UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
-------- --------
Indicate by check mark whether the registrant is a shell company (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 October 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................................ 37
ITEM 4. CONTROLS AND PROCEDURES................................................................... 38
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.................................................................................. 39
SIGNATURES............................................................................................ 40
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
September 30, December 31,
2005 2004
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks.............................................................. $ 201,321 149,605
Short-term investments............................................................... 85,808 117,505
---------- ---------
Total cash and cash equivalents................................................. 287,129 267,110
---------- ---------
Investment securities:
Available for sale................................................................... 1,559,014 1,788,063
Held to maturity (fair value of $27,068 and $25,586, respectively)................... 27,066 25,286
---------- ---------
Total investment securities..................................................... 1,586,080 1,813,349
---------- ---------
Loans:
Commercial, financial and agricultural............................................... 1,584,191 1,575,232
Real estate construction and development............................................. 1,421,877 1,318,413
Real estate mortgage................................................................. 3,311,471 3,061,581
Consumer and installment............................................................. 59,291 54,546
Loans held for sale.................................................................. 257,605 133,065
---------- ---------
Total loans..................................................................... 6,634,435 6,142,837
Unearned discount.................................................................... (6,625) (4,869)
Allowance for loan losses............................................................ (139,471) (150,707)
---------- ---------
Net loans....................................................................... 6,488,339 5,987,261
---------- ---------
Bank premises and equipment, net of accumulated depreciation and amortization............. 142,405 144,486
Goodwill.................................................................................. 166,170 156,849
Bank-owned life insurance................................................................. 110,318 106,788
Deferred income taxes..................................................................... 126,579 127,397
Other assets.............................................................................. 101,482 129,601
---------- ---------
Total assets.................................................................... $9,008,502 8,732,841
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand........................................................... $1,316,287 1,194,662
Interest-bearing demand.............................................................. 926,913 875,489
Savings.............................................................................. 2,103,603 2,249,644
Time deposits of $100 or more........................................................ 1,018,055 807,220
Other time deposits.................................................................. 2,015,633 2,024,955
---------- ---------
Total deposits.................................................................. 7,380,491 7,151,970
Other borrowings.......................................................................... 568,699 594,750
Notes payable............................................................................. 80,000 15,000
Subordinated debentures................................................................... 215,433 273,300
Deferred income taxes..................................................................... 27,670 34,812
Accrued expenses and other liabilities.................................................... 64,776 62,116
Minority interest in subsidiary........................................................... 6,314 --
---------- ---------
Total liabilities............................................................... 8,343,383 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......................................................................... 653,798 577,836
Accumulated other comprehensive loss...................................................... (13,567) (1,831)
---------- ---------
Total stockholders' equity...................................................... 665,119 600,893
---------- ---------
Total liabilities and stockholders' equity...................................... $9,008,502 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 Nine Months Ended
September 30, September 30,
------------------- ------------------
2005 2004 2005 2004
---- ---- ---- ----
Interest income:
Interest and fees on loans........................................... $ 109,903 86,201 303,515 254,176
Investment securities................................................ 17,057 12,784 52,001 37,098
Short-term investments............................................... 841 476 1,701 899
--------- -------- -------- --------
Total interest income........................................... 127,801 99,461 357,217 292,173
--------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................ 979 801 2,799 2,592
Savings............................................................ 8,345 5,116 20,420 14,486
Time deposits of $100 or more...................................... 7,206 3,358 18,806 9,353
Other time deposits................................................ 16,832 8,636 46,967 25,296
Other borrowings..................................................... 4,946 1,982 12,480 3,383
Notes payable........................................................ 862 229 1,103 398
Subordinated debentures.............................................. 5,985 3,731 16,096 10,798
--------- -------- -------- --------
Total interest expense.......................................... 45,155 23,853 118,671 66,306
--------- -------- -------- --------
Net interest income............................................. 82,646 75,608 238,546 225,867
Provision for loan losses................................................. -- 7,500 (8,000) 23,250
--------- -------- -------- --------
Net interest income after provision for loan losses............. 82,646 68,108 246,546 202,617
--------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees........ 10,175 9,837 29,651 28,578
Gain on loans sold and held for sale................................. 6,505 4,676 17,865 12,866
Net (loss) gain on sales of available-for-sale
investment securities.............................................. (3) 257 (3) 257
(Loss) gain on sales of branches, net of expenses.................... -- (20) -- 1,000
Bank-owned life insurance investment income.......................... 1,177 1,255 3,711 3,874
Investment management income......................................... 2,129 1,795 6,375 5,079
Other................................................................ 4,552 4,182 13,840 10,991
--------- -------- -------- --------
Total noninterest income........................................ 24,535 21,982 71,439 62,645
--------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits....................................... 35,667 29,936 103,145 85,825
Occupancy, net of rental income...................................... 5,327 4,674 15,792 13,744
Furniture and equipment.............................................. 3,960 4,099 11,798 12,802
Postage, printing and supplies....................................... 1,387 1,222 4,339 3,765
Information technology fees.......................................... 9,141 7,977 26,686 23,965
Legal, examination and professional fees............................. 2,257 1,644 6,710 4,895
Amortization of intangibles associated with the purchase
of subsidiaries.................................................... 1,168 733 3,523 2,049
Communications....................................................... 495 469 1,470 1,333
Advertising and business development................................. 1,623 1,297 5,018 3,902
Charitable contributions............................................. 111 294 1,789 424
Other................................................................ 6,303 6,046 20,697 13,694
--------- -------- -------- --------
Total noninterest expense....................................... 67,439 58,391 200,967 166,398
--------- -------- -------- --------
Income before provision for income taxes and minority
interest in loss of subsidiary............................... 39,742 31,699 117,018 98,864
Provision for income taxes................................................ 13,265 11,951 41,568 34,844
--------- -------- -------- --------
Income before minority interest in loss of subsidiary........... 26,477 19,748 75,450 64,020
Minority interest in loss of subsidiary................................... (1,036) -- (1,036) --
--------- -------- -------- --------
Net income...................................................... 27,513 19,748 76,486 64,020
Preferred stock dividends................................................. 196 196 524 524
--------- -------- -------- --------
Net income available to common stockholders..................... $ 27,317 19,552 75,962 63,496
========= ======== ======== ========
Basic earnings per common share........................................... $1,154.52 826.33 3,210.44 2,683.56
========= ======== ======== ========
Diluted earnings per common share......................................... $1,139.46 815.20 3,163.13 2,642.12
========= ======== ======== ========
Weighted average common stock outstanding................................. 23,661 23,661 23,661 23,661
========= ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Nine Months Ended September 30, 2005 and 2004 and Three 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
-------
Nine months ended September 30, 2004:
Comprehensive income: (1)
Net income..................................... -- -- -- -- 64,020 -- 64,020
Other comprehensive loss, net of tax:
Unrealized losses on investment securities... -- -- -- -- -- (1,719) (1,719)
Reclassification adjustment for
gains included in net income............... -- -- -- -- -- (167) (167)
Derivative instruments:
Current period transactions................ -- -- -- -- -- (22,074) (22,074)
-------
Total comprehensive income....................... 40,060
Class A preferred stock dividends,
$0.80 per share................................ -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share................................ -- -- -- -- (11) -- (11)
------- --- ----- ----- ------- ------- -------
Consolidated balances, September 30, 2004............ 12,822 241 5,915 5,910 559,210 5,253 589,351
-------
Three months ended December 31, 2004:
Comprehensive income:
Net income..................................... -- -- -- -- 18,888 -- 18,888
Other comprehensive loss, net of tax:
Unrealized losses on investment securities... -- -- -- -- -- (3,992) (3,992)
Derivative instruments:
Current period transactions................ -- -- -- -- -- (3,092) (3,092)
-------
Total comprehensive income....................... 11,804
Class A preferred stock dividends,
$0.40 per share................................ -- -- -- -- (256) -- (256)
Class B preferred stock dividends,
$0.04 per share................................ -- -- -- -- (6) -- (6)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2004............. 12,822 241 5,915 5,910 577,836 (1,831) 600,893
-------
Nine months ended September 30, 2005:
Comprehensive income: (1)
Net income..................................... -- -- -- -- 76,486 -- 76,486
Other comprehensive loss, net of tax:
Unrealized losses on investment securities... -- -- -- -- -- (7,842) (7,842)
Reclassification adjustment for
losses included in net income.............. -- -- -- -- -- 2 2
Derivative instruments:
Current period transactions................ -- -- -- -- -- (3,896) (3,896)
-------
Total comprehensive income....................... 64,750
Class A preferred stock dividends,
$0.80 per share................................ -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share................................ -- -- -- -- (11) -- (11)
------- --- ----- ----- ------- ------- -------
Consolidated balances, September 30, 2005............ $12,822 241 5,915 5,910 653,798 (13,567) 665,119
======= === ===== ===== ======= ======= =======
- -------------------------
(1) Disclosure of Comprehensive Income (Loss):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
---- ---- ---- ----
Comprehensive income:
Net income.................................................. $27,513 19,748 76,486 64,020
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on investment securities........ (4,271) 17,397 (7,842) (1,719)
Reclassification adjustment for losses (gains)
included in net income.................................. 2 (167) 2 (167)
Derivative instruments:
Current period transactions............................. (1,153) (3,379) (3,896) (22,074)
------- ------ ------ -------
Total comprehensive income.................................... $22,091 33,599 64,750 40,060
======= ====== ====== =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Nine Months Ended
September 30,
-----------------------
2005 2004
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 76,486 64,020
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of bank premises and equipment..................... 12,895 13,921
Amortization, net of accretion................................................... 13,180 12,602
Originations and purchases of loans held for sale................................ (1,170,240) (881,860)
Proceeds from sales of loans held for sale....................................... 858,586 741,108
Provision for loan losses........................................................ (8,000) 23,250
Provision for income taxes....................................................... 41,568 34,844
Payments of income taxes......................................................... (41,983) (35,480)
Decrease in accrued interest receivable.......................................... 702 1,814
Interest accrued on liabilities.................................................. 118,671 66,306
Payments of interest on liabilities.............................................. (116,053) (65,603)
Gain on loans sold and held for sale............................................. (17,865) (12,866)
Net loss (gain) on sales of available-for-sale investment securities............. 3 (257)
Gain on sales of branches, net of expenses....................................... -- (1,000)
Other operating activities, net.................................................. 9,854 (5,483)
Minority interest in loss of subsidiary.......................................... (1,036) --
---------- --------
Net cash used in operating activities......................................... (223,232) (44,684)
---------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received......... (9,500) (35,348)
Proceeds from sales of investment securities available for sale.................... -- 26,340
Maturities of investment securities available for sale............................. 594,846 364,312
Maturities of investment securities held to maturity............................... 1,684 3,149
Purchases of investment securities available for sale.............................. (317,776) (503,776)
Purchases of investment securities held to maturity................................ (3,508) (18,524)
Net increase in loans.............................................................. (39,397) (81,606)
Recoveries of loans previously charged-off......................................... 15,702 18,129
Purchases of bank premises and equipment........................................... (9,876) (4,585)
Sale of minority interest in subsidiary............................................ 7,350 --
Other investing activities, net.................................................... 1,393 12,078
---------- --------
Net cash provided by (used in) investing activities........................... 240,918 (219,831)
---------- --------
Cash flows from financing activities:
(Decrease) increase in demand and savings deposits................................. (74,456) 101,615
Increase (decrease) in time deposits............................................... 107,520 (13,078)
Decrease in Federal Home Loan Bank advances........................................ (6,144) (2,000)
(Decrease) increase in securities sold under agreements to repurchase.............. (29,785) 248,619
Advances drawn on notes payable.................................................... 80,000 --
Repayments of notes payable........................................................ (15,000) (17,000)
Proceeds from issuance of subordinated debentures.................................. -- 20,619
Payments for redemptions of subordinated debentures................................ (59,278) --
Cash paid for sales of branches, net of cash and cash equivalents sold............. -- (19,353)
Payment of preferred stock dividends............................................... (524) (524)
---------- --------
Net cash provided by financing activities..................................... 2,333 318,898
---------- --------
Net increase in cash and cash equivalents..................................... 20,019 54,383
Cash and cash equivalents, beginning of period.......................................... 267,110 213,537
---------- --------
Cash and cash equivalents, end of period................................................ $ 287,129 267,920
========== ========
Noncash investing and financing activities:
Loans transferred to other real estate............................................. $ 2,783 4,246
========== ========
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 nine months ended September 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, giving effect to the minority interest in
one subsidiary, 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, Missouri. First Bank operates through its branch banking offices and
subsidiaries, FB Commercial Finance, Inc., Missouri Valley Partners, Inc. (MVP)
and Small Business Loan Source LLC (SBLS LLC) which, except for SBLS LLC, are
wholly owned subsidiaries.
(2) ACQUISITIONS, INTEGRATION COSTS AND OTHER CORPORATE TRANSACTIONS
Completed Acquisitions
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), 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 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. Goodwill, which is not deductible for tax purposes, was $2.8
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 $1.7 million. FBA was merged with and into SFC and FBOTA was merged
with and into First Bank.
On September 30, 2005, First Banks completed its acquisition of
International Bank of California (IBOC) for $33.7 million in cash. The
acquisition served to further expand First Banks' banking franchise in Southern
California, providing five additional banking offices in Los Angeles,
California, including one branch in downtown Los Angeles and four branches in
eastern Los Angeles County, in Alhambra, Arcadia, Artesia and Rowland Heights.
The transaction was funded with a portion of the proceeds of First Banks' $100.0
million term loan, as further discussed in Note 10 to the Consolidated Financial
Statements. At the time of the acquisition, IBOC had assets of $151.6 million,
loans, net of unearned discount, of $113.5 million, deposits of $132.1 million
and stockholders' equity of $18.6 million. 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 $12.4 million, and the core
deposit intangibles, which are not deductible for tax purposes and will be
amortized over seven years utilizing the straight-line method, were
approximately $3.8 million. IBOC was merged with and into First Bank.
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 and significantly higher sales prices received over 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 repaid
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.
Pending Acquisitions
On April 27, 2005, First Banks executed an Agreement and Plan of
Reorganization providing for the acquisition of Northway State Bank (NSB) for
$10.3 million in cash. NSB was headquartered in Grayslake, Illinois, and
operated one banking office located in Lake County in the northern Chicago
metropolitan area. As further described in Note 13 to the Consolidated Financial
Statements, First Banks completed its acquisition of NSB on October 31, 2005.
As previously announced on August 22, 2005, First Banks entered into an
Agreement and Plan of Reorganization, which was restated as a Stock Purchase
Agreement with certain shareholders of First National Bank of Sachse (FNBS) on
October 28, 2005, that provides for First Banks to acquire approximately 85% of
the outstanding common stock of FNBS for $45.62 per share. FNBS operates one
banking office located in Sachse, Texas, which is located approximately 20 miles
northeast of the Dallas metropolitan area. At September 30, 2005, FNBS reported
assets of approximately $72.2 million, loans, net of unearned discount, of
approximately $53.0 million, deposits of approximately $61.3 million and
stockholders' equity of approximately $9.7 million. The transaction, which is
subject to regulatory approvals and the approval of FNBS's shareholders, is
expected to be completed by the first quarter of 2006.
Other Corporate Transactions
SBLS LLC, a 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, 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. FCA exercised this
option on June 30, 2005 and paid First Bank $7.4 million in cash. As a result of
this transaction, SBLS LLC became 51.0% owned by First Bank and 49.0% owned by
FCA, and accordingly, FCA's ownership interest is recognized as minority
interest in subsidiary in the consolidated balance sheets and the related
minority interest in income or loss of subsidiary is recognized in the
consolidated statements of income.
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.
On September 23, 2005, First Bank completed its assumption of the
deposit liabilities of the Roodhouse, Illinois branch office of Bank and Trust
Company, an Illinois commercial bank, for $100,000 in cash. At the time of
assumption, the deposit liabilities of the Roodhouse branch office were $5.1
million. The core deposit intangibles, which are deductible for tax purposes and
are being amortized over seven years utilizing the straight-line method, were
$100,000.
Acquisition and Integration Costs
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 three months 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 $665,000, as summarized in
the following table, is comprised of contractual obligations under salary
continuation agreements to seven individuals with remaining terms ranging from
approximately three months 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
Nine Months Ended September 30, 2005:
Amounts accrued at acquisition date......................... 588 916 1,504
Payments.................................................... (684) (127) (811)
------ ----- ------
Balance at September 30, 2005................................. $ 665 789 1,454
====== ===== ======
(3) INTANGIBLE ASSETS ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES AND BRANCH OFFICES
Intangible assets associated with the purchase of subsidiaries and
branch offices, net of amortization, were comprised of the following at
September 30, 2005 and December 31, 2004:
September 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.................... $ 35,646 (10,419) 32,823 (7,003)
Goodwill associated with
purchases of branch offices............... 2,210 (1,110) 2,210 (1,003)
-------- ------- ------- -------
Total.................................. $ 37,856 (11,529) 35,033 (8,006)
======== ======= ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries.................. $165,070 155,642
======== =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $1.2 million and $3.5 million for the three
and nine months ended September 30, 2005, respectively, and $733,000 and $2.0
million for the comparable periods in 2004. Amortization of intangibles
associated with the purchase of subsidiaries, including amortization of core
deposit intangibles and goodwill associated with 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...................................................... $ 1,305
2006................................................................ 5,220
2007................................................................ 5,220
2008................................................................ 5,220
2009 ............................................................... 3,316
2010 ............................................................... 2,856
Thereafter.......................................................... 3,190
--------
Total.......................................................... $ 26,327
========
Changes in the carrying amount of goodwill for the three and nine
months ended September 30, 2005 and 2004 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period......................... $154,664 145,255 156,849 145,548
Goodwill acquired during period...................... 12,969 6,564 15,186 6,564
Acquisition-related adjustments (1) (2).............. (1,427) -- (5,758) (222)
Amortization - purchases of branch offices........... (36) (36) (107) (107)
-------- -------- -------- --------
Balance, end of period............................... $166,170 151,783 166,170 151,783
======== ======== ======== ========
------------------
(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.
(2) Acquisition-related adjustments of $1.4 million recorded in the third quarter of 2005 pertain to the
acquisition of Continental Mortgage Corporation - Delaware.
(4) SERVICING RIGHTS
Mortgage Banking Activities. At September 30, 2005 and December 31,
2004, First Banks serviced mortgage loans for others amounting to $1.02 billion
and $1.06 billion, respectively. Changes in mortgage servicing rights, net of
amortization, for the three and nine months ended September 30, 2005 and 2004
were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $ 8,502 12,533 10,242 15,408
Servicing rights acquired during the period......... -- -- 435 --
Originated servicing rights......................... 256 345 657 1,164
Amortization........................................ (1,261) (1,498) (3,837) (5,192)
------- ------- ------- -------
Balance, end of period.............................. $ 7,497 11,380 7,497 11,380
======= ======= ======= =======
The fair value of mortgage servicing rights was approximately $13.2
million and $16.8 million at September 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 $5.7 million and $5.4
million at September 30, 2005 and 2004, respectively, and $4.4 million at
December 31, 2004. First Banks did not incur any impairment of mortgage
servicing rights during the three and nine months ended September 30, 2005 and
2004.
Amortization of mortgage servicing rights at September 30, 2005 has
been estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2005 remaining...................................................... $ 942
2006................................................................ 3,286
2007................................................................ 2,000
2008................................................................ 863
2009................................................................ 317
2010................................................................ 89
-------
Total.......................................................... $ 7,497
=======
Other Servicing Activities. At September 30, 2005 and December 31,
2004, First Banks serviced United States Small Business Administration (SBA)
loans for others amounting to $170.1 million and $174.7 million, respectively.
Changes in SBA servicing rights, net of amortization, for the three and nine
months ended September 30, 2005 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $12,351 -- 13,013 --
Servicing rights acquired during the period......... -- 15,076 -- 15,076
Originated servicing rights......................... 393 -- 932 --
Amortization........................................ (576) (163) (1,777) (163)
Impairment valuation allowance...................... (2,359) -- (2,359) --
------- ------ ------ ------
Balance, end of period.............................. $ 9,809 14,913 9,809 14,913
======= ====== ====== ======
The fair value of SBA servicing rights was approximately $10.1 million
and $14.9 million at September 30, 2005 and 2004, respectively, and $13.0
million at December 31, 2004. The excess of the fair value of SBA servicing
rights over the carrying value was approximately $297,000 at September 30, 2005.
The fair value of SBA servicing rights approximated the carrying values of $13.0
million and $14.9 million at December 31, 2004 and September 30, 2004,
respectively. First Banks recognized impairment of $2.4 million for the three
and nine months ended September 30, 2005 resulting from a decline in the fair
value of the SBA servicing assets below the carrying value following substantial
damage to several shrimping vessels within the servicing portfolio caused by the
effects of Hurricane Katrina.
Amortization of SBA servicing rights at September 30, 2005 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2005 remaining...................................................... $ 449
2006................................................................ 1,607
2007................................................................ 1,357
2008................................................................ 1,143
2009................................................................ 960
2010................................................................ 805
Thereafter.......................................................... 3,488
-------
Total.......................................................... $ 9,809
=======
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted earnings per
share computations for the three and nine months ended September 30, 2005 and
2004:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except share and per share data)
Three months ended September 30, 2005:
Basic EPS - income available to common stockholders............. $ 27,317 23,661 $ 1,154.52
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 481 (15.06)
-------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 27,509 24,142 $ 1,139.46
======== ======= ==========
Three months ended September 30, 2004:
Basic EPS - income available to common stockholders............. $ 19,552 23,661 $ 826.33
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 559 (11.13)
-------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 19,744 24,220 $ 815.20
======== ======= ==========
Nine months ended September 30, 2005:
Basic EPS - income available to common stockholders............. $ 75,962 23,661 $ 3,210.44
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 516 (47.31)
-------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 76,475 24,177 $ 3,163.13
======== ======= ==========
Nine months ended September 30, 2004:
Basic EPS - income available to common stockholders............. $ 63,496 23,661 $ 2,683.56
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 565 (41.44)
-------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 64,009 24,226 $ 2,642.12
======== ======= ==========
(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, item processing and various related services to First Banks, Inc.
and its subsidiaries. Fees paid under agreements with First Services, L.P. were
$7.6 million and $22.3 million for the three and nine months ended September 30,
2005, respectively, and $6.7 million and $19.9 million for the comparable
periods in 2004. First Services, L.P. leases information technology and other
equipment from First Bank. During the three months ended September 30, 2005 and
2004, First Services, L.P. paid First Bank $1.1 million and $1.0 million,
respectively, and during the nine months ended September 30, 2005 and 2004,
First Services, L.P. paid First Bank $3.3 million and $3.2 million,
respectively, 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 $529,000 and $1.8 million for the three and nine months ended
September 30, 2005, respectively, and $870,000 and $2.6 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 $98,000 and $281,000 for
the three and nine months ended September 30, 2005, respectively, and $100,000
and $304,000 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 these 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 the brother of First Banks' Chairman and
members of his immediate family. Total rent expense incurred by First Bank under
the lease obligation contracts was $72,000 and $237,000 for the three and nine
months ended September 30, 2005, respectively, and $68,000 and $214,000 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 $33.4 million and $31.0 million at September 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 wholly owned limited liability
company of First Bank, at a price of $10,000 per Membership Interest, or $7.4
million in aggregate. The option could have been exercised by FCA at any time
prior to its expiration, which was extended to June 30, 2005. On June 30, 2005,
FCA exercised this option and paid First Bank $7.4 million in cash.
Consequently, SBLS LLC became 51.0% owned by First Bank and 49% owned by FCA as
of June 30, 2005.
On June 30, 2005, SBLS LLC executed a Multi-Party Agreement by and
among SBLS LLC, First Bank, Colson Services Corp., fiscal transfer agent for the
SBA, and the SBA, in addition to 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 of advances outstanding under this line of credit was $31.9
million at September 30, 2005. Interest expense recorded under the Agreement
since its inception on June 30, 2005 was $518,000.
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 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. As of September 30, 2005, First Bank had made payments of
$3,000 under the contract.
(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 September 30, 2005, First Banks and First Bank were each well
capitalized. As of September 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 following table.
At September 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
September 30, December 31, Adequacy Prompt Corrective
2005 2004 Purposes Action Provisions
---- ---- -------- -----------------
Total capital (to risk-weighted assets):
First Banks..................................... 10.31% 10.61% 8.0% 10.0%
First Bank...................................... 10.92 10.73 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks..................................... 9.06 8.43 4.0 6.0
First Bank...................................... 9.66 9.47 4.0 6.0
Tier 1 capital (to average assets):
First Banks..................................... 8.12 7.89 3.0 5.0
First Bank...................................... 8.67 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.
Specifically, 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 will be 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 rules that will be
effective in March 2009 would reduce First Banks' Tier 1 capital (to
risk-weighted assets) and Tier 1 capital (to average assets) to 8.54% and 7.66%,
respectively, as of September 30, 2005. On October 6, 2005, the Board, in
conjunction with various other regulatory agencies, announced plans to consider
various proposed revisions to U.S. risk-based capital standards that would
enhance risk sensitivity of the existing framework. The comment period ends in
90 days.
(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
--------------------------- --------------------------- ----------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $1,575,720 1,803,454 10,360 9,895 1,586,080 1,813,349
Loans, net of unearned discount......... 6,627,810 6,137,968 -- -- 6,627,810 6,137,968
Goodwill................................ 166,170 156,849 -- -- 166,170 156,849
Total assets............................ 8,995,185 8,720,331 13,317 12,510 9,008,502 8,732,841
Deposits................................ 7,416,505 7,161,636 (36,014) (9,666) 7,380,491 7,151,970
Notes payable........................... -- -- 80,000 15,000 80,000 15,000
Subordinated debentures................. -- -- 215,433 273,300 215,433 273,300
Stockholders' equity.................... 922,437 877,473 (257,318) (276,580) 665,119 600,893
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------ ---------------------- -----------------------
Three Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
------------------------ ---------------------- -----------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income......................... $ 127,612 99,311 189 150 127,801 99,461
Interest expense........................ 38,419 19,916 6,736 3,937 45,155 23,853
---------- --------- -------- -------- --------- ---------
Net interest income................ 89,193 79,395 (6,547) (3,787) 82,646 75,608
Provision for loan losses............... -- 7,500 -- -- -- 7,500
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses........ 89,193 71,895 (6,547) (3,787) 82,646 68,108
---------- --------- -------- -------- --------- ---------
Noninterest income...................... 24,739 22,133 (204) (151) 24,535 21,982
Noninterest expense..................... 65,773 57,398 1,666 993 67,439 58,391
---------- --------- -------- -------- --------- ---------
Income before provision for income
taxes and minority interest
in loss of subsidiary............ 48,159 36,630 (8,417) (4,931) 39,742 31,699
Provision for income taxes.............. 16,206 13,663 (2,941) (1,712) 13,265 11,951
---------- --------- -------- -------- --------- ---------
Income before minority interest
in loss of subsidiary............ 31,953 22,967 (5,476) (3,219) 26,477 19,748
Minority interest in loss of subsidiary. (1,036) -- -- -- (1,036) --
---------- --------- -------- -------- --------- ---------
Net income......................... $ 32,989 22,967 (5,476) (3,219) 27,513 19,748
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------ ---------------------- -----------------------
Nine Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30,
------------------------ ---------------------- -----------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income......................... $ 356,682 291,744 535 429 357,217 292,173
Interest expense........................ 101,615 55,162 17,056 11,144 118,671 66,306
---------- --------- -------- -------- --------- ---------
Net interest income................ 255,067 236,582 (16,521) (10,715) 238,546 225,867
Provision for loan losses............... (8,000) 23,250 -- -- (8,000) 23,250
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses........ 263,067 213,332 (16,521) (10,715) 246,546 202,617
---------- --------- -------- -------- --------- ---------
Noninterest income...................... 72,079 63,102 (640) (457) 71,439 62,645
Noninterest expense..................... 197,016 163,303 3,951 3,095 200,967 166,398
---------- --------- -------- -------- --------- ---------
Income before provision for
income taxes and minority
interest in loss of subsidiary... 138,130 113,131 (21,112) (14,267) 117,018 98,864
Provision for income taxes.............. 48,940 42,613 (7,372) (7,769) 41,568 34,844
---------- --------- -------- -------- --------- ---------
Income before minority interest
in loss of subsidiary............ 89,190 70,518 (13,740) (6,498) 75,450 64,020
Minority interest in loss of subsidiary. (1,036) -- -- -- (1,036) --
---------- --------- -------- -------- --------- ---------
Net income......................... $ 90,226 70,518 (13,740) (6,498) 76,486 64,020
========== ========= ======== ======== ========= =========
- ------------------
(1) Corporate and other includes $3.9 million and $2.4 million of interest expense on subordinated debentures, after
applicable income tax benefit of $2.1 million and $1.3 million, for the three months ended September 30, 2005 and 2004,
respectively. For the nine months ended September 30, 2005 and 2004, corporate and other includes $10.5 million and $7.0
million of interest expense on subordinated debentures, after applicable income tax benefits of $5.6 million and $3.8
million, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at September 30, 2005
and December 31, 2004:
September 30, December 31,
2005 2004
-------------- ------------
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily............................................................... $ 179,321 209,106
Term................................................................ 350,000 350,000
FHLB advances............................................................ 39,300 35,644
Fed funds purchased...................................................... 78 --
--------- -------
Total other borrowings.......................................... $ 568,699 594,750
========= =======
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 previously 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 following table. 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
September 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)
September 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 September 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) NOTES PAYABLE
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, the
most significant of which 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 the 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. There were no amounts borrowed on the Revolving Credit on August 11,
2005. First Banks borrowed $80.0 million on the Term Loan on August 11, 2005 and
borrowed the remaining $20.0 million on November 14, 2005, as further described
in Note 13 to the Consolidated Financial Statements. 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 on
August 10, 2008. 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. Letters of credit issued to unaffiliated third
parties on behalf of First Banks under the LC Facility were $3.7 million and
$6.3 million at September 30, 2005 and December 31, 2004, respectively, and had
not been drawn on by the counterparties.
Notes payable were comprised of the following at September 30, 2005 and
December 31, 2004:
September 30, December 31,
2005 2004
------------- ------------
(dollars expressed in thousands)
Revolving credit......................................................... $ -- 15,000
Term loan................................................................ 80,000 --
-------- -------
Total notes payable............................................. $ 80,000 15,000
======== =======
(11) SUBORDINATED DEBENTURES
On September 30, 2005, First Banks redeemed the First Preferred Capital
Trust II (First Preferred II) 10.24% cumulative trust preferred securities at
the liquidation value of $25 per preferred security, together with distributions
accumulated and unpaid to the redemption date. The trust preferred securities of
First Preferred II were traded on the Nasdaq National Market System under the
ticker symbol "FBNKN." In conjunction with this transaction, First Banks paid in
full its outstanding $59.3 million of 10.24% subordinated debentures that were
issued by First Banks to First Preferred II in October 2000. The funds necessary
for the redemption of the subordinated debentures were provided from a portion
of the proceeds of First Banks' Term Loan, as discussed in Note 10 to the
Consolidated Financial Statements.
(12) 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 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 September 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 September 30, 2005 and December 31, 2004,
this liability was $980,000 and $1.6 million, respectively, reflecting a change
in the estimated probable loss based upon the payments received from the
borrowers of the specific pools of leases sold and the performance of the
portfolio.
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. SBLS LLC was not required to make any payments to the seller as
of September 30, 2005, the first measurement date under the terms of the Asset
Purchase Agreement. As of September 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 future
payments under the Asset Purchase Agreement is not ascertainable at the present
time.
(13) SUBSEQUENT EVENTS
On October 31, 2005, First Banks completed its acquisition of NSB,
Grayslake, Illinois, for $10.3 million in cash. The acquisition served to expand
First Banks' banking franchise in Chicago, Illinois. The transaction was funded
through internally generated funds. At the time of the acquisition, NSB had
assets of $50.4 million, loans, net of unearned discount, of $41.4 million,
deposits of $45.2 million and stockholders' equity of $5.0 million. 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 $4.8 million, and the core deposit intangibles, which are not
deductible for tax purposes and will be amortized over seven years utilizing the
straight-line method, were approximately $909,000. NSB was merged with and into
First Bank.
On November 14, 2005, First Banks borrowed the remaining $20.0 million
available on its Term Loan, bringing the total outstanding balance under the
Term Loan to $100.0 million. The Term Loan is further described in Note 10 to
the Consolidated Financial Statements.
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, 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, 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 subsidiaries. First Bank
currently operates 177 branch banking offices in California, Illinois, Missouri
and Texas. At September 30, 2005, we had total assets of $9.01 billion, loans,
net of unearned discount, of $6.63 billion, total deposits of $7.38 billion and
total stockholders' equity of $665.1 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 $9.01 billion and $8.73 billion at September 30, 2005
and December 31, 2004, respectively, reflecting an increase of $275.7 million
for the nine months ended September 30, 2005. The increase in total assets is
attributable to our acquisitions of FBA Bancorp, Inc., or FBA, on April 29,
2005, which provided total assets of $73.3 million, and International Bank of
California, or IBOC, on September 30, 2005, which provided total assets of
$151.6 million, increased goodwill associated with these acquisitions, in
addition to internal growth within our loan portfolio and increases in cash and
cash equivalents. These increases in total assets were partially offset by
reductions in investment securities and other assets. Total loans, net of
unearned discount, increased $489.8 million to $6.63 billion at September 30,
2005, from $6.14 billion at December 31, 2004, reflecting continued internal
loan growth, and the acquisitions of FBA and IBOC, which provided loans, net of
unearned discount, of $167.8 million, in aggregate, 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 $228.5 million to $7.38 billion at September 30, 2005, from
$7.15 billion at December 31, 2004. The deposit growth was primarily
attributable to the acquisitions of FBA and IBOC, which provided deposits of
$187.8 million, in aggregate. The increase in deposits was 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 increased
$20.0 million to $287.1 million at September 30, 2005, from $267.1 million at
December 31, 2004. Investment securities decreased $227.3 million to $1.59
billion at September 30, 2005, from $1.81 billion at December 31, 2004,
primarily reflecting maturities of $596.5 million and purchases of $321.3
million, including $100.0 million of securities purchases and subsequent
maturities associated with the investment of funds provided by a temporary
deposit, as further discussed below, and a $60.0 million purchase and subsequent
maturity within the third quarter of 2005 associated with the temporary
investment of funds provided from our $80.0 million term loan borrowed on August
11, 2005. The increase in loans was primarily funded by available cash and cash
equivalents and maturities of investment securities. Goodwill increased $9.3
million to $166.2 million at September 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 acquisitions
of FBA and IBOC, as further discussed in Note 2 to our Consolidated Financial
Statements. Other assets decreased $28.1 million to $101.5 million at September
30, 2005, from $129.6 million at December 31, 2004. This decrease is primarily
attributable to a $9.9 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 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 $228.5 million to $7.38 billion at September
30, 2005, from $7.15 billion at December 31, 2004. The increase is primarily
attributable to our acquisitions of FBA and IBOC, which provided total deposits
of $55.7 million and $132.1 million, respectively. A single source temporary
commercial money market deposit received in the second quarter of 2005, with a
balance of $216.4 million at June 30, 2005, has declined to $14.1 million at
September 30, 2005. The overall increase in deposits 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 focus and efforts to further develop
multiple account relationships with our customers, coupled with slightly higher
deposit rates on certain products, have contributed to 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 $26.1 million to $568.7 million at September
30, 2005, from $594.8 million at December 31, 2004. The decrease is attributable
to a $29.8 million decrease in daily securities sold under agreements to
repurchase resulting from changes in customer activity and demand, partially
offset by a $3.7 million increase in Federal Home Loan Bank advances that were
assumed with our FBA acquisition. Our notes payable increased $65.0 million to
$80.0 million at September 30, 2005 as a result of the $80.0 million borrowed on
our $100.0 million term loan facility on August 11, 2005, as further described
in Note 10 to our Consolidated Financial Statements. This increase was partially
offset by a $15.0 million reduction in borrowings on our revolving credit
facility, which was repaid with funds generated from dividends from First Bank.
Our subordinated debentures decreased to $215.4 million at September 30, 2005
from $273.3 million at December 31, 2004, as a result of the repayment, on
September 30, 2005, of our $59.3 million of 10.24% subordinated debentures that
were issued to First Preferred Capital Trust II, or First Preferred II, as
further described in Note 11 to our Consolidated Financial Statements. The
decrease in our subordinated debentures was partially offset by 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
and the continued amortization of debt issuance costs.
Minority interest in SBLS LLC was $6.3 million at September 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 $665.1 million and $600.9 million at September
30, 2005 and December 31, 2004, respectively, reflecting an increase of $64.2
million. The increase is attributable to net income of $76.5 million, partially
offset by an $11.7 million decrease in accumulated other comprehensive income,
comprised of $3.9 million associated with changes in the fair value of our
derivative financial instruments and $7.8 million associated with changes in
unrealized gains and losses on our available-for-sale investment securities. The
decrease in accumulated other comprehensive income 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 $27.5 million and $19.7 million for the three months
ended September 30, 2005 and 2004, respectively, reflecting an increase of
39.3%. Net income was $76.5 million and $64.0 million for the nine months ended
September 30, 2005 and 2004, respectively, reflecting an increase of 19.5%. Our
return on average assets was 1.23% and 1.17% for the three and nine months ended
September 30, 2005, respectively, compared to 1.04% and 1.16% for the comparable
periods in 2004. Our return on average stockholders' equity was 16.61% and
16.26% for the three and nine months ended September 30, 2005, respectively,
compared to 13.89% and 15.11% for the comparable periods in 2004. Net income for
the three and nine months ended September 30, 2005 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.
The increase in earnings in 2005 reflects our continuing efforts to
strengthen earnings and simultaneously improve asset quality. Net
interest-earning assets provided by our 2004 and 2005 acquisitions,
higher-yielding investment securities, and internal loan growth coupled with
higher interest rates on loans have contributed to increased interest income.
However, 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 in earnings on our swap agreements was primarily
the result of increasing prevailing interest rates and the maturity and
termination of certain interest rate swap agreements, as further discussed under
"--Interest Rate Risk Management." In addition, interest expense increased due
to higher interest rates on deposits; a redistribution of deposit balances
toward higher-yielding products primarily related to the mix of the CIB Bank
deposit base acquired, which included higher cost time deposits, including
brokered and internet deposits; increased levels of other borrowings coupled
with increased rates on such borrowings, including our term loan; and the
issuance of additional subordinated debentures late in 2004 to partially fund
our acquisition of CIB Bank. Despite the increasing interest rate environment,
overall 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 $19.3 million, or 21.4% reduction in nonperforming assets,
and a $25.9 million, or 90.3% reduction in loans past due 90 days or more and
still accruing interest since December 31, 2004. A significant portion of our
nonperforming assets is comprised of nonperforming loans associated with our
acquisition of CIB Bank, which reflect $32.8 million, or 48.4%, of our total
nonperforming loans at September 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 reduction in net loan charge-offs, as well as loan
payoffs and/or external refinancing 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 substantial reduction in our provision
for loan losses. We recorded a negative provision for loan losses of $8.0
million for the nine months ended September 30, 2005, compared to provisions for
loan losses of $7.5 million and $23.3 million for the three and nine months
ended September 30, 2004, respectively. We did not record a provision for loan
losses for the three months ended September 30, 2005. 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.
Noninterest income was $24.5 million and $71.4 million for the three
and nine months ended September 30, 2005, respectively, in comparison to $22.0
million and $62.6 million for the comparable periods in 2004. The increase for
the first nine months of 2005 is primarily attributable to noninterest income
resulting from our 2004 and 2005 acquisitions, increased gains on loans sold and
held for sale, 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, increased
gains, net of losses, on the sale of certain assets, primarily related to our
commercial leasing portfolio, the recognition of recoveries of certain loans
that had been charged-off by the respective financial institutions prior to the
date of our acquisition, and recoveries of loan collection expenses. The overall
increase in noninterest income for 2005 was partially offset by a decline in
loan servicing fees, primarily as a result of the recognition of a $2.4 million
impairment charge on our small business lending servicing assets following
substantial damage to several shrimping vessels within our servicing portfolio
caused by the effects of Hurricane Katrina. In addition, rental income declined
as a result of our reduced commercial leasing activities, and losses on the
disposal of fixed assets increased, primarily associated with the demolition of
a branch drive-thru facility in the first quarter of 2005. Also, as previously
discussed, we recorded $1.0 million in gains, net of expenses, resulting from
the sale of two Midwest branch banking offices in 2004.
Noninterest expense was $67.4 million and $201.0 million for the three
and nine months ended September 30, 2005, respectively, in comparison to $58.4
million and $166.4 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 62.92% and 64.83% for the three and
nine months ended September 30, 2005, respectively, compared to 59.83% and
57.67% for the comparable periods in 2004. The overall increase in our
noninterest expenses and our efficiency ratio is attributable to expenses
resulting from our 2004 and 2005 acquisitions, increases in salaries and
employee benefits expense, information technology expense, and expenditures and
losses, net of gains, on other real estate, as further discussed below. The
increase in our efficiency ratio is also attributable to a decrease in our net
interest margin from year-to-year in addition to larger increases in noninterest
expense as compared to the increases in net interest income and noninterest
income, which did not increase at the same rate as noninterest expenses. Salary
and employee benefit expenses increased due to the impact of our acquisitions in
2004 and 2005, which added a total of 26 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 enhanced incentive compensation and
employee benefit plans. We continue to closely monitor noninterest expense
levels following our recent acquisitions and have implemented certain expense
reduction measures in an effort to improve our efficiency ratio in future
periods.
Net Interest Income
Net interest income (expressed on a tax-equivalent basis) increased to
$83.0 million and $239.5 million for the three and nine months ended September
30, 2005, respectively, from $75.9 million and $226.8 million for the comparable
periods in 2004, reflecting continued growth. Our net interest rate margin was
4.00% and 3.97% for the three and nine months ended September 30, 2005,
respectively, in comparison to 4.37% and 4.50% for the three and nine months
ended September 30, 2004, respectively. 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 to
interest-earning assets provided by our 2004 and 2005 acquisitions,
higher-yielding investment securities, internal loan growth coupled with higher
interest rates on loans, partially offset by increased interest expense
associated with higher interest rates on deposits and a redistribution of
deposit balances toward higher-yielding products, the mix of the CIB Bank
deposit base acquired, as further discussed below, and increased levels of other
borrowings, including our term loan, coupled with increased interest rates on
such 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 reduced our net interest income by $626,000 for the third quarter of
2005, in comparison to increasing our net interest income by $13.0 million for
the comparable period in 2004. For the nine months ended September 30, 2005 and
2004, our derivative financial instruments increased our net interest income by
$3.3 million and $44.7 million, respectively. The decreased earnings on our
interest rate swap agreements for the three and nine months ended September 30,
2005 contributed to a reduction in our net interest margin of approximately 66
basis points and 69 basis points, respectively, and reflect the impact of higher
interest rates and maturities of $750.0 million of interest rate swap agreements
designated as cash flow hedges and $50.0 million of interest rate swap
agreements designated as fair value hedges during 2004, and the maturity of
$200.0 million of interest rate swap agreements designated as cash flow hedges
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 substantial reduction of net
interest income and further compression of our net interest margin, which has
been partially offset by the impact of the rising rate environment.
Average interest-earning assets increased to $8.22 billion and $8.06
billion for the three and nine months ended September 30, 2005, respectively,
from $6.90 billion and $6.74 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 of FBA
on April 29, 2005, which provided assets of $73.3 million. The increase in
average interest-earning assets is also attributable to internal growth within
our loan portfolio. In addition, we purchased $250.0 million of callable U.S.
Government agency securities relating to 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. Despite
the rising interest rate environment, overall competitive conditions within our
market areas and the impact of the maturity and termination of certain interest
rate swap agreements, as discussed above and under "--Interest Rate Risk
Management," continue to exert pressure on our net interest income and net
interest margin.
Average investment securities increased to $1.68 billion and $1.70
billion for the three and nine months ended September 30, 2005, respectively,
from $1.25 billion and $1.22 billion for the comparable periods in 2004. The
yield on our investment portfolio was 4.09% and 4.15% for the three and nine
months ended September 30, 2005, respectively, compared to 4.14% and 4.12% for
the comparable periods in 2004. The overall increase in the average balance of
investment securities primarily relates to our 2004 and 2005 acquisitions, which
provided investment securities of $438.0 million and $20.1 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, primarily time deposits acquired with CIB
Bank. The remaining funds available from maturities of investment securities
were used to fund loan growth and 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, loan growth, and to purchase higher-yielding
available-for-sale investment securities, resulting in a decline in average
short-term investments to $96.3 million and $75.8 million for the three and nine
months ended September 30, 2005, respectively, from $136.0 million and $105.7
million for the comparable periods in 2004. During 2005, our investment
securities purchases and maturities included the purchase of $160.0 million of
short-term Federal Home Loan Bank discount notes associated with the investment
of 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 $6.45 billion and $6.29
billion for the three and nine months ended September 30, 2005, respectively,
compared to $5.52 billion and $5.41 billion for the comparable periods in 2004.
The yield on our loan portfolio was 6.76% and 6.46% for the three and nine
months ended September 30, 2005, respectively, in comparison to 6.22% and 6.28%
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 designated as cash flow hedges of
$750.0 million in 2004 and $200.0 million in March 2005 resulted in decreased
earnings on our swap agreements thereby contributing to a reduction in yields on
our loan portfolio, and a compression of our net interest income and net
interest margin of approximately $10.0 million or 48 basis points, and $32.6
million or 54 basis points, for the three and nine months ended September 30,
2005, respectively, as compared to the comparable periods in 2004. Interest
income on our loan portfolio includes the recognition of $1.7 million of
interest income resulting from payoffs of certain loans on nonaccrual status
during 2005. We attribute the increase in average loans of $878.9 million for
the nine months ended September 30, 2005, over the comparable period in 2004,
primarily to our acquisitions completed during 2004 and 2005, which provided
total loans, in aggregate, of $780.9 million and $167.8 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 refinancing of various
credits. Average commercial, financial and agricultural loans increased $124.1
million for the nine months ended September 30, 2005, over the comparable period
in 2004, as a result of our 2004 acquisitions. This increase was partially
offset by a $33.2 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 $204.8 million for
the nine months ended September 30, 2005, over the comparable period in 2004,
primarily as a result of our recent acquisitions and seasonal fluctuations on
existing and available credit lines as well as new loan production. Average real
estate mortgage loans increased approximately $540.2 million for the nine months
ended September 30, 2005, over the comparable period in 2004. This increase is
attributable to a $395.9 million increase in commercial real estate loans
primarily resulting from our recent acquisitions, as well as a $144.3 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 $34.1
million for the nine months ended September 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 $7.23 billion and $7.12 billion for the
three and nine months ended September 30, 2005, from $6.12 billion and $6.04
billion for the comparable periods in 2004. For the three and nine months ended
September 30, 2005, the aggregate weighted average rate paid on our deposit
portfolio increased 80 basis points and 63 basis points to 2.22% and 2.02%,
respectively, from 1.42% and 1.39% 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, which included
higher cost time deposits, including brokered and internet deposits. 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 for the three and nine months
ended September 30, 2005, of approximately $2.4 million or 12 basis points, and
$6.2 million or 11 basis points, respectively, compared to the same periods in
2004. The increase in average deposits is primarily reflective of our
acquisitions completed during 2004 and 2005, which provided deposits, in
aggregate, of $1.21 billion and $192.9 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, particularly savings and
time deposits, including brokered and internet deposits. 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 $4.34 billion and $4.28 billion for the three
and nine months ended September 30, 2005, respectively, and $4.14 billion and
$4.09 billion for the comparable periods in 2004. Average total time deposits
increased to $2.89 billion and $2.84 billion for the three and nine months ended
September 30, 2005, respectively, compared to $1.98 billion and $1.95 billion
for the comparable periods in 2004. The $216.4 million single source temporary
commercial money market deposit that originated in the second quarter of 2005
had decreased to $14.1 million at September 30, 2005, and accounted for an
increase in average savings deposits of approximately $109.6 million and $54.8
million for the three and nine months ended September 30, 2005, respectively,
over the comparable periods in 2004.
Average other borrowings increased to $570.9 million and $572.7 million
for the three and nine months ended September 30, 2005, respectively, compared
to $541.1 million and $456.6 million for the comparable periods in 2004. The
aggregate weighted average rate paid on our other borrowings was 3.44% and 2.91%
for the three and nine months ended September 30, 2005, respectively, compared
to 1.46% and 0.99% 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 notes payable averaged $44.3 million and $18.8 million for the
three and nine months ended September 30, 2005, respectively, and $3.1 million
for the nine months ended September 30, 2004. The aggregate weighted average
rate paid on our notes payable was 7.71% and 7.85% for the three and nine months
ended September 30, 2005, respectively, and 16.97% for the nine months ended
September 30, 2004. The weighted average rate paid reflects unused credit
commitment and letter of credit facility fees on our secured credit agreement,
as well as other fees paid in conjunction with the annual renewal of our secured
credit agreement. Amounts outstanding under our revolving line of credit with a
group of unaffiliated financial institutions bear interest at a floating rate
equal to the lead bank's prime rate or, at our option, at the London Interbank
Offering Rate, or Eurodollar Rate, plus a margin determined by the outstanding
loan balances and our profitability for the preceding four calendar quarters.
Amounts outstanding under our term loan with a group of unaffiliated financial
institutions bear interest at a floating rate equal to the Eurodollar Rate plus
a margin determined by the outstanding loan balances and our profitability for
the preceding four calendar quarters. Thus, our secured credit agreement
represents a relatively high-cost funding source as increased advances have the
effect of increasing the weighted average rate of non-deposit liabilities. 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 10 to our Consolidated Financial Statements. In conjunction
with this transaction, we borrowed $80.0 million on the term loan and borrowed
the remaining $20.0 million on November 14, 2005. The proceeds of the term loan
were used to fund our acquisition of IBOC and to partially fund the redemption
of our 10.24% subordinated debentures issued to First Preferred II, as further
discussed below.
Average subordinated debentures were $274.5 million and $274.0 million
for the three and nine months ended September 30, 2005, compared to $211.8
million and $210.6 million for the comparable periods in 2004. The aggregate
weighted average rate paid on our subordinated debentures was 8.65% and 7.85%
for the three and nine months ended September 30, 2005, respectively, and 7.01%
and 6.85% for the comparable periods in 2004. Interest expense on our
subordinated debentures was $6.0 million and $16.1 million for the three and
nine months ended September 30, 2005, respectively, compared to $3.7 million and
$10.8 million for the comparable periods in 2004. As previously discussed, the
increase for the three and nine months ended September 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, partially offset by the
earnings impact of our interest rate swap agreements. The issuance of the
additional subordinated debentures as well as 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 for the three and nine months ended September 30, 2005, of
approximately $2.1 million or ten basis points, and $5.0 million or eight basis
points, respectively, compared to the comparable periods in 2004. However, as
further described in Note 11 to our Consolidated Financial Statements, on
September 30, 2005, we paid in full our outstanding $59.3 million of 10.24%
subordinated debentures that we previously issued in October 2000. The reduction
of these outstanding subordinated debentures will assist us in improving our net
interest income and net interest margin in the future, especially in
consideration of the high interest rate associated with them.
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 September 30, Nine Months Ended September 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).......... $6,450,922 109,997 6.76% $5,518,978 86,315 6.22% $6,288,486 303,801 6.46% $5,409,545 254,504 6.28%
Investment securities (4)... 1,676,052 17,296 4.09 1,247,820 12,972 4.14 1,698,032 52,710 4.15 1,221,985 37,697 4.12
Short-term investments...... 96,257 841 3.47 135,987 476 1.39 75,830 1,701 3.00 105,748 899 1.14
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-earning
assets............... 8,223,231 128,134 6.18 6,902,785 99,763 5.75 8,062,348 358,212 5.94 6,737,278 293,100 5.81
------- ------ ------- -------
Nonearning assets.............. 651,429 618,644 653,118 634,085
---------- ---------- ---------- ----------
Total assets........... $8,874,660 $7,521,429 $8,715,466 $7,371,363
========== ========== ========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits................ $ 897,502 979 0.43% $ 842,855 801 0.38% $ 888,585 2,799 0.42% $ 855,434 2,592 0.40%
Savings deposits.......... 2,171,596 8,345 1.52 2,180,594 5,116 0.93 2,150,792 20,420 1.27 2,162,174 14,486 0.89
Time deposits of $100
or more................. 907,311 7,206 3.15 501,660 3,358 2.66 854,041 18,806 2.94 466,543 9,353 2.68
Other time deposits (3)... 1,979,844 16,832 3.37 1,480,167 8,636 2.32 1,986,212 46,967 3.16 1,486,212 25,296 2.27
---------- ------- ---------- ------ ---------- ------- --------- -------
Total interest-bearing
deposits............. 5,956,253 33,362 2.22 5,005,276 17,911 1.42 5,879,630 88,992 2.02 4,970,363 51,727 1.39
Other borrowings............ 570,919 4,946 3.44 541,073 1,982 1.46 572,686 12,480 2.91 456,621 3,383 0.99
Notes payable (5)........... 44,348 862 7.71 -- 229 -- 18,791 1,103 7.85 3,133 398 16.97
Subordinated debentures (3). 274,466 5,985 8.65 211,773 3,731 7.01 274,026 16,096 7.85 210,570 10,798 6.85
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
liabilities.......... 6,845,986 45,155 2.62 5,758,122 23,853 1.65 6,745,133 118,671 2.35 5,640,687 66,306 1.57
------- ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits............. 1,274,933 1,114,587 1,242,166 1,070,269
Other liabilities........... 96,719 83,109 99,094 94,299
---------- ---------- ---------- ----------
Total liabilities...... 8,217,638 6,955,818 8,086,393 6,805,255
Stockholders' equity........... 657,022 565,611 629,073 566,108
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity. $8,874,660 $7,521,429 $8,715,466 $7,371,363
========== ========== ========== ==========
Net interest income............ 82,979 75,910 239,541 226,794
======= ====== ======= =======
Interest rate spread........... 3.56 4.10 3.59 4.24
Net interest margin (6)........ 4.00% 4.37% 3.97% 4.50%
==== ==== ==== =====
- --------------------
(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 $333,000 and $995,000 for the three and nine months ended September 30, 2005, and $302,000 and $927,000 for the
comparable periods in 2004, respectively.
(5) Interest expense on the notes payable includes commitment, arrangement and renewal fees. Exclusive of these fees, the interest
rates paid were 5.14% and 5.81% for the three and nine months ended September 30, 2005, and 10.06% for the nine months ended
September 30, 2004.
(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 did not record a provision for loan losses for the three months
ended September 30, 2005. We recorded an $8.0 million negative provision for
loan losses for the nine months ended September 30, 2005, in comparison to
provisions for loan losses of $7.5 million and $23.3 million for the three and
nine months ended September 30, 2004, respectively. The negative provision for
loan losses recorded during 2005 is reflective of a 21% improvement in
nonperforming loans from December 31, 2004 to September 30, 2005 resulting from
loan payoffs and/or external refinancing of various credit relationships as well
as a significant reduction in net loan charge-offs. Nonperforming loans
decreased $18.0 million, or 21.0%, to $67.8 million at September 30, 2005 from
$85.8 million at December 31, 2004. Loans past due 90 days or more and still
accruing interest decreased $25.9 million, or 90.3%, to $2.8 million at
September 30, 2005 from $28.7 million at December 31, 2004. The decrease in
nonperforming loans and past due loans during the nine months ended September
30, 2005 reflects an improvement in asset quality resulting from the sale of
approximately $14.3 million of certain acquired nonperforming loans, a
significant reduction in net loan charge-offs, as well as loan payoffs and/or
external refinancing of various credits, including $97.3 million in payoffs
relating to 14 credit relationships, as further discussed under "--Loans and
Allowance for Loan Losses." We recorded net loan charge-offs of $1.8 million and
$4.7 million for the three and nine months ended September 30, 2005,
respectively, compared to $7.9 million and $18.6 million for the comparable
periods in 2004. Our allowance for loan losses was $139.5 million at September
30, 2005, compared to $140.2 million at June 30, 2005, $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 2.10% at September 30,
2005, compared to 2.22% at June 30, 2005, 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 205.64% at September 30, 2005, compared to 188.77% at
June 30, 2005, 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 significant level of nonperforming loans acquired with
our CIB Bank acquisition, which represent 48.4% of our total nonperforming loans
at September 30, 2005. While nonperforming loans added by our recent
acquisitions have contributed to the overall level of nonperforming assets, such
increases have been offset by improvements both in the remainder of our loan
portfolio and in the acquired loan portfolios subsequent to their acquisition
dates. 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 $24.5 million and $71.4 million for the three
and nine months ended September 30, 2005, respectively, in comparison to $22.0
million and $62.6 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 $29.7 million for the three and nine months ended September
30, 2005, respectively, in comparison to $9.8 million and $28.6 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 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, as
well as pricing increases on certain service charges and customer service fees
instituted to reflect current market conditions.
The gain on loans sold and held for sale was $6.5 million and $17.9
million for the three and nine months ended September 30, 2005, respectively, in
comparison to $4.7 million and $12.9 million for the comparable periods in 2004.
The increase in 2005 is partially attributable to an increase of $2.3 million of
gains on United States Small Business Administration, or SBA, loans sold
associated with SBLS LLC. The increase is also attributable to an increase in
gains on mortgage loans sold resulting from an increase in the volume of
mortgage loan sales in the secondary market as a result of increased loan
origination volumes. In general, new residential mortgage loan production of
15-year fixed rate, conforming conventional adjustable rate mortgages and other
similar products are being retained in our portfolio, while other loans,
primarily 20- and 30-year fixed rate loans, are typically being sold in the
secondary loan markets.
Gains, net of expenses, on the sale of two Midwest banking offices were
$1.0 million for the nine months ended September 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 have not been
any sales of branch banking offices during 2005.
Investment management income was $2.1 million and $6.4 million for the
three and nine months ended September 30, 2005, respectively, in comparison to
$1.8 million and $5.1 million for the comparable periods in 2004, reflecting
increased portfolio management fees generated by our institutional money
management subsidiary attributable to new business development and overall
growth in assets under management.
Bank-owned life insurance investment income was $1.2 million and $3.7
million for the three and nine months ended September 30, 2005, respectively, in
comparison to $1.3 million and $3.9 million for the comparable periods in 2004.
The decrease in investment income reflects a reduced return on the performance
of the underlying investments surrounding the insurance contracts which is
primarily attributable to the portfolio mix of investments and overall market
conditions.
Other income was $4.6 million and $13.8 million for the three and nine
months ended September 30, 2005, respectively, in comparison to $4.2 million and
$11.0 million for the comparable periods in 2004. We attribute the primary
components of the increase in 2005 to:
>> an increase of $2.3 million recorded in the third quarter of 2005
attributable to recoveries of certain loan principal balances
that had been charged-off by the various respective financial
institutions prior to their acquisition by First Banks;
>> a recovery of agent loan collection expenses of $500,000 and
$239,000 in the first and third quarters of 2005, respectively,
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 $640,000 and included $464,000
of gains on two sales of repossessed leasing equipment. Net
losses for 2004 were $307,000 and included a $750,000 write-down
on repossessed aircraft leasing equipment, partially offset by
gains of $510,000 on the sale of other repossessed aircraft
leasing equipment;
>> an increase of $608,000 reflecting reductions of a contingent
liability established in conjunction with the sale of a portion
of our commercial leasing portfolio in June 2004. The reductions
of the contingent liability in the second and third quarters of
2005 of $478,000 and $130,000, respectively, were the result of
further reductions in related lease balances for the specific
pools of leases sold, as further discussed in Note 12 to our
Consolidated Financial Statements;
>> an increase of $571,000 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 $215,000 net decrease in loan servicing fees. The net decrease
is primarily attributable to: increased fees from loans serviced
for others, primarily attributable to a $2.4 million increase in
SBLS LLC loan servicing fees, offset by a $1.6 million increase
in amortization of SBA servicing rights and the recognition of a
$2.4 million impairment charge on the SBA servicing rights
following substantial damage to several shrimping vessels within
the servicing portfolio caused by the effects of Hurricane
Katrina; a $329,000 decrease in mortgage loan servicing fees,
including a lower level of interest shortfall on mortgage loans,
offset by a $1.4 million decrease in amortization of mortgage
servicing rights; and increased unused commitment fees of
$405,000. 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 decline of $947,000 in rental income associated with our
reduced commercial leasing activities;
>> a decline of $550,000 in income associated with standby letters
of credit;
>> a decline of $148,000 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 $403,000 and $993,000 for
the three and nine months ended September 30, 2005, respectively,
compared to $401,000 and $856,000 for the comparable periods in
2004.
Noninterest Expense
Noninterest expense was $67.4 million and $201.0 million for the three
and nine months ended September 30, 2005, respectively, in comparison to $58.4
million and $166.4 million for the comparable periods in 2004. Our efficiency
ratio increased to 62.92% and 64.83% for the three and nine months ended
September 30, 2005, respectively, from 59.83% and 57.67% 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, and increases in salaries and employee
benefits expense, information technology expense, expenses and losses, net of
gains, on other real estate, and other expense.
Salaries and employee benefits expense was $35.7 million and $103.1
million for the three and nine months ended September 30, 2005, respectively, in
comparison to $29.9 million and $85.8 million for the comparable periods in
2004. We attribute the overall increase to increased salaries and employee
benefits expenses associated with an aggregate of 26 additional branches
acquired in 2004 and 2005, five de novo branches opened in 2004 and 2005, in
addition to generally higher salary and employee benefit costs associated with
employing and retaining qualified personnel, including enhanced incentive
compensation and employee benefits plans. Our number of employees on a full-time
equivalent basis increased to 2,238 at September 30, 2005, from 2,028 at
September 30, 2004.
Occupancy, net of rental income, and furniture and equipment expense
totaled $9.3 million and $27.6 million for the three and nine months ended
September 30, 2005, respectively, in comparison to $8.8 million and $26.5
million for the comparable periods in 2004. The increase is primarily
attributable to higher levels of expense resulting from our acquisitions in 2004
and 2005, which added 26 branch offices, and the opening of five de novo branch
offices in 2004 and 2005, as discussed above. The increase is also attributable
to increased technology equipment expenditures, continued expansion and
renovation of certain corporate and branch offices, including additional
production and administrative offices, and increased depreciation expense
associated with capital expenditures and acquisitions.
Information technology and item processing fees were $9.1 million and
$26.7 million for the three and nine months ended September 30, 2005,
respectively, in comparison to $8.0 million and $24.0 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. Information
technology fees also include fees paid to outside servicers associated with our
mortgage lending division and our small business lending and institutional money
management subsidiaries. We attribute the level of fees to the additional branch
offices provided by our recent acquisitions and de novo branch office openings,
deconversion costs from other providers associated with our 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 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 $2.3 million and $6.7
million for the three and nine months ended September 30, 2005, respectively, in
comparison to $1.6 million and $4.9 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
accounting and other services, including operational and systems support,
provided by the seller of CIB Bank pursuant to a service agreement to provide
services from the November 2004 sale date through the system conversion date in
February 2005.
Amortization of intangibles associated with the purchase of
subsidiaries was $1.2 million and $3.5 million for the three and nine months
ended September 30, 2005, respectively, in comparison to $733,000 and $2.0
million for the comparable periods in 2004. The increase is 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
$2.1 million and $6.5 million for the three and nine months ended September 30,
2005, respectively, compared to $1.8 million and $5.2 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 and fall
advertising campaigns have contributed to the increase in 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 $111,000 and $1.8 million for the
three and nine months ended September 30, 2005, respectively, compared to
$294,000 and $424,000 for the comparable periods in 2004. The increase 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 $6.3 million and $20.7 million for the three and nine
months ended September 30, 2005, respectively, in comparison to $6.0 million and
$13.7 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 $3.7 million in expenditures and losses, net of
gains, on other real estate. Gains, net of losses and expenses,
on other real estate were $76,000 for the third quarter of 2005.
Expenditures and losses, net of gains, on other real estate were
$532,000 for the nine months ended September 30, 2005 and
included expenses of $812,000 and $170,000 in the second and
third quarters of 2005, respectively, in preparation for the sale
of a parcel of other real estate acquired 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, and a $307,000 gain on the sale of an
additional holding in the third quarter of 2005. Gains, net of
losses and expenses, on other real estate were $24,000 and $3.2
million for the three and nine months ended September 30, 2004,
and included a $2.7 million gain recorded in the first quarter of
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;
>> increased losses and adjustments to the carrying value of certain
affordable housing credit partnership investments in 2005; and
>> expenses associated with continued growth and expansion of our
banking franchise, including our de novo branch offices and
acquisitions completed during 2004 and 2005, particularly CIB
Bank in November 2004.
Provision for Income Taxes
The provision for income taxes was $13.3 million and $41.6 million for
the three and nine months ended September 30, 2005, respectively, in comparison
to $12.0 million and $34.8 million for the comparable periods in 2004. The
effective tax rate was 32.5% and 35.2% for the three and nine months ended
September 30, 2005, respectively, in comparison to 37.7% and 35.2% for the
comparable periods in 2004. In September 2005, we recorded a reversal of a $3.1
million state tax reserve, and 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 these transactions, the
effective tax rate was 37.4% and 36.9% for the three and nine months ended
September 30, 2005, respectively, in comparison to 37.7% and 38.1% for the
comparable periods in 2004. The lower effective tax rate in 2005, after
adjusting for the nonrecurring transactions, was primarily the result of 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 September 30, 2005 and December 31, 2004 are
summarized as follows:
September 30, 2005 December 31, 2004
----------------------- ----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $300,000 199 500,000 1,233
Fair value hedges.................................... 25,000 82 276,200 9,609
Interest rate floor agreement........................ 100,000 146 -- --
Interest rate lock commitments....................... 8,700 -- 5,400 --
Forward commitments to sell
mortgage-backed securities......................... 50,000 -- 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 months ended September 30, 2005, we realized net
interest expense of $626,000 on our derivative financial instruments, whereas
during the nine months ended September 30, 2005, we realized net interest income
of $3.3 million on our derivative financial instruments. For the three and nine
months ended September 30, 2004, we realized net interest income of $13.0
million and $44.7 million, respectively, on our derivative financial
instruments. The decreased earnings are 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 66 basis points and 69 basis points for the
three and nine months ended September 30, 2005, respectively, in comparison to
the comparable periods 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
$403,000 and $993,000 for the three and nine months ended September 30, 2005, in
comparison to net losses of $401,000 and $856,000 for the comparable periods in
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, and the change in the value of
our interest rate floor agreement entered into in September 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 September 30, 2005 and December 31, 2004,
respectively, and the amount payable by us under the swap agreements was $2.2
million and $1.4 million at September 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 September 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)
September 30, 2005:
April 2, 2006................................... $ 100,000 3.93% 5.45% $ 543
July 31, 2007................................... 200,000 3.90 3.08 (5,039)
--------- -------
$ 300,000 3.91 3.87 $(4,496)
========= ===== ===== =======
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 $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. Effective February 25, 2005, we terminated
these swap agreements. 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 September 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 September 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)
September 30, 2005:
March 20, 2033................................... $ 25,000 6.04% 8.10% $(1,220)
======== ===== ===== =======
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 our consolidated balance sheets and the related
interest expense is reflected as interest expense on other borrowings in our
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.
Interest Rate Floor Agreement. On September 9, 2005, we entered into a $100.0
million notional amount three-year interest rate floor agreement in conjunction
with our interest rate risk management program. The interest rate floor
agreement provides for us to receive a quarterly fixed rate of interest of 5.00%
should the three-month London Interbank Offering Rate equal or fall below the
strike price of 2.00%. The carrying value of the interest rate floor agreement,
which is included in other assets in our consolidated balance sheets, was
$146,000 at September 30, 2005.
Pledged Collateral. At September 30, 2005 and December 31, 2004, we had a $2.0
million and $5.0 million letter of credit, respectively, issued on our behalf to
the counterparty and had pledged investment securities available for sale with a
fair value of $3.9 million and $527,000, respectively, in connection with our
interest rate swap agreements. At September 30, 2005, we had pledged cash of
$891,000 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 our consolidated
balance sheets was $366,000 and $20,000 at September 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 86.0% and 85.0% of
total interest income for the three and nine months ended September 30, 2005,
respectively, in comparison to 86.7% and 87.0% for the comparable periods in
2004. Total loans, net of unearned discount, increased $489.8 million to $6.63
billion, or 73.6% of total assets, at September 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 our acquisitions of FBA and IBOC, which provided loans, net of
unearned discount, of $54.3 million and $113.5 million, respectively. The net
increase is primarily attributable to:
>> an increase of $249.9 million in our real estate mortgage
portfolio primarily attributable to our 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 management's business strategy in the third quarter
of 2005 to retain additional mortgage loan product production in
our residential real estate mortgage portfolio, including 15-year
fixed rate, conforming conventional adjustable rate mortgages and
other similar products; and a home equity product line campaign
that we held in mid-2004;
>> an increase of $124.5 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 nine months ended September 30, 2005 as compared to
the comparable periods in 2004, partially offset by the sale of
certain acquired loans; and
>> an increase of $103.5 million in our real estate construction and
development portfolio resulting primarily from new loan
originations and seasonal fluctuations on existing and available
credit lines.
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 September 30, 2005 and December 31, 2004:
September 30, December 31,
2005 2004
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual......................................................... $ 7,762 10,147
Restructured....................................................... -- 4
Real estate construction and development:
Nonaccrual......................................................... 8,816 13,435
Real estate mortgage:
One-to-four family residential:
Nonaccrual...................................................... 9,993 9,881
Restructured.................................................... 10 11
Multi-family residential loans:
Nonaccrual...................................................... 700 434
Commercial real estate loans:
Nonaccrual...................................................... 39,616 50,671
Lease financing:
Nonaccrual......................................................... 760 907
Consumer and installment:
Nonaccrual......................................................... 166 310
---------- ---------
Total nonperforming loans................................... 67,823 85,800
Other real estate.................................................... 2,747 4,030
---------- ---------
Total nonperforming assets.................................. $ 70,570 89,830
========== =========
Loans, net of unearned discount...................................... $6,627,810 6,137,968
========== =========
Loans past due 90 days or more and still accruing.................... $ 2,779 28,689
========== =========
Ratio of:
Allowance for loan losses to loans................................. 2.10% 2.46%
Nonperforming loans to loans....................................... 1.02 1.40
Allowance for loan losses to nonperforming loans................... 205.64 175.65
Nonperforming assets to loans and other real estate................ 1.06 1.46
========== =========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $67.8 million at September 30, 2005, in
comparison to $74.3 million at June 30, 2005, $79.8 million at March 31, 2005
and $85.8 million at December 31, 2004. Other real estate owned was $2.7
million, $2.0 million, $1.8 million and $4.0 million at September 30, 2005, June
30, 2005, March 31, 2005 and December 31, 2004, respectively. Nonperforming
assets, consisting of nonperforming loans and other real estate owned, improved
by $5.7 million, or 7.5%, during the third quarter of 2005, and $19.3 million,
or 21.4%, during the first nine months of 2005, to $70.6 million at September
30, 2005 compared to $76.3 million at June 30, 2005, $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 $32.8 million, or 48.4% of our
total nonperforming loans, at September 30, 2005, from $42.9 million at June 30,
2005, $43.7 million at March 31, 2005, and $50.5 million at December 31, 2004.
Nonperforming loans were 1.02% of loans, net of unearned discount, at September
30, 2005, compared to 1.18%, 1.30% and 1.40% at June 30, 2005, March 31, 2005
and December 31, 2004, respectively. Additionally, loans past due 90 days or
more and still accruing interest decreased $25.9 million to $2.8 million at
September 30, 2005 from $28.7 million at December 31, 2004. The decrease in
nonperforming loans and past due loans during the nine months ended September
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 reduction in net loan
charge-offs, which decreased $6.1 million and $13.9 million for the three and
nine months ended September 30, 2005, respectively, compared to the comparable
periods in 2004; strengthening of certain loans; and significant loan payoffs
and/or external refinancing of various credits, including $97.3 million of loan
payoffs on 14 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.
Net loan charge-offs decreased to $1.8 million and $4.7 million for the
three and nine months ended September 30, 2005, respectively, compared to $7.9
million and $18.6 million for the comparable periods in 2004. Loan charge-offs
were $5.4 million and $20.4 million for the three and nine months ended
September 30, 2005, respectively, in comparison to $12.5 million and $36.8
million for the comparable periods in 2004. Loan recoveries were $3.6 million
and $15.7 million for the three and nine months ended September 30, 2005,
respectively, in comparison to $4.6 million and $18.1 million for the comparable
periods in 2004. The allowance for loan losses was $139.5 million at September
30, 2005, compared to $140.2 million at June 30, 2005, $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 2.10% at September 30,
2005, compared to 2.22% at June 30, 2005, 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 205.64% at September 30, 2005, compared to 188.77% at
June 30, 2005, 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 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.
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 nine months
ended September 30, 2005 and 2004 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2005 2004 2005 2004
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period....................... $140,164 120,966 150,707 116,451
Acquired allowance for loan losses................. 1,065 7,379 1,484 7,379
Other adjustments (1)(2)......................... -- -- -- (479)
-------- -------- -------- --------
141,229 128,345 152,191 123,351
-------- -------- -------- --------
Loans charged-off.................................. (5,401) (12,465) (20,422) (36,760)
Recoveries of loans previously charged-off......... 3,643 4,590 15,702 18,129
-------- -------- -------- --------
Net loan charge-offs............................. (1,758) (7,875) (4,720) (18,631)
-------- -------- -------- --------
Provision for loan losses.......................... -- 7,500 (8,000) 23,250
-------- -------- -------- --------
Balance, end of period............................. $139,471 127,970 139,471 127,970
======== ======== ======== ========
---------------
(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) In June 2004, we reclassified $1.5 million from our 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 term loan and our revolving credit line. The aggregate funds
acquired from these sources were $1.67 billion and $1.42 billion at September
30, 2005 and December 31, 2004, respectively.
The following table presents the maturity structure of these other
sources of funds, which consists of certificates of deposit of $100,000 or more
and other borrowings, including our notes payable, at September 30, 2005:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less..................................... $ 304,411 179,399 483,810
Over three months through six months..................... 211,873 -- 211,873
Over six months through twelve months.................... 254,008 56,000 310,008
Over twelve months....................................... 247,763 413,300 661,063
---------- ------- ---------
Total............................................... $1,018,055 648,699 1,666,754
========== ======= =========
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
September 30, 2005 and December 31, 2004, First Bank's borrowing capacity under
the agreement was approximately $763.8 million and $778.7 million, respectively.
In addition, First Bank's borrowing capacity through its relationship with the
Federal Home Loan Bank was approximately $473.4 million and $505.2 million at
September 30, 2005 and December 31, 2004, respectively. Exclusive of the Federal
Home Loan Bank advances outstanding of $39.3 million and $35.6 million at
September 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
September 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 September
30, 2005, were as follows:
Less than 1-3 3-5 Over
1 Year Years Years 5 Years Total
------ ----- ----- ------- -----
(dollars expressed in thousands)
Operating leases............................... $ 10,335 15,381 9,492 18,669 53,877
Certificates of deposit (1).................... 2,044,315 797,113 161,884 30,376 3,033,688
Other borrowings (1)........................... 235,399 393,500 13,800 6,000 648,699
Subordinated debentures (1).................... -- -- -- 215,433 215,433
Other contractual obligations.................. 2,409 293 48 20 2,770
---------- --------- ------- ------- ---------
Total..................................... $2,292,458 1,206,287 185,224 270,498 3,954,467
========== ========= ======= ======= =========
---------------
(1) Amounts exclude the related interest expense accrued on these obligations as of September 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 Financial
Accounting Standards Board, or 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 the EITF to issue EITF Issue 03-1-a,
Implementation Guidance for the Application of Paragraph 16 of EITF Issue No.
03-1, as final. On November 3, 2005, the FASB issued FASB Staff Position, or
FSP, FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments. The FSP addresses determining when an
investment is considered impaired and whether that impairment is other than
temporary, and measuring an impairment loss. The FSP also addresses the
accounting after an entity recognizes an other-than-temporary impairment, and
requires certain disclosures about unrealized losses that the entity did not
recognize as other-than-temporary impairments. The FSP is effective for
reporting periods beginning after December 15, 2005. We are currently evaluating
the requirements of FSP FAS 115-1 and FAS 124-1 and do not expect them to have a
material effect on our financial condition or results of operations.
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, and our acquisition of IBOC, which
we completed on September 30, 2005. At September 30, 2005, the carrying value of
acquired problem loans that are being accounted for under SOP 03-3 totaled $1.8
million in aggregate, and were acquired with our acquisition of IBOC on
September 30, 2005. Consequently, the implementation of SOP 03-3, as it pertains
to these transactions, 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.
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 financial
condition or results of operations.
In July 2005, the FASB issued an exposure draft titled Accounting for
Uncertain Tax Positions, an Interpretation of SFAS No. 109 -- Accounting for
Income Taxes. This exposure draft addresses accounting for tax uncertainties
that arise when a position that an entity takes on its tax return may be
different from the position that the taxing authority may take, and provides
guidance about the accounting for tax benefits associated with uncertain tax
positions, classification of a liability recognized for those tax positions, and
interim reporting considerations. The proposed interpretation is not expected to
be issued until the first quarter of 2006, at which time the FASB will decide on
a revised effective date and transition period. We are currently evaluating the
requirements of the exposure draft to determine their impact on our financial
condition and 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 September 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 nine months ended
September 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 nine
months ended September 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 nine months ended
September 30, 2005.
ITEM 4 - CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer have
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 and our Chief Financial
Officer have 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 6 - EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit Number Description
-------------- -----------
10 Amended and Restated Secured Credit Agreement
($100.0 million Term Loan Facility, $15.0 million
Revolving Credit Facility and $7.5 million Letter
of Credit Facility), dated as of August 11, 2005,
by and among First Banks, Inc. and Wells Fargo
Bank, National Association, as Agent, JP Morgan
Chase Bank, N.A., LaSalle Bank National
Association, The Northern Trust Company, Union
Bank of California, N.A., Fifth Third Bank (Chicago)
and U.S. Bank National Association - filed herewith.
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Executive Officer - filed herewith.
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Financial Officer - filed herewith.
32.1 Section 1350 Certifications of Chief Executive
Officer - filed herewith.
32.2 Section 1350 Certifications of Chief Financial
Officer - filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 14, 2005
FIRST BANKS, INC.
By: /s/ Allen H. Blake
------------------------------------------
Allen H. Blake
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Steven F. Schepman
------------------------------------------
Steven F. Schepman
Chief Financial Officer
(Principal Financial and Accounting
Officer)
EXHIBIT 31.1
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: November 14, 2005
FIRST BANKS, INC.
By: /s/ Allen H. Blake
------------------------------------------
Allen H. Blake
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Steven F. Schepman, 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: November 14, 2005
FIRST BANKS, INC.
By: /s/ Steven F. Schepman
------------------------------------------
Steven F. Schepman
Chief Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT 32.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350
I, Allen H. Blake, President and Chief Executive Officer of First
Banks, Inc. (the "Company"), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Quarterly Report on Form 10-Q of the Company for the
quarterly period ended September 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: November 14, 2005
By: /s/ Allen H. Blake
------------------------------------------
Allen H. Blake
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 32.2
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350
I, Steven F. Schepman, 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 September 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: November 14, 2005
By: /s/ Steven F. Schepman
------------------------------------------
Steven F. Schepman
Chief Financial Officer
(Principal Financial and
Accounting Officer)