interest rates paid on the term repurchase agreements were based on the three-month
London Interbank Offering Rate reset in arrears plus or minus the spread amount shown above minus a floating
amount equal to the differential between the three-month London Interbank Offering Rate reset in arrears and
the strike price shown above, if the three-month London Interbank Offering Rate reset in arrears falls below
the strike price associated with the interest rate floor agreements.
(2) As of December 31, 2004, the interest rates paid on the term repurchase agreements were based on the three-
month London Interbank Offering Rate reset in arrears minus the spread amount shown above plus a floating
amount equal to the differential between the three-month London Interbank Offering Rate reset in arrears and
the strike price shown above, if the three-month London Interbank Offering Rate reset in arrears exceeded
the strike price associated with the interest rate cap agreements.
(10) 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 $5.0 million 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 coexistent 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
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 June 30,
2005 and December 31, 2004, 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.
On June 30, 2004, First Bank completed the sale of a significant
portion of the leases in its commercial leasing portfolio. In conjunction with
the transaction, First Bank recorded a liability of $2.0 million for recourse
obligations related to the completion of the sale. For value received, First
Bank, as seller, indemnified the buyer of certain leases from any liability or
loss resulting from defaults subsequent to the sale. First Bank's
indemnification for the recourse obligations is limited to a specified
percentage, ranging from 15% to 25%, of the aggregate lease purchase price of
specific pools of leases sold. As of June 30, 2005 and December 31, 2004, this
liability was $1.1 million and $1.6 million, respectively, reflecting a change
in the estimated probable loss based upon the performance of the portfolio and
reductions in the related lease balances for the specific pools of leases sold
from borrower payments or repayments.
On August 31, 2004, SBLS LLC acquired substantially all of the assets
and assumed certain liabilities of SBLS. The Amended and Restated Asset Purchase
Agreement (Asset Purchase Agreement) governing this transaction provides for
certain payments to the seller contingent on future valuations of specifically
identified assets, including servicing assets and retained interests in
securitizations. As of June 30, 2005 and December 31, 2004, SBLS LLC had not
recorded a liability for the obligations associated with these contingent
payments, as the likelihood that SBLS LLC will be required to make payments
under the Asset Purchase Agreement is not ascertainable at the present time.
(11) SUBSEQUENT EVENTS
On August 11, 2005, First Banks entered into an Amended and Restated
Secured Credit Agreement with a group of unaffiliated financial institutions
(Credit Agreement) in the amount of $122.5 million. The Credit Agreement
replaced a secured credit agreement dated August 14, 2003, and subsequently
amended on August 12, 2004, that provided a $75.0 million revolving credit line
and a $25.0 million letter of credit facility. The Credit Agreement contains
material changes to the structure and terms of the financing arrangement, of
most significance is the addition of a term loan. The Credit Agreement provides
a $15.0 million revolving credit facility (Revolving Credit), a $7.5 million
letter of credit facility (LC Facility) and a $100.0 million term loan facility
(Term Loan). Interest is payable on outstanding principal loan balances of the
Revolving Credit at a floating rate equal to either the lender's prime rate or,
at First Banks' option, the London Interbank Offering Rate (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 Revolving Credit are accruing at the prime rate, interest is
paid monthly. If the loan balances outstanding under the Revolving Credit are
accruing at the Eurodollar Rate, interest is payable based on the one, two,
three or six-month Eurodollar Rate, as selected by First Banks. Interest is
payable on outstanding principal loan balances of the Term Loan at a floating
rate equal to the Eurodollar Rate plus a margin determined by the outstanding
loan balances and First Banks' net income for the preceding four calendar
quarters. First Banks borrowed $80.0 million on the Term Loan on August 11, 2005
and will borrow the remaining $20.0 million on November 11, 2005. The
outstanding principal balance of the Term Loan is payable in ten equal quarterly
installments of $5.0 million commencing on March 31, 2006, with the remainder of
the Term Loan balance to be repaid in full, including any unpaid interest, upon
maturity. Amounts may be borrowed under the Revolving Credit until August 10,
2006, at which time the principal and interest outstanding is due and payable.
The Credit Agreement requires maintenance of certain minimum capital ratios for
First Banks and First Bank, certain maximum nonperforming assets ratios for
First Bank and a minimum return on assets ratio for First Banks. In addition, it
contains additional covenants, including a limitation on the amount of dividends
on First Banks' common stock that may be paid to stockholders. The Credit
Agreement is secured by First Banks' ownership interest in the capital stock of
its subsidiaries.
On August 5, 2005, First Bank entered into a contract with World Wide
Technology, Inc. (WWT), a wholly owned subsidiary of World Wide Technology
Holding Co., Inc. (WWTHC). WWTHC is an electronic procurement and logistics
company in the information technology industry headquartered in St. Louis,
Missouri. The contract provides for WWT to provide information technology
services associated with the deployment of personal computers to First Bank
employees in an effort to further modernize the technological infrastructure
throughout the First Bank branch banking network. Mr. David L. Steward, a
director of First Banks and a member of the Audit Committee of First Banks,
serves as the Chairman of the Board of Directors of WWTHC. The Audit Committee
of First Banks has reviewed and approved the utilization of WWT for information
technology services with fees not to exceed $500,000 for the year ending
December 31, 2005. At the present time, First Bank has not made any payments
under the contract.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. Generally, forward looking statements may be identified through the
use of words such as: "believe," "expect," "anticipate," "intend," "plan,"
"estimate," or words of similar meaning or future or conditional terms such as:
"will," "would," "should," "could," "may," "likely," "probably," or "possibly."
Examples of forward looking statements include, but are not limited to,
estimates or projections with respect to our future financial condition,
expected or anticipated revenues with respect to our results of operations and
our 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 in the economy, including the threat of future terrorist activities,
existing and 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 Quarterly Report on Form 10-Q should
therefore consider these risks and uncertainties in evaluating forward looking
statements and should not place undo reliance on these statements.
General
We are a registered bank holding company incorporated in Missouri in
1978 and headquartered in St. Louis County, Missouri. We operate through our
wholly owned subsidiary bank holding company, The San Francisco Company, or SFC,
headquartered in San Francisco, California, and its wholly owned subsidiary
bank, First Bank, headquartered in St. Louis County, Missouri. First Bank
operates through its branch banking offices and subsidiaries, FB Commercial
Finance, Inc., Missouri Valley Partners, Inc. and Small Business Loan Source
LLC, or SBLS LLC which, except for SBLS LLC, are wholly owned. First Bank
currently operates 170 branch banking offices in California, Illinois, Missouri
and Texas. At June 30, 2005, we had total assets of $8.78 billion, loans, net of
unearned discount, of $6.31 billion, total deposits of $7.21 billion and total
stockholders' equity of $643.2 million.
Through First Bank, 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 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 and
trust, private banking and institutional money management services.
Primary responsibility for managing our banking unit 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 banking units to focus
on customer service.
Financial Condition
Total assets were $8.78 billion and $8.73 billion at June 30, 2005 and
December 31, 2004, respectively, reflecting an increase of $43.5 million for the
six months ended June 30, 2005. The increase in total assets is attributable to
our acquisition of FBA Bancorp, Inc., or FBA, on April 29, 2005, which provided
total assets of $73.3 million, partially offset by decreases in investment
securities, cash and cash equivalents and other assets. Total loans, net of
unearned discount, increased $171.7 million to $6.31 billion at June 30, 2005,
from $6.14 billion at December 31, 2004, reflecting continued internal loan
growth, the acquisition of FBA, which provided loans, net of unearned discount,
of $54.3 million, partially offset by loan sales and/or payoffs or reductions of
balances associated with certain acquired loans, as further discussed under
"--Loans and Allowance for Loan Losses." Total deposits increased $58.8 million
to $7.21 billion at June 30, 2005, from $7.15 billion at December 31, 2004,
resulting from the acquisition of FBA, a single source temporary deposit of
$216.4 million, partially offset by an anticipated level of attrition associated
with the deposits acquired from CIB Bank, as further discussed below. Available
cash and cash equivalents decreased $38.0 million to $229.1 million at June 30,
2005, from $267.1 million at December 31, 2004. Investment securities decreased
$65.1 million to $1.75 billion at June 30, 2005, from $1.81 billion at December
31, 2004, primarily reflecting maturities of $309.9 million and purchases of
$219.7 million, including $100.0 million of securities purchases associated with
the investment of funds provided by the temporary deposit mentioned above. The
increase in loans was primarily funded by available cash and cash equivalents
and maturities of investment securities. Goodwill declined $2.2 million to
$154.7 million at June 30, 2005, from $156.8 million at December 31, 2004, and
reflects the reallocation of the purchase price associated with our acquisition
of CIB Bank, offset by goodwill associated with our acquisition of FBA, as
further discussed in Note 2 to our Consolidated Financial Statements. Other
assets decreased $30.0 million to $99.6 million at June 30, 2005, from $129.6
million at December 31, 2004. This decrease is attributable to a $7.6 million
decline in our derivative financial instruments from $4.7 million at December
31, 2004, due to a decline in the fair value of certain derivative financial
instruments, the maturity of $200.0 million notional amount of interest rate
swap agreements on March 21, 2005 and the termination of $150.0 million and
$101.2 million notional amount of interest rate swap agreements on February 25,
2005 and May 27, 2005, respectively, as further discussed under "--Interest Rate
Risk Management." Additionally, the decline in other assets reflects: a decrease
in accrued interest receivable, primarily related to our interest rate swap
agreements; decreases in servicing assets and core deposit intangibles;
reductions in other real estate owned; and the receipt of certain receivables
during the first quarter of 2005, including a receivable for current income
taxes of $8.3 million and a receivable for fiduciary related fees of $3.4
million.
Total deposits increased $58.8 million to $7.21 billion at June 30,
2005, from $7.15 billion at December 31, 2004. The increase is primarily
attributable to our acquisition of FBA, which provided total deposits of $55.7
million. A single source temporary commercial money market deposit with a
balance of $216.4 million at June 30, 2005 also contributed to the increase in
total deposits. The overall increase was largely offset by a decrease in
deposits attributable to an anticipated level of attrition associated with the
deposits acquired from CIB Bank, particularly savings and time deposits,
including brokered and internet deposits. The acquisition of CIB Bank, which was
completed on November 30, 2004, provided total deposits of $1.10 billion. Our
continued deposit marketing efforts and efforts to further develop multiple
account relationships with our customers, in addition to slightly higher deposit
rates on certain products, have contributed to some deposit growth despite
continued aggressive competition within our market areas and the anticipated
level of attrition associated with our recent acquisitions. The deposit mix
reflects our continued efforts to restructure the composition of our deposit
base as the majority of our deposit development programs are directed toward
increased transaction accounts, such as demand and savings accounts, rather than
higher-cost time deposits.
Other borrowings decreased $38.5 million to $556.3 million at June 30,
2005, from $594.8 million at December 31, 2004. The decrease is attributable to
a $42.3 million decrease in daily securities sold under agreements to repurchase
due to changes in customer activity and demand, partially offset by a $3.8
million increase in Federal Home Loan Bank advances, primarily due to advances
that were assumed with our FBA acquisition. We fully repaid our note payable
with funds generated from dividends from First Bank, reducing the balance by
$11.0 million in January 2005 and repaying the remaining balance of $4.0 million
in June 2005. Our subordinated debentures increased to $275.2 million at June
30, 2005 from $273.3 million at December 31, 2004 due to changes in the fair
value of our interest rate swap agreements that are designated as fair value
hedges and utilized to hedge certain issues of our subordinated debentures,
partially offset by the continued amortization of debt issuance costs.
Minority interest in SBLS LLC was $7.4 million at June 30, 2005. On
June 30, 2005, First Capital America, Inc., or FCA, exercised an option to
purchase Membership Interests of SBLS LLC for $7.4 million in cash. As a result
of this transaction, SBLS LLC became 51% owned by First Bank and 49% owned by
FCA, as further described in Note 1, Note 2 and Note 6 to our Consolidated
Financial Statements.
Stockholders' equity was $643.2 million and $600.9 million at June 30,
2005 and December 31, 2004, respectively, reflecting an increase of $42.3
million. The increase is primarily attributable to net income of $49.0 million,
partially offset by a $6.3 million decrease in accumulated other comprehensive
income. The decrease in accumulated other comprehensive income is comprised of
$2.7 million associated with changes in the fair value of our derivative
financial instruments and $3.6 million associated with changes in our unrealized
gains and losses on available-for-sale investment securities. The decrease is
reflective of increases in prevailing interest rates, a decline in the fair
value of our derivative financial instruments, and the maturity of $200.0
million notional amount of our interest rate swap agreements designated as cash
flow hedges during the first quarter of 2005, as further discussed under
"--Interest Rate Risk Management."
Results of Operations
Net Income
Net income was $26.8 million and $49.0 million for the three and six
months ended June 30, 2005 respectively, compared to $26.0 million and $44.3
million for the comparable periods in 2004. Our return on average assets was
1.25% and 1.14% for the three and six months ended June 30, 2005, respectively,
compared to 1.43% and 1.22% for the comparable periods in 2004. Our return on
average stockholders' equity was 17.43% and 16.06% for the three and six months
ended June 30, 2005, respectively, compared to 18.21% and 15.72% for the
comparable periods in 2004. Net income for the three and six months ended June
20, 3005 reflects increased net interest income and noninterest income, and a
negative provision for loan losses, partially offset by increased noninterest
expense and an increased provision for income taxes. Net income for 2004
includes a gain of $2.7 million, before applicable income taxes, recorded in
February 2004 relating to the sale of a residential and recreational development
property that was foreclosed on in January 2003, and gains, net of expenses, of
$1.0 million, before applicable income taxes, recorded in February 2004 and
April 2004 on the sale of two Midwest branch banking offices.
The increase in earnings in 2005 reflects our focus to continue to
improve asset quality, maintain an acceptable net interest margin, improve our
noninterest income and control operating expenses. Net interest-earning assets
provided by our 2004 and 2005 acquisitions, higher-yielding investment
securities, internal loan growth and higher interest rates on loans have
contributed to increased net interest income. This increase was partially offset
by increased interest expense associated with higher deposit rates, a
redistribution of deposit balances toward higher-yielding products, and the mix
of the CIB deposit base acquired, as well as increased levels of other
borrowings and increased rates on such borrowings, and the issuance of
additional subordinated debentures late in 2004 to partially fund our
acquisition of CIB Bank. Net interest income was adversely affected by a decline
in earnings on our interest rate swap agreements that were entered into in
conjunction with our interest rate risk management program to mitigate the
effects of decreasing interest rates. This decline was the result of the
maturity and termination of certain interest rate swap agreements, as further
discussed under "--Interest Rate Risk Management." The current interest rate
environment, conditions within our markets and the impact of the decline in
earnings on our interest rate swap agreements continue to exert pressure on our
net interest income and net interest margin.
Our overall asset quality levels reflect continued improvement during
2005, resulting in a $13.6 million, or 15.11% reduction in nonperforming assets,
and a $21.5 million, or 75.1% reduction in loans past due 90 days or more and
still accruing interest since December 31, 2004. A significant portion of our
nonperforming assets at June 30, 2005 is comprised of $42.9 million of
nonperforming loans associated with our acquisition of CIB Bank, which
represents 57.75% of total nonperforming loans at June 30, 2005. The reduction
in both nonperforming loans and loans past due 90 days or more and still
accruing interest reflects our ongoing emphasis on improving asset quality, the
sale of certain acquired nonperforming loans, a notable reduction in net loan
charge-offs, as well as loan payoffs and/or external refinancings of various
credits, as further discussed under "--Loans and Allowance for Loan Losses" and
"--Provision for Loan Losses." Several of these factors contributed to a notable
decrease in our provision for loan losses. We recorded a negative provision for
loan losses of $8.0 million for the three and six months ended June 30, 2005,
compared to a $3.0 million and $15.8 million provision for loan losses for the
comparable periods in 2004. We continue to closely monitor our loan portfolio
and consider these factors in our overall assessment of the adequacy of the
allowance for loan losses. While we continue our efforts to reduce nonperforming
loans, we expect the overall level of such loans to remain at somewhat elevated
levels in the near future as a result of the significant level of nonperforming
loans associated with the CIB Bank acquisition.
Noninterest income was $25.8 million and $46.9 million for the three
and six months ended June 30, 2005, respectively, in comparison to $20.1 million
and $40.7 million for the comparable periods in 2004. The increase for the first
six months of 2005 is attributable to increased gains on loans sold and held for
sale, loan servicing fees, increased investment management fees associated with
our institutional money management subsidiary, increased service charges on
deposit accounts and customer service fees related to higher deposit balances,
and a recovery of loan collection expenses. The increase is also attributable to
a decrease in write-downs and net losses on the sale of certain assets related
to the commercial leasing portfolio. The overall increase in noninterest income
for 2005 was partially offset by a decline in rental income associated with our
reduced commercial leasing activities and an increase in losses on the disposal
of fixed assets, primarily associated with the demolition of a branch drive-thru
facility in the first quarter of 2005. In addition, we recorded $1.0 million in
gains, net of expenses, resulting from the sale of two Midwest branch banking
offices in February 2004 and April 2004.
Noninterest expense was $69.8 million and $133.5 million for the three
and six months ended June 30, 2005, respectively, in comparison to $55.4 million
and $108.0 million for the comparable periods in 2004. Our efficiency ratio,
which is defined as the ratio of noninterest expense to the sum of net interest
income and noninterest income, was 67.33% and 65.84% for the three and six
months ended June 30, 2005, respectively, compared to 57.89% and 56.57% for the
comparable periods in 2004. The overall increase in our noninterest expenses and
our efficiency ratio was attributable to expenses resulting from our 2004 and
2005 acquisitions, increases in salaries and employee benefits expense,
charitable contribution expense, and expenditures and losses, net of gains, on
other real estate, as further discussed below. We continue to closely monitor
noninterest expense levels following our recent acquisitions and anticipate that
the implementation of certain expense reduction measures will result in a future
improvement in our efficiency ratio. Salary and employee benefit expenses
increased due to the impact of our acquisitions in 2004 and 2005, which added a
total of 21 branch offices, the addition of five de novo branch offices in 2004
and 2005, and generally higher costs of employing and retaining qualified
personnel, including higher employee benefit costs. Noninterest expenses also
increased due to a $2.7 million nonrecurring gain recorded in February 2004 on
the sale of a residential and recreational development property that was
foreclosed on in January 2003.
Net Interest Income
Net interest income (expressed on a tax-equivalent basis) increased to
$78.1 million and $156.6 million for the three and six months ended June 30,
2005, respectively, compared to $75.9 million and $150.9 million for the
comparable periods in 2004, reflecting continued growth. Our net interest rate
margin was 3.94% and 3.96% for the three and six months ended June 30, 2005,
respectively, in comparison to 4.56% for the three and six months ended June 30,
2004. Net interest income is the difference between interest earned on our
interest-earning assets, such as loans and securities, and interest paid on our
interest-bearing liabilities, such as deposits and borrowings. Net interest
income is affected by the level and composition of assets, liabilities and
stockholders' equity, as well as the general level of interest rates and changes
in interest rates. Interest income on a tax-equivalent basis includes the
additional amount of interest income that would have been earned if our
investment in certain tax-exempt interest earning assets had been made in assets
subject to federal, state and local income taxes yielding the same after-tax
income. Net interest margin is determined by dividing net interest income on a
tax-equivalent basis by average interest-earning assets. The interest rate
spread is the difference between the average equivalent yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
We primarily credit the increase in net interest income during the
three and six months ended June 30, 2005 to net interest-earning assets provided
by our 2004 and 2005 acquisitions, higher-yielding investment securities,
internal loan growth and higher interest rates on loans, partially offset by
increased interest expense associated with higher deposit rates, a
redistribution of deposit balances toward higher-yielding products, and the mix
of the CIB deposit base acquired, as well as increased levels of other
borrowings and the issuance of additional subordinated debentures in late 2004
to partially fund our acquisition of CIB Bank. Net interest income was adversely
impacted by a decline in earnings on our interest rate swap agreements that were
entered into in conjunction with our interest rate risk management program to
mitigate the effects of decreasing interest rates. As further discussed under
"--Interest Rate Risk Management," these derivative financial instruments
contributed $297,000 and $3.9 million to net interest income for the three and
six months ended June 30, 2005, respectively, compared to the $15.4 million and
$31.7 million for the comparable periods in 2004. The decreased earnings on our
interest rate swap agreements for the three and six months ended June 30, 2005
contributed to a compression of our net interest margin of approximately 76
basis points and 70 basis points, respectively, and reflect the impact of higher
interest rates and maturities of interest rate swap agreements of $800.0 million
during 2004 and $200.0 million in March 2005, as well as the termination of
$150.0 million and $101.2 million of interest rate swap agreements on February
25, 2005 and May 27, 2005, respectively. Although the Company has implemented
other methods to mitigate the reduction in net interest income resulting from
the decreased earnings on our interest rate swap agreements, including the
funding of investment security purchases through the issuance of term repurchase
agreements, the reduction of our interest rate swap agreements has resulted in a
reduction of net interest income and further compression of our net interest
margin, which was partially offset by the impact of the rising rate environment.
Average interest-earning assets increased to $7.95 billion and $7.98
billion for the three and six months ended June 30, 2005, respectively, from
$6.70 billion and $6.65 billion for comparable periods in 2004. The increase is
primarily attributable to our three acquisitions completed in 2004, which
provided assets of $1.38 billion in aggregate, and our acquisition completed in
2005, which provided assets of $73.3 million. Internal growth within our loan
portfolio also contributed to the increase in average interest-earning assets.
In addition, we purchased $250.0 million of callable U.S. Government agency
securities in conjunction with the issuance of $250.0 million of term repurchase
agreements that we entered into in conjunction with our interest rate risk
management program during the first and second quarters of 2004. The current
interest rate environment, overall economic conditions and the maturity and
termination of certain interest rate swap agreements, as discussed above,
continue to exert pressure on our net interest margin.
Average investment securities increased $413.7 million and $500.3
million to $1.68 billion and $1.71 billion for the three and six months ended
June 30, 2005, respectively, from $1.26 billion and $1.21 billion for the
comparable periods in 2004. The yield on our investment portfolio was 4.22% and
4.18% for the three and six months ended June 30, 2005, compared to 4.11% for
the comparable periods in 2004. The overall increase in the average balance of
investment securities relates primarily to our 2004 and 2005 acquisitions, which
provided investment securities of $438.0 million and $5.4 million, respectively.
Funds available from maturities of investment securities were used to fund a
decrease in deposits associated with an anticipated level of attrition during
the first quarter of 2005 associated with the time deposits acquired with the
acquisition of CIB Bank. The remaining funds available from maturities of
investment securities were used to fund the reinvestment in additional
higher-yielding investment securities. Additionally, a portion of excess
short-term investments, which include federal funds sold and interest-bearing
deposits, was also utilized to fund deposit attrition and to purchase
higher-yielding available-for-sale investment securities, resulting in a decline
in average short-term investments to $47.8 million and $65.4 million for the
three and six months ended June 30, 2005, respectively, from $58.2 million and
$90.5 million for the comparable periods in 2004. Our investment securities
purchases during June 2005 included the purchase of $100.0 million of Federal
Home Loan Bank discount notes associated with the funds provided by a single
source temporary deposit, as previously discussed. During 2004, our investment
securities purchases included the purchase of $250.0 million of callable U.S.
Government agency securities, representing the underlying securities associated
with $250.0 million, in aggregate, of three-year term repurchase agreements
under master repurchase agreements that we consummated in the first and second
quarters of 2004, as further described in Note 9 to our Consolidated Financial
Statements.
Average loans, net of unearned discount, were $6.23 billion and $6.21
billion for the three and six months ended June 30, 2005, respectively, compared
to $5.38 billion and $5.35 billion for the comparable periods in 2004. The yield
on our loan portfolio was 6.41% and 6.30% for the three and six months ended
June 30, 2005, respectively, in comparison to 6.27% and 6.32% for the comparable
periods in 2004. Although our loan portfolio yields increased with rising
interest rates during 2005, total interest income on our loan portfolio was
adversely impacted by decreased earnings on our interest rate swap agreements
designated as cash flow hedges. Higher interest rates and the maturities of
interest rate swap agreements of $750.0 million in 2004 and $200.0 million in
March 2005 resulted in decreased earnings on our swap agreements of
approximately $22.6 million, contributing to a reduction in yields on our loan
portfolio, and a compression of our net interest margin of approximately 57
basis points for the six months ended June 30, 2005 as compared to the same
period in 2004. We attribute the increase in average loans of $851.7 million for
the six months ended June 30, 2005, over the comparable period in 2004,
primarily to our acquisitions completed during 2004 and 2005, which provided
total loans of $780.9 million, in aggregate, and $54.3 million, respectively.
The increase is also the result of internal loan growth, partially offset by
reductions in our nonperforming loan portfolio due to the sale of certain
nonperforming loans, loan payoffs and/or external refinancings. Average
commercial, financial and agricultural loans increased $77.5 million for the six
months ended June 30, 2005, over the comparable period in 2004, as a result of
our 2004 acquisitions. This increase was partially offset by a $47.4 million
decrease in average lease financing volumes resulting from our business strategy
initiated in late 2002 to reduce our commercial leasing activities and
subsequently sell a significant portion of the remaining leases in our
commercial leasing portfolio in June 2004. Average real estate construction and
development loans increased approximately $209.7 million for the six months
ended June 30, 2005, over the comparable period in 2004, primarily as a result
of our recent acquisitions and seasonal increases on existing and available
credit lines as well as new loan production. Average real estate mortgage loans
increased approximately $537.4 million for the six months ended June 30, 2005,
over the comparable period in 2004. This increase is attributable to a $418.9
million increase in commercial real estate loans resulting from our recent
acquisitions, as well as a $118.5 million increase in residential real estate
mortgage loans due to our recent acquisitions and our business strategy decision
to retain a portion of our residential mortgage loan production that would have
been previously sold in the secondary market. Average loans held for sale
increased approximately $21.1 million for the six months ended June 30, 2005,
over the comparable period in 2004, resulting from increased volumes of loan
originations coupled with the timing of loan sales in the secondary mortgage
market.
Average deposits increased to $7.04 billion and $7.07 billion for the
three and six months ended June 30, 2005, from $6.01 billion and $6.00 billion
for the comparable periods in 2004. For the three and six months ended June 30,
2005, the aggregate weighted average rate paid on our deposit portfolio
increased 69 basis points and 55 basis points to 2.05% and 1.92%, respectively,
from 1.36% and 1.37% for the comparable periods in 2004, and is primarily
attributable to the current rising interest rate environment and the mix of the
CIB Bank deposit base acquired in November 2004. In addition, the decreased
earnings associated with certain of our interest rate swap agreements designated
as fair value hedges, as well as the termination of $150.0 million of fair value
hedges on February 25, 2005, resulted in a decrease in our net interest income
and net interest margin of approximately $3.8 million and ten basis points,
respectively, for the six months ended June 30, 2005, compared to the same
period in 2004. The increase in average deposits is primarily reflective of our
acquisitions completed during 2004 and 2005, which provided deposits of $1.21
billion, in aggregate, and $55.7 million, respectively. Although overall average
deposit levels have increased as a result of our 2004 and 2005 acquisitions, the
overall increase in average deposits was partially offset by a significant
decrease in deposits due to an anticipated level of attrition associated with
the deposits acquired from CIB Bank. Excluding the impact of our acquisitions,
the change in our average deposit mix reflects our continued efforts to
restructure the composition of our deposit base as the majority of our deposit
development programs are directed toward increased transactional accounts, such
as demand and savings accounts, rather than time deposits, and emphasize
attracting more than one account relationship with customers. Average demand and
savings deposits were $4.21 billion and $4.25 billion for the three and six
months ended June 30, 2005, respectively, from $4.07 billion and $4.06 billion
for the comparable periods in 2004. Average total time deposits increased to
$2.83 billion and $2.82 billion for the three and six months ended June 30,
2005, respectively, compared to $1.93 and $1.94 billion for the comparable
periods in 2004.
Average other borrowings increased to $569.2 million and $573.6 million
for the three and six months ended June 30, 2005, respectively, compared to
$439.1 million and $413.9 million for the comparable periods in 2004. The
aggregate weighted average rate paid on our other borrowings was 2.98% and 2.65%
for the three and six months ended June 30, 2005, respectively, compared to
0.69% and 0.68% for the comparable periods in 2004. The increased rate paid on
our other borrowings reflects the increased short-term interest rate environment
that began in the second quarter of 2004. The increase in average other
borrowings is primarily attributable to $250.0 million of term repurchase
agreements that we consummated during 2004, as further described in Note 9 to
our Consolidated Financial Statements.
Our note payable averaged $4.0 million and $5.8 million for the three
and six months ended June 30, 2005, respectively, compared to $1.1 million and
$4.7 million for the comparable periods in 2004. The aggregate weighted average
rate paid on our note payable was 10.44% and 8.38% for the three and six months
ended June 30, 2005, respectively, compared to 23.66% and 7.20% for the
comparable periods ended June 30, 2004. The weighted average rate paid reflects
unused credit commitment and letter of credit facility fees on our secured
credit facility agreement. Amounts outstanding under our 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 London Interbank
Offering Rate plus a margin determined by the outstanding balance and our
profitability for the preceding four calendar quarters. 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. However, the borrowing level for these periods has been minimal. On
August 11, 2005, we entered into an Amended and Restated Secured Credit
Agreement and restructured our overall financing arrangement, as further
described in Note 11 to our Consolidated Financial Statements.
Average subordinated debentures were $273.8 million for the three and
six months ended June 30, 2005, compared to $209.0 million and $210.0 million
for the comparable periods ended June 30, 2004. The aggregate weighted average
rate paid on our subordinated debentures was 7.86% and 7.45% for the three and
six months ended June 30, 2005 respectively, and 6.79% and 6.77% for the
comparable periods in 2004. Interest expense on our subordinated debentures was
$5.4 million and $10.1 million for the three and six months ended June 30, 2005,
respectively, compared to $3.5 million and $7.1 million for the comparable
periods in 2004. As previously discussed, the increase for the three and six
months ended June 30, 2005 primarily reflects the issuance of $61.9 million of
additional subordinated debentures in late 2004 to partially fund our
acquisition of CIB Bank, as well as the earnings impact of our interest rate
swap agreements. The issuance of the additional subordinated debentures resulted
in a decrease in our net interest income and net interest margin of
approximately $1.5 million and three basis points, respectively, for the six
months ended June 30, 2005, compared to the comparable period in 2004. The
termination of $101.2 million of fair value hedges on May 27, 2005, as further
discussed under "--Interest Rate Risk Management," resulted in a decrease in our
net interest income and net interest margin of approximately $1.3 million and
three basis points, respectively, for the six months ended June 30, 2005,
compared to the comparable period in 2004.
The following table sets forth, on a tax-equivalent basis, certain
information relating to our average balance sheets, and reflects the average
yield earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting net interest income for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------- -------------------------------------------------
2005 2004 2005 2004
-------------------------- ---------------------- ----------------------- -------------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ---- ------- -------- ----
(dollars expressed in thousands)
Assets
------
Interest-earning assets:
Loans (1)(2)(3)(4).......... $6,227,487 99,534 6.41% $5,375,102 83,861 6.27% $6,205,923 193,804 6.30% $5,354,228 168,189 6.32%
Investment securities (4)... 1,676,866 17,629 4.22 1,263,191 12,894 4.11 1,709,203 35,414 4.18 1,208,927 24,725 4.11
Short-term investments...... 47,788 351 2.95 58,164 137 0.95 65,447 860 2.65 90,461 423 0.94
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-earning
assets............... 7,952,141 117,514 5.93 6,696,457 96,892 5.82 7,980,573 230,078 5.81 6,653,616 193,337 5.84
------- ------ ------- -------
Nonearning assets.............. 653,522 631,260 653,976 641,890
---------- ---------- ---------- ----------
Total assets........... $8,605,663 $7,327,717 $8,634,549 $7,295,506
========== ========== ========== ==========
Liabilities and
---------------
Stockholders' Equity
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits................ $ 882,567 932 0.42% $ 854,874 824 0.39% $ 884,053 1,820 0.42% $ 861,793 1,791 0.42%
Savings deposits.......... 2,082,986 6,331 1.22 2,143,816 4,593 0.86 2,140,218 12,075 1.14 2,152,863 9,370 0.88
Time deposits of $100
or more................. 846,317 6,246 2.96 459,164 3,039 2.66 826,965 11,600 2.83 448,791 5,995 2.69
Other time deposits (3)... 1,988,122 16,156 3.26 1,474,899 8,173 2.23 1,989,449 30,135 3.05 1,489,267 16,660 2.25
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
deposits............. 5,799,992 29,665 2.05 4,932,753 16,629 1.36 5,840,685 55,630 1.92 4,952,714 33,816 1.37
Other borrowings............ 569,222 4,234 2.98 439,070 757 0.69 573,585 7,534 2.65 413,932 1,401 0.68
Note payable (5)............ 3,956 103 10.44 1,088 64 23.66 5,801 241 8.38 4,717 169 7.20
Subordinated debentures (3). 273,803 5,365 7.86 209,036 3,529 6.79 273,802 10,111 7.45 209,963 7,067 6.77
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
liabilities.......... 6,646,973 39,367 2.38 5,581,947 20,979 1.51 6,693,873 73,516 2.21 5,581,326 42,453 1.53
------- ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits............. 1,243,568 1,073,988 1,225,511 1,047,866
Other liabilities........... 97,246 97,585 100,299 99,955
---------- ---------- ---------- ----------
Total liabilities...... 7,987,787 6,753,520 8,019,683 6,729,147
Stockholders' equity........... 617,876 574,197 614,866 566,359
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity. $8,605,663 $7,327,717 $8,634,549 $7,295,506
========== ========== ========== ==========
Net interest income............ 78,147 75,913 156,562 150,884
======= ====== ======= =======
Interest rate spread........... 3.55 4.31 3.60 4.31
Net interest margin (6)........ 3.94% 4.56% 3.96% 4.56%
===== ===== ==== ====
- --------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $326,000 and $662,000 for the three and six months ended June 30, 2005, and $307,000 and $625,000 for the
comparable periods in 2004, respectively.
(5) Interest expense on the note payable includes commitment, arrangement and renewal fees.
(6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-
earning assets.
Provision for Loan Losses
We recorded an $8.0 million negative provision for loan losses for the
three and six months ended June 30, 2005, in comparison to a provision for loan
losses of $3.0 million and $15.8 million recorded for the three and six months
ended June 30, 2004. The negative provision for loan losses during the second
quarter of 2005 is attributable to an improvement in nonperforming loans from
December 31, 2004 to June 30, 2005, resulting from loan payoffs and/or external
refinancings and a significant reduction in net loan charge-offs. Nonperforming
loans at June 30, 2005 decreased $11.5 million, or 13.46%, to $74.3 million from
$85.8 million at December 31, 2004. Loans past due 90 days or more and still
accruing interest decreased $21.5 million, or 75.1%, to $7.1 million at June 30,
2005 from $28.7 million at December 31, 2004. The decrease in nonperforming
loans and past due loans during the six months ended June 30, 2005 reflects an
improvement in asset quality resulting from the sale of approximately $14.3
million of certain acquired nonperforming loans, a notable reduction in net loan
charge-offs, as well as loan payoffs and/or external refinancings of various
credits, including $58.8 million in payoffs relating to eight credit
relationships, as further discussed under "--Loans and Allowance for Loan
Losses." We recorded net loan recoveries of $3.6 million for the three months
ended June 30, 2005 and net loan charge-offs of $3.0 million for the six months
ended June 30, 2005, compared to net loan charge-offs of $5.4 million and $10.8
million for the comparable periods in 2004. Our allowance for loan losses was
$140.2 million at June 30, 2005, compared to $144.2 million at March 31, 2005
and $150.7 million at December 31, 2004. Our allowance for loan losses as a
percentage of loans, net of unearned discount, was 2.22% at June 30, 2005,
compared to 2.34% at March 31, 2005 and 2.46% at December 31, 2004. Our
allowance for loan losses as a percentage of nonperforming loans was 188.77% at
June 30, 2005, compared to 180.71% at March 31, 2005 and 175.65% at December 31,
2004. Management continues to closely monitor its operations to address the
ongoing challenges posed by the current economic environment and expects
nonperforming loans to remain at somewhat elevated levels in the near future
primarily as a result of the significant level of nonperforming loans associated
with our CIB Bank acquisition, which represent 57.75% of our total nonperforming
loans at June 30, 2005. Management considers these factors in its overall
assessment of the adequacy of the allowance for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $25.8 million and $46.9 million for the three
and six months ended June 30, 2005, respectively, in comparison to $20.1 million
and $40.7 million for the comparable periods in 2004. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, investment management income, bank owned life
insurance investment income and other income.
Service charges on deposit accounts and customer service fees were
$10.2 million and $19.5 million for the three and six months ended June 30,
2005, respectively, in comparison to $9.8 million and $18.7 million for the
comparable periods in 2004. The increase in service charges and customer service
fees is primarily attributable to increased demand deposit account balances
associated with our acquisitions of Continental Community Bank and Trust
Company, or CCB, CIB Bank and FBA, completed in July 2004, November 2004 and
April 2005, respectively. The increase is also attributable to additional
products and services available and utilized by our expanded retail and
commercial customer base, increased fee income from customer service charges for
non-sufficient fund and returned check fees coupled with enhanced control of fee
waivers, higher earnings allowances on commercial deposit accounts and increased
income associated with automated teller machine services and debit cards.
The gain on loans sold and held for sale was $6.8 million and $11.4
million for the three and six months ended June 30, 2005, respectively, in
comparison to $4.0 million and $8.2 million for the comparable periods in 2004.
We attribute the increase in 2005 to an increase in the volume of mortgage loan
sales in the secondary market as a result of increased loan origination volumes.
The increase was also attributable to $1.3 million of gains on SBA loans sold by
SBLS LLC.
Gains, net of expenses, on the sale of two Midwest banking offices were
$630,000 and $1.0 million for the three and six months ended June 30, 2004, and
reflect a $390,000 gain, net of expenses, on the sale of one of our Missouri
branch banking offices in February 2004, and a $630,000 gain, net of expenses,
on the sale of one of our Illinois banking offices in April 2004. There were no
sales of branch banking offices during the three and six months ended June 30,
2005.
Investment management income was $2.2 million and $4.2 million for the
three and six months ended June 30, 2005, respectively, in comparison to $1.7
million and $3.3 million for the comparable periods in 2004, reflecting
increased portfolio management fees generated by our institutional money
management subsidiary attributable to growth in assets under management as a
result of new business development.
Other income was $5.3 million and $9.3 million for the three and six
months ended June 30, 2005, respectively, in comparison to $2.7 million and $6.8
million for the comparable periods in 2004. We attribute the primary components
of the increase in 2005 to:
>> an increase of $2.0 million in loan servicing fees. The net
increase is primarily attributable to increased fees from loans
serviced for others, including SBLS LLC loan servicing fees of
$1.8 million, partially offset by amortization of SBA servicing
rights of $1.2 million, decreased amortization of mortgage
servicing rights of $1.1 million, increased unused commitment
fees of $447,000 and a lower level of interest shortfall on
mortgage loans. Interest shortfall is 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;
>> a $500,000 recovery of agent loan collection expenses, as
permitted under a loan participation agreement prior to recovery
of principal and interest, from funds collected from the
liquidation of a portion of the collateral that secured the loan
by the receiver;
>> a net decrease in losses on the valuation or sale of certain
repossessed assets, primarily related to our commercial leasing
portfolio. Net gains for 2005 were $441,000 and included a
$287,000 gain on the sale of repossessed leasing equipment. Net
losses for 2004 were $654,000 and included a $750,000 write-down
on repossessed aircraft leasing equipment;
>> an increase of $478,000 reflecting the reduction of a contingent
liability established in conjunction with the sale of a portion
of our commercial leasing portfolio in June 2004. The reduction
of the contingent liability in June 2005 was the result of
further reductions in related lease balances for the specific
pools of leases sold, as further discussed in Note 10 to our
Consolidated Financial Statements;
>> an increase of $431,000 in fees from fiduciary activities; and
>> our acquisitions of CCB and CIB Bank completed during 2004 and
FBA completed in April 2005; partially offset by
>> a decline of $852,000 in rental income associated with our
reduced commercial leasing activities;
>> a decline of $392,000 in income associated with standby letters
of credit;
>> a decline of $113,000 in brokerage revenue primarily associated
with overall market conditions and reduced customer demand;
>> a net increase in losses, net of gains, on the disposition of
certain assets, primarily attributable to a $319,000 net loss
resulting from the demolition of a branch drive-thru facility in
the first quarter of 2005; and
>> an increase in net losses on our derivative instruments. Net
losses on derivative instruments were $590,000 for the six months
ended June 30, 2005, compared to $455,000 for the comparable
period in 2004.
Noninterest Expense
Noninterest expense was $69.8 million and $133.5 million for the three
and six months ended June 30, 2005, respectively, in comparison to $55.4 million
and $108.0 million for the comparable periods in 2004. Our efficiency ratio was
67.33% and 65.84% for the three and six months ended June 30, 2005,
respectively, from 57.89% and 56.57% for the comparable periods in 2004. The
efficiency ratio is used by the financial services industry to measure an
organization's operating efficiency. The efficiency ratio represents the ratio
of noninterest expense to net interest income and noninterest income. The
increases in noninterest expense and our efficiency ratio for 2005 were
primarily attributable to increases in expenses resulting from our 2004 and 2005
acquisitions, increases in salaries and employee benefits expense, charitable
contribution expense, and expenses and losses, net of gains, on other real
estate.
Salaries and employee benefits expense was $34.5 million and $67.5
million for the three and six months ended June 30, 2005, respectively, in
comparison to $28.2 million and $55.9 million for the comparable periods in
2004. We attribute the overall increase to increased salaries and employee
benefits expenses associated with an aggregate of 21 additional branches
acquired in 2004 and 2005, four de novo branches opened in 2004 and one de novo
branch opened in January 2005, in addition to generally higher salary and
employee benefit costs associated with employing and retaining qualified
personnel, including higher employee benefits expense. Our number of employees
on a full-time equivalent basis increased to approximately 2,230 at June 30,
2005, from approximately 1,970 at June 30, 2004.
Occupancy, net of rental income, and furniture and equipment expense
totaled $9.0 million and $18.3 million for the three and six months ended June
30, 2005, respectively, in comparison to $8.7 million and $17.8 million for the
comparable periods in 2004. The increase is attributable to higher levels of
expense resulting from our acquisitions in 2004 and 2005, which added 21 branch
offices, and the opening of five de novo branch offices in 2004 and 2005. The
increase is also attributable to increased technology equipment expenditures,
continued expansion and renovation of various corporate and branch offices, and
increased depreciation expense associated with capital expenditures and
acquisitions.
Information technology fees were $9.4 million and $17.5 million for the
three and six months ended June 30, 2005, respectively, in comparison to $8.0
million and $16.0 million for the comparable periods in 2004. As more fully
described in Note 6 to our Consolidated Financial Statements, First Services,
L.P., a limited partnership indirectly owned by our Chairman and members of his
immediate family, provides information technology and operational support
services to our subsidiaries and us. We attribute the level of fees to our
recent acquisitions, growth and technological advancements consistent with our
product and service offerings, continued expansion and upgrades to technological
equipment, networks and communication channels, partially offset by expense
reductions resulting from the information technology conversions of our
acquisitions completed in 2004, as well as the achievement of certain
efficiencies associated with the implementation of various technology projects.
The information technology conversions of CCB, CIB Bank and FBA were completed
in September 2004, February 2005 and June 2005, respectively.
Legal, examination and professional fees were $2.1 million and $4.5
million for the three and six months ended June 30, 2005, respectively, in
comparison to $1.7 million and $3.3 million for the comparable periods in 2004.
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 and certain defense litigation costs primarily related to acquired
entities have all contributed to the overall expense levels in 2004 and 2005.
The increase in 2005 is also attributable to $471,000 of fees paid for
information technology, accounting and other services provided by the seller of
CIB Bank pursuant to a service agreement to provide services from the date of
sale, November 30, 2004, through the date of system conversion, mid-February
2005.
Amortization of intangibles associated with the purchase of
subsidiaries was $1.1 million and $2.4 million for the three and six months
ended June 30, 2005, respectively, in comparison to $658,000 and $1.3 million
for the comparable periods in 2004. The increase is primarily attributable to
core deposit intangibles associated with our acquisitions of CCB and CIB Bank
completed in 2004 and our acquisition of FBA completed in April 2005.
Communications and advertising and business development expenses were
$2.2 million from $4.4 million for the three and six months ended June 30, 2005,
respectively, compared to $1.7 million and $3.5 million for the comparable
periods in 2004. The expansion of our sales, marketing and product group in 2004
and broadened advertising campaigns have contributed to higher expenditures and
are consistent with our continued focus on expanding our banking franchise and
the products and services available to our customers. Our spring advertising
campaign contributed to the increase in the second quarter of 2005. We continue
our efforts to manage these expenses through renegotiation of contracts,
enhanced focus on advertising and promotional activities in markets that offer
greater benefits, as well as ongoing cost containment efforts.
Charitable contributions expense was $1.6 million and $1.7 million for
the three and six months ended June 30, 2005, respectively, compared to $56,000
and $130,000 for the comparable periods in 2004. The increase in expense is
primarily attributable to a $1.5 million contribution in May 2005 to an urban
revitalization development project located in the city of St. Louis. In exchange
for this contribution, we received Missouri state tax credits that will be
utilized to reduce certain state income taxes.
Other expense was $8.5 million and $14.4 million for the three and six
months ended June 30, 2005, respectively, in comparison to $5.1 million and $7.6
million for the comparable periods in 2004. Other expense encompasses numerous
general and administrative expenses including insurance, freight and courier
services, correspondent bank charges, miscellaneous losses and recoveries,
expenses on other real estate owned, memberships and subscriptions, transfer
agent fees, sales taxes and travel, meals and entertainment. The increase is
primarily attributable to:
>> an increase of $3.8 million of expenditures and losses, net of
gains, on other real estate. Expenditures and losses, net of
gains, on other real estate were $570,000 and $608,000 for the
three and six months ended June 30, 2005, respectively, and
included an $812,000 expense in May 2005 related to a parcel of
other real estate acquired in conjunction with the acquisition of
CIB Bank. These expenditures were partially offset by
approximately $413,000 of gains recorded on the sale of three
holdings of other real estate during the first and second
quarters of 2005. Gains, net of losses and expenses, on other
real estate were $404,000 and $3.1 million for the three and six
months ended June 30, 2004, and included a $2.7 million gain
recorded in February 2004 on the sale of a residential and
recreational development property that was transferred to other
real estate in January 2003 and approximately $390,000 of gains
recorded on the sale of two additional holdings of other real
estate in the second quarter of 2004;
>> expenses associated with our acquisitions completed during 2004,
particularly CIB Bank, and 2005; and
>> continued growth and expansion of our banking franchise.
Provision for Income Taxes
The provision for income taxes was $15.0 million and $28.3 million for
the three and six months ended June 30, 2005, respectively, in comparison to
$11.3 million and $22.9 million for the comparable periods in 2004. The
effective tax rate was 35.85% and 36.63% for the three and six months ended June
30, 2005, respectively, in comparison to 30.30% and 34.08% for the comparable
periods in 2004. In June 2004, we recorded a reversal of a $2.8 million tax
reserve that was no longer deemed necessary as a result of the resolution of a
potential tax liability. Excluding this transaction, the effective tax rate was
37.80% and 38.25% for the three and six months ended June 30, 2004. The lower
effective tax rate for the three and six months ended June 30, 2005, compared to
the comparable periods in 2004 after adjusting for the nonrecurring transaction,
was primarily the result of a lower effective state tax rate and the utilization
of certain state tax credits.
Interest Rate Risk Management
We utilize derivative financial instruments to assist in our management
of interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The derivative financial
instruments we held as of June 30, 2005 and December 31, 2004 are summarized as
follows:
June 30, 2005 December 31, 2004
------------------------ ------------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $300,000 521 500,000 1,233
Fair value hedges.................................... 25,000 997 276,200 9,609
Interest rate lock commitments....................... 9,200 -- 5,400 --
Forward commitments to sell
mortgage-backed securities......................... 43,000 -- 34,000 --
======== === ======= =====
The notional amounts of our 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 loss we would incur in the event the counterparties failed
completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value.
During the three and six months ended June 30, 2005, we realized net
interest income on our derivative financial instruments of $297,000 and $3.9
million, respectively, in comparison to $15.4 million and $31.7 million for the
comparable periods in 2004. The decrease is primarily attributable to an
increase in prevailing interest rates that began in mid-2004 and has continued
into 2005, the maturity of $800.0 million notional amount of interest rate swap
agreements during 2004 and $200.0 million in March 2005, and the termination of
$150.0 million and $101.2 million of interest rate swap agreements designated as
fair value hedges in February 2005 and May 2005, respectively, as further
discussed below. Although the Company has implemented other methods to mitigate
the reduction in net interest income, as further discussed below, the maturity
and termination of the swap agreements has resulted in a compression of our net
interest margin of approximately 70 basis points for the six months ended June
30, 2005, in comparison to the same period in 2004, and will result in a
reduction of future net interest income and further compression of our net
interest margin unless interest rates increase. We recorded net losses on
derivative instruments, which are included in noninterest income in our
consolidated statements of income, of $590,000 for the three and six months
ended June 30, 2005, in comparison to net gains of $487,000 and $455,000 for the
three and six months ended June 30, 2004, respectively. The net losses recorded
in 2005 reflect changes in the value of our fair value hedges and the underlying
hedged liabilities during 2005 until the termination of the $150.0 million of
interest rate swap agreements designated as fair value hedges in February 2005,
as further discussed below.
Cash Flow Hedges. During September 2000, March 2001, April 2001, March 2002 and
July 2003, we entered into interest rate swap agreements of $600.0 million,
$200.0 million, $175.0 million, $150.0 million and $200.0 million notional
amount, respectively, to effectively lengthen the repricing characteristics of
certain interest-earning assets to correspond more closely with their funding
source with the objective of stabilizing cash flow, and accordingly, net
interest income over time. The underlying hedged assets are certain loans within
our commercial loan portfolio. The swap agreements, which have been designated
as cash flow hedges, provide for us to receive a fixed rate of interest and pay
an adjustable rate of interest equivalent to the weighted average prime lending
rate minus 2.70%, 2.82%, 2.82%, 2.80% and 2.85%, 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. In addition, the
$150.0 million notional amount swap agreement that we entered into in March 2002
matured in March 2004, the $600.0 million notional amount swap agreements that
we entered into in September 2000 matured in September 2004, and the $200.0
million notional amount swap agreement that we entered into in March 2001
matured on March 21, 2005. The amount receivable by us under the swap agreements
was $2.4 million and $2.7 million at June 30, 2005 and December 31, 2004,
respectively, and the amount payable by us under the swap agreements was $1.8
million and $1.4 million at June 30, 2005 and December 31, 2004, respectively.
In October 2004, we implemented the guidance required by the FASB's
Derivatives Implementation Group on Statement of Financial Accounting Standards
No. 133 Implementation Issue No. G25, Cash Flow Hedges: Using the
First-Payments-Received Technique in Hedging the Variable Interest Payments on a
Group of Non-Benchmark-Rate-Based Loans, or DIG issue G25, and de-designated all
of the specific pre-existing cash flow hedging relationships that were
inconsistent with the guidance in DIG Issue G25. Consequently, the $4.1 million
net gain associated with the de-designated cash flow hedging relationships at
September 30, 2004, is being amortized to interest income over the remaining
lives of the respective hedging relationships, which ranged from approximately
six months to three years at the date of implementation. We elected to
prospectively re-designate new cash flow hedging relationships based upon minor
revisions to the underlying hedged items as required by the guidance in DIG
Issue G25. The implementation of DIG Issue G25 did not and is not expected to
have a material impact on our consolidated financial statements, results of
operations or interest rate risk management program.
The maturity dates, notional amounts, interest rates paid and received
and fair value of our interest rate swap agreements designated as cash flow
hedges as of June 30, 2005 and December 31, 2004 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
June 30, 2005:
April 2, 2006................................... $ 100,000 3.18% 5.45% $ 1,179
July 31, 2007................................... 200,000 3.15 3.08 (3,902)
--------- -------
$ 300,000 3.16 3.87 $(2,723)
========= ==== ==== =======
December 31, 2004:
March 21, 2005.................................. $ 200,000 2.43% 5.24% $ 1,155
April 2, 2006................................... 100,000 2.43 5.45 2,678
July 31, 2007................................... 200,000 2.40 3.08 (2,335)
--------- -------
$ 500,000 2.42 4.42 $ 1,498
========= ==== ==== =======
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 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 provided 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 were a portion of our other time deposits. The terms
of the swap agreements provided 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 $3.9
million at December 31, 2004, and the amount payable by us under
the swap agreements was $695,000 at December 31, 2004. In
September 2003, we discontinued hedge accounting treatment on the
$50.0 million notional amount of three-year swap agreements
entered into in January 2001 due to the loss of our highly
correlated hedge positions between the swap agreements and the
underlying hedged liabilities. Consequently, the resulting $1.3
million basis adjustment of the underlying hedged liabilities was
recorded as a reduction of interest expense over the remaining
weighted average maturity of the underlying hedged liabilities of
approximately three months. This $50.0 million notional swap
agreement matured in January 2004. Effective February 25, 2005,
we terminated the remaining $150.0 million notional amount of
five-year interest rate swap agreements that hedged a portion of
our other time deposits. The termination of the swap agreements
resulted from an increasing level of ineffectiveness associated
with the correlation of the hedge positions between the swap
agreements and the underlying hedged liabilities that had been
anticipated as the swap agreements neared their originally
scheduled maturity dates in January 2006. The resulting $3.1
million basis adjustment of the underlying hedged liabilities is
being recorded as interest expense over the remaining weighted
average maturity of the underlying hedged liabilities of
approximately ten months.
>> During May 2002, March 2003 and April 2003, we entered into $55.2
million, $25.0 million and $46.0 million notional amount,
respectively, of interest rate swap agreements that provide for
us to receive a fixed rate of interest and pay an adjustable rate
of interest equivalent to the three-month London Interbank
Offering Rate plus 2.30%, 2.55% and 2.58%, respectively. The
underlying hedged liabilities are a portion of 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 June 30, 2005 or December
31, 2004. Effective May 27, 2005, we terminated the $55.2 million
and $46.0 million notional swap agreements in order to
appropriately modify our future hedge position in accordance with
our interest rate risk management program. The resulting $854,000
basis adjustment of the underlying hedged liabilities, in
aggregate, is being recorded as a reduction of interest expense
over the remaining maturities of the underlying hedged
liabilities, which range from 26 to 28 years.
The maturity dates, notional amounts, interest rates paid and received
and fair value of our interest rate swap agreements designated as fair value
hedges as of June 30, 2005 and December 31, 2004 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
June 30, 2005:
March 20, 2033................................... $ 25,000 5.64% 8.10% $ (280)
========= ===== ===== =======
December 31, 2004:
January 9, 2006 (1).............................. $ 150,000 2.06% 5.51% $ 3,610
December 31, 2031 (2)............................ 55,200 4.27 9.00 2,171
March 20, 2033................................... 25,000 4.52 8.10 (929)
June 30, 2033 (2)................................ 46,000 4.55 8.15 (1,689)
--------- -------
$ 276,200 3.14 6.88 $ 3,163
========= ==== ==== =======
------------------
(1) The interest rate swap agreements were terminated effective February 25, 2005, as further discussed above.
(2) The interest rate swap agreements were terminated effective May 27, 2005, as further discussed above.
Interest Rate Cap Agreements. During 2003 and 2004, we entered into five term
repurchase agreements under master repurchase agreements with unaffiliated third
parties, as further described in Note 9 to our Consolidated Financial
Statements. The underlying securities associated with the term repurchase
agreements are mortgage-backed securities and callable U.S. Government agency
securities and are held by other financial institutions under safekeeping
agreements. The term repurchase agreements were entered into with the objective
of stabilizing net interest income over time and further protecting our net
interest margin against changes in interest rates. The interest rate floor
agreements included within the term repurchase agreements (and the interest rate
cap agreements previously included within the term repurchase agreements)
represent embedded derivative instruments which, in accordance with existing
accounting literature governing derivative instruments, are not required to be
separated from the term repurchase agreements and accounted for separately as a
derivative financial instrument. As such, the term repurchase agreements are
reflected in other borrowings in the consolidated balance sheets and the related
interest expense is reflected as interest expense on other borrowings in the
consolidated statements of income. As further described in Note 9 to our
Consolidated Financial Statements, on March 21, 2005, in accordance with our
interest rate risk management program, we modified our term repurchase
agreements under master repurchase agreements with unaffiliated third parties to
terminate the interest rate cap agreements embedded within the agreements and
simultaneously enter into interest rate floor agreements, also embedded within
the agreements. These modifications resulted in adjustments to the existing
interest rate spread to LIBOR for the underlying agreements. The modified terms
of the term repurchase agreements became effective during the second quarter of
2005. We did not incur any costs associated with the modifications of the
agreements nor did the modifications result in a change to the accounting
treatment of the embedded derivative instruments.
Pledged Collateral. At June 30, 2005 and December 31, 2004, we had a $5.0
million letter of credit issued on our behalf to the counterparty and had
pledged investment securities available for sale with a fair value of $1.8
million and $527,000, respectively, in connection with our interest rate swap
agreements. At June 30, 2005, we had pledged cash of $368,000 as collateral in
connection with our interest rate swap agreements. At December 31, 2004, we had
accepted cash of $6.0 million as collateral in connection with our interest rate
swap agreements.
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 to be sold. 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. The carrying value of these
interest rate lock commitments included in other assets in the consolidated
balance sheets was $54,000 and $20,000 at June 30, 2005 and December 31, 2004,
respectively.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source
of income for First Bank. Interest and fees on loans were 84.9% and 84.4% of
total interest income for the three and six months ended June 30, 2005,
respectively, in comparison to 86.7% and 87.2% for the comparable periods in
2004. Total loans, net of unearned discount, increased $171.7 million to $6.31
billion, or 71.9% of total assets, at June 30, 2005, compared to $6.14 billion,
or 70.3% of total assets, at December 31, 2004. The overall increase in loans,
net of unearned discount, in 2005 is primarily attributable to internal loan
growth and the acquisition of FBA, which provided loans, net of unearned
discount, of $54.3 million. The net increase is primarily attributable to:
>> an increase of $120.5 million in our real estate mortgage
portfolio primarily attributable to the acquisition of FBA, which
provided real estate mortgage loans of $54.2 million, as well as
internal growth within our loan portfolio; management's business
strategy decision in mid-2003 to retain a portion of the new loan
production in our residential real estate mortgage portfolio as a
result of continued weak loan demand in other sectors of our loan
portfolio; and a home equity product line campaign that we held
in mid-2004;
>> an increase of $54.0 million in loans held for sale resulting
from the timing of loan sales in the secondary mortgage market,
coupled with an overall increase in loan origination volumes for
the three and six months ended June 30, 2005 as compared to the
comparable periods in 2004, partially offset by the sale of
certain acquired loans; and
>> an increase of $35.2 million in our real estate construction and
development portfolio resulting primarily from new loan
originations and seasonal fluctuations on existing and available
credit lines; partially offset by
>> a decrease of $40.1 million in our commercial, financial and
agricultural portfolio, due partially to a decline in internal
loan volumes and an anticipated amount of attrition associated
with our acquisitions completed during 2004, particularly CIB
Bank, as well as general runoff of balances within this
portfolio.
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 June 30, 2005 and December 31, 2004:
June 30, December 31,
2005 2004
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual......................................................... $ 8,838 10,147
Restructured....................................................... -- 4
Real estate construction and development:
Nonaccrual......................................................... 10,022 13,435
Real estate mortgage:
One-to-four family residential:
Nonaccrual...................................................... 10,613 9,881
Restructured.................................................... 11 11
Multi-family residential loans:
Nonaccrual...................................................... 976 434
Commercial real estate loans:
Nonaccrual...................................................... 42,871 50,671
Lease financing:
Nonaccrual......................................................... 766 907
Consumer and installment:
Nonaccrual......................................................... 155 310
----------- ----------
Total nonperforming loans................................... 74,252 85,800
Other real estate.................................................... 2,001 4,030
----------- ----------
Total nonperforming assets.................................. $ 76,253 89,830
=========== ==========
Loans, net of unearned discount...................................... $ 6,309,680 6,137,968
=========== ==========
Loans past due 90 days or more and still accruing.................... $ 7,146 28,689
=========== ==========
Ratio of:
Allowance for loan losses to loans................................. 2.22% 2.46%
Nonperforming loans to loans....................................... 1.18 1.40
Allowance for loan losses to nonperforming loans................... 188.77 175.65
Nonperforming assets to loans and other real estate................ 1.21 1.46
=========== ==========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $74.3 million at June 30, 2005, in comparison
to $79.8 million at March 31, 2005 and $85.8 million at December 31, 2004. Other
real estate owned was $2.0 million, $1.8 million, and $4.0 million at June 30,
2005, March 31, 2005 and December 31, 2004, respectively. Nonperforming assets,
consisting of nonperforming loans and other real estate owned, improved by $5.3
million, or 6.55%, during the second quarter of 2005, and $13.6 million, or
15.11%, during the first six months of 2005, to $76.3 million at June 30, 2005,
compared to $81.6 million at March 31, 2005 and $89.8 million at December 31,
2004. A significant portion of nonperforming assets includes nonperforming loans
associated with our acquisition of CIB Bank, which have decreased to $42.9
million, or 57.75% of our total nonperforming loans, at June 30, 2005, from
$43.7 million at March 31, 2005 and $50.5 million at December 31, 2004.
Nonperforming loans were 1.18% of loans, net of unearned discount, at June 30,
2005, compared to 1.30% and 1.40% at March 31, 2005 and December 31, 2004,
respectively. Additionally, loans past due 90 days or more and still accruing
interest decreased $21.5 million to $7.1 million at June 30, 2005 from $28.7
million at December 31, 2004. The decrease in nonperforming loans and past due
loans during the six months ended June 30, 2005 primarily resulted from: our
continued emphasis on improving asset quality; the sale of approximately $14.3
million of certain acquired nonperforming loans, specifically $2.8 million and
$11.5 million during the first and second quarters of 2005, respectively; a
notable reduction in net loan charge-offs, which reflected net loan recoveries
of $3.6 million for the three months ended June 30, 2005 and net loan
charge-offs of $3.0 million for the six months ended June 30, 2005; upgrades to
the credit ratings of certain loans; and significant loan payoffs and/or
external refinancings of various credits, including $58.5 million of loan
payoffs on eight credit relationships during the first and second quarters of
2005. A portion of the loan payoffs and sales during the first quarter of 2005
pertaining to certain acquired nonperforming loans that were classified as loans
held for sale as of December 31, 2004 contributed to a reallocation of the
purchase price on our acquisition of Hillside, as further discussed in Note 2 to
our Consolidated Financial Statements. Additionally, we recorded a write-down on
an acquired parcel of other real estate owned to its estimated fair value based
upon additional data received. This $1.6 million write-down on other real estate
owned, which was also recorded as an acquisition-related adjustment in the first
quarter of 2005 and is further discussed in Note 2 to our Consolidated Financial
Statements, further contributed to the decrease in nonperforming assets.
We recorded net loan recoveries of $3.6 million for the three months
ended June 30, 2005 and net loan charge-offs of $3.0 million for the six months
ended June 30, 2005, in comparison to net loan charge-offs of $5.4 million and
$10.8 million for the comparable periods in 2004. Loan charge-offs were $2.4
million and $15.0 million for the three and six months ended June 30, 2005, in
comparison to $12.8 million and $24.3 million for the comparable periods in
2004. Loan recoveries were $6.0 million and $12.1 million for the three and six
months ended June 30, 2005, in comparison to $7.4 million and $13.5 million for
the comparable periods in 2004. The allowance for loan losses was $140.2 million
at June 30, 2005, compared to $144.2 million at March 31, 2005 and $150.7
million at December 31, 2004. Our allowance for loan losses as a percentage of
loans, net of unearned discount, was 2.22% at June 30, 2005, compared to 2.34%
at March 31, 2005 and 2.46% at December 31, 2004. Our allowance for loan losses
as a percentage of nonperforming loans was 188.77% at June 30, 2005, compared to
180.71% at March 31, 2005 and 175.65% at December 31, 2004. We continue to
closely monitor our loan portfolio and address the ongoing challenges posed by
the current economic environment, including reduced loan demand within certain
sectors of our loan portfolio. We consider this in our overall assessment of the
adequacy of the allowance for loan losses. Despite the improvement in
nonperforming assets during 2005, we anticipate nonperforming assets will
continue to remain at somewhat elevated levels in the near future as a result of
the significant level of acquired nonperforming loans associated with our three
acquisitions in the later part of 2004, particularly our acquisition of CIB Bank
in November 2004.
Each month, the credit administration department provides management
with detailed lists of loans on the watch list and summaries of the entire loan
portfolio by risk rating. These are coupled with analyses of changes in the risk
profile of the portfolio, 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 level of risk in
the portfolio. Factors are applied to the loan portfolio for each category of
loan risk to determine acceptable levels of allowance for loan losses. In
addition, a quarterly evaluation of each lending unit is performed based on
certain factors, such as lending personnel experience, recent credit reviews,
loan concentrations and other factors. Based on this evaluation, changes to the
allowance for loan losses may be required due to the perceived risk of
particular portfolios. The calculated allowance required for the portfolio is
then compared to the actual allowance balance to determine the provisions
necessary to maintain the allowance at appropriate levels. In addition,
management exercises a certain degree of judgment in its analysis of the overall
adequacy of the allowance for loan losses. In its analysis, management considers
the change in the portfolio, including growth, composition, the ratio of net
loans to total assets, and the economic conditions of the regions in which we
operate. Based on this quantitative and qualitative analysis, adjustments are
made to the allowance for loan losses. Such adjustments are reflected in our
consolidated statements of income.
Changes in the allowance for loan losses for the three and six months
ended June 30, 2005 and 2004 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period....................... $ 144,154 124,871 150,707 116,451
Acquired allowance for loan losses................. 419 -- 419 --
Other adjustments (1)(2) -- (1,479) -- (479)
--------- ------- ------- -------
144,573 123,392 151,126 115,972
--------- ------- ------- -------
Loans charged-off.................................. (2,385) (12,801) (15,021) (24,295)
Recoveries of loans previously charged-off......... 5,976 7,375 12,059 13,539
--------- ------- ------- -------
Net loan recoveries (charge-offs)................ 3,591 (5,426) (2,962) (10,756)
--------- ------- ------- -------
Provision for loan losses.......................... (8,000) 3,000 (8,000) 15,750
--------- ------- ------- -------
Balance, end of period ............................ $ 140,164 120,966 140,164 120,966
========= ======= ======= =======
---------------
(1) In December 2003, we established a $1.0 million specific reserve for estimated losses on a $5.3 million
letter of credit that was recorded in accrued and other liabilities in our consolidated balance sheets.
In January 2004, the letter of credit was fully funded as a loan and the related $1.0 million specific
reserve was reclassified from accrued and other liabilities to the allowance for loan losses.
(2) On June 30, 2004, First Banks reclassified $1.5 million from the allowance for loan losses to accrued
and other liabilities to establish a specific reserve associated with the commercial leasing portfolio
sale and related recourse obligations for certain leases sold.
Liquidity
Our liquidity 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. We 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 Bank and other borrowings,
including our revolving credit line. The aggregate funds acquired from these
sources were $1.42 billion at June 30, 2005 and December 31, 2004.
The following table presents the maturity structure of these other
sources of funds, which consists of certificates of deposit of $100,000 or more
and other borrowings, including our note payable, at June 30, 2005:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less..................................... $219,375 166,991 386,366
Over three months through six months..................... 152,556 -- 152,556
Over six months through twelve months.................... 225,797 4,000 229,797
Over twelve months....................................... 270,750 385,300 656,050
-------- ------- ---------
Total............................................... $868,478 556,291 1,424,769
======== ======= =========
In addition to these sources of funds, First Bank has established a
borrowing relationship with the Federal Reserve Bank of St. Louis. This
borrowing relationship, which is secured by commercial loans, provides an
additional liquidity facility that may be utilized for contingency purposes. At
June 30, 2005 and December 31, 2004, First Bank's borrowing capacity under the
agreement was approximately $767.2 million and $778.7 million, respectively. In
addition, First Bank's borrowing capacity through its relationship with the
Federal Home Loan Bank was approximately $563.1 million and $505.2 million at
June 30, 2005 and December 31, 2004, respectively. Exclusive of the Federal Home
Loan Bank advances outstanding of $39.4 million and $35.6 million at June 30,
2005 and December 31, 2004, respectively, which represent advances assumed in
conjunction with various acquisitions, First Bank had no amounts outstanding
under its borrowing arrangement with the Federal Home Loan Bank at June 30, 2005
and December 31, 2004.
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 contractual obligations at June 30,
2005, are as follows:
Less than 1-3 3-5 Over
1 Year Years Years 5 Years Total
------ ----- ----- ------- -----
(dollars expressed in thousands)
Operating leases............................... $ 9,829 14,289 9,164 17,497 50,779
Certificates of deposit (1).................... 1,846,403 812,899 165,982 32,803 2,858,087
Other borrowings (1)........................... 170,991 365,500 8,800 11,000 556,291
Subordinated debentures (1).................... -- -- -- 275,213 275,213
Other contractual obligations.................. 1,678 323 77 20 2,098
---------- --------- -------- -------- ---------
Total..................................... $2,028,901 1,193,011 184,023 336,533 3,742,468
========== ========= ======== ======== =========
---------------
(1) Amounts exclude the related interest expense accrued on these obligations as of June 30, 2005.
Management believes the available liquidity and operating results of
First Bank 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
interest on the subordinated debentures that we issued to our affiliated
statutory and business financing trusts.
Effects of New Accounting Standards
In November 2003, the Emerging Issues Task Force, or EITF, reached a
consensus on certain disclosure requirements under EITF Issue No 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The new disclosure requirements apply to investment in debt and
marketable equity securities that are accounted for under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and SFAS No.
124, Accounting for Certain Investments Held by Not-for-Profit Organizations.
Effective for fiscal years ending after December 15, 2003, companies are
required to disclose information about debt or marketable equity securities with
market values below carrying values. We previously adopted the disclosure
requirements of EITF Issue No. 03-1. In March 2004, the EITF came to a consensus
regarding EITF 03-1. Securities in scope are those subject to SFAS 115 and SFAS
124. The EITF adopted a three-step model that requires management to determine
if impairment exists, decide whether it is other than temporary, and record
other-than-temporary losses in earnings. In September 2004, the FASB approved
issuing a Staff Position to delay the requirement to record impairment losses
under EITF 03-1, but broadened the scope to include additional types of
securities. As proposed, the delay would have applied only to those debt
securities described in paragraph 16 of EITF 03-1, the Consensus that provides
guidance for determining whether an investment's impairment is other than
temporary and should be recognized in income. On June 29, 2005, the FASB
directed to issue EITF Issue 03-1-a, Implementation Guidance for the Application
of Paragraph 16 of EITF Issue No. 03-1, as final. The final EITF, to be retitled
FAS 115-1, The Meaning of Other-Than Temporary Impairment and Its Application to
Certain Investments, is expected to be issued in August 2005 and will be
effective for other-than-temporary impairment analysis conducted in periods
beginning after September 15, 2005.
In December 2003, the Accounting Standards Executive Committee, or
AcSEC, issued SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired
in a Transfer, effective for loans acquired in fiscal years beginning after
December 15, 2004. The scope of SOP 03-3 applies to problem loans that have been
acquired, either individually in a portfolio, or in an acquisition. These loans
must have evidence of credit deterioration and the purchaser must not expect to
collect contractual cash flows. SOP 03-3 updates Practice Bulletin No. 6,
Amortization of Discounts on Certain Acquired Loans, for more recently issued
literature, including FASB Statements No. 114, Accounting by Creditors for
Impairment of a Loan; No. 115, Accounting for Certain Investments in Debt and
Equity Securities; and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Additionally, it addresses
FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases, which
requires that discounts be recognized as an adjustment of yield over a loan's
life. SOP 03-3 states that an institution may no longer display discounts on
purchased loans within the scope of SOP 03-3 on the balance sheet and may not
carry over the allowance for loan losses. For those loans within the scope of
SOP 03-3, this statement clarifies that a buyer cannot carry over the seller's
allowance for loan losses for the acquisition of loans with credit
deterioration. Loans acquired with evidence of deterioration in credit quality
since origination will need to be accounted for under a new method using an
income recognition model. This prohibition also applies to purchases of problem
loans not included in a purchase business combination, which would include
syndicated loans purchased in the secondary market and loans acquired in
portfolio purchases. We implemented SOP 03-3 in conjunction with our acquisition
of FBA, which we completed on April 29, 2005. The implementation of SOP 03-3, as
it pertains to this individual transaction, did not have a material impact on
our consolidated financial statements or results of operations. We will continue
to evaluate the impact of SOP 03-3 on our consolidated financial statements and
results of operations as it relates to the recently announced acquisitions
described in Note 2 to our Consolidated Financial Statements and future
transactions.
On March 1, 2005, the Board of Governors of the Federal Reserve System,
or Board, adopted a final rule, Risk-Based Capital Standards: Trust Preferred
Securities and the Definition of Capital, that allows for the continued limited
inclusion of trust preferred securities in Tier 1 capital, as further discussed
in Note 7 to our Consolidated Financial Statements. The Board's final rule
limits restricted core capital elements to 25% of the sum of all core capital
elements, including restricted core capital elements, net of goodwill less any
associated deferred tax liability. Amounts of restricted core capital elements
in excess of these limits may generally be included in Tier 2 capital. Amounts
of qualifying trust preferred securities and cumulative perpetual preferred
stock in excess of the 25% limit may be included in Tier 2 capital, but limited,
together with subordinated debt and limited-life preferred stock, to 50% of Tier
1 capital. In addition, the final rule provides that in the last five years
before the maturity of the underlying subordinated note, the outstanding amount
of the associated trust preferred securities is excluded from Tier 1 capital and
included in Tier 2 capital, subject to one-fifth amortization per year. The
final rule provides for a five-year transition period, ending March 31, 2009,
for the application of the quantitative limits. Until March 31, 2009, the
aggregate amount of qualifying cumulative perpetual preferred stock and
qualifying trust preferred securities that may be included in Tier 1 capital is
limited to 25% of the sum of the following core capital elements: qualifying
common stockholders' equity, qualifying noncumulative and cumulative perpetual
preferred stock, qualifying minority interest in the equity accounts of
consolidated subsidiaries and qualifying trust preferred securities. First Banks
has evaluated the impact of the final rule on the Company's financial condition
and results of operations, and determined the implementation of the Board's
final rule, as adopted, will reduce First Banks' regulatory capital ratios, as
set forth in Note 7 to our Consolidated Financial Statements.
In May 2005, the FASB issued SFAS No. 154 -- Accounting Changes and
Error Corrections. SFAS No. 154, a replacement of APB Opinion No. 20 --
Accounting Changes and FASB Statement No. 3 -- Reporting Accounting Changes in
Interim Financial Statements. SFAS No. 154 requires retrospective application
for voluntary changes in accounting principles unless it is impracticable to do
so. SFAS No. 154 is effective for accounting changes and corrections of errors
in fiscal years beginning after December 15, 2005. Early application is
permitted for accounting changes and corrections of errors during fiscal years
beginning after June 1, 2005. We are currently evaluating the requirements of
SFAS No. 154 and do not expect it to have a material effect on our consolidated
financial statements or results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2004, our risk management program's simulation model
indicated a loss of projected net interest income in the event of a decline in
interest rates. We are "asset-sensitive," indicating that our assets would
generally reprice with changes in rates more rapidly than our liabilities. While
a decline in interest rates of less than 100 basis points was projected to have
a relatively minimal impact on our net interest income, an instantaneous,
parallel decline in the interest yield curve of 100 basis points indicated a
pre-tax projected loss of approximately 8.9% in net interest income, based on
assets and liabilities at December 31, 2004. At June 30, 2005, we remain in an
"asset-sensitive" position and thus, remain subject to a higher level of risk in
a declining interest rate environment. Although we do not anticipate that
instantaneous shifts in the yield curve as projected in our simulation model are
likely, these are indications of the effects that changes in interest rates
would have over time. Our asset-sensitive position, coupled with declines in
income associated with our interest rate swap agreements and increases in
prevailing interest rates beginning in mid-2004 and continuing in 2005, is
reflected in our net interest margin for the three and six months ended June 30,
2005 as compared to the comparable periods in 2004 and further discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations." During the three and six months ended June
30, 2005, our asset-sensitive position and overall susceptibility to market
risks have not changed materially. However, prevailing interest rates have
continued to rise during the three and six months ended June 30, 2005.
ITEM 4 - CONTROLS AND PROCEDURES
Our Chief Executive Officer, who is our principal executive and
principal financial officer, has evaluated the effectiveness of our "disclosure
controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, or the Exchange Act), as of the end of the
period covered by this report. Based on such evaluation, our Chief Executive
Officer has concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act. There have not been any changes in the Company's internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that have materially effected, or are reasonably likely to materially
affect, the Company's control over financial reporting.
Part II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the April 29, 2005 Annual Meeting of Shareholders of First Banks
Messrs. James F. Dierberg, Allen H. Blake, Gordon A. Gundaker, Terrance M.
McCarthy, Steven F. Schepman, David L. Steward, Hal J. Upbin and Douglas H.
Yaeger, constituting all of the directors, were unanimously re-elected.
ITEM 6 - EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit Number Description
-------------- -----------
31 Rule 13a-14(a) / 15d-14(a) Certifications - filed herewith.
32 Section 1350 Certifications - filed herewith.
SIGNATURE
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.
Date: August 12, 2005
FIRST BANKS, INC.
By:/s/ Allen H. Blake
----------------------------------------------
Allen H. Blake
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
EXHIBIT 31
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Allen H. Blake, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (the "Report") of First
Banks, Inc. (the "Registrant");
2. Based on my knowledge, this 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
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 Report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 Report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this Report based on such evaluation; and
c) Disclosed in this Report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter (the Registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: August 12, 2005
FIRST BANKS, INC.
By:/s/ Allen H. Blake
----------------------------------------------
Allen H. Blake
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
EXHIBIT 32
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350
I, Allen H. Blake, President, Chief Executive Officer 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 Quarterly Report on Form 10-Q of the Company for the
quarterly period ended June 30, 2005 (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.
Date: August 12, 2005
By:/s/ Allen H. Blake
----------------------------------------------
Allen H. Blake
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)