UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 Number - 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
-------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
8.15% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust IV and New York Stock Exchange
guaranteed by First Banks, Inc.)
Securities registered pursuant to Section 12(g) of the Act:
9.00% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust III and
guaranteed by First Banks, Inc.)
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer:
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). [ ] Yes [X] No
None of the voting stock of the Company is held by non-affiliates. All
of the voting stock of the Company is owned by various trusts, which were
created by and for the benefit of Mr. James F. Dierberg, the Company's Chairman
of the Board of Directors, and members of his immediate family.
At March 27, 2006, there were 23,661 shares of the registrant's common
stock outstanding.
FIRST BANKS, INC.
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business............................................................................... 1
Item 1A. Risk Factors........................................................................... 17
Item 1B. Unresolved Staff Comments.............................................................. 18
Item 2. Properties............................................................................. 18
Item 3. Legal Proceedings...................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.................................... 19
Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.......................................... 19
Item 6. Selected Financial Data................................................................ 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 55
Item 8. Financial Statements and Supplementary Data............................................ 55
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................... 55
Item 9A. Controls and Procedures................................................................ 55
Item 9B. Other Information...................................................................... 55
Part III
Item 10. Directors and Executive Officers of the Registrant..................................... 56
Item 11. Executive Compensation................................................................. 60
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................................... 61
Item 13. Certain Relationships and Related Transactions......................................... 62
Item 14. Principal Accountant Fees and Services................................................. 62
Part IV
Item 15. Exhibits, Financial Statements Schedules............................................... 63
Signatures........................................................................................ 111
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. 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 Annual Report on Form 10-K should
therefore consider these risks and uncertainties in evaluating forward looking
statements and should not place undue reliance on these statements.
PART I
Item 1. Business
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, First Bank Business
Capital, Inc. (formerly 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 178 branch
offices in California, Illinois, Missouri and Texas. Since 1994, our
organization has grown significantly, primarily as a result of our acquisition
strategy, as well as through internal growth. At December 31, 2005, we had
assets of $9.17 billion, loans, net of unearned discount, of $7.02 billion,
deposits of $7.54 billion and stockholders' equity of $678.9 million.
Various trusts, which were created by and are administered by and for
the benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of
his immediate family, own all of our voting stock. Mr. Dierberg and his family,
therefore, control our management and policies.
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 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, small
business lending, and 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, trust, private banking and institutional money
management services.
Primary responsibility for managing our banking units rests with the
officers and directors of each unit, but we centralize many of our 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.
Since 1996, we have formed 10 financing entities that operate as
affiliated business or statutory trusts. These trusts, of which six were
outstanding at December 31, 2005, were created for the sole purpose of issuing
trust preferred securities, and the sole assets of the trusts are our
subordinated debentures. In conjunction with the formation of our financing
entities and their issuance of the trust preferred securities, we issued
subordinated debentures to each of our financing entities in amounts equivalent
to the respective trust preferred securities plus the amount of the common
securities of the individual trusts, as outlined in the following table and more
fully described in Note 12 to our Consolidated Financial Statements. We pay
interest on our subordinated debentures to our respective financing entities. In
turn, our financing entities pay distributions to the holders of the trust
preferred securities. These interest and distribution payments are paid
quarterly in arrears, in March, June, September, and December of each year, with
the exception of the trust preferred securities and related subordinated
debentures of First Bank Capital Trust, which are payable semi-annually in
arrears in April and October of each year. The distributions payable on our
subordinated debentures are included in interest expense in our consolidated
statements of income.
A summary of the outstanding trust preferred securities issued by our
affiliated statutory and business trusts, and our related subordinated
debentures issued to the respective trusts in conjunction with the trust
preferred securities offerings, is as follows:
Interest Preferred Subordinated
Name of Trust Date Formed Type of Offering Rate Securities Debentures
------------- ----------- ---------------- ---- ---------- ----------
First Preferred Capital Trust III November 2001 Publicly Underwritten 9.00 55,200,000 56,907,250
First Bank Capital Trust April 2002 Private Placement Variable 25,000,000 25,774,000
First Bank Statutory Trust March 2003 Private Placement 8.10 25,000,000 25,774,000
First Preferred Capital Trust IV January 2003 Publicly Underwritten 8.15 46,000,000 47,422,700
First Bank Statutory Trust II September 2004 Private Placement Variable 20,000,000 20,619,000
First Bank Statutory Trust III November 2004 Private Placement Variable 40,000,000 41,238,000
First Bank Statutory Trust IV February 2006 Private Placement Variable 40,000,000 41,238,000
Each of our existing financing entities operates as a Delaware business
trust with the exception of First Bank Statutory Trust, which operates as a
Connecticut statutory trust. The trust preferred securities issued by First
Preferred Capital Trust III are publicly held and traded on the Nasdaq Stock
Market's National Market system. The trust preferred securities issued by First
Preferred Capital Trust IV are publicly held and traded on the New York Stock
Exchange. The trust preferred securities issued by First Bank Capital Trust,
First Bank Statutory Trust, First Bank Statutory Trust II, or FBST II, and First
Bank Statutory Trust III, or FBST III, were issued in private placements and
rank equal to the trust preferred securities issued by First Preferred Capital
Trust IV, and junior to the trust preferred securities issued by First Preferred
Capital Trust III. The trust preferred securities have no voting rights except
in certain limited circumstances.
Strategy. In the development of our banking franchise, we acquire other entities
providing financial services as one means of achieving our growth objectives and
to augment internal growth. Acquisitions may serve to enhance our presence in a
given market, to expand the extent of our market area, to enable us to enter new
or noncontiguous markets or to enable us to expand the array of financial
services that we provide. Due to the nature of our ownership, we have elected to
only engage in those acquisitions that can be accomplished for cash, rather than
by issuing securities. However, by using cash in our acquisitions, the
characteristics of the acquisition arena may, at times, place us at a
competitive disadvantage relative to other acquirers offering stock
transactions. This results from the market attractiveness of other financial
institutions' stock and the advantages of tax-free exchanges to the selling
shareholders. Our acquisition activities are generally somewhat sporadic because
we may consummate multiple transactions in a particular period, followed by a
substantially less active acquisition period. Furthermore, the intangible assets
recorded in conjunction with these acquisitions create an immediate reduction in
our regulatory capital. This reduction, as required by regulatory policy,
provides further financial disincentives to paying large premiums in cash
acquisitions.
Recognizing these facts, we follow certain patterns in our
acquisitions. First, we generally acquire several smaller institutions,
sometimes over an extended period of time, rather than a single larger one. We
attribute this approach to the constraints imposed by the amount of funds
required for a larger transaction, as well as the opportunity to minimize the
aggregate premium required through smaller individual transactions. However, we
may periodically acquire larger institutions that provide us with the
opportunity to rapidly expand our market presence in a highly desired market
area. Secondly, in some acquisitions, we may acquire institutions having
significant asset-quality, ownership, regulatory or other problems. We seek to
address the risks of these issues by adjusting the acquisition pricing,
accompanied by appropriate remedial attention after consummation of the
transaction. In these institutions, these issues may diminish their
attractiveness to other potential acquirers, and therefore may reduce the amount
of acquisition premium required. Finally, we may pursue our acquisition strategy
in other geographic areas, or pursue internal growth more aggressively because
cash transactions may not be economically viable in extremely competitive
acquisition markets.
During the five years ended December 31, 2005, we completed ten
acquisitions of banks, one acquisition of a loan origination business, and two
purchases of branch offices, which provided us with an aggregate of $2.84
billion in assets and 53 banking locations as of the dates of the acquisitions.
This included five bank acquisitions in metropolitan Chicago, Illinois, and
three in metropolitan Los Angeles, California. Our acquisitions of FBA Bancorp,
Inc., or FBA, in Chicago, Illinois, in April 2005, and Northway State Bank, or
NSB, in Grayslake, Illinois, in November 2005, served to further expand our
growing Chicago banking franchise with the addition of four banking offices and
$123.7 million in assets. In September 2005, we expanded our southern California
banking franchise with our acquisition of International Bank of California, or
IBOC, in Los Angeles, California, which provided five additional banking
locations. We also completed a purchase of the Roodhouse, Illinois, branch
office from Bank and Trust Company in September 2005. In addition, in 2005, we
announced plans to expand our Dallas, Texas banking franchise with our
acquisition of First National Bank of Sachse, or FNBS, which was completed on
January 3, 2006, and our acquisition of the branch office of Dallas National
Bank in Richardson, Texas, or East Renner Branch, which was completed on January
20, 2006. We also announced plans to acquire Pittsfield Community Bancorp, Inc.,
or Bancorp, and its wholly owned banking subsidiary, Community Bank of
Pittsfield, or Pittsfield, in Pittsfield, Illinois, and First Independent
National Bank, in Plano, Texas. In 2004, we expanded our Chicago, Illinois
banking franchise with our acquisition of Continental Mortgage Corporation -
Delaware, or CMC, in Aurora, Illinois, which provided an additional two banking
offices and $140.7 million in assets, and Hillside Investors, Ltd., or Hillside,
and its wholly owned banking subsidiary, CIB Bank (collectively, CIB Bank), in
Hillside, Illinois. The acquisition of CIB Bank represented the largest
acquisition in our history, providing us with assets of $1.20 billion and
expanding our branch banking network in the Chicago metropolitan area by an
additional 16 branch offices. In August 2004, we acquired substantially all of
the assets of Small Business Loan Source, Inc., or SBLS, in Houston, Texas,
which originates, sells and services United States Small Business
Administration, or SBA, loans to small business concerns. In 2003, we further
expanded our Midwest banking franchise with our acquisition of Bank of Ste.
Genevieve, or BSG, in Ste. Genevieve, Missouri. These acquisitions have allowed
us to significantly expand our presence throughout our geographic markets,
improve operational efficiencies, convey a more consistent image and quality of
service and more cohesively market and deliver our products and services.
Following our acquisitions, various undertakings are necessary to
effectively integrate the acquired entities into our business systems and
culture. While the activities required are specifically dependent upon the
individual circumstances surrounding each acquisition, the majority of our
efforts have been concentrated in various areas including, but not limited to:
>> improving asset quality;
>> reducing unnecessary, duplicative and/or excessive expenses
including personnel, information technology and certain other
operational and administrative expenses;
>> maintaining, repairing and, in some cases, refurbishing bank
premises necessitated by the deferral of such projects by some of
the acquired entities;
>> renegotiating long-term leases that provide space in excess of that
necessary for banking activities and/or at rates in excess of
current market rates, or subleasing excess space to third parties;
>> relocating branch offices which are not adequate, conducive or
convenient for banking operations; and
>> managing actual or potential litigation that existed with respect
to acquired entities to minimize the overall costs of
negotiation, settlement or litigation.
The post-acquisition process also includes the combining of separate
and distinct entities together to form a cohesive organization with common
objectives and focus. We have invested significant resources to reorganize
staff, recruit personnel where needed, and establish the direction and focus
necessary for the combined entity to take advantage of the opportunities
available to it. This investment contributed to increases in noninterest
expense, and resulted in the creation of new banking units within the newly
integrated combined entity, which conveyed a more consistent image and quality
of service. The new banking units provide a broad array of banking products to
their customers and generally compete effectively in their marketplaces, even in
the presence of other financial institutions with much greater resources. While
some of these modifications did not contribute to reductions of noninterest
expense, they contributed to the commercial and retail business development
efforts of the banks, and ultimately to their prospects for improving future
profitability.
In 2002 and 2003, our acquisition prospects were somewhat limited
primarily due to the market environment requiring significantly higher premiums
in order to transact financial institution acquisitions. As a result, we
expanded our business strategy to include the opening of de novo branch offices
as another means of achieving our growth objectives. Our de novo branch strategy
also provides similar opportunities to our acquisition strategy by allowing us
to enhance our presence in our existing markets and enter new markets.
Additionally, we generally have more flexibility in selecting the most
opportunistic sites for our de novo branches, constructing the branch offices in
accordance with our standard business model and marketing and promoting our
customized products and services under our long-established trade name. In 2004,
we opened four de novo branches in Houston and McKinney, Texas, Wildwood,
Missouri, which is located in West St. Louis County, and in San Diego,
California. In January 2005, we opened an additional de novo branch in
Farmington, Missouri. Furthermore, we have plans to open several additional de
novo branch offices in 2006. We expect to further concentrate our efforts on
this portion of our business strategy while continuing to identify viable
acquisition candidates at reasonable acquisition premiums that are commensurate
with our established acquisition strategy.
In conjunction with our de novo and acquisition strategy, we have also
focused on building and reorganizing the infrastructure necessary to accomplish
our objectives for internal growth. Our organization is structured to leverage a
strong sales organization in each of our major market areas. Within the
individual markets, the sales organization is supported by a regional structure
to position it to serve the market opportunities within each area in the four
states that we operate. We are committed to serving the small business and
mid-sized commercial segments along with the retail consumer market. We have
devoted significant resources to improving our infrastructure dedicated to rapid
approval, underwriting and documentation of consumer loans, strengthening our
small business services area, increasing our commercial business development
staff, reorganizing our marketing and product management areas, improving the
quality and depth of our regional commercial and consumer management groups, and
increasing resources for financial service product line and delivery systems,
branch development and training, and administrative and operational support.
With the significant expansion of our Chicago banking franchise in the past two
years, we have created a complete regional structure in the Chicago area as well
as three additional commercial banking groups to better service our credit
administration, commercial real estate and commercial and industrial banking
groups, branch administration, credit review, and human resources and training
functions. We continue to focus on modifying and effectively repositioning our
internal and external resources to better serve the markets in which we operate.
Although these efforts have led to certain increased capital expenditures and
noninterest expenses, we expect they will lead to additional internal growth,
more efficient operations and improved profitability over the long term, in
accordance with our long-term corporate vision.
Lending Activities. Our enhanced business development resources assisted in the
realignment of certain acquired loan portfolios, which were skewed toward loan
types that reflected the abilities and experiences of the management members of
the acquired entities. In order to achieve a more diversified portfolio, to
address asset-quality issues in the portfolios and to achieve a higher interest
yield on our loan portfolio, we reduced a substantial portion of the loans which
were acquired during this time through payments, refinancing with other
financial institutions, charge-offs and, in certain instances, sales of loans.
As a result, our portfolio of consumer and installment loans, net of unearned
discount, decreased significantly from $174.3 million, or 3.7% of total loans,
excluding loans held for sale, at December 31, 2000, to $51.8 million, or 0.8%
of total loans, excluding loans held for sale, at December 31, 2005. The
decrease primarily reflects reductions in our indirect auto, credit card and
student loan portfolios. The sale of our student loan and credit card portfolios
in 2001 was consistent with our objective of reducing the amount of less
profitable loans and expanding our commercial lending and other consumer loans,
including home equity loans. We do not have any continuing involvement in the
transferred assets relating to the student loan and credit card portfolios sold
in 2001. Our expansion of other consumer loans is reflected in our portfolio of
one-to-four family residential real estate mortgage loans, excluding loans held
for sale, which increased from $726.5 million, or 15.5% of total loans,
excluding loans held for sale, at December 31, 2000, to $1.21 billion, or 18.1%
of total loans, excluding loans held for sale, at December 31, 2005, in line
with our current focus to increase residential mortgage loans and home equity
lines. Our business strategy decision in mid-2003 to retain a portion of our new
loan production in our real estate mortgage portfolio to provide more
diversification within the portfolio and to compensate for continued weak loan
demand in other sectors of our loan portfolio, as well as our business strategy
in the third quarter of 2005 to retain additional mortgage loan production in
our residential real estate mortgage portfolio, including 15-year fixed rate,
conforming conventional adjustable rate mortgages and other similar products,
contributed to this increase.
As components of acquired loan portfolios decreased, we replaced them
with higher yielding loans that were internally generated by our business
development function. With our acquisitions, we expanded our business
development function into the newly acquired market areas. We have continued to
grow through internal growth and acquisitions, and completed the largest
acquisition in our history in November 2004. Consequently, in spite of
relatively large reductions in certain acquired portfolios, our aggregate loan
portfolio, net of unearned discount, increased 47.7% from $4.75 billion at
December 31, 2000, to $7.02 billion at December 31, 2005.
Our business development efforts are primarily focused on the
origination of loans in three general types: commercial, financial and
agricultural loans, including lease financing, which totaled $1.62 billion, or
23.1% of total loans, at December 31, 2005; commercial real estate mortgage
loans, which totaled $2.11 billion, or 30.1% of total loans, at December 31,
2005; and real estate construction and land development loans, which totaled
$1.56 billion, or 22.3% of total loans, at December 31, 2005. We have also
focused our efforts on retaining certain residential real estate mortgage loans
in our loan portfolio. Such loans totaled approximately $1.21 billion, or 17.3%
of total loans, at December 31, 2005.
The primary component of commercial, financial and agricultural loans
is commercial loans, which are made based on the borrowers' general credit
strength and ability to generate cash flows for repayment from income sources.
Most of these loans are made on a secured basis, generally involving the use of
company equipment, inventory and/or accounts receivable, and, from time to time,
real estate, as collateral. Regardless of collateral, substantial emphasis is
placed on the borrowers' ability to generate cash flow sufficient to operate the
business and provide coverage of debt servicing requirements. Commercial loans
are frequently renewable annually, although some terms may be as long as five
years. These loans typically require the borrower to maintain certain operating
covenants appropriate for the specific business, such as profitability, debt
service coverage and current asset and leverage ratios, which are generally
reported and monitored on a quarterly basis and subject to more detailed annual
reviews.
Commercial loans are made to customers primarily located in First
Bank's geographic trade areas of California, Illinois, Missouri and Texas who
are engaged in manufacturing, retailing, wholesaling and service businesses.
This portfolio is not concentrated in large specific industry segments that are
characterized by sufficient homogeneity that would result in significant
concentrations of credit exposure. Rather, it is a highly diversified portfolio
that encompasses many industry segments. Within both our real estate and
commercial lending portfolios, we strive for the highest degree of diversity
that is practicable. We also emphasize the development of other service
relationships with our commercial borrowers, particularly deposit accounts.
Commercial real estate loans include loans for which the intended
source of repayment is rental and other income from the real estate. This
includes commercial real estate developed for lease to third parties as well as
the owner's occupancy. The underwriting of owner occupied commercial real estate
loans generally follows the procedures for commercial lending described above,
except that the collateral is real estate, and the loan term may be longer. The
primary emphasis in underwriting loans for which the source of repayment is the
performance of the collateral is the projected cash flow from the real estate
and its adequacy to cover the operating costs of the project and the debt
service requirements. Secondary emphasis is placed on the appraised value of the
real estate, with the requirement that the appraised liquidation value of the
collateral must be adequate to repay the debt and related interest in the event
the cash flow becomes insufficient to service the debt. Generally, underwriting
terms require the loan principal not to exceed 80% of the appraised value of the
collateral and the loan maturity not to exceed ten years. Commercial real estate
loans are made for commercial office space, retail properties, hospitality,
industrial and warehouse facilities and recreational properties. We rarely
finance commercial real estate or rental properties that do not have lease
commitments for a majority of the rentable space.
Construction and land development loans include commitments for
construction of both residential and commercial properties. Commercial real
estate projects often require commitments for permanent financing from other
lenders upon completion of the project and, more typically, may include a
short-term amortizing component of the financing from the bank. Commitments for
construction of multi-tenant commercial and retail projects generally require
lease commitments from a substantial primary tenant or tenants prior to
commencement of construction. We typically engage in multi-phase, multi-tenant
projects, as opposed to large vertical projects, that allow us to complete the
projects in phases and limit the number of tenant building starts based upon
successful lease and/or sale of the tenant units. We finance some projects for
borrowers whose home office is within our trade area for which the particular
project may be outside our normal trade area. However, we generally do not
engage in developing commercial and residential construction lending business
outside of our trade area, although certain of the loans acquired in recent
acquisitions have resulted in this situation. Residential real estate
construction and development loans are made based on the cost of land
acquisition and development, as well as the construction of the residential
units. Although we finance the cost of display units and units held for sale, a
substantial portion of the loans for individual residential units have purchase
commitments prior to funding. Residential condominium projects are funded as the
building construction progresses, but funding of unit finishing is generally
based on firm sales contracts.
In addition to underwriting based on estimates and projection of
financial strength, collateral values and future cash flows, most loans to
borrowing entities other than individuals require the guarantee of the parent
company or entity sponsor, or in the case of smaller entities, the personal
guarantees of the principals.
Our commercial leasing portfolio totaled $3.0 million and $5.9 million
at December 31, 2005 and 2004, respectively, reflecting significant reductions
from $124.1 million at December 31, 2000. This portfolio consisted of leases
originated by our former subsidiary, First Capital Group, Inc., headquartered in
Albuquerque, New Mexico, primarily through third parties, on commercial
equipment including aircraft parts and equipment. During 2002, we changed the
nature of this business, ultimately deciding to discontinue the operations of
First Capital Group, Inc. and transfer all responsibilities for the existing
portfolio to a new leasing staff in St. Louis, Missouri. Furthermore, in June
2004, we completed the sale of a significant portion of our commercial leasing
portfolio, resulting in a reduction of the commercial leasing portfolio by $33.1
million to $9.6 million. The portfolio has been further reduced to $3.0 million
at December 31, 2005.
Our nonperforming loans were $97.2 million, $85.8 million and $75.4
million at December 31, 2005, 2004 and 2003, respectively, representing 1.38%,
1.40% and 1.41%, respectively, of total loans. These levels of nonperforming
loans are higher than our historical averages which we attribute to our
acquisitions, total portfolio growth and increased commercial lending
activities. During 2005, we experienced continued improvement in our portfolio
of nonperforming assets through the first nine months of the year, however,
further deterioration of certain acquired loans in the fourth quarter of 2005
contributed to an overall increase in nonperforming loans for 2005 and the
decision to sell certain loans and transfer them to loans held for sale. This
increase was primarily associated with the deterioration of a few large credit
relationships in the Midwest region during the fourth quarter of 2005, including
two large credit relationships of $14.9 million and $16.6 million, or $31.5
million in aggregate. As a result, on December 31, 2005, we recognized $7.6
million of loan charge-offs in conjunction with the transfer of approximately
$59.7 million of nonperforming loans to our held for sale portfolio. These loans
included the two large credit relationships that had deteriorated during the
fourth quarter of 2005 and one credit relationship of $12.4 million that was
included in nonperforming loans at December 31, 2004 with a value of $14.5
million, all of which were acquired in the purchase of CIB Bank. The $59.7
million represents the estimated fair value, net of costs, that is expected to
be realized at the time of sale. In January 2006, we received a payoff on one of
the nonperforming loans in our held for sale portfolio, reducing the held for
sale portfolio by $12.4 million and resulting in the recognition of a $5.0
million loan recovery. Furthermore, in March 2006, we completed the sale of a
majority of the remaining nonaccrual loans in our held for sale portfolio,
reducing the held for sale portfolio by $32.5 million. We continue to actively
market the remaining loans held for sale through an independent third party. The
overall increase in nonperforming loans in 2005 was partially offset by
significant improvement of 21.0% in the level of nonperforming loans during the
first three quarters of 2005 resulting from the sale of certain acquired
nonperforming loans, strengthening of certain loans, and loan payoffs and/or
external refinancing of various credits. 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 CIB
Bank, as further discussed in Note 2 to our Consolidated Financial Statements.
The level of nonperforming loans associated with our acquisitions
completed in 2005 was not significant. Our nonperforming assets, exclusive of
the 2004 acquisitions, exhibited substantial improvement throughout 2004,
primarily as a result of significant loan payoffs, the liquidation of certain
real property that had been acquired through foreclosure, the sale of a portion
of our commercial leasing portfolio, the sale of certain acquired nonperforming
loans, the strengthening of certain loans and our continued efforts to improve
asset quality. However, as we continued to further analyze the CIB Bank
acquisition, we determined the level of problem loans that we expected to
acquire with this acquisition would, when combined with our existing portfolio
of such loans, result in a level of problem loans that was unacceptable to
management. Consequently, during the fourth quarter of 2004, we completed the
sale of approximately $50.2 million of problem loans, including $19.1 million of
nonperforming loans, which include loans on nonaccrual status and restructured
loans. Additionally, at December 31, 2004, we had $12.9 million of loans
classified as held for sale that we acquired from CIB Bank that were
subsequently sold in early 2005, as previously discussed. The increase in
nonperforming loans in 2002 and 2003 was primarily attributable to general
economic conditions, additional problems identified in certain acquired loan
portfolios and the continued deterioration of the portfolio of leases in our
commercial leasing portfolio, particularly the segment related to the airline
industry. Furthermore, in January 2003, we foreclosed on a residential and
recreational development property that had been placed on nonaccrual status
during the second quarter of 2002. The relationship related to a residential and
recreational development project that had significant financial difficulties and
experienced inadequate project financing, project delays and weak project
management. We sold this property in February 2004, thereby reducing our
nonperforming assets by $9.2 million, and realizing a gain of $2.7 million,
before applicable income taxes. We believe these increases in nonperforming
assets, while partially attributable to our acquisitions and the overall risk in
our loan portfolio, are reflective of cyclical trends experienced within the
banking industry as a result of economic conditions within our market areas. We
continue our efforts to improve asset quality through an ongoing process of
problem loan work-out, loan payoffs and external refinancings, and the sale of
certain nonperforming loans. Loans past due 90 days or more and still accruing
interest showed significant improvement during 2005, decreasing $23.1 million to
$5.6 million at December 31, 2005, from $28.7 million at December 31, 2004 and
$2.8 million at December 31, 2003. Loan charge-offs, net of recoveries,
decreased to $13.4 million for 2005, compared to $24.8 million for 2004 and
$32.7 million for 2003, as further discussed under "--Loans and Allowance for
Loan Losses."
The results of our due diligence reviews of the loan portfolios of CMC
and CIB Bank prior to their acquisition indicated significant asset quality
problems and, particularly with respect to CIB Bank, a significant concentration
in commercial real estate loans outstanding to a relatively small number of
borrowers. The acquisition of CMC in July 2004 resulted in a $2.5 million
increase in our nonperforming loans, which have subsequently declined to $1.9
million and $400,000 at December 31, 2004 and 2005, respectively. Also, the
acquisition of CIB Bank resulted in a significant increase in our nonperforming
loans. As of the date of the acquisition, November 30, 2004, CIB Bank had $60.3
million of nonperforming loans, which represented approximately 8.8% of CIB
Bank's total loan portfolio. As a result of loan payoffs, the level of
nonperforming loans related to our CIB Bank acquisition declined to $50.5
million at December 31, 2004, representing 58.8% of nonperforming loans. The
level of nonperforming loans related to our CIB Bank acquisition further
declined to $32.8 million, or 48.4% of nonperforming loans at September 30,
2005, resulting from sales of loans and additional loan payoffs. However, as a
result of further deterioration of a few credit relationships in the fourth
quarter of 2005, the level of nonperforming loans related to our CIB Bank
acquisition increased to $55.0 million, or 56.6% of nonperforming loans, at
December 31, 2005. We had anticipated these problems in negotiating the
acquisition price of CIB Bank. In 2004, we transferred $18.3 million of CIB
Bank's nonperforming loans to loans held for sale and recorded a corresponding
charge of $5.4 million to our allowance for loan losses to reduce the loans held
for sale to their estimated fair value, net of costs, that was expected to be
realized at the time of the sale. While CIB Bank had utilized a long-term
workout strategy to address certain nonperforming assets, our strategy is to
address problem assets in a more accelerated manner. Accordingly, we elected to
hold for sale a portion of the problem assets acquired from CIB Bank.
Furthermore, we increased the allowance for loan losses by $15.7 million to
reflect the additional reserves associated with the loans transferred to loans
held for sale and the application of our loss factors to CIB Bank's loan
portfolio risk ratings. This reflects our use of strategies for more rapid
disposition and recovery of certain acquired classified and nonperforming
assets. As further described in Note 2 to our Consolidated Financial Statements,
we completed the sale of these loans during the first and second quarters of
2005. We recorded a $10.0 million reduction in goodwill to adjust loans held for
sale, net of the related tax effect, as a result of loan payoffs and
significantly higher sales prices received over the original third-party bid
estimates for certain loans held for sale. At December 31, 2005, we transferred
an additional $56.1 million of nonperforming loans associated with our
acquisition of CIB Bank to loans held for sale and recorded a $6.0 million
charge-off to our allowance for loan losses to reduce the loans held for sale to
their estimated fair value, net of costs, that is expected to be realized at the
time of the sale. We are actively marketing these loans through an independent
third party. These nonperforming loans will continue to be a primary focus of
members of our Credit Administration function as we work to resolve the
individual issues surrounding these credit relationships that led to their
deterioration.
SBLS LLC's purchase of substantially all of the assets of SBLS in
August 2004 resulted in an increase to nonperforming loans of $8.8 million,
which represented approximately 36.7% of SBLS's loan portfolio at the time of
acquisition. SBLS LLC held a significant concentration of assets associated with
the shrimping vessel industry, reflected in both loans and other repossessed
assets. The shrimping vessel industry concentration and its depressed status
were reflected in our net asset purchase price. SBLS LLC's nonperforming loans
have declined since the date of acquisition to $6.2 million and $1.8 million at
December 31, 2004 and 2005, respectively. SBLS LLC's asset concentration
associated with the distressed shrimping vessels industry further deteriorated
in 2005 due to higher interest rates, increased fuel costs, and the physical
damage to several of the vessels by Hurricane Katrina. As a result, the SBA
agreed to repurchase SBLS LLC's entire shrimping vessels portfolio, and these
loans were placed in liquidation status resulting in the recognition of
substantial loan losses in 2005. SBLS LLC's net loan charge-offs were $3.8
million for 2005, compared to $690,000 for 2004.
During 2001 and 2002, the nation generally experienced a relatively
mild, but prolonged economic slow down that affected us and much of the banking
industry. This was exacerbated by the terrorist attacks in late 2001 and the
effects the attacks and related governmental responses had on economic activity.
In 2003, we continued to experience weak economic conditions in our market
areas, despite some slight economic improvements in certain sectors. The overall
effects of the economic downturn have been inconsistent between various
geographic areas of the country, as well as different segments of the economy.
To us, the effects of the downturn can be observed in generally lower interest
rates, which have a negative impact on our net interest income, and on the
performance of our loan portfolio, which is reflected in higher delinquencies,
nonperforming assets, charge-offs and provisions for loan losses, as well as
reduced loan demand from customers. The impact of lower interest rates was
significantly reduced through the use of various derivative financial
instruments that provide hedges of this interest rate risk. However, the benefit
of these derivative financial instruments was substantially reduced in late 2004
and 2005 with the maturity and termination of certain interest rate swap
agreements and increases in the overall interest rates that began in mid-2004
and continued throughout 2005, as further discussed under "--Interest Rate Risk
Management." During 2002 and 2003, we incurred continued asset quality issues
that were at least partially attributable to economic conditions. During 2004
and 2005, certain sectors of the economy have stabilized, which contributed to
the overall improvement in our asset quality, exclusive of our 2004 acquisition
transactions. During 2005, our asset quality reflected substantial improvement
during the first nine months as a result of the sale of certain acquired
nonperforming loans, the strengthening of certain loans, and loan payoffs and
external refinancing of various credits. However, as a result of further
deterioration of a few large relationships in the fourth quarter of 2005, our
overall level of nonperforming assets increased during 2005.
Within our market areas, the impact of the economy has become evident
at different times. In our Midwest market, a perceptible increase in loan
delinquencies began in late 2000 and continued throughout 2001, with some modest
improvement in 2002 and 2003. The increase in delinquencies was primarily
focused in commercial, financial and agricultural loans, lease financing loans
and, to a lesser extent, commercial real estate loans, and initially involved
borrowers that had already encountered some operating problems that continued to
deteriorate as the economy became weaker. Included in this were loans on hotels
and leases to the commercial airline industry. In both instances, the industry
had been suffering from overcapacity prior to 2001, which then became much worse
with the economic downturn and the effects of terrorist attacks. As the
recession continued, the effects expanded to companies that had been stronger,
but succumbed to the ongoing effects of slowed economic activity. We sold a
significant portion of the remaining leases in our commercial leasing portfolio
in June 2004. While we recognized a trend in asset quality improvement, we
recorded a significant increase in the level of our nonperforming loans
associated with our acquisition of CIB Bank. Nonperforming loans and leases for
the Midwest region were $82.8 million at December 31, 2005, compared to $76.0
million and $56.2 million at December 31, 2004 and 2003, respectively.
Nonperforming loans associated with our acquisition of CIB Bank were $55.0
million and $50.5 million at December 31, 2005 and 2004, respectively. The
significant improvement in nonperforming assets that was reflected during most
of 2004 was offset by the previously discussed increase in nonperforming assets
resulting from our acquisitions of CMC and CIB Bank. We saw a significant
improvement in nonperforming loans during the first nine months of 2005, which,
however, was offset by further deterioration of a few credit relationships,
primarily associated with CIB Bank, during the fourth quarter of 2005, as
previously discussed. We continue to address the significant asset quality
issues that we inherited with our acquisition of CIB Bank and expect these
issues to improve over time through our efforts to improve nonperforming loans.
Net loan charge-offs for our Midwest banking region decreased to $8.7 million
for the year ended December 31, 2005, compared to $11.2 million and $25.7
million for the years ended December 31, 2004 and 2003, respectively. The
decrease in 2005 is primarily attributable to the strengthening of asset quality
related to our core portfolio throughout most of 2005. The decrease in 2004 is
attributable to a $14.7 million decrease in net loan charge-offs associated with
our commercial leasing business, partially offset by a $3.0 million increase in
net loan charge-offs associated with our CMC loan portfolio. The increase for
2003 is attributable to a $6.4 million increase in net loan charge-offs in our
commercial leasing portfolio.
Our California banking region recognized net loan recoveries of
$704,000 and $680,000 for the years ended December 31, 2005 and 2003,
respectively. In 2004, we experienced certain problems with two significant
commercial credit relationships concentrated in a single lending unit in the
southern California region. As a result, net loan charge-offs in our California
banking region for the year ended December 31, 2004 were $8.6 million, and
included $6.9 million of charge-offs related to these two individual
relationships. Nonperforming loans for our California banking region were $8.7
million at December 31, 2005, compared to $1.6 million and $13.0 million at
December 31, 2004 and 2003, respectively. Generally, the effects on us of the
economic downturn in California have been primarily limited to the San Francisco
Bay area, including the area known as "Silicon Valley." Although we have a
substantial banking presence in the San Francisco Bay area, we have relatively
little direct exposure to the high technology companies. Consequently, the
decline in that industry beginning in 2000 had little direct effect on our
California operations. However, as the magnitude of the problems in the high
technology sector increased, the effects spread to companies that were suppliers
and servicers of the high technology sector, and to commercial real estate in
the area. As a result, our asset quality issues in California have been
primarily concentrated within the San Francisco Bay area, and generally do not
involve Southern California or the Sacramento-Roseville area in Northern
California.
Our Texas banking operation represents a somewhat smaller portion of
our overall lending function. The Texas economy has generally continued to be
fairly strong, resulting in relatively few asset quality issues. Total
nonperforming loans for this region were $5.7 million and $8.2 million at
December 31, 2005 and 2004, respectively, of which $1.8 million and $6.2
million, respectively, were associated with SBLS LLC, whose loan portfolio
included a significant concentration of assets associated with the distressed
shrimping vessels industry, as previously discussed. Net loan charge-offs for
the Texas region were $5.4 million for the year ended December 31, 2005, and
included $3.8 million of net loan charge-offs associated with SBLS LLC. Net loan
charge-offs for 2004 were $4.9 million and included $3.4 million on two credit
relationships and $690,000 of net loan charge-offs related to our purchase of
assets from SBLS. We recorded net loan charge-offs for our Texas region of $7.7
million for the year ended December 31, 2003, which included $6.6 million
associated with three credit relationships.
In addition to restructuring our loan portfolio, we also have changed
the composition of our deposit base. The deposit mix of 2005 reflects our
continued efforts in this regard as a majority of our deposit development
programs are directed toward increased transaction accounts, such as demand and
savings accounts, rather than time deposits. We have also expanded our
development of multiple account relationships with individual customers,
expanding our relationship with existing customers and expanding the products
provided to our customers. This growth is accomplished by cross-selling various
products and services, packaging account types and offering incentives to
deposit customers on other deposit or non-deposit services. The expansion of our
small business market lending provides additional opportunities to cross sell
other financial services such as investment, trust, insurance and traditional
personal banking services to small business owners. In addition, commercial
borrowers are encouraged to maintain their operating deposit accounts with us.
Although time deposits have increased to $3.15 billion at December 31, 2005,
they represented 41.8% of total deposits, as compared to $2.31 billion, or 46.0%
of total deposits at December 31, 2000. Total demand and savings accounts have
increased to $4.39 billion, or 58.2% of total deposits, at December 31, 2005,
from $2.70 billion, or 54.0% of total deposits, at December 31, 2000, reflecting
our continued focus on transactional accounts and full service deposit
relationships with our customers.
Despite the significant expenses we incurred in the amalgamation of the
acquired entities into our corporate culture and systems, and in the expansion
of our organizational capabilities, the earnings of the acquired entities and
the increased net interest income resulting from the transition in the
composition of our loan and deposit portfolios have contributed to improving net
income. For the years ended December 31, 2005 and 2004, net income was $96.9
million and $82.9 million, respectively, compared to $62.8 million, $45.2
million and $64.5 million in 2003, 2002 and 2001, respectively. The negative
provision for loan losses of $4.0 million in 2005 reflects a significant
reduction in net loan charge-offs and, exclusive of a deterioration of certain
credit relationships during the fourth quarter of 2005 that were associated with
our acquisition of CIB Bank, an overall improvement in asset quality and reduced
levels of nonperforming loans during the first nine months of 2005, as further
discussed under "--Comparison of Results of Operations for 2005 and 2004 -
Provision for Loan Losses" and under "--Loans and Allowance for Loan Losses."
The higher-than-historical provision for loan losses in 2003 reflects the then
current economic environment and significantly increased loan charge-off,
delinquency and nonperforming trends. The reduced provision for loan losses in
2004 reflects loan sales of problem credits and, exclusive of 2004 acquisition
activity, an overall improvement in asset quality, reduced levels of
nonperforming loans and lower net loan charge-offs, as further discussed under
"--Comparison of Results of Operations for 2004 and 2003 - Provision for Loan
Losses." Although we anticipate certain short-term adverse effects on our
operating results associated with acquisitions, we believe the long-term
benefits of our acquisition program will exceed the short-term issues
encountered with some acquisitions. Accordingly, in addition to concentrating on
internal growth through continued efforts to further develop our corporate
infrastructure and product and service offerings, we expect to continue to
identify and pursue opportunities for further growth through acquisitions and
expansionary de novo branch activities.
Acquisitions. In the development of our banking franchise, we emphasize
acquiring other financial institutions as one means of achieving our growth
objectives. Acquisitions may serve to enhance our presence in a given market, to
expand the extent of our market area or to enable us to enter new or
noncontiguous market areas. After we consummate an acquisition, we expect to
enhance the franchise of the acquired entity by supplementing the marketing and
business development efforts to broaden the customer bases, strengthening
particular segments of the business or filling voids in the overall market
coverage. We have primarily utilized cash, borrowings and the issuance of
subordinated debentures through our various statutory and business trusts, which
serve as financing entities, to meet our growth objectives under our acquisition
program.
During the three years ended December 31, 2005, we completed six
acquisitions of banks, one branch office purchase and purchased substantially
all of the assets and assumed certain liabilities of a company that originates,
sells and services SBA loans to small business concerns. As demonstrated in the
following table, our acquisitions during the three years ended December 31, 2005
have primarily served to significantly increase our presence in the metropolitan
Chicago, Illinois market and to further augment our existing markets and our
California and Midwest banking franchises. These transactions, which are further
described in Note 2 to our Consolidated Financial Statements, are summarized as
follows:
Loans, Number
Net of of
Entity / Total Unearned Investment Purchase Banking
Closing Date Assets Discount Securities Deposits Price Goodwill Locations
------------ ------ -------- ---------- -------- ----- -------- ---------
(dollars expressed in thousands)
2005
----
Northway State Bank
Grayslake, Illinois
October 31, 2005 $ 50,400 41,800 -- 45,200 10,300 3,800 1
International Bank of
California
Los Angeles, California
September 30, 2005 151,600 113,500 14,700 132,100 33,700 12,000 5
Bank and Trust Company
Roodhouse, Illinois
Branch Office (1)
September 23, 2005 5,000 -- -- 5,100 -- -- --
FBA Bancorp, Inc.
Chicago, Illinois
April 29, 2005 73,300 54,300 5,400 55,700 10,500 2,800 3
----------- ------- ------- --------- ------- ------- --
$ 280,300 209,600 20,100 238,100 54,500 18,600 9
=========== ======= ======= ========= ======= ======= ==
2004
----
Hillside Investors, Ltd.
Hillside, Illinois
November 30, 2004 $ 1,196,700 683,300 393,200 1,102,000 67,400 -- 16
Small Business Loan
Source, Inc. (2)
Houston, Texas
August 31, 2004 47,100 24,000 -- -- 45,600 5,900 --
Continental Mortgage
Corporation - Delaware
Aurora, Illinois
July 30, 2004 140,700 73,600 44,800 104,600 4,200 (3) 100 2
----------- ------- ------- --------- ------- ------- --
$ 1,384,500 780,900 438,000 1,206,600 117,200 6,000 18
=========== ======= ======= ========= ======= ======= ==
2003
----
Bank of Ste. Genevieve
Ste. Genevieve, Missouri
March 31, 2003 $ 115,100 43,700 47,800 93,700 15,400 (4) 900 2
=========== ======= ======= ========= ======= ======= ==
---------------
(1) The Roodhouse, Illinois branch of Bank and Trust Company was acquired by First Bank through a purchase of
certain assets and assumption of certain liabilities of the branch office. Total assets consisted
primarily of cash received upon assumption of the deposit liabilities.
(2) SBLS LLC, a Nevada-based limited liability company and subsidiary of First Bank, purchased substantially
all of the assets and assumed certain liabilities of SBLS. In conjunction with this transaction, on
August 30, 2004, First Bank granted to First Capital America, Inc., or FCA, a corporation owned by our
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.
(3) In conjunction with the acquisition of CMC, First Banks redeemed in full all of the outstanding subordinated
promissory notes of CMC, including accumulated accrued and unpaid interest, totaling $4.5 million in
aggregate.
(4) First Banks completed its acquisition of BSG in exchange for approximately 974,150 shares of Allegiant
Bancorp, Inc., or Allegiant, common stock previously held based upon an agreed-upon purchase price of
$18.375 per share, or $17.9 million. However, in conjunction with a litigation settlement related to this
transaction that occurred during the fourth quarter of 2005, First Banks received 75,758 shares of common
stock of National City Corporation, successor to Allegiant, with a fair value of approximately $2.5
million at the time of the settlement, as further described in Note 2 to our Consolidated Financial
Statements.
We funded the completed acquisitions from available cash reserves,
borrowings under our term loan and revolving credit agreements, proceeds from
the issuance of subordinated debentures, dividends from subsidiaries, and/or
exchanges of available-for-sale investment securities.
Pending Acquisitions. On August 1, 2005, we executed an Agreement and
Plan of Reorganization, which was restated as a Stock Purchase Agreement with
certain shareholders of FNBS on October 28, 2005, that provided for First Banks
to acquire the outstanding common stock of FNBS for $45.62 per share. FNBS
operated one banking office in Sachse, Texas, located in the northeast Dallas
metropolitan area. As further described in Note 25 to our Consolidated Financial
Statements, we completed our acquisition of FNBS on January 3, 2006. At the time
of the acquisition, FNBS had assets of $76.1 million, loans, net of unearned
discount, of $49.3 million, deposits of $66.2 million and stockholders' equity
of $9.9 million.
On November 18, 2005, we executed a Branch Purchase and Assumption
Agreement that provided for First Bank to acquire the East Renner Branch located
at 4251 East Renner Road, in Richardson, Texas. As further described in Note 25
to our Consolidated Financial Statements, First Bank completed its purchase of
assets and assumption of liabilities of the East Renner Branch on January 20,
2006. At the time of the acquisition, the East Renner Branch had assets of
approximately $667,000, including loans, net of unearned discount, of
approximately $144,000, and deposits of approximately $1.1 million.
On December 19, 2005, we executed an Agreement and Plan of
Reorganization providing for the acquisition of Bancorp, and its wholly owned
banking subsidiary, Pittsfield, for approximately $4.9 million in cash.
Pittsfield is headquartered in Pittsfield, Illinois and operates two banking
offices, one in Pittsfield, Illinois, and one in Mount Sterling, Illinois. The
transaction, which is subject to regulatory approvals, is expected to be
completed during the second quarter of 2006. At December 31, 2005, Pittsfield
reported assets of approximately $17.0 million, loans, net of unearned discount,
of approximately $10.7 million, deposits of approximately $13.7 million and
stockholders' equity of approximately $2.7 million. As further described in Note
25 to our Consolidated Financial Statements, on March 7, 2006, First Bank
executed a Purchase and Assumption Agreement providing for the sale of the
banking office located in Mount Sterling, Illinois to Beardstown Savings, s.b.
following the completion of our acquisition of Bancorp.
Subsequent to December 31, 2005, we entered into three agreements
related to acquisition transactions, as more fully described in Note 25 to our
Consolidated Financial Statements.
Other Corporate Transactions. During the three years ended December 31,
2005, we opened the following five de novo branch offices:
Branch Office Location Date Opened
---------------------- -----------
Houston, Texas February 9, 2004
Wildwood, Missouri February 20, 2004
McKinney, Texas July 19, 2004
San Diego, California August 16, 2004
Farmington, Missouri January 18, 2005
On March 31, 2003, we completed the merger of our two wholly owned bank
subsidiaries, First Bank and First Bank & Trust, or FB&T, to allow certain
administrative and operational economies not available while the two banks
maintained separate charters.
On October 17, 2003, First Bank completed its divestiture of three
branch offices in the northern and central Illinois market area, and on December
5, 2003, First Bank completed its divestiture of one branch office in eastern
Missouri. These branch divestitures resulted in a reduction of First Bank's
deposit base of approximately $88.3 million, and a pre-tax gain of approximately
$4.0 million.
On February 6, 2004, First Bank completed its divestiture of one branch
office in rural Missouri. On April 16, 2004, First Bank completed its
divestiture of one branch office in southern Illinois. These branch divestitures
resulted in a reduction of First Bank's deposit base of approximately $23.4
million, and a pre-tax gain of approximately $1.0 million.
On June 30, 2004, First Bank completed the sale of a significant
portion of the leases in its commercial leasing portfolio. The sale reduced our
commercial leasing portfolio by approximately $33.1 million to $9.6 million at
June 30, 2004. No gain or loss was recorded on the transaction. In conjunction
with the transaction, First Bank established a $2.0 million liability associated
with the related recourse obligations for certain leases sold, as further
described in Note 24 to our Consolidated Financial Statements. Our commercial
leasing portfolio has further declined to $3.0 million at December 31, 2005 from
$5.9 million at December 31, 2004, reflecting our overall business strategy to
reduce commercial leasing activities.
On March 25, 2005, we completed the merger of two branch offices in
Hillside, located in the Chicago, Illinois metropolitan area.
Acquisition and Integration Costs. We accrue certain costs associated
with our acquisitions, as applicable, as of the respective consummation dates
that relate to adjustments to the staffing levels of the acquired entities or to
the costs of terminating existing information technology or item processing
contracts of the acquired entities prior to their stated contractual expiration
dates. The most significant costs that we incur relate to salary continuation
agreements, or other similar agreements, of executive management and certain
other employees of the acquired entities that were in place prior to the
acquisition dates. These agreements provide for payments over periods ranging
from two to 15 years and are triggered as a result of the change in control of
the acquired entity. Other severance benefits for employees that are terminated
in conjunction with the integration of the acquired entities into our existing
operations are normally paid to the recipients within 90 days of the respective
consummation date and are expensed in our consolidated statements of income as
incurred. Our accrued severance balance of $542,000 at December 31, 2005 is
comprised of contractual obligations under salary continuation agreements to six
individuals with remaining terms ranging from approximately one to ten years. 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 included in Note 2 to our Consolidated Financial
Statements. These acquisition and integration costs are reflected in accrued and
other liabilities in our consolidated balance sheets. As the obligation to make
payments under these agreements is accrued at the consummation date, such
payments do not have any impact on our consolidated statements of income. As
further discussed and quantified under "--Comparison of Results of Operations
for 2005 and 2004," and "--Comparison of Results of Operations for 2004 and
2003," we also incur costs associated with our acquisitions that are expensed in
our consolidated statements of income. These costs relate principally to
additional costs incurred in conjunction with the information technology
conversions of the respective entities.
Market Area. As of December 31, 2005, First Bank's 177 banking facilities were
located in California, Illinois, eastern Missouri and Texas. First Bank operates
in the St. Louis metropolitan area, in eastern Missouri and throughout Illinois,
including Chicago. First Bank also operates in southern California, including
the greater Los Angeles metropolitan area, including Ventura County, Riverside
County and Orange County; in Santa Barbara County; in northern California,
including the greater San Francisco, San Jose and Sacramento metropolitan areas;
and in Texas in the Houston and Dallas metropolitan areas and in McKinney and
Denton. Our larger networks of branch offices are located in high growth
markets, specifically, Los Angeles, Orange County, Chicago and metropolitan St.
Louis. Through our recent expansion in the Los Angeles area, our largest market
area is southern California. Our second and third largest market areas are the
St. Louis, Missouri metropolitan area and northern Illinois, primarily resulting
from our expansion activities in the Chicago metropolitan area during 2004 and
2005, and our fourth largest market area is northern California.
The following table lists the market areas in which First Bank
operates, total deposits, deposits as a percentage of total deposits and the
number of locations as of December 31, 2005:
Total Deposits Number
Deposits as a Percentage of
Geographic Area (in millions) of Total Deposits Locations
--------------- ------------- ----------------- ---------
Southern California.................................................. $ 1,771.5 23.5% 38
St. Louis, Missouri metropolitan area................................ 1,482.3 19.7 29
Northern Illinois.................................................... 1,317.8 17.5 34
Northern California.................................................. 1,135.6 15.0 16
Central and southern Illinois........................................ 1,009.7 13.4 34
Eastern Missouri..................................................... 475.5 6.3 16
Texas................................................................ 349.4 4.6 10
--------- ----- ---
Total deposits.................................................. $ 7,541.8 100.0% 177
========= ===== ===
Competition and Branch Banking. First Bank engages in highly competitive
activities. Those activities and the geographic markets served primarily involve
competition with other banks, some of which are affiliated with large regional
or national holding companies. Financial institutions compete based upon
interest rates offered on deposit accounts, interest rates charged on loans and
other credit and service charges, the quality of services rendered, the
convenience of banking facilities and, in the case of loans to large commercial
borrowers, relative lending limits.
Our principal competitors include other commercial banks, savings
banks, savings and loan associations, mutual funds, finance companies, trust
companies, insurance companies, leasing companies, credit unions, mortgage
companies, private issuers of debt obligations and suppliers of other investment
alternatives, such as securities firms and financial holding companies. Many of
our non-bank competitors are not subject to the same degree of regulation as
that imposed on bank holding companies, federally insured banks and national or
state chartered banks. As a result, such non-bank competitors have advantages
over us in providing certain services. We also compete with major multi-bank
holding companies, which are significantly larger than us and have greater
access to capital and other resources.
We believe we will continue to face competition in the acquisition of
independent banks, savings banks and other financial companies. We often compete
with larger financial institutions that have substantially greater resources
available for making acquisitions.
Subject to regulatory approval, commercial banks operating in
California, Illinois, Missouri and Texas are permitted to establish branches
throughout their respective states, thereby creating the potential for
additional competition in our service areas.
Supervision and Regulation
General. Along with First Bank, we are extensively regulated by Federal and
state laws and regulations which are designed to protect depositors of First
Bank and the safety and soundness of the U.S. banking system, not our
stockholders. To the extent this discussion refers to statutory or regulatory
provisions, it is not intended to summarize all such provisions and is qualified
in its entirety by reference to the relevant statutory and regulatory
provisions. Changes in applicable laws, regulations or regulatory policies may
have a material effect on our business and prospects. We are unable to predict
the nature or extent of the effects on our business and earnings that new
federal and state legislation or regulation may have. The enactment of the
legislation described below has significantly affected the banking industry
generally and is likely to have ongoing effects on First Bank and us in the
future.
As a registered bank holding company under the Bank Holding Company Act
of 1956, as amended, we are subject to regulation and supervision of the Board
of Governors of the Federal Reserve System, or Federal Reserve. We file annual
reports with the Federal Reserve and provide to the Federal Reserve additional
information as it may require.
Since First Bank is an institution chartered by the State of Missouri
and a member of the Federal Reserve, both the State of Missouri Division of
Finance and the Federal Reserve supervise, regulate and examine First Bank.
First Bank is also regulated by the Federal Deposit Insurance Corporation, or
FDIC, which provides deposit insurance of up to $100,000 for each insured
depositor.
Bank Holding Company Regulation. The activities of bank holding companies are
generally limited to the business of banking, managing or controlling banks, and
other activities that the Federal Reserve has determined to be so closely
related to banking or managing or controlling banks as to the proper incident
thereto. In addition, under the Gramm-Leach-Bliley Act, or GLB Act, which was
enacted in November 1999 and is further discussed below, a bank holding company,
whose control depository institutions are "well-capitalized" and "well-managed"
(as defined in Federal Banking Regulations), and which obtains "satisfactory"
Community Reinvestment Act (discussed briefly below) ratings, may declare itself
to be a "financial holding company" and engage in a broader range of activities.
As of this date, we are not a "financial holding company."
We are also subject to capital requirements applied on a consolidated
basis, which are substantially similar to those required of First Bank (briefly
summarized below). The Bank Holding Company Act also requires a bank holding
company to obtain approval from the Federal Reserve before:
>> acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls a majority of such
shares);
>> acquiring all or substantially all of the assets of another bank
or bank holding company; or
>> merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or
consolidation that would have a substantially anti-competitive result, unless
the anti-competitive effects of the proposed transaction are clearly outweighed
by a greater public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve also considers capital adequacy and
other financial and managerial factors in reviewing acquisitions and mergers.
Safety and Soundness and Similar Regulations. We are subject to various
regulations and regulatory policies directed at the financial soundness of First
Bank. These include, but are not limited to, the Federal Reserve's source of
strength policy, which obligates a bank holding company such as us to provide
financial and managerial strength to its subsidiary banks; restrictions on the
nature and size of certain affiliate transactions between a bank holding company
and its subsidiary depository institutions and restrictions on extensions of
credit by its subsidiary banks to executive officers, directors, principal
stockholders and the related interests of such persons.
Regulatory Capital Standards. The federal bank regulatory agencies have adopted
substantially similar risk-based and leverage capital guidelines for banking
organizations. Risk-based capital ratios are determined by classifying assets
and specified off-balance sheet obligations and financial instruments into
weighted categories, with higher levels of capital being required for categories
deemed to represent greater risk. Federal Reserve policy also provides that
banking organizations generally, and particularly those that are experiencing
internal growth or actively making acquisitions, are expected to maintain
capital positions that are substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Under the risk-based capital standard, the minimum consolidated ratio
of total capital to risk-adjusted assets required for bank holding companies is
8%. At least one-half of the total capital must be composed of common equity,
retained earnings, qualifying noncumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual preferred stock and minority interests
in the equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets, which amount is referred to as
"Tier I capital." The remainder may consist of qualifying hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier I
capital and a limited amount of loan and lease loss reserves, which amount,
together with Tier I capital, is referred to as "Total Risk-Based Capital."
In addition to the risk-based standard, we are subject to minimum
requirements with respect to the ratio of our Tier I capital to our average
assets less goodwill and certain other intangible assets, or the Leverage Ratio.
Applicable requirements provide for a minimum Leverage Ratio of 3% for bank
holding companies that have the highest supervisory rating, while all other bank
holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%.
The Office of the Comptroller of the Currency and the FDIC have established
capital requirements for banks under their respective jurisdictions that are
consistent with those imposed by the Federal Reserve on bank holding companies.
Information regarding our capital levels and First Bank's capital
levels under the federal capital requirements is contained in Note 21 to our
Consolidated Financial Statements appearing elsewhere in this report. As further
described in Note 21 to our Consolidated Financial Statements, on March 1, 2005,
the Federal Reserve adopted a final rule, Risk-Based Capital Standards: Trust
Preferred Securities and the Definition of Capital, which allows for the
continued inclusion, on a limited basis, of trust preferred securities in Tier I
capital. Under the final rule, trust preferred securities and other restricted
core capital elements will be subject to stricter quantitative limits. The
Federal Reserve'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.
Prompt Corrective Action. The FDIC Improvement Act requires the federal bank
regulatory agencies to take prompt corrective action in respect to depository
institutions that do not meet minimum capital requirements. A depository
institution's status under the prompt corrective action provisions depends upon
how its capital levels compare to various relevant capital measures and other
factors as established by regulation.
The federal regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. Under the regulations, a
bank will be:
>> "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier I capital ratio of 6% or greater and a
Leverage Ratio of 5% or greater and is not subject to any order
or written directive by any such regulatory authority to meet and
maintain a specific capital level for any capital measure;
>> "adequately capitalized" if it has a total risk-based capital
ratio of 8% or greater, a Tier I capital ratio of 4% or greater
and a Leverage Ratio of 4% or greater (3% in certain
circumstances);
>> "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I capital ratio of less than 4% or a
Leverage Ratio of less than 4% (3% in certain circumstances);
>> "significantly undercapitalized" if it has a total risk-based
capital ratio of less than 6%, a Tier I capital ratio of less
than 3% or a Leverage Ratio of less than 3%; and
>> "critically undercapitalized" if its tangible equity is equal to
or less than 2% of its average quarterly tangible assets.
Under certain circumstances, a depository institution's primary federal
regulatory agency may use its authority to lower the institution's capital
category. The banking agencies are permitted to establish individual minimum
capital requirements exceeding the general requirements described above.
Generally, failing to maintain the status of "well capitalized" or "adequately
capitalized" subjects a bank to restrictions and limitations on its business
that become progressively more severe as the capital levels decrease.
A bank is prohibited from making any capital distribution (including
payment of a dividend) or paying any management fee to its holding company if
the bank would thereafter be "undercapitalized." Limitations exist for
"undercapitalized" depository institutions regarding, among other things, asset
growth, acquisitions, branching, new lines of business, acceptance of brokered
deposits and borrowings from the Federal Reserve System. These institutions are
also required to submit a capital restoration plan that includes a guarantee
from the institution's holding company. "Significantly undercapitalized"
depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
"adequately capitalized," requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. The appointment of a receiver or
conservator may be required for "critically undercapitalized" institutions.
Dividends. Our primary source of funds in the future is the dividends, if any,
paid by First Bank. The ability of First Bank to pay dividends is limited by
federal laws, by regulations promulgated by the bank regulatory agencies and by
principles of prudent bank management. Under the most restrictive of these
requirements, the future payment of dividends from First Bank is limited to
approximately $81.5 million at December 31, 2005, unless prior permission of the
regulatory authorities is obtained.
Customer Protection. First Bank is also subject to consumer laws and regulations
intended to protect consumers in transactions with depository institutions, as
well as other laws or regulations affecting customers of financial institutions
generally. These laws and regulations mandate various disclosure requirements
and substantively regulate the manner in which financial institutions must deal
with their customers. First Bank must comply with numerous regulations in this
regard and is subject to periodic examinations with respect to its compliance
with the requirements.
Community Reinvestment Act. The Community Reinvestment Act of 1977 requires
that, in connection with examinations of financial institutions within their
jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those financial institutions. These factors are also
considered in evaluating mergers, acquisitions and other applications to expand.
The Gramm-Leach-Bliley Act. The GLB Act, enacted in 1999, amended and repealed
portions of the Glass-Steagall Act and other federal laws restricting the
ability of bank holding companies, securities firms and insurance companies to
affiliate with each other and to enter new lines of business. The GLB Act
established a comprehensive framework to permit financial companies to expand
their activities, including through such affiliations, and to modify the federal
regulatory structure governing some financial services activities. This
authority of financial firms to broaden the types of financial services offered
to customers and to affiliates with other types of financial services companies
may lead to further consolidation in the financial services industry. However,
it may lead to additional competition in the markets in which we operate by
allowing new entrants into various segments of those markets that are not the
traditional competitors in those segments. Furthermore, the authority granted by
the GLB Act may encourage the growth of larger competitors.
The GLB Act also adopted consumer privacy safeguards requiring
financial services providers to disclose their policies regarding the privacy of
customer information to their customers and, subject to some exceptions,
allowing customers to "opt out" of policies permitting such companies to
disclose confidential financial information to non-affiliated third parties.
The Sarbanes-Oxley Act. In July 2002, the Sarbanes-Oxley Act of 2002 was
enacted. The Sarbanes-Oxley Act imposes a myriad of corporate governance and
accounting measures designed to ensure that the shareholders of corporate
America are treated fairly and have full and accurate information about the
public companies in which they invest. All public companies, including companies
such as First Banks, that file periodic reports with the Securities and Exchange
Commission, or SEC, are affected by the Sarbanes-Oxley Act.
Certain provisions of the Sarbanes-Oxley Act became effective
immediately, while other provisions will become effective as the SEC adopts
rules to implement those provisions. Some of the principal provisions of the
Sarbanes-Oxley Act which may affect us include:
>> the creation of an independent accounting oversight board to
oversee the audit of public companies and auditors who perform
such audits;
>> auditor independence provisions which restrict non-audit services
that independent accountants may provide to their audit clients;
>> additional corporate governance and responsibility measures which
(i) require the chief executive officer and chief financial
officer to certify financial statements and to forfeit salary and
bonuses in certain situations, and (ii) protect whistleblowers
and informants;
>> expansion of the audit committee's authority and responsibility
by requiring that the audit committee (i) have direct control of
the outside auditor, (ii) be able to hire and fire the auditor,
and (iii) approve all non-audit services;
>> mandatory disclosure by analysts of potential conflicts of
interest; and
>> enhanced penalties for fraud and other violations.
The Sarbanes-Oxley Act has and is expected to continue to increase the
administrative costs of doing business for public companies; however, we cannot
predict the significance of such increase.
The USA Patriot Act. The Patriot Act was enacted in October 2001 in response to
the terrorist attacks in New York, Pennsylvania and Washington, D.C. that
occurred on September 11, 2001. The Patriot Act is intended to strengthen the
ability of U.S. law enforcement agencies and the intelligence communities to
work cohesively to combat terrorism on a variety of fronts. The potential impact
of the Patriot Act on financial institutions of all kinds is significant and
wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and imposes various regulations, including standards
for verifying client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering. The Patriot Act is expected to increase the administrative costs and
burden of doing business for financial institutions; however, while we cannot
predict the full impact of such an increase, we do not expect it to differ from
that of other financial institutions.
Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System.
The Federal Reserve requires all depository institutions to maintain reserves
against their transaction accounts and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements. Institutions are authorized to borrow
from the Federal Reserve Bank discount window, but Federal Reserve regulations
require institutions to exhaust other reasonable alternative sources of funds,
including advances from Federal Home Loan Banks, before borrowing from the
Federal Reserve Bank.
First Bank is a member of the Federal Reserve System and the Federal
Home Loan Bank System. As a member, First Bank is required to hold investments
in regional banks within those systems. First Bank was in compliance with these
requirements at December 31, 2005, with investments of $10.3 million in stock of
the Federal Home Loan Bank of Des Moines and $22.2 million in stock of the
Federal Reserve Bank of St. Louis. First Bank also holds an investment of $2.0
million in stock of the Federal Home Loan Bank of Chicago, as a nonmember, to
collateralize certain Federal Home Loan Bank advances assumed in conjunction
with certain acquisition transactions.
Monetary Policy and Economic Control. The commercial banking business is
affected by legislation, regulatory policies and general economic conditions as
well as the monetary policies of the Federal Reserve. The instruments of
monetary policy available to the Federal Reserve include the following:
>> changes in the discount rate on member bank borrowings and the
targeted federal funds rate;
>> the availability of credit at the discount window;
>> open market operations;
>> the imposition of changes in reserve requirements against
deposits of domestic banks;
>> the imposition of changes in reserve requirements against
deposits and assets of foreign branches; and
>> the imposition of and changes in reserve requirements against
certain borrowings by banks and their affiliates.
These monetary policies are used in varying combinations to influence
overall growth and distributions of bank loans, investments and deposits, and
this use may affect interest rates charged on loans or paid on liabilities. The
monetary policies of the Federal Reserve have had a significant effect on the
operating results of commercial banks and are expected to do so in the future.
Such policies are influenced by various factors, including inflation,
unemployment, and short-term and long-term changes in the international trade
balance and in the fiscal policies of the U.S. Government. We cannot predict the
effect that changes in monetary policy or in the discount rate on member bank
borrowings will have on our future business and earnings or those of First Bank.
Employees
As of March 27, 2006, we employed approximately 2,530 employees. None
of the employees are subject to a collective bargaining agreement. We consider
our relationships with our employees to be good.
Item 1A. Risk Factors
Readers of our Annual Report on Form 10-K should consider the risk
factors described below in conjunction with the other information included in
this Annual Report on Form 10-K, including Management's Discussion and Analysis
of Financial Condition and Results of Operations, our Selected Financial Data,
our Consolidated Financial Statements and the related notes thereto, and the
financial and other data contained elsewhere in this report. See also "Special
Note Regarding Forward-Looking Statements" appearing at the beginning of this
report.
We pursue acquisitions to supplement our internal growth. Acquisitions
involve varying degrees of inherent risk that could affect our profitability.
Acquisitions of other banks or businesses may expose us to asset quality
problems, higher than anticipated expenses, operational problems or unknown or
contingent liabilities of the entities we acquire. If the quantity of these
problems exceeds our estimates, our earnings and financial condition may be
adversely affected. Furthermore, acquisitions generally require integration of
the acquired entity's systems and procedures with ours in order to make the
transaction economically feasible. This integration process is complicated and
time consuming and can also be disruptive to the customers of the acquired
business. If the integration process is not conducted successfully and with
minimal effect on the business and its customers, we may not realize the
anticipated economic benefits of particular acquisitions within the expected
time frame, and we may lose higher than expected numbers of customers or
employees of the acquired business.
Competition for acquisitions in the financial services industry and our
status as a privately held company make our efforts to grow through acquisitions
difficult. We face intense competition from other financial institutions in
pursuing acquisitions, particularly related to price. Prices at which
acquisitions can be made fluctuate with market conditions. We have experienced
times during which acquisitions could not be made in specific markets at prices
our management considered acceptable, and we expect that this situation will
happen again. Because of our intention to remain a closely held company, we do
not use our common stock to make acquisitions. Our use of cash as acquisition
consideration can be a disadvantage in acquisitions relative to other
prospective acquirers in those instances in which selling stockholders desire a
tax-free exchange.
Geographic distance between our operations increases operating costs
and makes efforts to standardize operations more difficult. We operate banking
offices in California, Illinois, Missouri and Texas. The noncontiguous nature of
many of our geographic markets increases operating costs and makes it more
difficult for us to standardize our business practices and procedures. As a
result of our geographic dispersion, we face the following challenges: (a)
operation of information technology and item processing functions at remote
locations including the transportation of documents and increased communications
line charges from various service providers; (b) control of correspondent
accounts, reserve balances and wire transfers in different time zones; (c)
familiarizing personnel with our business environment, banking practices and
customer requirements at geographically dispersed areas; (d) providing
administrative support, including accounting, human resources, credit
administration, loan servicing, internal audit and credit review at significant
distances; and (e) establishing and monitoring compliance with our corporate
policies and procedures in different areas.
Our emphasis on commercial real estate lending and real estate
construction and development lending has increased our credit risk. Our expanded
level of commercial real estate and construction and development lending carries
with it greater credit risk than the credit risk associated with residential
real estate lending. A substantial portion of our loans are secured by
commercial real estate. Commercial real estate and real estate construction and
development loans were $2.11 billion and $1.56 billion, respectively, at
December 31, 2005, representing 31.5% and 23.3%, respectively, of our loan
portfolio, excluding loans held for sale. During 2004 and 2005, we experienced
increasing amounts of nonperforming loans within our commercial real estate and
real estate construction and development loan portfolios. Adverse developments
affecting real estate in one or more of our markets could further increase the
credit risk associated with our loan portfolio, as further discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Lending Activities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Loans and Allowance for Loan
Losses." On January 13, 2006, the Department of the Treasury, Federal Reserve
and FDIC collectively issued proposed guidance entitled, "Interagency Guidance
on Concentrations in Commercial Real Estate Lending, Sound Risk Management
Practices." This proposed guidance focuses on financial institutions that have
high and increasing concentrations of commercial real estate loans on their
balance sheets that make them more vulnerable to cyclical commercial real estate
markets, and is intended to reinforce the institution's risk management
practices and appropriate capital levels associated with these concentrations.
The comment period ends April 13, 2006.
Decreases in interest rates could have a negative impact on our
profitability. Our earnings are principally dependent on our ability to generate
net interest income. Net interest income is affected by many factors that are
partly or completely beyond our control, including competition, general economic
conditions and the policies of regulatory authorities, including the monetary
policies of the Federal Reserve. Under our current interest rate risk position,
our net interest income could be negatively affected by a decline in interest
rates, as further discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Interest Rate Risk Management."
Our interest rate risk hedging activities may increase volatility in
earnings. To offset the risks associated with the effects of changes in market
interest rates, we periodically enter into transactions designed to hedge our
interest rate risk. The accounting for such hedging activities under U.S.
generally accepted accounting principles requires our hedging instruments to be
recorded at fair value. The effect of certain of our hedging strategies may
result in volatility in our quarterly and annual earnings as interest rates
change or as the volatility in the underlying derivatives markets increases or
decreases. The volatility in earnings is primarily a result of marking to market
certain of our hedging instruments and/or modifying our overall hedge position,
as further discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Interest Rate Risk Management."
The financial services business is highly competitive, and we face
competitive disadvantages because of our size and the nature of banking
regulation. We encounter strong direct competition for deposits, loans and other
financial services in all of our market areas. Our larger competitors, which
have significantly greater resources, may have advantages over us in providing
certain services. Our principal competitors include other commercial banks,
savings banks, savings and loan associations, mutual funds, finance companies,
trust companies, insurance companies, leasing companies, credit unions, mortgage
companies, private issuers of debt obligations and suppliers of other investment
alternatives, such as securities firms and financial holding companies. Many of
our non-bank competitors are not subject to the same degree of regulation as
that imposed on bank holding companies, federally insured banks and national or
state chartered banks. As a result, such non-bank competitors may have
advantages over us in providing certain services.
We may not be able to implement technological change as effectively as
our competitors. The financial services industry has in the past and continues
to undergo rapid technological change related to delivery and availability of
products and services and operating efficiencies. In many instances
technological improvements require significant capital expenditures, and many of
our larger competitors have significantly greater resources than we may have
available.
We operate in a highly regulated environment. Recently enacted,
proposed and future legislation and regulations may increase our cost of doing
business. We and our subsidiaries are subject to extensive federal and state
legislation, regulation and supervision. Recently enacted, proposed and future
legislation and regulations have had and are expected to continue to have a
significant impact on the financial services industry. Some of the legislative
and regulatory changes, including the Sarbanes-Oxley Act and the USA Patriot
Act, have and are expected to continue to increase our costs of doing business,
particularly personnel and technology expenses necessary to maintain compliance
with the expanded regulatory requirements. Additionally, the legislative and
regulatory changes could reduce our ability to compete in certain markets, as
further discussed under "--Business -- Supervision and Regulation."
Item 1B. Unresolved Staff Comments
We are not an accelerated filer or a large accelerated filer, as
defined in Rule 12b-2 of the Securities Exchange Act of 1934, or the Exchange
Act, nor are we a well-known seasoned issuer as defined in Rule 405 of the
Securities Act. Consequently, Item 1B is not applicable to us.
Item 2. Properties
We own our office building, which houses our principal place of
business, located at 135 North Meramec, Clayton, Missouri 63105. The property is
in good condition and consists of approximately 60,353 square feet, of which
approximately 9,970 square feet is currently leased to others. Of our other 177
offices and three operations and administrative facilities, 101 are located in
buildings that we own and 79 are located in buildings that we lease.
We consider the properties at which we do business to be in good
condition generally and suitable for our business conducted at each location. To
the extent our properties or those acquired in connection with our acquisition
of other entities provide space in excess of that effectively utilized in the
operations of First Bank, we seek to lease or sub-lease any excess space to
third parties. Additional information regarding the premises and equipment
utilized by First Bank appears in Note 7 to our Consolidated Financial
Statements appearing elsewhere in this report.
Item 3. Legal Proceedings
In the ordinary course of business, we and our subsidiaries become
involved in legal proceedings. Our management, in consultation with legal
counsel, believes the ultimate resolution of existing proceedings will not have
a material adverse effect on our business, financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Information. There is no established public trading market for our common
stock. Various trusts, which were created by and are administered by and for the
benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of his
immediate family, own all of our voting stock.
Dividends. In recent years, we have paid minimal dividends on our Class A
Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible
Adjustable Rate Preferred Stock, and have paid no dividends on our Common Stock.
Our ability to pay dividends is limited by regulatory requirements and our
credit agreement, and by the receipt of dividend payments from First Bank, which
is also subject to regulatory requirements. The dividend limitations are further
described in Note 11 and Note 22 to our Consolidated Financial Statements
appearing elsewhere in this report.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below are derived
from our consolidated financial statements. This information is qualified by
reference to our Consolidated Financial Statements appearing elsewhere in this
report. This information should be read in conjunction with such Consolidated
Financial Statements, the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As of or For the Year Ended December 31, (1)
------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(dollars expressed in thousands, except share and per share data)
Income Statement Data:
Interest income..................................... $ 493,940 394,782 391,153 425,721 445,385
Interest expense.................................... 168,259 94,767 104,026 157,551 210,246
---------- --------- --------- --------- ---------
Net interest income................................. 325,681 300,015 287,127 268,170 235,139
Provision for loan losses........................... (4,000) 25,750 49,000 55,500 23,510
---------- --------- --------- --------- ---------
Net interest income after provision for loan losses. 329,681 274,265 238,127 212,670 211,629
Noninterest income.................................. 94,743 83,486 87,708 67,511 89,095
Noninterest expense................................. 276,296 229,505 227,069 210,812 202,157
---------- --------- --------- --------- ---------
Income before provision for income taxes,
minority interest in (loss) income of
subsidiary and cumulative effect of change
in accounting principle........................... 148,128 128,246 98,766 69,369 98,567
Provision for income taxes.......................... 52,509 45,338 35,955 22,771 30,048
---------- --------- --------- --------- ---------
Income before minority interest in (loss)
income of subsidiary and cumulative effect
of change in accounting principle................. 95,619 82,908 62,811 46,598 68,519
Minority interest in (loss) income of subsidiary.... (1,287) -- -- 1,431 2,629
---------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle.............................. 96,906 82,908 62,811 45,167 65,890
Cumulative effect of change in accounting
principle, net of tax............................. -- -- -- -- (1,376)
---------- --------- --------- --------- ---------
Net income.......................................... $ 96,906 82,908 62,811 45,167 64,514
========== ========= ========= ========= =========
Dividends:
Preferred stock..................................... $ 786 786 786 786 786
Common stock........................................ -- -- -- -- --
Ratio of total dividends declared to net income..... 0.81% 0.95% 1.25% 1.74% 1.22%
Per Share Data:
Earnings per common share:
Basic:
Income before cumulative effect of change
in accounting principle...................... $ 4,062.36 3,470.80 2,621.39 1,875.69 2,751.54
Cumulative effect of change in accounting
principle, net of tax........................ -- -- -- -- (58.16)
---------- --------- --------- --------- ---------
Basic.......................................... $ 4,062.36 3,470.80 2,621.39 1,875.69 2,693.38
========== ========= ========= ========= =========
Diluted:
Income before cumulative effect of change
in accounting principle...................... $ 4,007.46 3,421.58 2,588.31 1,853.64 2,684.93
Cumulative effect of change in accounting
principle, net of tax........................ -- -- -- -- (58.16)
---------- --------- --------- --------- ---------
Diluted........................................ $ 4,007.46 3,421.58 2,588.31 1,853.64 2,626.77
========== ========= ========= ========= =========
Weighted average shares of common
stock outstanding................................. 23,661 23,661 23,661 23,661 23,661
Balance Sheet Data:
Investment securities............................... $1,340,783 1,813,349 1,049,714 1,145,670 638,644
Loans, net of unearned discount..................... 7,020,771 6,137,968 5,328,075 5,432,588 5,408,869
Total assets........................................ 9,170,333 8,732,841 7,106,940 7,351,177 6,786,045
Total deposits...................................... 7,541,831 7,151,970 5,961,615 6,172,820 5,683,904
Notes payable....................................... 100,000 15,000 17,000 7,000 27,500
Subordinated debentures............................. 215,461 273,300 209,320 278,389 243,457
Common stockholders' equity......................... 665,875 587,830 536,752 505,978 435,594
Total stockholders' equity.......................... 678,938 600,893 549,815 519,041 448,657
Earnings Ratios:
Return on average assets............................ 1.10% 1.10% 0.87% 0.64% 1.08%
Return on average stockholders' equity.............. 15.11 14.44 11.68 9.44 15.96
Efficiency ratio (2)................................ 65.72 59.84 60.58 62.80 62.35
Net interest margin (3)............................. 4.01 4.36 4.45 4.23 4.34
Asset Quality Ratios:
Allowance for loan losses to loans.................. 1.93 2.46 2.19 1.83 1.80
Nonperforming loans to loans (4).................... 1.38 1.40 1.41 1.38 1.24
Allowance for loan losses to
nonperforming loans (4)........................... 139.23 175.65 154.52 132.29 144.36
Nonperforming assets to loans and
other real estate (5)............................. 1.41 1.46 1.62 1.52 1.32
Net loan charge-offs to average loans............... 0.21 0.45 0.61 1.01 0.45
Capital Ratios:
Average total stockholders' equity to
average total assets.............................. 7.28 7.61 7.48 6.78 6.74
Total risk-based capital ratio...................... 10.14 10.61 10.27 10.68 10.53
Leverage ratio...................................... 8.13 7.89 7.62 6.45 7.24
- ----------------
(1) The comparability of the selected data presented is affected by the acquisitions of ten banks, a loan origination
business and two branch offices during the five-year period ended December 31, 2005. The selected data includes the
financial position and results of operations of each acquired entity only for the periods subsequent to its
respective date of acquisition.
(2) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income.
(3) Net interest rate margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average
interest-earning assets.
(4) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms.
(5) Nonperforming assets consist of nonperforming loans and other real estate.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following presents management's discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. This discussion should be read in conjunction with our
"Selected Financial Data," our Consolidated Financial Statements and the related
notes thereto, and the other financial data contained elsewhere in this report.
This discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Various factors
may cause our actual results to differ materially from those contemplated by the
forward-looking statements herein. We do not have a duty to and will not update
these forward-looking statements. Readers of our Annual Report on Form 10-K
should therefore consider these risks and uncertainties in evaluating
forward-looking statements and should not place undue reliance on
forward-looking statements. See "Special Note Regarding Forward-Looking
Statements" appearing at the beginning of this report and "Item 1A - Risk
Factors," appearing elsewhere in this report.
RESULTS OF OPERATIONS
Overview
Net income was $96.9 million, $82.9 million and $62.8 million for the
years ended December 31, 2005, 2004 and 2003, respectively. Our return on
average assets and our return on average stockholders' equity were 1.10% and
15.11%, respectively, for the year ended December 31, 2005, compared to 1.10%
and 14.44%, respectively, for 2004, and 0.87% and 11.68%, respectively, for
2003. Results for 2005 reflect 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 net income for 2005 over 2004 reflects our continuing
efforts to strengthen earnings while simultaneously focusing on growing our
banking franchise and continuing our efforts to improve asset quality. The
increase in net income for 2005 was primarily attributable to a significant
reduction in our provision for loan losses. A negative provision for loan losses
of $8.0 million was recorded during the first nine months of 2005 as a result of
overall improvement in nonperforming loans during this period due to significant
loan payoffs and/or external refinancing of various credits, a sizeable
reduction in net loan charge-offs and the sale of certain nonperforming loans.
However, the improvement in our nonperforming loans was subsequently offset by
deterioration of certain large credits during the fourth quarter of 2005,
resulting in a fourth quarter provision for loan losses of $4.0 million, as
further discussed below. The increase in net income for 2005 was also
attributable to increased net interest income resulting from 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. However, net interest income was adversely
affected by a decline in earnings on our interest rate swap agreements
associated with our interest rate risk management program, primarily resulting
from 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, our interest expense increased as a result
of higher interest rates on deposits and 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 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. Our net interest income increased $25.7 million in 2005
to $325.7 million for the year ended December 31, 2005, compared to $300.0
million for 2004. Despite the increase in net interest income and the increasing
interest rate environment, our net interest margin decreased to 4.01% for the
year ended December 31, 2005, compared to 4.36% for 2004 primarily due to
overall conditions within our markets and the impact of the decline in earnings
on our interest rate swap agreements, both of which continue to exert pressure
on our net interest income and net interest margin. Noninterest income increased
13.5% in 2005 to $94.7 million, from $83.5 million in 2004. Our efficiency ratio
was 65.72% in 2005 compared to 59.84% in 2004, reflecting a significant increase
in our level of noninterest expenses, largely attributable to overall expenses
associated with our 2004 and 2005 acquisitions, as well as significant
charitable contributions expense incurred in 2005. The increase in net income
for 2004 was primarily attributable to a significant reduction in our provision
for loan losses as well as increased net interest income resulting from
higher-yielding investment portfolio securities and reduced deposit rates,
partially offset by decreased earnings on our loan portfolio attributable to
reduced earnings on our interest rate swap agreements associated with our
interest rate risk management program. Results for 2004 also included a gain of
$2.7 million, before applicable income taxes, recorded in February 2004 relating
to the sale of a residential and recreational development property that was
foreclosed on in January 2003, and gains, net of expenses, totaling $1.0
million, before applicable income taxes, recorded in February and April 2004 on
the sale of two Midwest branch banking offices.
We recorded a negative provision for loan losses of $4.0 million for
the year ended December 31, 2005. While we had recorded a negative provision for
loan losses of $8.0 million for the first nine months of 2005, reflecting a
21.0% improvement in nonperforming loans during this period from the sale of
certain acquired nonperforming loans, the strengthening of certain loans, loan
payoffs and /or external refinancing of various credits, and a significant
reduction in net loan charge-offs, the level of nonperforming loans increased
during the fourth quarter of 2005 as a result of further deterioration of a few
large credit relationships in our Midwest region, which resulted in a fourth
quarter provision for loan losses of $4.0 million. Net loan charge-offs
decreased to $13.4 million in 2005 from $24.8 million in 2004, and included $7.6
million in loan charge-offs associated with the transfer of $59.7 million of
nonperforming loans to our held for sale portfolio on December 31, 2005. The
$59.7 million represents the estimated fair value, net of costs, that is
expected to be realized at the time of sale. Several of the credit relationships
that had deteriorated during the fourth quarter of 2005 were included in the
loans transferred to our held for sale portfolio. Our provision for loan losses
of $25.8 million for the year ended December 31, 2004 reflected a significant
reduction from a provision for loan losses of $49.0 million for the comparable
period in 2003, and was primarily attributable to loan sales of problem credits
completed in late 2004 and, exclusive of our 2004 acquisition activity,
substantial improvement in asset quality, reduced levels of nonperforming loans
and lower net loan charge-offs. We continue to closely monitor the level of our
nonperforming assets and our focus of further reducing these assets.
Financial Condition and Average Balances
Our average total assets were $8.81 billion for the year ended December
31, 2005, compared to $7.54 billion and $7.18 billion for the years ended
December 31, 2004 and 2003, respectively. Our total assets were $9.17 billion,
$8.73 billion and $7.11 billion at December 31, 2005, 2004 and 2003,
respectively. We attribute the $437.5 million increase in total assets in 2005
primarily to internal loan growth within our commercial and residential real
estate lending portfolios, our acquisition of CIB Bank late in 2004, as further
discussed below, and our acquisitions of FBA, IBOC and NSB, which provided
assets of $275.3 million, in aggregate, as well as the intangible assets
associated with these transactions. We attribute the $1.63 billion increase in
total assets in 2004 primarily to our acquisition of CIB Bank on November 30,
2004, which provided assets of $1.20 billion, and our acquisitions of CCB and
SBLS in the third quarter of 2004, which provided assets of $187.8 million, in
aggregate, as well as the intangible assets associated with those transactions.
Additionally, exclusive of the loans provided by the acquisitions, our
commercial and residential real estate lending portfolios increased $124.1
million in 2004, reflecting internal growth within these portfolios. The overall
increase in total assets in 2004 was partially offset by a $44.6 million
decrease in the fair value of our derivative instruments to $4.7 million at
December 31, 2004 from $49.3 million at December 31, 2003, primarily resulting
from the maturity of a significant notional amount of our interest rate swap
agreements in March and September 2004.
The increase in our average assets for 2005 was primarily funded by an
increase in average deposits of $1.04 billion to $7.20 billion for the year
ended December 31, 2005; an increase in average other borrowings of $85.7
million; an increase in average notes payable of $33.2 million; and an increase
in average subordinated debentures of $38.8 million. The increase in average
assets for 2004 was primarily funded by an increase in average deposits of
$114.8 million to $6.17 billion for the year ended December 31, 2004, and an
increase of $266.7 million in average other borrowings to $486.0 million for the
year ended December 31, 2004, primarily attributable to term repurchase
agreements. Funds available from maturities and sales of investment securities
during 2005 were primarily used to fund loan growth, resulting in a decrease in
our investment securities portfolio. A portion of the remaining funds available
from maturities of investment securities were reinvested in higher-yielding
available-for-sale investment securities. Interest-earning assets averaged $8.15
billion for the year ended December 31, 2005, compared to $6.91 billion and
$6.49 billion for the years ended December 31, 2004 and 2003, respectively,
while interest-bearing liabilities averaged $6.82 billion for the year ended
December 31, 2005, compared to $5.78 billion and $5.53 billion for the years
ended December 31, 2004 and 2003, respectively.
Average loans, net of unearned discount, were $6.44 billion, $5.51
billion and $5.39 billion for the years ended December 31, 2005, 2004 and 2003,
respectively. The acquisitions we completed during 2004 and 2005 provided total
loans, net of unearned discount, of $780.9 million and $209.6 million,
respectively. Our 2005 acquisitions of FBA, IBOC and NSB provided loans, net of
unearned discount, of $54.3 million, $113.5 million and $41.8 million,
respectively. Internal loan growth of $687.5 million for 2005 was primarily
generated from a $286.8 million increase in our real estate mortgage portfolio
resulting from management's business decision to retain additional mortgage loan
product production in our residential real estate mortgage portfolio, and a home
equity product line campaign that we held in mid-2004, a $241.9 million increase
in our real estate construction and development portfolio, and a $194.8 million
increase in our loans held for sale portfolio, including approximately $59.7
million of nonperforming loans that were transferred to the loans held for sale
portfolio at December 31, 2005, as further discussed under "--Loans and
Allowance for Loan Losses." This increase was partially offset by reductions in
a portion of our nonperforming loan portfolio due to the sale of certain
nonperforming loans in early 2005, loan payoffs and/or external refinancing of
various credits. Our 2004 acquisitions of CIB Bank, CCB and SBLS provided loans,
net of unearned discount, of $683.3 million, $73.6 million and $24.0 million,
respectively. Additionally, internal loan growth in 2004 contributed to a $91.8
million increase in commercial loans and a $32.3 million increase in residential
real estate mortgage loans, partially offset by a decrease in consumer loans of
$11.9 million. The overall increase in our loan portfolio was partially offset
by a decrease in our loan portfolio of $83.2 million resulting from the sale of
a portion of our commercial leasing portfolio and management's business decision
to reduce our level of nonperforming assets through the sale of certain
nonperforming loans in November and December 2004.
Investment securities averaged $1.64 billion, $1.28 billion and $957.4
million for the years ended December 31, 2005, 2004 and 2003, respectively,
reflecting increases of $361.8 million and $325.6 million for the years ended
December 31, 2005 and 2004, respectively. We attribute the increase in 2005
primarily to our 2004 and 2005 acquisitions, which provided investment
securities, in aggregate, of $438.0 million and $20.1 million, respectively.
Funds available from maturities of investment securities, deposit growth and an
increase in our other borrowings were used to fund loan growth and for the
reinvestment in additional higher-yielding available-for-sale investment
securities. Additionally, throughout 2005, short-tem investments were utilized
to fund an anticipated level of attrition associated with our acquisitions,
primarily time deposits acquired with CIB Bank. Average short-term investments
declined $49.1 million to $70.3 million for the year ended December 31, 2005,
from $119.4 million in 2004. The increase in 2004 was primarily associated with
the investment of additional funds provided by an increase in our other
borrowings as well as our acquisitions of CIB Bank and CCB, which provided us
with $393.2 million and $44.8 million of investment securities, respectively.
Additionally, a portion of excess short-term investments were utilized to
purchase higher-yielding available-for-sale investment securities, resulting in
a decline in average short-term investments of $23.7 million to $119.4 million
for the year ended December 31, 2004, from $143.0 million in 2003.
Nonearning assets averaged $662.4 million, $633.2 million and $698.7
million for the years ended December 31, 2005, 2004 and 2003, respectively. Our
derivative financial instruments averaged ($3.1) million, $25.9 million and
$78.7 million for the years ended December 31, 2005, 2004 and 2003,
respectively. This reflects a decline in the fair value of certain derivative
financial instruments and the maturity of $200.0 million and $800.0 million
notional amount of interest rate swap agreements during 2005 and 2004,
respectively, as further discussed under "--Interest Rate Risk Management" and
Note 5 to our Consolidated Financial Statements. In 2005, the acquisitions of
FBA, IBOC and NSB increased our capital expenditures, thus contributing to an
overall increase in bank premises and equipment, which was partially offset by
continued depreciation and amortization. Intangible assets, primarily goodwill
and core deposit intangibles associated with our acquisitions, and deferred
income taxes also contributed to the increase in our nonearning assets during
2005 and 2004. In 2004, the acquisitions of CIB Bank and CCB, the opening of
four de novo branch banking offices, partially offset by continued depreciation
and amortization and the divestiture of two branch banking offices, contributed
to an overall increase in bank premises and equipment. In addition, our
liquidation of certain parcels of other real estate, as further discussed under
"--Loans and Allowance for Loan Losses," further contributed to the overall
decline in our average nonearning assets in 2004.
We use deposits as our primary funding source and acquire them from a
broad base of local markets, including both individual and corporate customers.
Deposits averaged $7.20 billion, $6.17 billion and $6.05 billion for the years
ended December 31, 2005, 2004 and 2003, respectively. Our actual deposits were
$7.54 billion, $7.15 billion and $5.96 billion at December 31, 2005, 2004 and
2003, respectively, reflecting increases of $389.9 million for 2005 and $1.19
billion for 2004. The increase in 2005 is primarily attributable to internal
growth stemming from our deposit development programs and our acquisitions of
FBA, IBOC and NSB, which provided deposits of $233.0 million, in aggregate. The
increase in 2004 is primarily attributable to our acquisitions of CIB Bank and
CCB, which provided deposits of $1.10 billion and $104.6 million, respectively,
as well as the expansion of our banking franchise with the opening of four de
novo branch offices in 2004, in West St. Louis County, Missouri, Houston, Texas,
McKinney, Texas and San Diego, California. The increase was partially offset by
a $23.4 million reduction in our deposit base associated with our divestiture of
two Midwest branch banking offices during the first and second quarters of 2004.
Although our overall deposit levels have increased as a result of our 2004 and
2005 acquisitions, the overall increase in our 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:
(a) our continued efforts to restructure the composition of our deposit base as
the majority of our deposit development programs are directed toward increasing
transactional accounts, such as demand and savings accounts, while more
selectively growing time deposits; and (b) expanding our relationships with our
existing customers by increasing the number and types of products provided.
Other borrowings averaged $571.7 million, $486.0 million and $219.3
million for the years ended December 31, 2005, 2004 and 2003, respectively. The
increase in the average balances for 2005 and 2004 reflect $250.0 million of
term securities sold under agreements to repurchase that we entered into in
conjunction with our interest rate risk management program during the first and
second quarters of 2004, as further discussed in Note 5 and Note 10 to our
Consolidated Financial Statements. The average balance for 2005 also reflects
the termination of $50.0 million of term securities sold under agreements to
repurchase in November 2005. The increase in average balances for 2005 and 2004
also reflect an increase in daily securities sold under agreements to
repurchase, principally in connection with the cash management activities of our
commercial deposit customers, as well as an increase in average Federal Home
Loan Bank advances, primarily associated with our acquisitions, to $44.2 million
for 2005, compared to $21.0 million and $12.5 million for 2004 and 2003,
respectively.
Our notes payable averaged $36.8 million, $3.7 million and $15.4
million for the years ended December 31, 2005, 2004 and 2003, respectively. Our
notes payable were $100.0 million at December 31, 2005. On August 11, 2005, we
entered into an Amended and Restated Secured Credit Agreement and restructured
our overall financing arrangement, the most significant change representing the
addition of a term loan, as further discussed in Note 11 to our Consolidated
Financial Statements. In conjunction with this transaction, we borrowed $80.0
million on the term loan on August 11, 2005 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 Capital Trust II, or First
Preferred II, as further discussed below. Our note payable was $15.0 million at
December 31, 2004 and resulted from a single advance drawn under our revolving
credit line on November 30, 2004 to partially fund our acquisition of CIB Bank.
As of June 30, 2005, this advance had been repaid in full through dividends from
our subsidiary bank. The balance of our note payable at December 31, 2003 of
$17.0 million was repaid in April 2004 through dividends from our subsidiary
bank.
Subordinated debentures issued to our statutory and business trusts
averaged $259.2 million, $220.4 million and $249.1 million for the years ended
December 31, 2005, 2004 and 2003, respectively. The increase in our average
subordinated debentures for 2005 reflects our issuance of additional
subordinated debentures late in 2004, as further discussed below, partially
offset by the repayment of certain subordinated debentures at the end of the
third quarter of 2005. On September 30, 2005, we paid in full all of the
outstanding $59.3 million of 10.24% subordinated debentures that we issued to
First Preferred II in October 2000, as further described in Note 12 to our
Consolidated Financial Statements. The repayment of these subordinated
debentures was funded by the term loan. During 2004, our outstanding
subordinated debentures increased $61.9 million due to the issuance of $20.6
million of subordinated debentures to FBST II, a newly formed affiliated
statutory trust, in September 2004, and the issuance of $41.2 million of
subordinated debentures to FBST III, a newly formed affiliated statutory trust,
in November 2004, as further discussed in Note 12 to our Consolidated Financial
Statements. The proceeds from the issuance of these subordinated debentures were
utilized to partially fund our acquisition of CIB Bank.
Stockholders' equity averaged $641.5 million, $574.3 million and $537.6
million for the years ended December 31, 2005, 2004 and 2003, respectively. We
primarily attribute the increase for 2005 to net income of $96.9 million,
partially offset by dividends paid on our Class A and Class B preferred stock,
and an $18.1 million decrease in accumulated other comprehensive income, which
was comprised of $13.8 million associated with the change in our unrealized
gains and losses on available-for-sale investment securities and $4.3 million
associated with the change in the fair value of our derivative financial
instruments. These decreases are reflective of changes 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 2005, as further discussed
under "--Interest Rate Risk Management" and Note 5 to our Consolidated Financial
Statements. We primarily attribute the increase for 2004 to net income of $82.9
million, partially offset by dividends paid on our Class A and Class B preferred
stock, and a $31.0 million decrease in accumulated other comprehensive income,
which was comprised of $25.2 million associated with the change in the fair
value of our derivative financial instruments and $5.8 million associated with
the change in our unrealized gains and losses on available-for-sale investment
securities. These decreases are reflective of changes in prevailing interest
rates, a decline in the fair value of our derivative financial instruments, and
the maturity of $750.0 million notional amount of our interest rate swap
agreements designated as cash flow hedges during 2004.
The following table sets forth, on a tax-equivalent basis, certain
information relating to our average balance sheets, and reflects the average
yield earned on our interest-earning assets, the average cost of our
interest-bearing liabilities and the resulting net interest income for the
periods presented.
Years Ended December 31,
---------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ----------------------------- ----------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans: (1)(2)(3)
Taxable........................ $6,422,341 423,361 6.59% $5,493,867 340,660 6.20% $5,369,046 354,649 6.61%
Tax-exempt (4)................. 14,629 1,129 7.72 15,187 1,260 8.30 16,317 1,266 7.76
Investment securities:
Taxable........................ 1,599,161 65,895 4.12 1,245,226 50,170 4.03 914,357 32,442 3.55
Tax-exempt (4)................. 45,626 2,675 5.86 37,775 2,292 6.07 43,074 2,672 6.20
Short-term investments............ 70,251 2,211 3.15 119,370 1,643 1.38 143,046 1,502 1.05
---------- ------- ---------- ------- ---------- -------
Total interest-earning
assets..................... 8,152,008 495,271 6.08 6,911,425 396,025 5.73 6,485,840 392,531 6.05
------- ------- -------
Nonearning assets..................... 662,396 633,154 698,740
---------- ---------- ----------
Total assets................. $8,814,404 $7,544,579 $7,184,580
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits..................... $ 905,613 4,398 0.49% $ 856,765 3,472 0.41% $ 852,104 5,470 0.64%
Savings deposits............... 2,135,156 29,592 1.39 2,175,425 20,128 0.93 2,147,573 23,373 1.09
Time deposits (3).............. 2,906,601 93,167 3.21 2,036,323 49,467 2.43 2,046,741 54,276 2.65
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
deposits................... 5,947,370 127,157 2.14 5,068,513 73,067 1.44 5,046,418 83,119 1.65
Other borrowings.................. 571,717 18,240 3.19 485,994 6,102 1.26 219,264 2,243 1.02
Notes payable (5)................. 36,849 2,305 6.26 3,657 506 13.84 15,418 785 5.09
Subordinated debentures (3)....... 259,214 20,557 7.93 220,428 15,092 6.85 249,146 17,879 7.18
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities................ 6,815,150 168,259 2.47 5,778,592 94,767 1.64 5,530,246 104,026 1.88
------- ------- -------
Noninterest-bearing liabilities:
Demand deposits................... 1,257,277 1,100,072 1,007,400
Other liabilities................. 100,462 91,660 109,357
---------- ---------- ----------
Total liabilities............ 8,172,889 6,970,324 6,647,003
Stockholders' equity.................. 641,515 574,255 537,577
---------- ---------- ----------
Total liabilities and
stockholders' equity....... $8,814,404 $7,544,579 $7,184,580
========== ========== ==========
Net interest income................... 327,012 301,258 288,505
======= ======= =======
Interest rate spread.................. 3.61 4.09 4.17
Net interest margin (6)............... 4.01% 4.36% 4.45%
==== ===== ====
- --------------------------------
(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 $1.3 million, $1.2 million and $1.4 million for the years ended December 31, 2005, 2004 and 2003, respectively.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees. Exclusive of these fees, the
interest rates paid were 4.93%, 2.87% and 2.35% for the years ended December 31, 2005, 2004 and 2003, respectively.
(6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning
assets.
The following table indicates, on a tax-equivalent basis, the changes
in interest income and interest expense that are attributable to changes in
average volume and changes in average rates, in comparison with the preceding
year. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the dollar amounts of the
change in each.
Increase (Decrease) Attributable to Change in:
------------------------------------------------------------------
December 31, 2005 Compared December 31, 2004 Compared
to December 31, 2004 to December 31, 2003
------------------------------ ------------------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Interest earned on:
Loans: (1)(2)(3)
Taxable............................. $60,269 22,432 82,701 8,189 (22,178) (13,989)
Tax-exempt (4)...................... (45) (86) (131) (91) 85 (6)
Investment securities:
Taxable............................. 14,579 1,146 15,725 12,906 4,822 17,728
Tax-exempt (4)...................... 464 (81) 383 (325) (55) (380)
Short-term investments................. (888) 1,456 568 (277) 418 141
------- ------- ------ ------ ------- -------
Total interest income........... 74,379 24,867 99,246 20,402 (16,908) 3,494
------- ------- ------ ------ ------- -------
Interest paid on:
Interest-bearing demand deposits....... 209 717 926 29 (2,027) (1,998)
Savings deposits....................... (381) 9,845 9,464 294 (3,539) (3,245)
Time deposits (3)...................... 24,956 18,744 43,700 (278) (4,531) (4,809)
Other borrowings....................... 1,253 10,885 12,138 3,234 625 3,859
Notes payable (5)...................... 2,219 (420) 1,799 (915) 636 (279)
Subordinated debentures (3)............ 2,882 2,583 5,465 (1,993) (794) (2,787)
------- ------- ------ ------ ------- -------
Total interest expense.......... 31,138 42,354 73,492 371 (9,630) (9,259)
------- ------- ------ ------ ------- -------
Net interest income............. $43,241 (17,487) 25,754 20,031 (7,278) 12,753
======= ======= ====== ====== ======= =======
- ------------------------
(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 effect of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees.
Net Interest Income
The primary source of our income is net interest income. Net interest
income (expressed on a tax-equivalent basis) increased to $327.0 million for the
year ended December 31, 2005, from $301.3 million and $288.5 million for the
years ended December 31, 2004 and 2003, respectively. Our net interest margin
was 4.01% for the year ended December 31, 2005, compared to 4.36% and 4.45% for
the years ended December 31, 2004 and 2003, respectively. Net interest income is
the difference between the interest earned on our interest-earning assets, such
as loans and investment securities, and the 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 in 2005 to
interest-earning assets provided by our acquisitions completed in 2004 and 2005,
internal loan growth coupled with higher interest rates on loans,
higher-yielding investment securities and the repayment of our 10.24%
subordinated debentures in September 2005. The overall increase in our net
interest income was partially offset by increased interest expense associated
with deposit growth, higher interest rates paid on deposits, and a
redistribution of deposit balances toward higher-yielding products; the mix of
the CIB Bank deposit base acquired; 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. We credit the increased net
interest income for 2004 primarily to the net interest-earning assets provided
by our 2003 and 2004 acquisitions; increased average investment securities with
higher yields, partially offset by increased rates on other borrowings; lower
rates paid on deposits; a $63.1 million net reduction in our outstanding
subordinated debentures during 2003 as well as reduced rates associated with our
outstanding subordinated debentures; increased average investment securities
with higher yields; and increased average loan balances associated with our
acquisitions and internal growth. As more fully described in Note 12 to our
Consolidated Financial Statements, in September 2004, we issued $20.6 million of
subordinated debentures to FBST II and in November 2004, we issued $41.2 million
of subordinated debentures to FBST III. On September 30, 2005, we repaid in full
$59.3 million of our outstanding subordinated debentures that were issued in
October 2000. These transactions, coupled with our use of derivative financial
instruments, have allowed us to reduce our overall interest expense associated
with our subordinated debentures as the additional subordinated debentures have
been issued at significantly lower interest rates. Derivative financial
instruments that were entered into in conjunction with our interest rate risk
management program to mitigate the effects of decreasing interest rates
contributed $2.2 million, $50.1 million and $64.6 million, respectively, to net
interest income for the years ended December 31, 2005, 2004 and 2003. The
decreased earnings on our interest rate swap agreements for 2005 contributed to
a reduction in our net interest margin of approximately 59 basis points, and
reflects higher interest rates and maturities of $750.0 million of interest rate
swaps designated as cash flow hedges and $50.0 million of interest rate swap
agreements designated as fair value hedges during 2004; the maturity of $200.0
million of interest rate swap agreements designated as cash flow hedges 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 and May, 2005,
respectively. However, the earnings on our interest rate swap agreements
contributed to the level of our net interest margin in 2004. 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 our net interest income
and further compression of our net interest margin, which has been partially
offset by the impact of the rising rate environment experienced in 2005, as
further discussed below.
The yield on our loan portfolio was 6.59% for the year ended December
31, 2005, compared to 6.21% and 6.61% for 2004 and 2003, respectively. Average
loans, net of unearned discount, were $6.44 billion for the year ended December
31, 2005, in comparison to $5.51 billion and $5.39 billion for the years ended
December 31, 2004 and 2003, respectively. We attribute the overall increase in
yields on our loan portfolio in 2005 to increases in prevailing interest rates.
During 2005, the Federal Reserve increased the targeted federal funds rate eight
times, resulting in eight increases in the prime rate of interest from 5.25% at
December 31, 2004 to 7.25% at December 31, 2005. The prime rate of interest
increased from 4.00% at January 1, 2004 to 5.25% at December 31, 2004. This is
reflected not only in the rate of interest earned on loans that are indexed to
the prime rate, but also in other assets and liabilities which either have
variable or adjustable rates, or which have matured or repriced during this
period. Although the rising interest rate environment contributed to an increase
in loan yields, total interest income on our loan portfolio was adversely
impacted by decreased earnings on our interest rate swap agreements designated
as cash flow hedges. The earnings on these swap agreements were $2.6 million,
$38.3 million and $49.4 million for the years ended December 31, 2005, 2004, and
2003, respectively. 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 of approximately $35.7 million for
2005 compared to 2004, as further discussed under "--Interest Rate Risk
Management." During 2004, increased competition and general economic conditions
within our market areas contributed to continued weak loan demand and generally
low prevailing interest rates resulting in a lower yield on our loan portfolio,
despite the increases in the prime lending rate experienced in the third and
fourth quarters of 2004.
For the years ended December 31, 2005, 2004 and 2003, the aggregate
weighted average rate paid on our interest-bearing deposit portfolio was 2.14%,
1.44% and 1.65%, respectively. We attribute the increase in 2005 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, 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 notional of fair value hedges in
February 2005, resulted in a decrease in our net interest income of
approximately $8.5 million for 2005, compared to 2004, as further discussed in
Note 5 to our Consolidated Financial Statements. The decline in the aggregate
weighted average rate paid in 2004 was primarily attributable to significantly
decreased rates paid on our savings and time deposits, which continued to
decline in conjunction with the interest rate reductions previously discussed.
However, the continued competitive pressures on deposits within our market area
precluded us from fully reflecting the general interest rate decreases in our
deposit pricing while still providing an adequate funding source for our loan
portfolio. The earnings associated with certain of our interest rate swap
agreements designated as fair value hedges further contributed to the overall
reduction in deposit rates paid on time deposits; however, the earnings
associated with certain of our interest rate swap agreements were significantly
reduced in 2004 due to a substantially increasing level of ineffectiveness
experienced in the hedging relationships as the underlying hedged liabilities
neared maturity that ultimately led to management's decision to terminate the
remaining $150.0 million of fair value hedges that hedged a portion of our other
time deposits effective February 2005, as discussed above and in Note 5 to our
Consolidated Financial Statements.
The aggregate weighted average rate on our notes payable was 6.26%,
13.84% and 5.09% for the years ended December 31, 2005, 2004 and 2003,
respectively. The weighted average rates paid reflect changing market interest
rates during these periods, in addition to unused credit commitment and letter
of credit facility fees on our secured credit agreement with a group of
unaffiliated financial institutions, as well as other fees paid in conjunction
with the annual renewal of this financing arrangement. Amounts outstanding under
our term loan bear interest at a floating rate equal to the London Interbank
Offering Rate, or LIBOR, plus a margin determined by the outstanding loan
balances and our profitability for the preceding four calendar quarters. Amounts
outstanding under our revolving line of credit bear interest at a floating rate
equal to the lead bank's prime rate or, at our option, at LIBOR 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 our non-deposit liabilities. The overall
cost of this funding source during 2004 was higher due to fees associated with
the credit facility coupled with minimal borrowings under the revolving credit
line during 2004 as compared to 2003. The balance of our note payable at
December 31, 2004 was $15.0 million and resulted from an advance drawn in
November 2004 to partially fund our acquisition of CIB Bank. In January 2005, we
reduced this advance by $11.0 million through dividends from our subsidiary
bank, and we fully repaid the advance in June 2005. As further described in Note
11 to our Consolidated Financial Statements, we borrowed $80.0 million on our
term loan in August 2005 and $20.0 million on our term loan in November 2005.
The proceeds of the term loan were primarily used to fund our acquisition of
IBOC and to partially fund the repayment of our 10.24% subordinated debentures,
as well as for general corporate purposes and pending acquisitions.
The aggregate weighted average rate paid on our other borrowings was
3.19% for the year ended December 31, 2005, as compared to 1.26% and 1.02% for
the years ended December 31, 2004 and 2003, respectively, reflecting changes in
the current interest rate environment during these periods. The increase in the
aggregate weighted average rate paid on our other borrowings in 2005 was also
attributable to the $250.0 million of term securities sold under agreements to
repurchase that we entered into in conjunction with our interest rate risk
management program during the first and second quarters of 2004, partially
offset by the termination of $50.0 million of term securities sold under
agreements to repurchase in November 2005, as further discussed in Note 5 and
Note 10 to our Consolidated Financial Statements.
The aggregate weighted average rate paid on our subordinated debentures
was 7.93%, 6.85% and 7.18% for the years ended December 31, 2005, 2004 and 2003,
respectively. The aggregate weighted average rates reflect the repayment of
$59.3 million of 10.24% subordinated debentures in September 2005, the issuance
of $61.9 million of subordinated debentures in late 2004 associated with our
acquisition of CIB Bank, and the repayment of $136.3 million of subordinated
debentures and the related issuance of $73.2 million of subordinated debentures
at lower interest rates in 2003. The aggregate weighted average rates also
reflect the earnings impact of our interest rate swap agreements entered into in
March 2003, and the two entered into in May 2002 and April 2003 that we
terminated in May 2005, as further discussed under "--Interest Rate Risk
Management" and in Note 5 to our Consolidated Financial Statements.
Comparison of Results of Operations for 2005 and 2004
Net Income. Net income was $96.9 million for the year ended December
31, 2005, compared to $82.9 million for 2004. Our return on average assets and
our return on average stockholders' equity were 1.10% and 15.11%, respectively,
for the year ended December 31, 2005, compared to 1.10% and 14.44%,
respectively, for 2004. Results for 2005 reflect 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 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
contributed to increased interest income in 2005. However, net interest income
was adversely affected by a decline in earnings on our interest rate swap
agreements associated with our interest rate risk management program, primarily
resulting from increasing prevailing interest rates and the maturity and
termination of certain interest rate swap agreements; increased interest expense
as a result of higher interest rates on deposits and a redistribution of deposit
balances toward higher-yielding products in conjunction with the CIB Bank
deposit base acquired in November 2004; increased levels of borrowings coupled
with increased rates on such borrowings; and the issuance of additional
subordinated debentures late in 2004 to partially fund our acquisition of CIB
Bank, as further discussed under "--Net Interest Income." 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 our net interest margin. The
increase in net income in 2005 also resulted from a significant reduction in our
provision for loan losses as a result of overall improvement in our
nonperforming loans during 2005, exclusive of a deterioration of certain credits
in the fourth quarter of 2005 that we transferred to our loans held for sale
portfolio, as further discussed under "--Provision for Loan Losses." We
primarily attribute the increased noninterest income to additional noninterest
income associated with our 2004 and 2005 acquisitions, increased gains on
mortgage loans sold and held for sale, increased investment management fee
income, and increased service charges on deposit accounts and customer service
fees related to higher deposit balances; partially offset by net losses on sales
of available-for-sale investment securities and the recognition of impairment on
our SBA servicing assets, as further discussed under "--Noninterest Income." The
overall increase in our operating expenses for 2005, as further discussed under
"--Noninterest Expense," primarily reflects increased expense levels resulting
from our 2004 and 2005 acquisitions and the addition of five de novo branch
offices in 2004 and 2005, significant charitable contributions expense and
increases in salaries and employee benefits expenses.
Provision for Loan Losses. We recorded a $4.0 million negative
provision for loan losses for the year ended December 31, 2005, in comparison to
a provision for loan losses of $25.8 million for the year ended December 31,
2004. Our net loan charge-offs declined to $13.4 million from $24.8 million for
the years ended December 31, 2005 and 2004, respectively. As further discussed
under "--Lending Activities" and "--Loans and Allowance for Loan Losses," while
we had recorded a negative provision for loan losses of $8.0 million for the
first nine months of 2005, reflecting a 21.0% improvement in our nonperforming
loans during this period as a result of the sale of certain acquired
nonperforming loans, the strengthening of certain loans, loan payoffs and
external refinancing of various credits, and a significant reduction in net loan
charge-offs, the level of nonperforming loans increased during the fourth
quarter of 2005 following further deterioration of a few large credit
relationships in our Midwest region, resulting in a fourth quarter provision for
loan losses of $4.0 million. Our nonperforming loans, which had decreased 21.0%
to $67.8 million at September 30, 2005 from $85.8 million at December 31, 2004,
increased $29.4 million during the fourth quarter of 2005, resulting in a
balance of $97.2 million at December 31, 2005. The increase in nonperforming
loans in the fourth quarter of 2005 is primarily attributable to further
deterioration of a small number of credit relationships in our Midwest region,
including two large credit relationships associated with our CIB Bank purchase
of $14.9 million and $16.6 million, or $31.5 million in aggregate. On December
31, 2005, we recognized $7.6 million of loan charge-offs to reduce the loans to
their estimated fair value, net of costs, that is expected to be realized at the
time of the sale, and transferred approximately $59.7 million of nonperforming
loans to our held for sale portfolio, which included several of the
relationships that deteriorated during the fourth quarter of 2005. Included in
the loan charge-offs and loans transferred to our held for sale portfolio were
$6.0 million of loan charge-offs and approximately $49.6 million of
nonperforming loans that were associated with our CIB Bank purchase. In January
2006, we received a payoff of one of the nonperforming loans in our held for
sale portfolio that had a carrying value of $12.4 million at December 31, 2005,
and recorded a $5.0 million loan recovery. Furthermore, in March 2006, we
completed the sale of a majority of the remaining nonaccrual loans in our held
for sale portfolio that had a carrying value of approximately $32.5 million in
aggregate, at December 31, 2005, as further described in Note 25 to our
Consolidated Financial Statements.
Our loan policy requires all loans to be placed on a nonaccrual status
once principal or interest payments become 90 days past due. Our general
procedures for monitoring these loans allow individual loan officers to submit a
written request for approval to continue the accrual of interest on loans that
become 90 days past due. These requests must be submitted for approval
consistent with the authority levels provided in our credit approval policies,
and they are only granted if an expected near term future event, such as a
pending renewal or expected payoff, exists at the time the loan becomes 90 days
past due. If the expected near term future event does not occur as anticipated,
the loan is placed on nonaccrual status. Management considers the nonperforming
assets trends in its overall assessment of the adequacy of the allowance for
loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31, 2005
and 2004:
December 31, Increase (Decrease)
------------------- -------------------
2005 2004 Amount %
---- ---- ------ ---
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees..... $ 39,776 38,230 1,546 4.04%
Gain on loans sold and held for sale.............................. 20,804 18,497 2,307 12.47
Net (loss) gain on sales of available-for-sale
investment securities.......................................... (2,873) 257 (3,130) (1,217.90)
Gain on sales of branches, net of expenses........................ -- 1,000 (1,000) (100.00)
Bank-owned life insurance investment income....................... 4,860 5,201 (341) (6.56)
Investment management income...................................... 8,573 6,870 1,703 24.79
Other............................................................. 23,603 13,431 10,172 75.74
--------- ------- ------
Total noninterest income.................................... $ 94,743 83,486 11,257 13.48
========= ======= ====== =========
Noninterest expense:
Salaries and employee benefits.................................... $ 139,764 117,492 22,272 18.96%
Occupancy, net of rental income................................... 22,081 19,882 2,199 11.06
Furniture and equipment........................................... 16,015 17,017 (1,002) (5.89)
Postage, printing and supplies.................................... 5,743 5,010 733 14.63
Information technology fees....................................... 35,472 32,019 3,453 10.78
Legal, examination and professional fees.......................... 9,319 7,412 1,907 25.73
Amortization of intangibles associated with the
purchase of subsidiaries....................................... 4,850 2,912 1,938 66.55
Communications.................................................... 2,012 1,866 146 7.82
Advertising and business development.............................. 7,043 5,493 1,550 28.22
Charitable contributions.......................................... 5,922 577 5,345 926.34
Other............................................................. 28,075 19,825 8,250 41.61
--------- ------- ------
Total noninterest expense................................... $ 276,296 229,505 46,791 20.39
========= ======= ====== =========
Noninterest Income. Noninterest income was $94.7 million for the year
ended December 31, 2005, in comparison to $83.5 million for 2004. Noninterest
income consists primarily of service charges on deposit accounts and customer
service fees, mortgage-banking revenues, management income and other income.
Service charges on deposit accounts and customer service fees increased
to $39.8 million from $38.2 million for the years ended December 31, 2005 and
2004, respectively. The increase in service charges and customer service fees is
primarily attributable to:
>> increased demand deposit account balances associated with
internal growth and our acquisitions of CCB and CIB Bank
completed in 2004, and FBA, IBOC and NSB completed in 2005;
>> 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 fee rates coupled with
enhanced control of fee waivers;
>> higher earnings allowances on commercial deposit accounts;
>> increased fee income associated with automated teller machine
services and debit cards; and
>> 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 increased to $20.8 million
from $18.5 million for the years ended December 31, 2005 and 2004, respectively.
The increase in 2005 is partially attributable to an increase of $2.0 million of
gains on SBA loans sold by 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 is 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.
Noninterest income includes a net loss on sales of available-for-sale
securities of $2.9 million for the year ended December 31, 2005, in comparison
to a net gain on sales of available-for-sale securities of $257,000 in 2004. The
net loss for 2005 resulted from the sale of certain investment securities
associated with our termination of a $50.0 million term repurchase agreement in
the fourth quarter of 2005, as further discussed in Note 3, Note 5 and Note 10
to our Consolidated Financial Statements. The net gain for 2004 resulted
primarily from the sales of certain investment securities held by acquired
institutions that did not meet our overall investment objectives.
Gains, net of expenses, on the sale of two Midwest banking offices in
2004 totaled $1.0 million and reflect a $390,000 gain, net of expenses, on the
sale of one of our Missouri branch banking offices in February 2004, and a
$630,000 gain, net of expenses, on the sale of one of our Illinois banking
offices in April 2004. There were no sales of branch banking offices in 2005.
Bank-owned life insurance income was $4.9 million for the year ended
December 31, 2005, in comparison to $5.2 million in 2004. The decrease in
investment income reflects a reduced return on the performance of the underlying
securities surrounding the insurance contracts which is primarily attributable
to the portfolio mix of investments and overall market conditions.
Investment management income was $8.6 million for the year ended
December 31, 2005, in comparison to $6.9 million in 2004, reflecting increased
portfolio management fee income generated by our institutional money management
subsidiary attributable to new business development and overall growth in assets
under management.
Other income was $23.6 million and $13.4 million for the years ended
December 31, 2005 and 2004, respectively. We attribute the primary components of
the increase in other income to:
>> an increase of $3.6 million 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;
>> an increase of $3.1 million attributable to the reversal of a
specific reserve on a letter of credit assumed with the CIB Bank
acquisition and collection of the related fees resulting from the
cancellation of the letter of credit;
>> 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 $696,000 and included $464,000
of gains on two sales of repossessed leasing equipment. Net
losses for 2004 were $1.6 million and included a $750,000
write-down on repossessed aircraft leasing equipment and a $1.3
million write-down on repossessed equipment unrelated to the
airline industry, partially offset by gains of $350,000 on the
sale of other repossessed aircraft leasing equipment;
>> an increase of $713,000 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 2005 and 2004 of $1.1 million and
$375,000, respectively, were the result of further reductions in
related lease balances for the specific pools of leases sold, as
further described in Note 24 to our Consolidated Financial
Statements;
>> a recovery of agent loan collection expenses of $739,000 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 $602,000 net increase in loan servicing fees. The net increase
is primarily attributable to: increased fees from loans serviced
for others, primarily attributable to a $2.3 million increase in
SBLS LLC loan servicing fees, offset by an $887,000 increase in
amortization of SBA servicing rights and the recognition of a
$2.4 million impairment charge on our SBA servicing rights
following substantial damage to several shrimping vessels within
the servicing portfolio caused by the effects of Hurricane
Katrina; a $199,000 decrease in mortgage loan servicing fees,
including a lower level of interest shortfall on mortgage loans,
offset by a $1.6 million decrease in amortization of mortgage
servicing rights; and increased unused commitment fees of
$281,000. 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;
>> an increase of $584,000 in fees from fiduciary activities;
>> a $448,000 decrease in net losses on our derivative instruments;
and
>> our acquisitions of CCB and CIB Bank completed in 2004, and FBA,
IBOC and NSB completed in 2005; partially offset by
>> a decline of $1.2 million in rental income associated with
reduced commercial leasing activities; and
>> a net increase in losses, net of gains, on the disposition of
certain assets, primarily attributable to a $459,000 net loss
resulting from the demolition of a branch drive-thru facility and
a $277,000 net loss resulting from the sale of a former CIB Bank
branch facility during 2005.
Noninterest Expense. Noninterest expense was $276.3 million for the
year ended December 31, 2005, in comparison to $229.5 million for 2004. Our
efficiency ratio was 65.72% for the year ended December 31, 2005, compared to
59.84% for 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 the sum of 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 the addition of five de novo branch
offices in 2004 and 2005, and increases in salaries and employee benefits
expense, information technology expense, charitable contributions expense,
expenses and losses, net of gains, on other real estate, and other expense.
We record the majority of integration costs attributable to our
acquisitions as of the consummation date of our purchase business combinations.
These costs include, but are not limited to, items such as:
>> write-downs and impairment of assets of the acquired entities
that will no longer be usable subsequent to the consummation
date, primarily data processing equipment, incompatible hardware
and software, bank signage, etc. These adjustments are generally
recorded as of the consummation date as an allocation of the
purchase price with the offsetting adjustment recorded as an
increase to goodwill. For all periods presented, these
adjustments are not material to our operations;
>> costs associated with a planned exit of an activity of the
acquired entity that is not associated with or is not expected to
generate revenues after the consummation date, such as credit
card lending. These costs are generally recorded as of the
consummation date through the establishment of an accrued
liability with the offsetting adjustment recorded as an increase
to goodwill. These costs are infrequently encountered and, for
all periods presented, are not material to our operations;
>> planned involuntary employee termination benefits, as further
discussed under "--Acquisitions - Acquisition and Integration
Costs" and Note 2 to our Consolidated Financial Statements; and
>> contractual obligations of the acquired entities that existed
prior to the consummation date that either have no economic
benefit to the combined entity or have a penalty that we will
incur to cancel the contractual obligation. These contractual
obligations generally relate to existing information technology
and item processing contracts of the acquired entities that
include penalties for early termination. In conjunction with the
merger and integration of our acquisitions, the acquired entities
are converted to our existing information technology and item
processing systems. Consequently, the costs associated with
terminating the existing contracts of the acquired entities are
generally recorded as of the consummation date through the
establishment of an accrued liability with the offsetting
adjustment recorded as an increase to goodwill as further
discussed under "--Acquisitions - Acquisition and Integration
Costs" and Note 2 to our Consolidated Financial Statements.
We make adjustments to the fair value of the acquired entities' assets
and liabilities for these items as of the consummation date and include them in
the allocation of the overall acquisition cost. We also incur costs associated
with our acquisitions that are expensed in our consolidated statements of
income. These costs relate specifically to additional costs incurred in
conjunction with the information technology and item processing conversions of
the acquired entities, as well as training of personnel on First Bank's systems,
as further described and quantified below.
Salaries and employee benefits increased by $22.3 million to $139.8
million for the year ended December 31, 2005, from $117.5 million in 2004. We
attribute the overall increase to increased salaries and employee benefits
expenses associated with an aggregate of 27 additional branches acquired in 2004
and 2005 and five de novo branches opened in 2004 and 2005; and the addition of
a regional structure in Chicago following our significant expansion in the
Chicago market area, including credit administration, commercial real estate and
commercial and industrial banking groups, branch administration, credit review
and human resource and training functions. The increase is also attributable 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 2,288 at December 31, 2005, from 2,172 at December 31, 2004.
Occupancy, net of rental income, and furniture and equipment expense
totaled $38.1 million and $36.9 million for the years ended December 31, 2005
and 2004, respectively. The increase is primarily attributable to higher levels
of expense resulting from our acquisitions in 2004 and 2005, which added 27
branch offices, and the opening of five de novo branch offices in 2004 and 2005,
as well as the formation of separate small business banking loan origination
offices in most of our market areas. 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
acquisitions and capital expenditures.
Information technology and item processing fees were $35.5 million and
$32.0 million for the years ended December 31, 2005 and 2004, respectively. As
more fully described in Note 19 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 various
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. The increased level of fees is primarily attributable
to the additional branch offices provided by our acquisitions and de novo branch
office openings; certain de-conversion costs from other providers associated
with our acquisitions, growth and technological advancements consistent with our
product and service offerings; and 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, FBA, IBOC and NSB were
completed in September 2004, February 2005, June 2005, October 2005 and December
2005, respectively.
Legal, examination and professional fees were $9.3 million and $7.4
million for the years ended December 31, 2005 and 2004, respectively. 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 our various 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 $4.9 million and $2.9 million for the years ended December 31,
2005 and 2004, respectively. The increase is attributable to core deposit
intangibles associated with our acquisitions of CCB and CIB Bank completed in
2004 and our acquisitions of FBA, IBOC and NSB completed in 2005.
Communications and advertising and business development expenses were
$9.1 million and $7.4 million for the years ended December 31, 2005 and 2004,
respectively. 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 contribution expense was $5.9 million and $577,000 for the
years ended December 31, 2005 and 2004, respectively. The increase in 2005 is
primarily attributable to First Bank contributions of $2.5 million and $1.5
million, respectively, in December 2005 to The Dierberg Foundation and the
Dierberg Operating Foundation, Inc., charitable foundations created by First
Banks' Chairman and member of his immediate family, as further described in Note
19 to our Consolidated Financial Statements. The increase is also 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 $28.1 million and $19.8 million for the years ended
December 31, 2005 and 2004, respectively. 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 $4.0 million in expenditures and losses, net of
gains, on other real estate. Expenditures and losses, net of
gains, on other real estate were $644,000 for the year ended
December 31, 2005 and included expenses of $1.1 million 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 $972,000 of gains recorded
on the sale of six holdings of other real estate. Gains, net of
losses and expenses, on other real estate were $3.3 million for
the year ended December 31, 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;
>> increased losses and adjustments to the carrying value of certain
affordable housing credit partnership investments; 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.
Provision for Income Taxes. The provision for income taxes was $52.5
million for the year ended December 31, 2005, representing an effective income
tax rate of 35.5%, in comparison to $45.3 million, representing an effective
income tax rate of 35.4%, for the year ended December 31, 2004. The increase in
our provision for income taxes primarily reflects our increased earnings. In
2005, we reversed a $3.3 million state tax reserve as it was no longer deemed
necessary as a result of the resolution of a potential tax liability. In
addition, we recorded a benefit of $3.1 million relating to our utilization of
federal and state tax credits. In the second quarter of 2004, we reversed a $2.8
million tax reserve as it was not longer deemed necessary as a result of
resolution of a potential tax liability. Excluding these transactions, the
effective income tax rate was 38.4% and 37.5% for the years ended December 31,
2005 and 2004, respectively.
Comparison of Results of Operations for 2004 and 2003
Net Income. Net income was $82.9 million for the year ended December
31, 2004, compared to $62.8 million for 2003. Our return on average assets and
our return on average stockholders' equity were 1.10% and 14.44%, respectively,
for the year ended December 31, 2004, compared to 0.87% and 11.68%,
respectively, for 2003. Results for 2004 reflect increased net interest income
and a reduced provision for loan losses, partially offset by decreased
noninterest income, increased noninterest expense and an increased provision for
income taxes. The provision for loan losses for 2004, which was significantly
lower than the higher-than-historical amount reflected in 2003, reflects an
overall improvement in asset quality, reduced levels of nonperforming loans and
lower net loan charge-offs than experienced in recent years, as further
discussed under "--Provision for Loan Losses" and exclusive of our 2004
acquisition. Increased net interest income is primarily attributable to our 2004
acquisitions, reduced deposit rates and earnings on our interest rate swap
agreements, as further discussed under "--Net Interest Income." We attribute the
decreased noninterest income to a nonrecurring gain on the sale of our
investment in Allegiant for a 100% ownership interest in BSG in 2003 and
decreased gains on the divestiture of branch offices in 2004 as compared to
2003, partially offset by increased service charges on deposit accounts, gains
on mortgage loans sold and held for sale, and investment management income, as
further discussed under "--Noninterest Income." The overall increase in
operating expenses for 2004, as further discussed under "--Noninterest Expense,"
was primarily due to increases in salaries and employee benefit expenses that
were partially offset by a decrease in write-downs on operating leases
associated with our commercial leasing business and a nonrecurring charitable
contribution expense related to the contribution of our shares of Allegiant
common stock in the fourth quarter of 2003.
Provision for Loan Losses. The provision for loan losses was $25.8
million and $49.0 million for the years ended December 31, 2004 and 2003,
respectively. Net loan charge-offs were $24.8 million and $32.7 million for the
years ended December 31, 2004 and 2003, respectively. In 2003, we continued to
experience the higher level of problem loans, related charge-offs and past due
loans that we began to experience in early 2002. This was a result of economic
conditions within our market areas, additional problems identified in certain
acquired loan portfolios and continuing deterioration in our commercial leasing
portfolio, particularly the segment of the portfolio relating to the airline
industry. These factors necessitated higher provisions for loan losses than in
prior periods. The reduced provision for loan losses in 2004 resulted from loan
sales completed late in the fourth quarter of 2004 and, exclusive of acquisition
activity, substantial improvement in asset quality, reduced levels of
nonperforming loans, primarily resulting from significant loan payoffs, and
lower net loan charge-offs, as further discussed under "--Lending Activities"
and "--Loans and Allowance for Loan Losses." Our nonperforming loans increased
to $85.8 million at December 31, 2004 from $75.4 million at December 31, 2003,
reflecting the acquisition of a significant amount of nonperforming loans
associated with our 2004 acquisitions, particularly CIB Bank which provided
nonperforming loans of $60.3 million. In addition, our acquisitions of CCB, SBLS
and CIB Bank provided $4.4 million, $3.0 million and $26.4 million,
respectively, in additional allowances for loan losses. Management expected
nonperforming assets to remain at higher levels in 2005 because of our CIB Bank
and CCB acquisitions and considered these trends in its overall assessment of
the adequacy of the allowance for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31, 2004
and 2003:
December 31, Increase (Decrease)
------------------ -------------------
2004 2003 Amount %
---- ---- ------ ---
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees..... $ 38,230 36,113 2,117 5.86%
Gain on loans sold and held for sale.............................. 18,497 15,645 2,852 18.23
Net gain on sales of available-for-sale investment securities..... 257 8,761 (8,504) (97.07)
Gain on sales of branches, net of expenses........................ 1,000 3,992 (2,992) (74.95)
Bank-owned life insurance investment income....................... 5,201 5,469 (268) (4.90)
Investment management income...................................... 6,870 4,762 2,108 44.27
Other............................................................. 13,431 12,966 465 3.59
-------- ------- -------
Total noninterest income.................................... $ 83,486 87,708 (4,222) (4.81)
======== ======= ======= =======
Noninterest expense:
Salaries and employee benefits.................................... $117,492 95,441 22,051 23.10%
Occupancy, net of rental income................................... 19,882 20,940 (1,058) (5.05)
Furniture and equipment........................................... 17,017 18,286 (1,269) (6.94)
Postage, printing and supplies.................................... 5,010 5,100 (90) (1.76)
Information technology fees....................................... 32,019 32,136 (117) (0.36)
Legal, examination and professional fees.......................... 7,412 8,131 (719) (8.84)
Amortization of intangibles associated with the purchase
of subsidiaries................................................ 2,912 2,506 406 16.20
Communications.................................................... 1,866 2,667 (801) (30.03)
Advertising and business development.............................. 5,493 4,271 1,222 28.61
Charitable contributions.......................................... 577 5,334 (4,757) (89.18)
Other............................................................. 19,825 32,257 (12,432) (38.54)
-------- ------- -------
Total noninterest expense................................... $229,505 227,069 2,436 1.07
======== ======= ======= =======
Noninterest Income. Noninterest income was $83.5 million for the year
ended December 31, 2004, compared to $87.7 million for 2003. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, net gain on sales of available-for-sale
investment securities, bank-owned life insurance investment income, investment
management income and other income.
Service charges on deposit accounts and customer service fees increased
to $38.2 million for 2004, from $36.1 million for 2003. We attribute the
increase in service charges and customer service fees to:
>> our acquisitions completed during 2003 and 2004;
>> increased demand deposit account balances;
>> additional products and services available and utilized by our
retail and commercial customers;
>> increased fee income resulting from revisions of customer service
charges for non-sufficient fund and returned check fee rates that
became effective in December 2003, and enhanced control of fee
waivers; and
>> increased fee income associated with automated teller machine
services and debit cards.
The gain on loans sold and held for sale increased to $18.5 million
from $15.6 million for the years ended December 31, 2004 and 2003, respectively.
The change reflects the continued slowdown in 2004 in the volume of mortgage
loans originated and sold that was initially experienced in the fourth quarter
of 2003, management's decision to retain a portion of new mortgage loan
production in the real estate mortgage portfolio in mid-2003 and a decrease in
the allocation of direct mortgage loan origination costs from salary and
employee benefits expense to gain on loans sold and held for sale since late
2003, and a change in the fallout percentage associated with the allocation. The
fallout percentage represents the percentage of the number of loan applications
that do not result in the ultimate origination of a loan divided by the total
number of loan applications received.
Noninterest income for the years ended December 31, 2004 and 2003
includes net gains on sales of available-for-sale investment securities of
$257,000 and $8.8 million, respectively. The net gain for 2004 resulted
primarily from the sales of certain investment securities held by acquired
institutions that did not meet our overall investment objectives. The net gain
for 2003 includes a $6.3 million gain on the exchange of our Allegiant common
stock for a 100% ownership interest in BSG in the first quarter of 2003 and a
$2.3 million gain realized on the subsequent contribution of our remaining
shares of Allegiant common stock to a previously established charitable
foundation in the fourth quarter of 2003, partially offset by a $431,000
impairment loss resulting from a permanent decline in the fair value of an
equity fund investment.
Gains, net of expenses, on the sale of two Midwest banking offices in
2004 totaled $1.0 million and reflect a $392,000 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. The additional adjustment to gains, net of expenses, in
2004 relates to an adjustment to the fourth quarter 2003 gain recorded on the
divestiture of four banking offices due to an expense incurred to correct
certain environmental issues associated with one of the banking offices. During
the fourth quarter of 2003, we recorded a $4.0 million gain, net of expenses, on
the sale of four branch offices in eastern Missouri and central and northern
Illinois.
Bank-owned life insurance income was $5.2 million for the year ended
December 31, 2004, in comparison to $5.5 million in 2003, and reflects a reduced
return on this product primarily associated with the reduced interest rate
environment and overall market conditions.
Investment management income was $6.9 million for the year ended
December 31, 2004, in comparison to $4.8 million in 2003. The increase in 2004
reflects increased portfolio management fee income associated with our
Institutional Money Management division.
Other income was $13.4 million and $13.0 million for the years ended
December 31, 2004 and 2003, respectively. We attribute the primary components of
the increase in other income to:
>> increased loan servicing fees of $3.0 million primarily
attributable to increased fees from loans serviced for others,
including fees from the SBA assets purchased from SBLS, decreased
amortization of mortgage servicing rights and a lower level of
interest shortfall. Loan servicing fees for 2004 also included an
impairment charge of $459,000 on our SBA servicing asset;
>> an increase of $665,000 in fees from fiduciary activities, which
were $2.8 million and $2.1 million for the years ended December
31, 2004 and 2003, respectively;
>> our acquisitions completed during 2003 and 2004;
>> increased income of $512,000 from standby letters of credit; and
>> an increase of $375,000 reflecting the reduction of a contingent
liability recorded in conjunction with the sale of a portion of
our leasing portfolio as a result of reductions in related lease
balances for the specific pools of leases sold, as further
discussed in Note 24 to our Consolidated Financial Statements;
partially offset by
>> decreased net gains on derivative instruments of $2.0 million.
The net loss on derivative instruments was $1.5 million for the
year ended December 31, 2004, in comparison to a net gain of
$496,000 in 2003. The decrease in the net gain on derivative
instruments reflects changes in the fair value of our interest
rate cap agreements, fair value hedges and underlying hedged
liabilities. The decrease reflects the discontinuation, in 2003,
of hedge accounting treatment on two interest rate swap
agreements that matured in January 2004, resulting from the loss
of our highly correlated hedge positions between the swap
agreements and the underlying hedged liabilities;
>> a decrease of $1.1 million in rental income associated with our
reduced commercial leasing activities;
>> a $282,000 write-off of fixed assets associated with the
remodeling of a branch office facility to accommodate our St.
Louis based mortgage banking operation;
>> a decline of $265,000 in brokerage revenue primarily associated
with overall market conditions and reduced customer demand; and
>> a net increase of $643,000 in losses on sales or reductions in
valuations of repossessed assets, primarily related to leasing
equipment associated with our commercial leasing business. Net
losses for 2004 were $1.6 million and included a $750,000
write-down on repossessed aircraft equipment and a $1.3 million
write-down on repossessed equipment unrelated to the airline
industry. These write-downs were partially offset by a $350,000
gain on the sale of other repossessed aircraft equipment
associated with our commercial leasing portfolio. Net losses for
2003 were $950,000 and included write-downs of $855,000 on the
disposition of certain aircraft and aircraft equipment parts.
Noninterest Expense. Noninterest expense was $229.5 million for the
year ended December 31, 2004, in comparison to $227.1 million for 2003. Our
efficiency ratio was 59.84% for the year ended December 31, 2004, compared to
60.58% for 2003. The net increase in noninterest expense for 2004 primarily
reflects the noninterest expense of our acquisitions completed during 2003 and
2004, as well as increases in salaries and employee benefits expenses, partially
offset by the nonrecurring $5.1 million charitable contribution expense
recognized in the fourth quarter of 2003 on the contribution of our Allegiant
common stock, a decline in expenses and losses, net of gains, on other real
estate owned, a decrease in write-downs on various operating leases associated
with our commercial leasing business, and a decrease in occupancy, net of rental
income, and furniture and equipment expense.
Salaries and employee benefits increased by $22.1 million to $117.5
million for the year ended December 31, 2004, from $95.4 million in 2003. We
primarily associate the overall increase with our 2003 and 2004 acquisitions;
generally higher salary and employee benefit costs associated with employing and
retaining qualified personnel; and additions to staff to enhance senior
management expertise and expand our product lines. The increase is also
attributable to a lower allocation of direct mortgage loan origination costs
from salaries and employee benefits expense to gain on loans sold and held for
sale due to a slowdown in the volume of mortgage loans originated and sold,
management's decision to retain a portion of new mortgage loan production in our
real estate mortgage portfolio in mid-2003 and a change in the fallout
percentage associated with the allocation.
Occupancy, net of rental income, and furniture and equipment expense
totaled $36.9 million and $39.2 million for the years ended December 31, 2004
and 2003, respectively. We primarily attribute the continued higher levels of
expense to acquisitions, technology equipment expenditures, continued expansion
and renovation of various corporate and branch offices and the relocation of
certain branches and operational areas. The decrease in 2004 is partially
attributable to decreased rent expense associated with various lease
terminations in 2003, including a $1.0 million lease termination obligation
associated with the relocation of our San Francisco-based loan administration
department to southern California and a $200,000 lease buyout on a California
branch facility recorded in the first quarter of 2003, a $979,000 decrease in
depreciation expense on leased equipment associated with our reduced commercial
leasing activities, partially offset by an increase attributable to our 2004
acquisitions.
Information technology fees were $32.0 million and $32.1 million for
the years ended December 31, 2004 and 2003, respectively. We attribute the level
of fees to growth and technological advancements consistent with our product and
service offerings, and continued expansion and upgrades to technological
equipment, networks and communication channels, partially offset by expense
reductions resulting from the information technology conversion of BSG completed
in 2003, as well as the achievement of certain efficiencies associated with the
implementation of various technology projects. The information technology
conversion of CCB was completed in September 2004.
Legal, examination and professional fees were $7.4 million and $8.1
million for the years ended December 31, 2004 and 2003, respectively. The
decrease in these fees in 2004 is primarily associated with higher legal fees
paid in 2003 related to an ongoing lawsuit that reached final resolution in the
second quarter of 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 related to acquired entities
have all contributed to the overall expense levels in 2003 and 2004.
Amortization of intangibles associated with the purchase of
subsidiaries was $2.9 million and $2.5 million for the years ended December 31,
2004 and 2003, respectively. We attribute the increase to the core deposit
intangibles associated with our 2003 and 2004 acquisitions.
Communications and advertising and business development expenses were
$7.4 million and $6.9 million for the years ended December 31, 2004 and 2003,
respectively. 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. 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 contribution expense was $577,000 and $5.3 million for the
years ended December 31, 2004 and 2003, respectively. We recorded contribution
expense of $5.1 million in the fourth quarter of 2003 related to the
contribution of our remaining shares of Allegiant common stock, as further
discussed under "--Overview" and "--Acquisitions - Completed Acquisitions."
Other expense was $19.8 million and $32.3 million for the years ended
December 31, 2004 and 2003, respectively. 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. We attribute the
majority of the decrease in other expense for 2004, as compared to 2003, to:
>> a decrease of $5.2 million on expenditures and losses, net of
gains, on other real estate. Expenditures and losses, net of
gains, on other real estate reflected net gains of $3.3 million
for the year ended December 31, 2004, in comparison to net
expenses and losses of $1.9 million in 2003. Net gains on sales
of other real estate in 2004 include a $2.7 million gain on the
sale of a residential and recreational development property that
was transferred to other real estate in January 2003, as further
discussed under "--Loans and Allowance for Loan Losses," and
approximately $454,000 in gains recorded on the sale of two
additional holdings of other real estate. Net expenditures on
other real estate for 2003 primarily included expenditures
associated with the operation of the residential and recreational
development property that was sold in February 2004 as well as a
$200,000 expenditure associated with an unrelated residential
real estate property located in the northern California region;
>> decreased write-downs of $6.1 million on various operating leases
associated with our commercial leasing business, which were
primarily a result of reductions in estimated residual values. We
recorded write-downs of $664,000 for the year ended December 31,
2004, compared to $6.8 million in 2003; and
>> a $1.0 million specific reserve established in December 2003 for
the estimated loss associated with a $5.3 million unfunded letter
of credit that we subsequently funded as a loan in January 2004;
partially offset by
>> higher expenses associated with our acquisitions completed during
2003 and 2004, including increased travel, meals and
entertainment expenses incurred by our conversion team members in
anticipation of the information technology conversion of CIB Bank
that occurred in February 2005; and
>> continued growth and expansion of our banking franchise.
Provision for Income Taxes. The provision for income taxes was $45.3
million for the year ended December 31, 2004, representing an effective income
tax rate of 35.4%, in comparison to $36.0 million, representing an effective
income tax rate of 36.4%, for the year ended December 31, 2003. The decrease in
the effective income tax rate is primarily attributable to the reversal of a
$2.8 million tax reserve in the second quarter of 2004 that was no longer deemed
necessary as a result of the resolution of a potential tax liability. Excluding
this transaction, the effective income tax rate was 37.5% for the year ended
December 31, 2004, reflecting higher taxable income and the merger of our two
bank charters in March 2003, which resulted in higher taxable income allocations
in states where we file separate tax returns.
Interest Rate Risk Management
For financial institutions, the maintenance of a satisfactory level of
net interest income is a primary factor in achieving acceptable income levels.
However, the maturity and repricing characteristics of the institution's loan
and investment portfolios may differ significantly from those within its deposit
structure. The nature of the loan and deposit markets within which a financial
institution operates and its objectives for business development within those
markets at any point in time influence these characteristics. In addition, the
ability of borrowers to repay loans and depositors to withdraw funds prior to
stated maturity dates introduces divergent option characteristics that operate
primarily as interest rates change. These factors cause various elements of the
institution's balance sheet to react in different manners and at different times
relative to changes in interest rates, potentially leading to increases or
decreases in net interest income over time. Depending upon the direction and
magnitude of interest rate movements and their effect on the specific components
of the institution's balance sheet, the effects on net interest income can be
substantial. Consequently, managing a financial institution requires
establishing effective control over the exposure of the institution to changes
in interest rates.
We strive to manage our interest rate risk by:
>> maintaining an Asset Liability Committee, or ALCO, responsible to
our Board of Directors, to review the overall interest rate risk
management activity and approve actions taken to reduce risk;
>> employing a financial simulation model to determine our exposure
to changes in interest rates;
>> coordinating the lending, investing and deposit-generating
functions to control the assumption of interest rate risk; and
>> utilizing various financial instruments, including derivatives,
to offset inherent interest rate risk should it become excessive.
The objective of these procedures is to limit the adverse impact that
changes in interest rates may have on our net interest income.
The ALCO has overall responsibility for the effective management of
interest rate risk and the approval of policy guidelines. The ALCO includes our
President and Chief Executive Officer, Chief Operating Officer, Chief Credit
Officer, Chief Financial Officer, Chief Investment Officer and the senior
officers of finance and risk management, and certain other officers. The Asset
Liability Management Group, which monitors interest rate risk, supports the
ALCO, prepares analyses for review by the ALCO and implements actions that are
either specifically directed by the ALCO or established by policy guidelines.
In managing sensitivity, we strive to reduce the adverse impact on
earnings by managing interest rate risk within internal policy constraints. Our
policy is to manage exposure to potential risks associated with changing
interest rates by maintaining a balance sheet posture in which annual net
interest income is not significantly impacted by reasonably possible near-term
changes in interest rates. To measure the effect of interest rate changes, we
project our net income over a two-year horizon on a pro forma basis. The
analysis assumes various scenarios for increases and decreases in interest rates
including both instantaneous and gradual, and parallel and non-parallel shifts
in the yield curve, in varying amounts. For purposes of arriving at reasonably
possible near-term changes in interest rates, we include scenarios based on
actual changes in interest rates, which have occurred over a two-year period,
simulating both a declining and rising interest rate scenario.
We are "asset-sensitive," indicating that our assets would generally
reprice with changes in interest rates more rapidly than our liabilities, and
our simulation model indicates a loss of projected net interest income should
interest rates decline. While a decline in interest rates of less than 100 basis
points has a relatively minimal impact on our net interest income, an
instantaneous parallel decline in the interest yield curve of 100 basis points
indicates a pre-tax projected loss of approximately 6.4% of net interest income,
based on assets and liabilities at December 31, 2005. Although we do not
anticipate that instantaneous shifts in the yield curve as projected in our
simulation model are likely, these are indications of the effects that changes
in interest rates would have over time.
We also prepare and review a more traditional interest rate sensitivity
position in conjunction with the results of our simulation model. The following
table presents the projected maturities and periods to repricing of our rate
sensitive assets and liabilities as of December 31, 2005, adjusted to account
for anticipated prepayments:
Over Over
Three Six Over
Three through through One Over
Months Six Twelve through Five
or Less Months Months Five Years Years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
Loans (1)...................................... $4,453,237 318,688 479,676 1,563,896 205,274 7,020,771
Investment securities.......................... 151,245 96,943 248,610 655,604 188,381 1,340,783
Short-term investments......................... 65,000 -- -- -- -- 65,000
---------- --------- --------- --------- --------- ---------
Total interest-earning assets.............. 4,669,482 415,631 728,286 2,219,500 393,655 8,426,554
Effect of interest rate swap agreements........ (300,000) 100,000 -- 200,000 -- --
---------- --------- --------- --------- --------- ---------
Total interest-earning assets after
the effect of interest
rate swap agreements..................... $4,369,482 515,631 728,286 2,419,500 393,655 8,426,554
========== ========= ========= ========= ========= =========
Interest-bearing liabilities:
Interest-bearing demand accounts............... $ 363,279 225,822 147,275 108,002 137,459 981,837
Money market accounts.......................... 1,416,912 -- -- -- -- 1,416,912
Savings accounts............................... 117,225 96,538 82,747 117,225 275,823 689,558
Time deposits.................................. 906,633 474,495 954,027 793,049 25,970 3,154,174
Other borrowings............................... 199,874 4,000 4,000 330,300 1,000 539,174
Notes payable.................................. 5,000 5,000 10,000 80,000 -- 100,000
Subordinated debentures........................ -- -- -- -- 215,461 215,461
---------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities......... 3,008,923 805,855 1,198,049 1,428,576 655,713 7,097,116
Effect of interest rate swap agreements........ 25,000 -- -- -- (25,000) --
---------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities
after the effect of interest
rate swap agreements..................... $3,033,923 805,855 1,198,049 1,428,576 630,713 7,097,116
========== ========= ========= ========= ========= =========
Interest-sensitivity gap:
Periodic....................................... $1,335,559 (290,224) (469,763) 990,924 (237,058) 1,329,438
=========
Cumulative..................................... 1,335,559 1,045,335 575,572 1,566,496 1,329,438
========== ========= ========= ========= =========
Ratio of interest-sensitive assets to
interest-sensitive liabilities:
Periodic................................... 1.44 0.64 0.61 1.69 0.62 1.19
=========
Cumulative................................. 1.44 1.27 1.11 1.24 1.19
========== ========= ========= ========= =========
- ---------------
(1) Loans are presented net of unearned discount.
Management made certain assumptions in preparing the foregoing table.
These assumptions included:
>> loans will repay at projected repayment rates;
>> mortgage-backed securities, included in investment securities,
will repay at projected repayment rates;
>> interest-bearing demand accounts and savings accounts will behave
in a projected manner with regard to their interest rate
sensitivity; and
>> fixed maturity deposits will not be withdrawn prior to maturity.
A significant variance in actual results from one or more of these
assumptions could materially affect the results reflected in the table.
Our asset-sensitive position at December 31, 2005 on a cumulative basis
through the twelve-month time horizon remained relatively consistent, at $575.6
million, or 6.28% of our assets, in comparison to our asset-sensitive position
on a cumulative basis through the twelve-month time horizon of $571.4 million,
or 6.54% of our assets, at December 31, 2004.
The interest-sensitivity position is one of several measurements of the
impact of interest rate changes on net interest income. Its usefulness in
assessing the effect of potential changes in net interest income varies with the
constant change in the composition of our assets and liabilities and changes in
interest rates. For this reason, we place greater emphasis on our simulation
model for monitoring our interest rate risk exposure.
As previously discussed, we utilize derivative financial instruments to
assist in our management of interest rate sensitivity by modifying the
repricing, maturity and option characteristics of certain assets and
liabilities. The derivative financial instruments we held as of December 31,
2005 and 2004 are summarized as follows:
December 31,
---------------------------------------------------
2005 2004
------------------------ ----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................ $ 300,000 114 500,000 1,233
Fair value hedges........................... 25,000 748 276,200 9,609
Interest rate floor agreements.............. 100,000 70 -- --
Interest rate lock commitments.............. 5,900 -- 5,400 --
Forward commitments to sell
mortgage-backed securities................ 47,000 -- 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.
For the years ended December 31, 2005, 2004 and 2003, we realized net
interest income of $2.2 million, $50.1 million and $64.6 million, respectively,
on our derivative financial instruments. The decreased earnings for 2005 and
2004 are primarily attributable to an increase in prevailing interest rates that
began in mid-2004 and continued throughout 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. Although we have implemented other methods to
mitigate the reduction in our net interest income, the maturity and termination
of the swap agreements has resulted in a compression of our net interest margin
of approximately 59 basis points for the year ended December 31, 2005, in
comparison to 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 $1.1 million
and $1.5 million for the years ended December 31, 2005 and 2004, respectively,
in comparison to a net gain of $496,000 for the year ended December 31, 2003.
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. Information regarding our derivative
financial instruments outlined in the table above is further described in Note 5
to our Consolidated Financial Statements appearing elsewhere in this report.
Mortgage Banking Activities
Our mortgage banking activities consist of the origination, purchase
and servicing of residential mortgage loans. The purchase of loans to be held
for sale is primarily limited to loans that we acquire in conjunction with our
acquisition of other financial institutions. Generally, we sell our production
of residential mortgage loans in the secondary loan markets. However, in
mid-2003, as a result of continued weak loan demand in other sectors of our loan
portfolio, we made a business strategy decision to retain a portion of new
residential mortgage loan production in our real estate mortgage portfolio,
generally represented by production originated in our St. Louis production
offices with the exception of 20 and 30-year fixed rate loans which are
typically sold in the secondary loan markets. Furthermore, in the third quarter
of 2005, we revised our strategy and began retaining additional mortgage loan
production in our residential real estate mortgage portfolio, including 15-year
fixed rate, conforming conventional adjustable rate mortgages and other similar
products, as further discussed in "--Loans and Allowance for Loan Losses."
Servicing rights may either be retained or released with respect to
conventional, FHA and VA conforming fixed-rate and conventional adjustable rate
residential mortgage loans.
For the three years ended December 31, 2005, 2004 and 2003, we
originated residential mortgage loans held for sale and held for portfolio
totaling $1.60 billion, $1.14 billion and $2.16 billion, respectively, and sold
residential mortgage loans totaling $1.14 billion, $1.03 billion and $2.19
billion, respectively. The origination and purchase of residential mortgage
loans and the related sale of the loans provides us with additional sources of
income including the gain or loss realized upon sale, the interest income earned
while the loan is held awaiting sale and the ongoing loan servicing fees from
the loans sold with servicing rights retained. Mortgage loans serviced for
investors aggregated $1.01 billion, $1.06 billion and $1.22 billion at December
31, 2005, 2004 and 2003, respectively.
The gain on mortgage loans originated for resale, including loans sold
and held for sale, was $18.1 million, $17.8 million and $15.6 million for the
years ended December 31, 2005, 2004 and 2003, respectively. We determine these
gains, net of losses, on a lower of cost or market basis. These gains are
realized at the time of sale. The cost basis reflects both the adjustments of
the carrying values of loans held for sale to the lower of cost, adjusted to
include the cost of hedging the loans held for sale, or current market values,
as well as the adjustments for any gains or losses on loan commitments for which
the interest rate has been established, net of anticipated underwriting
"fallout," adjusted for the cost of hedging these loan commitments. Fallout
represents loans not funded due to issues discovered during the underwriting
process or withdrawal of the loan request by the customer. The increases for
2004 and 2005 are primarily attributable to the continued growth of our mortgage
banking activities and the relatively high volume of loans originated and sold
commensurate with the prevailing interest rate environment experienced in 2003,
partially offset by the slowdown in the volume of mortgage loans originated and
sold that began in the fourth quarter of 2003 and continued throughout 2004 and
into the first quarter of 2005, coupled with management's decision to retain
additional loan volume in our residential real estate mortgage portfolio, as
discussed above.
Interest income on loans held for sale was $11.7 million for the year
ended December 31, 2005, in comparison to $8.8 million and $17.0 million for the
years ended December 31, 2004 and 2003, respectively. The amount of interest
income realized on loans held for sale is a function of the average balance of
loans held for sale, the period for which the loans are held and the prevailing
interest rates when the loans are made. The average balance of loans held for
sale was $184.1 million, $133.3 million and $273.0 million for the years ended
December 31, 2005, 2004 and 2003, respectively. On an annualized basis, our
yield on the portfolio of loans held for sale was 6.36%, 6.61% and 6.21% for the
years ended December 31, 2005, 2004 and 2003, respectively. This compares with
our cost of funds, as a percentage of average interest-bearing liabilities, of
2.47%, 1.64% and 1.88% for the years ended December 31, 2005, 2004 and 2003,
respectively.
We report mortgage loan servicing fees in other noninterest income in
our consolidated statements of income, net of amortization of mortgage servicing
rights, interest shortfall and mortgage-backed security guarantee fee expense.
Interest shortfall equals the difference between the interest collected from a
loan-servicing customer upon prepayment of the loan and a full month's interest
that is required to be remitted to the security owner. Although net mortgage
loan servicing fees increased throughout these periods, they contributed to an
overall reduction in our other noninterest income of $1.2 million, $2.6 million
and $4.8 million for the years ended December 31, 2005, 2004 and 2003,
respectively, including the recognition of amortization of mortgage servicing
rights of $5.0 million, $6.5 million and $7.5 million for the years ended
December 31, 2005, 2004 and 2003, respectively. We attribute the increase in net
loan servicing fees in 2005 to reduced amortization of mortgage servicing
rights, partially offset by a reduction in fees associated with a lower volume
of loans serviced for others and the retention of a portion of loan production
in our residential mortgage loan portfolio, as previously discussed. We
attribute the increase in net loan servicing fees in 2004 to increased fees
associated with a lower level of interest shortfall as well as reduced
amortization expense.
Our interest rate risk management policy provides certain hedging
parameters to reduce the interest rate risk exposure arising from changes in
loan prices from the time of commitment until the sale of the security or loan.
To reduce this exposure, we use forward commitments to sell fixed-rate
mortgage-backed securities at a specified date in the future. At December 31,
2005, 2004 and 2003, we had $47.7 million, $35.3 million and $58.2 million,
respectively, of loans held for sale and related commitments, net of committed
loan sales and estimated underwriting fallout, of which $47.0 million, $34.0
million and $58.5 million, respectively, were hedged through the use of such
forward commitments.
Investment Securities
We classify the securities within our investment portfolio as trading,
available for sale or held to maturity. Our investment security portfolio
consists primarily of securities designated as available for sale. During the
fourth quarter of 2005, we began to engage in the trading of investment
securities, which were $3.4 million at December 31, 2005. The investment
security portfolio was $1.34 billion at December 31, 2005, compared to $1.81
billion and $1.05 billion at December 31, 2004 and 2003, respectively. Funds
available from maturities of investment securities during 2005 were primarily
used to fund loan growth, resulting in the decrease in our investment securities
portfolio in 2005. A portion of the remaining funds available from maturities of
investment securities were reinvested in higher-yielding available-for-sale
investment securities. The decrease also reflects the sale of the underlying
available-for-sale investment securities associated with the termination of a
$50.0 million term repurchase agreement in November 2005, as further discussed
in Note 3, Note 5 and Note 10 to our Consolidated Financial Statements. The
significant increase in the investment securities portfolio in 2004 is
attributable to securities acquired through acquisitions and funds provided by
an increase in other borrowings, primarily term repurchase agreements, combined
with the overall level of loan demand within our market areas, which affects the
amount of funds available for investment.
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 85.9%, 86.5% and 90.9%
of total interest income for the years ended December 31, 2005, 2004 and 2003,
respectively. We recognize interest and fees on loans as income using the
interest method of accounting. Loan origination fees are deferred and accreted
to interest income over the estimated life of the loans using the interest
method of accounting. The accrual of interest on loans is discontinued when it
appears that interest or principal may not be paid in a timely manner in the
normal course of business. We generally record payments received on nonaccrual
and impaired loans as principal reductions, and defer the recognition of
interest income on loans until all principal has been repaid or an improvement
in the condition of the loan has occurred which would warrant the resumption of
interest accruals.
Loans, net of unearned discount, represented 76.6% of our assets as of
December 31, 2005, compared to 70.3% of our assets at December 31, 2004. Loans,
net of unearned discount, increased $882.8 million to $7.02 billion at December
31, 2005 from $6.14 billion at December 31, 2004. Our acquisitions of FBA, IBOC
and NSB provided loans, net of unearned discount, of $54.3 million, $113.5
million and $41.8 million, respectively, or $209.6 million in aggregate.
Exclusive of these acquisitions completed in 2005, our loans, net of unearned
discount, increased $687.5 million as a result of internal growth in 2005. In
addition, we reduced our loans and leases by $14.3 million in the first and
second quarters of 2005 from the sale of certain nonperforming loans, resulting
from management's business decision in late 2004 to reduce the level of our
nonperforming assets through the sale of certain nonperforming loans. Loans, net
of unearned discount, increased $809.9 million to $6.14 billion at December 31,
2004 from $5.33 billion at December 31, 2003. Our 2004 acquisitions of CIB Bank,
CCB and SBLS provided loans, net of unearned discount, of $683.3 million, $73.6
million and $24.0 million, respectively or $780.9 million in aggregate. In
addition, we reduced our loans and leases by $83.2 million in 2004 from the sale
of a portion of our commercial leasing portfolio and the sale of certain
performing and nonperforming loans. Exclusive of these acquisitions and loan
sales completed in 2004, loans, net of unearned discount, increased $112.2
million from internal growth in 2004. The overall increase in loans, net of
unearned discount, in 2005 primarily resulted from:
>> an increase of $408.2 million in our real estate mortgage
portfolio, primarily attributable to internal growth within our
loan portfolio and our acquisitions completed during 2005, which
provided real estate mortgage loans of $166.7 million, as well as
a home equity product line campaign that we held in mid-2004 in
line with our goal to increase our home equity lines. The
increase is also attributable to management's business strategy
decision in mid-2003 to retain a portion of our new loan
production in our 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;
>> an increase of $245.8 million in our real estate construction and
development portfolio resulting from internal growth due to new
loan originations and seasonal fluctuations on existing and
available credit lines, and a $5.3 million increase associated
with our acquisitions completed in 2005;
>> an increase of $182.1 million in loans held for sale resulting
from an overall increase in loan origination volumes and the
timing of loan sales in the secondary mortgage market, partially
offset by the sale of certain acquired loans. In addition, in an
effort to reduce the level of our nonperforming assets through
the sale of certain nonperforming loans, we transferred
approximately $59.7 million of nonperforming loans to our held
for sale portfolio at December 31, 2005, further contributing to
the overall increase in 2005; and
>> an increase of $44.6 million in our commercial, financial and
agricultural portfolio, primarily attributable to a $36.7 million
increase associated with our acquisitions completed during 2005,
partially offset by general runoff of the balances within this
portfolio as well as an anticipated amount of attrition
associated with our acquisitions completed during 2003 and 2004.
In our evaluation of acquisitions, it is anticipated that as we apply
our standards for credit structuring, underwriting, documentation and approval,
a portion of the existing borrowers will elect to refinance with another
financial institution, because: (a) there may be an aggressive effort by other
financial institutions to attract them; (b) they do not accept the changes
involved, or (c) they are unable to meet our credit requirements. In addition,
another portion of the portfolio may either enter our remedial collection
process to reduce undue credit exposure or improve problem loans, or may be
charged-off. The amount of this attrition will vary substantially among
acquisitions depending on the strength and discipline within the credit function
of the acquired institution; the magnitude of problems contained in the acquired
portfolio; the aggressiveness of competing institutions to attract business; and
the significance of the acquired institution to the overall banking market.
Typically, in acquisitions of institutions that have strong credit cultures
prior to their acquisitions and operate in relatively large markets, there is
relatively little attrition that occurs after the acquisition. However, in those
acquisitions in which the credit discipline has been weak, and particularly
those in small metropolitan or rural areas, we can experience substantially
greater attrition. Generally, this process occurs within approximately six to 12
months after completion of the acquisition.
During the five years ended December 31, 2005, loans, net of unearned
discount, increased significantly from $4.75 billion at December 31, 2000 to
$7.02 billion at December 31, 2005. Throughout this period, we have
substantially enhanced our capabilities for achieving and managing internal
growth. A key element of this process has been the expansion of our corporate
business development staff, which is responsible for the internal development
and management of both loan and deposit relationships with commercial customers.
While this process was occurring, in an attempt to achieve more diversification,
a higher level of interest yield and a reduction in interest rate risk within
our loan portfolio, we also focused on repositioning our portfolio. As the
corporate business development effort continued to originate a substantial
volume of new loans, substantially all of our conforming residential mortgage
loan production was historically sold in the secondary mortgage market until
management's decision in 2003 to retain a portion of the new loan production in
our real estate mortgage portfolio to offset continued weak loan demand in other
sectors of our loan portfolio and management's decision 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. Furthermore,
we substantially reduced our lease financing portfolio as a result of (a) the
discontinuation of our New Mexico based leasing operation in 2002, the transfer
of all responsibilities for the existing portfolio to a new leasing staff in St.
Louis, Missouri, a change in our overall business strategy resulting in reduced
commercial leasing activities and repayment of leases by borrowers, and (b) the
sale of a significant portion of our remaining commercial leasing portfolio,
which reduced the portfolio by approximately $33.1 million to $9.6 million at
June 30, 2004. This portfolio has further declined to $3.0 million at December
31, 2005. We have also substantially reduced our consumer lending by
discontinuing the origination of indirect auto loans and selling our student
loan and credit card loan portfolios. This allowed us to fund part of the growth
in corporate lending through reductions in indirect automobile and other
consumer-related loans.
In addition, our acquisitions have contributed to a substantial
increase in the portfolios of new loans. In certain cases, these acquired
portfolios contained significant loan problems, which we had anticipated and
attempted to consider in our acquisition pricing. As we resolved the asset
quality issues, the portfolios of the acquired entities tended to decline due to
the elimination of problem loans and because many of the resources that would
otherwise be directed toward generating new loans were concentrated on improving
or eliminating existing relationships. We continue to experience this trend,
primarily as a result of our acquisitions of CCB and CIB Bank, completed in July
2004 and November 2004, respectively, and expect the resolution of certain
problem credits acquired from CIB Bank to continue in the near term.
The following table summarizes the components of changes in our loan
portfolio, net of unearned discount, for the five years ended December 31, 2005:
Increase (Decrease) For the Year Ended December 31,
--------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(dollars expressed in thousands)
Internal loan volume increase (decrease):
Commercial lending................................ $ 204,494 91,760 (22,211) (119,295) 174,568
Residential real estate lending (1) .............. 481,642 32,348 (103,573) 36,074 48,616
Consumer lending, net of unearned discount........ 1,383 (11,900) (22,429) (44,060) (75,280)
Loans and leases sold................................. (14,337) (83,216) -- -- --
Loans provided by acquisitions........................ 209,621 780,901 43,700 151,000 508,700
--------- ------- -------- -------- -------
Total increase (decrease)......................... $ 882,803 809,893 (104,513) 23,719 656,604
========= ======= ======== ======== =======
---------------
(1) Includes loans held for sale.
Our lending strategy emphasizes quality, growth and diversification.
Throughout our organization, we employ a common credit underwriting policy. Our
commercial lenders focus principally on small to middle-market companies.
Consumer lenders focus principally on residential loans, including home equity
loans and other consumer financing opportunities arising out of our branch
banking network.
Commercial, financial and agricultural loans include loans that are
made primarily based on the borrowers' general credit strength and ability to
generate cash flows for repayment from income sources even though such loans may
also be secured by real estate or other assets. Real estate construction and
development loans, primarily relating to residential properties and commercial
properties, represent financing secured by real estate under construction. Real
estate mortgage loans consist primarily of loans secured by single-family,
owner-occupied properties and various types of commercial properties on which
the income from the property is the intended source of repayment. Consumer and
installment loans are loans to individuals and consist of a mix of secured and
unsecured loans, including preferred credit and loans secured by automobiles.
Loans held for sale are primarily fixed and adjustable rate residential mortgage
loans pending sale in the secondary mortgage market in the form of a
mortgage-backed security, or to various private third-party investors.
The following table summarizes the composition of our loan portfolio by
major category and the percent of each category to the total portfolio as of the
dates presented:
December 31,
--------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------- ------------------ -------------------- ------------------- ------------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
(dollars expressed in thousands)
Commercial, financial
and agricultural............ $1,616,841 24.1% $1,569,321 26.1% $1,407,626 27.1% $1,443,016 28.4% $1,532,875 29.5%
Real estate construction
and development............. 1,564,255 23.3 1,318,413 22.0 1,063,889 20.5 989,650 19.5 954,913 18.4
Real estate mortgage:
One-to-four-family
residential loans......... 1,214,121 18.1 870,889 14.5 811,650 15.7 694,604 13.7 798,089 15.3
Multi-family residential
loans..................... 143,663 2.2 102,447 1.7 108,163 2.1 112,517 2.2 148,684 2.9
Commercial real estate
loans..................... 2,112,004 31.5 2,088,245 34.8 1,662,451 32.1 1,637,001 32.2 1,499,074 28.8
Lease financing................. 2,981 -- 5,911 0.1 67,282 1.3 126,738 2.5 148,971 2.8
Consumer and installment,
net of unearned
discount.................... 51,772 0.8 49,677 0.8 61,268 1.2 79,097 1.5 122,057 2.3
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans,
excluding loans
held for sale........ 6,705,637 100.0% 6,004,903 100.0% 5,182,329 100.0% 5,082,623 100.0% 5,204,663 100.0%
===== ===== ===== ===== =====
Loans held for sale............. 315,134 133,065 145,746 349,965 204,206
---------- ---------- ---------- ---------- ----------
Total loans............. $7,020,771 $6,137,968 $5,328,075 $5,432,588 $5,408,869
========== ========== ========== ========== ==========
Loans at December 31, 2005 mature as follows:
Over One Year
Through Five
Years Over Five Years
---------------------- -------------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
Commercial, financial and agricultural.................... $ 937,844 195,269 390,940 40,230 52,558 1,616,841
Real estate construction and development.................. 888,281 91,562 530,635 28,043 25,734 1,564,255
Real estate mortgage:
One-to-four family residential loans.................. 87,684 136,470 54,905 256,454 678,608 1,214,121
Multi-family residential loans........................ 35,512 37,081 39,425 15,270 16,375 143,663
Commercial real estate loans.......................... 443,229 607,132 501,292 264,792 295,559 2,112,004
Lease financing........................................... -- 2,981 -- -- -- 2,981
Consumer and installment, net of unearned discount........ 22,882 24,001 2,109 2,460 320 51,772
Loans held for sale....................................... 315,134 -- -- -- -- 315,134
---------- --------- --------- ------- --------- ---------
Total loans......................................... $2,730,566 1,094,496 1,519,306 607,249 1,069,154 7,020,771
========== ========= ========= ======= ========= =========
Nonperforming assets include nonaccrual loans, restructured loans and
other real estate. The following table presents the categories of nonperforming
assets and certain ratios as of the dates presented:
December 31,
-----------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual.................................... $ 4,937 10,147 26,876 15,787 17,141
Restructured terms............................ -- 4 -- -- --
Real estate construction and development:
Nonaccrual.................................... 11,137 13,435 6,402 23,378 3,270
Real estate mortgage:
One-to-four family residential loans:
Nonaccrual.................................. 9,576 9,881 21,611 14,833 20,780
Restructured terms.......................... 10 11 13 15 20
Multi-family residential loans:
Nonaccrual.................................. 740 434 804 772 476
Commercial real estate loans:
Nonaccrual.................................. 70,625 50,671 13,994 8,890 20,642
Restructured terms.......................... -- -- -- 1,907 1,993
Lease financing:
Nonaccrual.................................... 11 907 5,328 8,723 2,185
Consumer and installment:
Nonaccrual.................................... 160 310 336 860 794
Restructured terms............................ -- -- -- -- 7
---------- --------- --------- --------- ---------
Total nonperforming loans............ 97,196 85,800 75,364 75,165 67,308
Other real estate............................... 2,025 4,030 11,130 7,609 4,316
---------- --------- --------- --------- ---------
Total nonperforming assets........... $ 99,221 89,830 86,494 82,774 71,624
========== ========= ========= ========= =========
Loans, net of unearned discount................. $7,020,771 6,137,968 5,328,075 5,432,588 5,408,869
========== ========= ========= ========= =========
Loans past due 90 days or more
and still accruing............................ $ 5,576 28,689 2,776 4,635 15,156
========== ========= ========= ========= =========
Ratio of:
Allowance for loan losses to loans............ 1.93% 2.46% 2.19% 1.83% 1.80%
Nonperforming loans to loans.................. 1.38 1.40 1.41 1.38 1.24
Allowance for loan losses to
nonperforming loans......................... 139.23 175.65 154.52 132.29 144.36
Nonperforming assets to loans and
other real estate........................... 1.41 1.46 1.62 1.52 1.32
========== ========= ========= ========= =========
Nonperforming assets, consisting of nonperforming loans and other real
estate owned, were $99.2 million, $89.8 million and $86.5 million at December
31, 2005, 2004 and 2003, respectively. Other real estate owned was $2.0 million,
$4.0 million and $11.1 million at December 31, 2005, 2004 and 2003,
respectively. Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $97.2 million at December 31, 2005, in
comparison to $85.8 million and $75.4 million at December 31, 2004 and 2003,
respectively. A significant portion of our nonperforming loans includes loans
associated with our acquisition of CIB Bank in November 2004, which have
increased to $55.0 million, or 56.6% of nonperforming loans, at December 31,
2005, from $50.5 million, or 58.8% of nonperforming loans, at December 31, 2004.
As further discussed under "--Lending Activities," the increase in nonperforming
loans in 2005 is primarily attributable to the deterioration of a few large
credit relationships in our Midwest region during the fourth quarter of 2005,
partially offset by significant improvement in the overall level of
nonperforming loans during the first nine months of 2005. The increase in
nonperforming loans in the fourth quarter of 2005 is primarily attributable to
further deterioration of a small number of credit relationships in our Midwest
region, including two large relationships of $14.9 million and $16.6 million, or
$31.5 million in aggregate. On December 31, 2005, we recognized $7.6 million of
loan charge-offs to reduce the loans to their estimated fair value, net of
costs, that is expected to be realized at the time of the sale, and transferred
approximately $59.7 million of nonperforming loans to our held for sale
portfolio, which included several of the relationships that deteriorated during
the fourth quarter of 2005 and one credit relationship of $12.4 million, which
was included in nonperforming loans at December 31, 2004 with a value of $14.5
million. Included in these loan charge-offs and loans transferred to our held
for sale portfolio were $6.0 million of loan charge-offs and approximately $49.6
million of nonperforming loans that were associated with our CIB Bank purchase.
In January 2006, we received a payoff on one of the nonperforming loans in our
held for sale portfolio, reducing the held for sale portfolio by $12.4 million
and resulting in the recognition of a $5.0 million loan recovery. Furthermore,
in March 2006, we completed the sale of a majority of the remaining nonaccrual
loans in our held for sale portfolio, reducing the held for sale portfolio by
$32.5 million, as further discussed in Note 25 to our Consolidated Financial
Statements. We continue to actively market the remaining loans held for sale
through an independent third party. The improvement of nonperforming loans
during the first nine months of 2005 primarily resulted from: our continued
emphasis on improving asset quality; the sale of certain acquired nonperforming
loans; strengthening of certain loans; and loan payoffs and/or external
refinancing of various credits, as further discussed below. 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 CIB Bank, as further discussed in Note 2 to our Consolidated
Financial Statements. We also recorded a $1.6 million write-down on an acquired
parcel of other real estate owned to its estimated fair value based upon
additional data received. This write-down was recorded as an acquisition-related
adjustment in the first quarter of 2005 and is further discussed in Note 2 to
our Consolidated Financial Statements. The increase in nonperforming loans in
2004 is primarily associated with our 2004 acquisitions, partially offset by
substantial improvement in our existing portfolio of nonperforming assets as a
result of significant loan payoffs, the liquidation of foreclosed property, the
sale of certain nonperforming loans and the sale of a portion of our commercial
leasing portfolio. The increase in nonperforming loans in 2003 and 2002 is
primarily attributable to the current economic conditions as previously
discussed, additional problems identified in two acquired loan portfolios and
continuing deterioration in our commercial leasing portfolio, particularly the
segment of the portfolio related to the airline industry.
The 10.5% net increase in nonperforming assets during 2005 reflects the
following significant changes:
>> Overall improvement in the level of nonperforming assets during
the first nine months of 2005, exclusive of the deterioration of
certain credit relationships as discussed below, as a result of
our continued focus on improving asset quality through an ongoing
process of problem loan work-out; the sale of certain acquired
nonperforming loans, as previously discussed; the strengthening
of certain loans; and 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;
>> The deterioration of several credit relationships in the Midwest
region during the fourth quarter of 2005. There credits were
primarily associated with loans acquired in the purchase of CIB
Bank and included two large credit relationships of $14.9 million
and $16.6 million, respectively, which were placed on nonaccrual
status in the fourth quarter of 2005;
>> On December 31, 2005, we transferred 11 nonperforming loans
totaling approximately $59.7 million to our held for sale
portfolio. These loans were primarily associated with loans
acquired in the purchase of CIB Bank and included several of the
loans that had deteriorated during the fourth quarter of 2005, as
discussed above, and one credit relationship of $12.4 million,
which was included in nonperforming loans at December 31, 2004
with a value of $14.5 million. We recognized $7.6 million of loan
charge-offs in conjunction with this transfer to loans held for
sale to reduce the loans to their estimated fair value, net of
costs, that is expected to be realized at the time of the sale.
Included in these loan charge-offs and loans transferred to our
held for sale portfolio were $6.0 million of loan charge-offs and
approximately $49.6 million of nonperforming loans transferred to
our held for sale portfolio that were associated with our CIB
Bank purchase;
>> The sale of approximately $14.3 million of certain acquired
nonperforming loans in early 2005, specifically $2.8 million and
$11.5 million during the first and second quarters of 2005; and
>> A $4.0 million decrease in nonperforming assets associated with
our acquisition of SBLS in August 2004, primarily resulting from
$3.8 million of loan charge-offs recorded in 2005, which reduced
SBLS LLC's nonperforming assets to $2.3 million at December 31,
2005. SBLS LLC had a significant concentration of assets
associated with the shrimping vessels industry, which are
reflected in both nonperforming loans and other repossessed
assets. Although we adjusted our asset purchase price to reflect
this concentration, asset quality issues will likely continue in
the near future as a result of this industry concentration and
its ongoing depressed status, which has deteriorated further in
2005 due to higher interest rates, increased fuel costs and
damage to several vessels by Hurricane Katrina. The SBA agreed to
repurchase SBLS LLC's entire shrimping vessels portfolio, and
these loans were placed in liquidation status in 2005. However,
the ultimate liquidation of the shrimping vessels is expected to
be time consuming due to the poor condition of certain of the
vessels following Hurricane Katrina and the potential collection
of funds through insurance proceeds, which will likely require
additional time and effort to comply with the individual
requirements of the respective insurance companies.
Loans past due 90 days or more and still accruing interest decreased
$23.1 million to $5.6 million at December 31, 2005, from $28.7 million at
December 31, 2004, and were $2.8 million at December 31, 2003. The overall level
of such delinquencies at December 31, 2005 is primarily reflective of the
continued growth in our loan portfolio. The substantial increase in 2004
resulted from our acquisitions of CIB Bank and CCB, which comprised $27.2
million of our loans past due 90 days or more and still accruing interest at
December 31, 2004. A significant portion of these loans were past due as to
contractual maturity and pending renewal at December 31, 2004; however, the
majority of the loan payments were current and in accordance with the
contractual terms of the underlying credit agreements. Our allowance for loan
losses as a percentage of loans, net of unearned discount, was 1.93%, 2.46% and
2.19% at December 31, 2005, 2004 and 2003, respectively. Our allowance for loan
losses as a percentage of nonperforming loans decreased to 139.23% at December
31, 2005, from 175.65% and 154.52% at December 31, 2004 and 2003, respectively.
The allowance for loan losses was $135.3 million at December 31, 2005, compared
to $150.7 million and $116.5 million at December 31, 2004 and 2003,
respectively. As reflected in the table below, a $1.0 million specific reserve
was established in December 2003 for the estimated loss associated with a $5.3
million unfunded letter of credit. The letter of credit was subsequently funded
as a loan in January 2004, and the related $1.0 million specific reserve was
transferred to the allowance for loan losses. In addition, on June 30, 2004, we
transferred approximately $1.5 million from the allowance for loan losses to a
contingent liability related to recourse obligations associated with the sale of
certain leases in our commercial leasing portfolio, as further described in Note
24 to our Consolidated Financial Statements. As further described in the table
below and under "--Business - Lending Activities," the allowance for loan losses
also reflects an increase of $2.0 million in 2005 and an increase of $33.8
million in 2004 of balances acquired in conjunction with our acquisitions,
including a $15.7 million increase to reflect the application of our loss
factors to CIB Bank's loan portfolio risk ratings, reflecting our strategies for
more rapid resolution of certain acquired classified and nonperforming assets.
This adjustment was partially offset by our reclassification, at the time of
acquisition, of CIB Bank's specific reserves of $21.7 million as a reduction of
the basis of the individual loan relationships (which had no impact on our net
loan balances), and the transfer of $18.3 million of nonperforming loans to
loans held for sale, resulting in a corresponding charge of $5.4 million to the
allowance for loan losses to reduce the loans held for sale to their estimated
fair value, net of broker costs, that was expected to be realized at the time of
sale.
Loan charge-offs decreased to $33.1 million for the year ended December
31, 2005, compared to $50.6 million and $55.8 million for the comparable periods
in 2004 and 2003, respectively. Loan recoveries were $19.8 million for the year
ended December 31, 2005, compared to $25.9 million and $23.0 million for the
comparable periods in 2004 and 2003, respectively. Loan charge-offs, net of
recoveries, decreased to $13.4 million for the year ended December 31, 2005,
compared to $24.8 million and $32.7 million for the comparable periods in 2004
and 2003, respectively. Net loan charge-offs for 2005 included $7.6 million of
charge-offs associated with the $59.7 million of loans transferred to our held
for sale portfolio at December 31, 2005, as previously discussed. Net loan
charge-offs for 2004 reflect $2.5 million in net charge-offs related to certain
nonperforming and problem loans that were sold in the fourth quarter of 2004. In
addition, net loan recoveries associated with our commercial leasing portfolio
were $342,000 in 2004, compared to net loan charge-offs of $14.4 million in
2003. 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. The level of
nonperforming assets from our 2004 acquisitions significantly contributed to
increased levels of problem loans and past due loans, and we anticipated the
level of nonperforming and delinquent loans to continue during 2005 as we worked
to resolve the underlying issues associated with the nonperforming assets of CCB
and CIB Bank, including our efforts to actively market a significant portion of
the problem loans, as discussed above. Although substantial improvement was made
in this regard throughout 2005, we continue our efforts to reduce the overall
level of our nonperforming assets.
As of December 31, 2005, 2004, 2003, 2002 and 2001, $124.3 million,
$161.8 million, $109.4 million, $98.2 million and $123.2 million, respectively,
of loans not included in the table above were identified by management as having
potential credit problems, or problem loans. The decline in the level of problem
loans for the year ended December 31, 2005 primarily reflects improvement in the
management of these problem loans and success in resolving certain of the
problem loans associated with our 2004 acquisitions. The significant increase in
the level of problem loans for the year ended December 31, 2004 is primarily
attributable to our acquisitions of CCB and CIB Bank, in addition to internal
portfolio growth and economic conditions within certain sectors of the markets
in which we operate. The significant level of problem loans for the year ended
December 31, 2003 was primarily due to continuing deterioration of our
commercial leasing portfolio, portfolio growth (both internal and external), the
gradual slow down and uncertainties that occurred in the economy in the markets
in which we operate, as well as residual problem loans stemming from our
acquisition of Union Financial Group, Ltd. in December 2001. As previously
discussed under "--Lending Activities," certain acquired loan portfolios
exhibited varying degrees of distress prior to their acquisition. While these
problems had been identified and considered in our acquisition pricing, the
acquisitions led to an increase in nonperforming assets and problem loans.
Management continues its efforts to reduce nonperforming and problem loans and
re-define overall strategy and business plans with respect to our loan portfolio
as deemed necessary.
Our credit management policies and procedures focus on identifying,
measuring and controlling credit exposure. These procedures employ a
lender-initiated system of rating credits, which is ratified in the loan
approval process and subsequently tested in internal credit reviews, external
audits and regulatory bank examinations. The system requires rating all loans at
the time they are originated, except for homogeneous categories of loans, such
as residential real estate mortgage loans and consumer loans. These homogeneous
loans are assigned an initial rating based on our experience with each type of
loan. We adjust these ratings based on payment experience subsequent to their
origination.
We include adversely rated credits, including loans requiring close
monitoring which would not normally be considered classified credits by
regulators, on our monthly loan watch list. Loans may be added to our watch list
for reasons that are temporary and correctable, such as the absence of current
financial statements of the borrower or a deficiency in loan documentation.
Other loans are added whenever any adverse circumstance is detected which might
affect the borrower's ability to comply with the terms of the loan. The
delinquency of a scheduled loan payment, deterioration in the borrower's
financial condition identified in a review of periodic financial statements, a
decrease in the value of the collateral securing the loan, or a change in the
economic environment within which the borrower operates could initiate the
addition of a loan to our watch list. Loans on our watch list require periodic
detailed loan status reports prepared by the responsible officer, which are
discussed in formal meetings with credit review and credit administration staff
members. Upgrades and downgrades of loan risk ratings may be initiated by the
responsible loan officer. However, upgrades of risk ratings associated with
significant credit relationships and/or problem credit relationships may only be
made with the concurrence of appropriate regional or senior regional credit
officers.
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
profiles 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 levels of risk in
the portfolio. Factors are applied to the loan portfolio for each category of
loan risk to determine acceptable levels of the 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, additional
provisions 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
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.
The allocation of the allowance for loan losses by loan category is a
result of the application of our risk rating system augmented by qualitative
analysis. The same procedures we employ to determine the overall risk in our
loan portfolio and our requirements for the allowance for loan losses determine
the distribution of the allowance by loan category. Consequently, the
distribution of the allowance will change from period to period due to (a)
changes in the aggregate loan balances by loan category; (b) changes in the
identified risk in each loan in the portfolio over time, excluding those
homogeneous categories of loans such as consumer and installment loans and
residential real estate mortgage loans for which risk ratings are changed based
on payment performance; and (c) changes in loan concentrations by borrower.
Since the methods of calculating the allowance requirements have not
significantly changed over time, the reallocations among different categories of
loans that appear between periods are the result of the redistribution of the
individual loans that comprise the aggregate portfolio due to the factors listed
above. However, the perception of risk with respect to particular loans within
the portfolio will change over time as a result of the characteristics and
performance of those loans, as well as the overall economic trends and market
trends, including our actual and expected trends in nonperforming loans.
Consequently, while there are no specific allocations of the allowance resulting
from economic or market conditions or actual or expected trends in nonperforming
loans, these factors are considered in the initial assignment of risk ratings to
loans and in subsequent changes to those risk ratings.
The following table is a summary of our loan loss experience for the
five years ended December 31, 2005:
As of or For the Years Ended December 31,
-------------------------------------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of year......... $ 150,707 116,451 99,439 97,164 81,592
Acquired allowances for loan losses.................. 1,989 33,752 757 1,366 14,046
Other adjustments (1)(2)............................. -- (479) -- -- --
---------- --------- --------- --------- ---------
152,696 149,724 100,196 98,530 95,638
---------- --------- --------- --------- ---------
Loans charged-off:
Commercial, financial and agricultural........... (10,500) (26,550) (23,476) (45,697) (21,085)
Real estate construction and development......... (7,838) (3,481) (5,825) (7,778) (108)
Real estate mortgage:
One-to-four family residential loans.......... (3,399) (4,891) (4,167) (2,697) (802)
Multi-family residential loans................ -- (139) (87) (109) (4)
Commercial real estate loans.................. (9,699) (9,995) (1,708) (2,747) (1,012)
Lease financing.................................. (491) (4,536) (19,160) (8,426) (6,749)
Consumer and installment......................... (1,196) (1,051) (1,350) (3,070) (1,693)
---------- --------- --------- --------- ---------
Total...................................... (33,123) (50,643) (55,773) (70,524) (31,453)
---------- --------- --------- --------- ---------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural........... 10,802 14,983 10,147 8,331 4,015
Real estate construction and development......... 1,963 748 1,659 631 1,171
Real estate mortgage:
One-to-four family residential loans.......... 1,953 1,597 781 628 755
Multi-family residential loans................ -- 27 99 792 15
Commercial real estate loans.................. 2,901 2,659 4,174 3,491 1,332
Lease financing.................................. 1,501 4,878 4,805 494 435
Consumer and installment......................... 637 984 1,363 1,566 1,746
---------- --------- --------- --------- ---------
Total...................................... 19,757 25,876 23,028 15,933 9,469
---------- --------- --------- --------- ---------
Net loans charged-off...................... (13,366) (24,767) (32,745) (54,591) (21,984)
---------- --------- --------- --------- ---------
Provision for loan losses............................ (4,000) 25,750 49,000 55,500 23,510
---------- --------- --------- --------- ---------
Allowance for loan losses, end of year............... $ 135,330 150,707 116,451 99,439 97,164
========== ========= ========= ========= =========
Loans outstanding, net of unearned discount:
Average.......................................... $6,436,970 5,509,054 5,385,363 5,424,508 4,884,299
End of year...................................... 7,020,771 6,137,968 5,328,075 5,432,588 5,408,869
End of year, excluding loans held for sale....... 6,705,637 6,004,903 5,182,329 5,082,623 5,204,663
========== ========= ========= ========= =========
Ratio of allowance for loan losses
to loans outstanding:
Average.......................................... 2.10% 2.74% 2.16% 1.83% 1.99%
End of year...................................... 1.93 2.46 2.19 1.83 1.80
End of year, excluding loans held for sale....... 2.02 2.51 2.25 1.96 1.87
Ratio of net charge-offs to average
loans outstanding................................ 0.21 0.45 0.61 1.01 0.45
Ratio of current year recoveries to
preceding year's charge-offs..................... 39.01 46.40 32.65 50.66 55.54
========== ========= ========= ========= =========
- ---------------
(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 the allowance for loan losses to accrued and other liabilities
to establish a specific reserve associated with our commercial leasing portfolio sale and related recourse
obligations for certain leases sold.
The following table is a summary of the allocation of the allowance for
loan losses for the five years ended December 31, 2005:
2005 2004 2003 2002 2001
---------------- ---------------- ---------------- --------------- ---------------
Percent Percent Percent Percent Percent
of of of of of
Category Category Category Category Category
of of of of of
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars expressed in thousands)
Commercial, financial
and agricultural.................. $ 39,245 23.03% $ 46,195 25.57% $ 37,142 26.42% $34,915 26.56% $40,161 28.34%
Real estate construction
and development................... 32,638 22.28 38,525 21.48 26,782 19.97 22,667 18.22 21,598 17.65
Real estate mortgage:
One-to-four family
residential loans.............. 10,526 17.29 8,466 14.19 9,684 15.23 7,913 12.79 5,349 14.76
Multi-family residential loans.... 67 2.05 20 1.67 186 2.03 32 2.07 81 2.75
Commercial real estate loans...... 51,199 30.08 55,922 34.01 36,632 31.20 28,477 30.13 25,167 27.71
Lease financing...................... 315 0.04 628 0.10 4,830 1.26 3,649 2.33 3,062 2.75
Consumer and installment............. 757 0.74 617 0.81 668 1.15 703 1.46 937 2.26
Loans held for sale.................. 583 4.49 334 2.17 527 2.74 1,083 6.44 809 3.78
-------- ------ -------- ------ -------- ------ ------- ------ ------- ------
Total........................... $135,330 100.00% $150,707 100.00% $116,451 100.00% $99,439 100.00% $97,164 100.00%
======== ====== ======== ====== ======== ====== ======= ====== ======= ======
Deposits
Deposits are the primary source of funds for First Bank. Our deposits
consist principally of core deposits from our local market areas, including
individual and corporate customers.
The following table sets forth the distribution of our average deposit
accounts for the years indicated and the weighted average interest rates on each
category of deposits:
Year Ended December 31,
------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------- ------------------------------ ----------------------------
Percent Percent Percent
of of of
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(dollars expressed in thousands)
Noninterest-bearing demand
deposits......................... $1,257,277 17.45% --% $1,100,072 17.83% --% $1,007,400 16.64% --%
Interest-bearing demand deposits... 905,613 12.57 0.49 856,765 13.89 0.41 852,104 14.08 0.64
Savings deposits................... 2,135,156 29.64 1.39 2,175,425 35.27 0.93 2,147,573 35.47 1.09
Time deposits ..................... 2,906,601 40.34 3.21 2,036,323 33.01 2.43 2,046,741 33.81 2.65
---------- ------ ==== ---------- ------ ==== ---------- ------ ====
Total average deposits....... $7,204,647 100.00% $6,168,585 100.00% $6,053,818 100.00%
========== ====== ========== ====== ========== ======
Capital and Dividends
Historically, we have accumulated capital to support our acquisitions
by retaining most of our earnings. We pay relatively small dividends on our
Class A convertible, adjustable rate preferred stock and our Class B adjustable
rate preferred stock, totaling $786,000 for the years ended December 31, 2005,
2004 and 2003.
Management believes as of December 31, 2005 and 2004, First Bank and we
were "well capitalized," as defined in regulations adopted pursuant to the FDIC
Improvement Act of 1991. First Bank's and our actual and required capital ratios
are further described in Note 21 to our Consolidated Financial Statements.
As of December 31, 2005, we had six statutory and business trusts that
were created for the sole purpose of issuing trust preferred securities. As
further described in Note 12 to our Consolidated Financial Statements, the sole
assets of the statutory and business trusts are our subordinated debentures.
Initially, the trusts served as financing subsidiaries, however, as discussed in
Note 1 to our Consolidated Financial Statements, on December 31, 2003, we
implemented Financial Accounting Standards Board, or FASB, Interpretation No.
46, Consolidation of Variable Interest Entities, an interpretation of ARB No.
51, which resulted in the deconsolidation of these financing subsidiaries.
Consequently, the trusts now serve as affiliated statutory and business trusts.
The implementation of this Interpretation had no material effect on our
consolidated financial position or results of operations.
A summary of the outstanding trust preferred securities issued by our
affiliated statutory and business trusts, and our related subordinated
debentures issued to the respective trusts in conjunction with the trust
preferred securities offerings as of December 31, 2005, is as follows:
Preferred Subordinated
Name of Trust Date Formed Type of Offering Securities Debentures
------------- ----------- ---------------- ---------- ----------
First Preferred Capital Trust III November 2001 Publicly Underwritten 55,200,000 56,907,250
First Bank Capital Trust April 2002 Private Placement 25,000,000 25,774,000
First Bank Statutory Trust March 2003 Private Placement 25,000,000 25,774,000
First Preferred Capital Trust IV January 2003 Publicly Underwritten 46,000,000 47,422,700
First Bank Statutory Trust II September 2004 Private Placement 20,000,000 20,619,000
First Bank Statutory Trust III November 2004 Private Placement 40,000,000 41,238,000
For regulatory reporting purposes, the trust preferred securities are
eligible for inclusion, subject to certain limitations, in our Tier 1 capital.
As of December 31, 2005, there were no limitations on the trust preferred
securities eligible for inclusion in our Tier 1 capital.
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 Banks and other borrowings,
including our term loan and our revolving credit line. The aggregate funds
acquired from these sources were $1.72 billion and $1.42 billion at December 31,
2005 and 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 December 31, 2005:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less.................................... $ 354,323 204,874 559,197
Over three months through six months.................... 165,291 9,000 174,291
Over six months through twelve months................... 314,491 14,000 328,491
Over twelve months...................................... 242,803 411,300 654,103
---------- ------- ---------
Total.............................................. $1,076,908 639,174 1,716,082
========== ======= =========
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
December 31, 2005 and 2004, First Bank's borrowing capacity under the agreement
was approximately $743.6 million and $778.7 million, respectively. In addition,
First Bank's borrowing capacity through its relationship with the Federal Home
Loan Bank was approximately $679.3 million and $505.2 million at December 31,
2005 and 2004, respectively. Exclusive of the Federal Home Loan Bank advances
outstanding of $39.3 million and $35.6 million at December 31, 2005 and 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 December 31, 2005 and 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 obligations at December 31, 2005 were
as follows:
Less Than 1-3 3-5 Over
1 Year Years Years 5 Years Total
---------- ------ ----- ------- -----
(dollars expressed in thousands)
Operating leases........................ $ 11,356 17,867 12,993 18,231 60,447
Certificates of deposit (1)............. 2,270,737 720,393 137,066 25,978 3,154,174
Other borrowings........................ 207,874 314,500 15,800 1,000 539,174
Notes payable........................... 20,000 80,000 -- -- 100,000
Subordinated debentures................. -- -- -- 215,461 215,461
Other contractual obligations........... 1,288 263 18 19 1,588
---------- --------- ------- ------- ---------
Total.............................. $2,511,255 1,133,023 165,877 260,689 4,070,844
========== ========= ======= ======= =========
-------------------------
(1) Amounts exclude the related interest expense accrued on these obligations as of December 31, 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 the
interest on the subordinated debentures that we issued to our affiliated
statutory and business financing trusts.
Critical Accounting Policies
Our financial condition and results of operations presented in our
Consolidated Financial Statements, accompanying notes to our Consolidated
Financial Statements, selected consolidated and other financial data appearing
elsewhere in this report, and management's discussion and analysis of financial
condition and results of operations are, to a large degree, dependent upon our
accounting policies. The selection and application of our accounting policies
involve judgments, estimates and uncertainties that are susceptible to change.
We have identified the following accounting policies that we believe
are the most critical to the understanding of our financial condition and
results of operations. These critical accounting policies require management's
most difficult, subjective and complex judgments about matters that are
inherently uncertain. In the event that different assumptions or conditions were
to prevail, and depending upon the severity of such changes, the possibility of
a materially different financial condition and/or results of operations could be
a reasonable likelihood. The impact and any associated risks related to our
critical accounting policies on our business operations is discussed throughout
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations," where such policies affect our reported and expected financial
results. A detailed discussion on the application of these and other accounting
policies is summarized in Note 1 to our Consolidated Financial Statements
appearing elsewhere in this report.
Loans and Allowance for Loan Losses. We maintain an allowance for loan
losses at a level we consider adequate to provide for probable losses in our
loan portfolio. The determination of our allowance for loan losses requires
management to make significant judgments and estimates based upon a periodic
analysis of our loans held for portfolio and held for sale considering, among
other factors, current economic conditions, loan portfolio composition, past
loan loss experience, independent appraisals, the fair value of underlying loan
collateral, our customers' ability to repay their loans and selected key
financial ratios. If actual events prove the estimates and assumptions we used
in determining our allowance for loan losses were incorrect, we may need to make
additional provisions for loan losses. See further discussion under "--Loans and
Allowance for Loan Losses" and Note 4 to our Consolidated Financial Statements
appearing elsewhere in this report.
Derivative Financial Instruments. We utilize derivative financial
instruments to assist in our management of interest rate sensitivity by
modifying the repricing, maturity and option characteristics of certain assets
and liabilities. The judgments and assumptions that are most critical to the
application of this critical accounting policy are those affecting the
estimation of fair value and hedge effectiveness. Fair value is based on quoted
market prices where available. If quoted market prices are unavailable, fair
value is based on quoted market prices of comparable derivative instruments.
Factors that affect hedge effectiveness include the initial selection of the
derivative that will be used as a hedge and how well changes in its cash flow or
fair value have correlated and are expected to correlate with changes in the
cash flow or fair value of the underlying hedged asset or liability. Past
correlation is easy to demonstrate, but expected correlation depends upon
projections and trends that may not always hold true within acceptable limits.
Changes in assumptions and conditions could result in greater than expected
inefficiencies that, if large enough, could reduce or eliminate the economic
benefits anticipated when the hedges were established and/or invalidate
continuation of hedge accounting. Greater inefficiency and/or discontinuation of
hedge accounting are likely to result in increased volatility to our reported
earnings. For cash flow hedges, this would result as more or all of the change
in the fair value of the affected derivative being reported in noninterest
income. For fair value hedges, there may be some impact on our reported earnings
as the change in the fair value of the affected derivative may not be offset by
changes in the fair value of the underlying hedged asset or liability. See
further discussion under "--Effects of New Accounting Standards," "--Interest
Rate Risk Management" and Note 5 to our Consolidated Financial Statements
appearing elsewhere in this report.
Deferred Tax Assets. We recognize deferred tax assets and deferred tax
liabilities for the estimated future tax effects of temporary differences, net
operating loss carryforwards and tax credits. We recognize deferred tax assets
subject to management's judgment based upon available evidence that realization
is more likely than not. Our deferred tax assets are reduced, if necessary, by a
deferred tax asset valuation allowance. In the event that we determine we would
not be able to realize all or part of our net deferred tax assets in the future,
we would need to adjust the recorded value of our deferred tax assets, which
would result in a direct charge to our provision for income taxes in the period
in which such determination is made. See further discussion under "--Comparison
of Results of Operations for 2005 and 2004 - Provision for Income Taxes,"
"--Comparison of Results of Operations for 2004 and 2003 - Provision for Income
Taxes," and Note 13 to our Consolidated Financial Statements appearing elsewhere
in this report.
Business Combinations. We emphasize acquiring other financial
institutions as one means of achieving our growth objectives. The determination
of the fair value of the assets and liabilities acquired in these transactions
as well as the returns on investment that may be achieved requires management to
make significant judgments and estimates based upon detailed analyses of the
existing and future economic value of such assets and liabilities and/or the
related income streams, including the resulting intangible assets. If actual
events prove the estimates and assumptions we used in determining the fair
values of the acquired assets and liabilities or the projected income streams
were incorrect, we may need to make additional adjustments to the recorded
values of such assets and liabilities, which could result in increased
volatility to our reported earnings. In addition, we may need to make additional
adjustments to the recorded value of our intangible assets, which directly
impacts our regulatory capital levels. See further discussion under
"--Acquisitions" and Note 2, Note 8 and Note 21 to our Consolidated Financial
Statements appearing elsewhere in this report.
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 investments in debt and
marketable equity securities that are accounted for under Statement of Financial
Accounting Standards, or 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 No. 115 and SFAS No. 124. The EITF adopted a three-step
model that requires management to determine if impairment exists, decide whether
it is other than temporary, and record other-than-temporary losses in earnings.
In September 2004, the FASB approved issuing a Staff Position to delay the
requirement to record impairment losses under EITF 03-1, but broadened the scope
to include additional types of securities. As proposed, the delay would have
applied only to those debt securities described in paragraph 16 of EITF 03-1,
the Consensus that provides guidance for determining whether an investment's
impairment is other than temporary and should be recognized in income. On June
29, 2005, the FASB directed 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 have evaluated 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 FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, a
revision to FASB Interpretation No. 46, Consolidation of Variable Interest
Entities issued in January 2003. This Interpretation is intended to achieve more
consistent application of consolidation policies to variable interest entities
and, thus to improve comparability between enterprises engaged in similar
activities even if some of those activities are conducted through variable
interest entities. The provisions of this Interpretation are effective for
financial statements issued for fiscal years ending after December 15, 2003. We
have several statutory and business trusts that were formed for the sole purpose
of issuing trust preferred securities. As further described in Note 1 and Note
12 to our Consolidated Financial Statements appearing elsewhere in this report,
on December 31, 2003, we implemented FASB Interpretation No. 46, as amended,
which resulted in the deconsolidation of our statutory and business trusts. The
implementation of this Interpretation had no material effect on our consolidated
financial position or results of operations. Furthermore, on March 1, 2005, the
Federal Reserve 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 I capital. As
further discussed in Note 21 to our Consolidated Financial Statements, we have
evaluated the impact of the final rule on our financial condition and results of
operations, and determined the implementation of the Federal Reserve's final
rules that will be effective in March 2009 would reduce our bank holding
company's Tier I capital (to risk-weighted assets) and Tier I capital (to
average assets) to 8.47% and 7.74%, respectively, as of December 31, 2005. In
October 2005, the Federal Reserve, 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 ended in January 2006. We are awaiting further
guidance from the Board pending the outcome of the newly proposed revisions, and
are continuing to evaluate the proposed changes and their overall impact on our
financial condition and results of operations.
In December 2003, the Accounting Standards Executive Committee, or
AcSEC, issued Statement of Position, or 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's SFAS No. 114, Accounting
by Creditors for Impairment of a Loan; SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities; and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
Additionally, it addresses SFAS 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, our acquisition of IBOC, which we
completed on September 30, 2005, and our acquisition of NSB, which we completed
on October 31, 2005. At September 30, 2005, the carrying value of acquired
problem loans that were being accounted for under SOP 03-3 totaled $1.8 million
in aggregate. During the fourth quarter of 2005, these loans were either
charged-off due to further credit deterioration or were transferred to our held
for sale portfolio and are now being accounted for at the lower of cost or
market, less applicable selling costs. Consequently, we did not have any
acquired problem loans that are being accounted for under SOP 03-3 at December
31, 2005. The implementation of SOP 03-3, as it pertains to our 2005
transactions, did not have a material impact on our financial condition or
results of operations. We will continue to evaluate the impact of SOP 03-3 on
our financial condition and results of operations as it relates to our recently
announced acquisitions described in Note 2 and in Note 25 to our Consolidated
Financial Statements and future transactions.
In July 2004, the FASB's Derivatives Implementation Group issued
guidance on SFAS 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. DIG Issue G25
clarifies the FASB's position on the ability of entities to hedge the
variability in interest receipts or overall changes in cash flows on a group of
prime-rate-based loans. The new guidance permits the use of the
first-payments-received technique in a cash flow hedge of the variable
prime-rate-based or other variable non-benchmark-rate-based interest payments
for a rolling portfolio of prepayable interest-bearing loans, provided the
hedging relationship meets all other conditions in SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, for cash flow hedge accounting.
If a pre-existing cash flow hedging relationship has identified the hedged
transactions in a manner inconsistent with the guidance in DIG Issue G25, the
hedging relationship must be de-designated at the effective date, as further
discussed below, and any derivative gains or losses in accumulated other
comprehensive income related to the de-designated hedging relationships should
be accounted for under paragraphs 31 and 32 of SFAS No. 133. We had pre-existing
cash flow hedging relationships that were inconsistent with the guidance in DIG
Issue G25. As of September 30, 2004, our accumulated other comprehensive income
included a $4.1 million net gain attributable to these pre-existing cash flow
hedging relationships. DIG Issue G25 is effective for the fiscal quarter
beginning after August 9, 2004, and shall be applied to all hedging
relationships as of the effective date. On October 1, 2004, we implemented DIG
Issue G25 and de-designated all of our specific 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 is being amortized over the remaining lives of the respective
hedging relationships, which range from approximately six months to three years.
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 financial position, results of
operations or our interest rate risk management program.
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 SFAS No. 3 -- Reporting Accounting Changes in
Interim Financial Statements, 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 have evaluated 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 second quarter of 2006. We are currently evaluating the
requirements of the exposure draft to determine their impact on our financial
condition and results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The quantitative and qualitative disclosures about market risk are
included under "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Interest Rate Risk Management" appearing
on pages 38 through 40 of this report.
Effects of Inflation
Inflation affects financial institutions less than other types of
companies. Financial institutions make relatively few significant asset
acquisitions that are directly affected by changing prices. Instead, the assets
and liabilities are primarily monetary in nature. Consequently, interest rates
are more significant to the performance of financial institutions than the
effect of general inflation levels. While a relationship exists between the
inflation rate and interest rates, we believe this is generally manageable
through our asset-liability management program.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data appear on pages 64
through 108 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. 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 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 fourth
quarter of 2005 that have materially affected, or are reasonably likely to
materially affect, the Company's control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Board of Directors and Committees of the Board
We are a "controlled company" as defined in Rule 4350(c)(5) of the
NASDAQ Marketplace Rules because more than 50% of our voting power is held by
James F. Dierberg, our Chairman of the Board, as more fully discussed under
"Item 12 - Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters." Therefore, we are not subject to certain
requirements of Rule 4350.
Our Board of Directors currently consists of seven members, following
the resignation of Mr. Hal J. Upbin on January 27, 2006, as further discussed
below. The Board determined that Messrs. Gundaker, Steward, Upbin and Yaeger are
independent. Each of our directors identified in the following table was elected
or appointed to serve a one-year term and until his successor has been duly
qualified for office.
Director Principal Occupation(s) During Last Five Years
Name Age Since and Directorships of Public Companies
---- --- ----- -------------------------------------
James F. Dierberg (1) 68 1979 Chairman of the Board of Directors of First Banks, Inc. since 1988;
Chief Executive Officer of First Banks, Inc. from 1988 to April
2003; President of First Banks, Inc. from 1979 to 1992 and from
1994 to October 1999; Chairman of the Board of Directors, President
and Chief Executive Officer of First Banks America, Inc.from 1994
until its merger with First Banks, Inc. in December 2002.
Allen H. Blake 63 1988 President of First Banks, Inc. since October 1999; Chief Executive
Officer of First Banks, Inc. since April 2003; Chief Financial
Officer of First Banks, Inc. from 1984 to September 1999 and from
May 2001 to August 31, 2005; Chief Operating Officer of First
Banks, Inc. from 1998 to July 2002; Director of First Banks, Inc.
since 1988; Director, Executive Vice President, Chief Operating
Officer and Secretary of First Banks America, Inc. from 1998 until
its merger with First Banks, Inc. in December 2002; Chief
Financial Officer of First Banks America, Inc. from 1994 to
September 1999 and from May 2001 until December 2002.
Terrance M. McCarthy 51 2003 Senior Executive Vice President and Chief Operating Officer of
First Banks, Inc. since August 2002; Director of First Banks, Inc.
since April 2003; Director of First Banks America, Inc. from July
2001 until its merger with First Banks, Inc. in December 2002;
Executive Vice President of First Banks America, Inc. from 1999 to
December 2002; Chairman of the Board of Directors of First Bank
since January 2003; President and Chief Executive Officer of First
Bank since August 2002; Chairman of the Board of Directors,
President and Chief Executive Officer of First Bank and Trust from
April 2000 until its merger with and into First Bank in March
2003; Director of First Bank Business Capital, Inc. (formerly FB
Commercial Finance, Inc.) since March 2003; Chairman of the
Members, President and Chief Executive Officer of Small Business
Loan Source LLC since September 2004.
Steven F. Schepman (1) 33 2004 Director of First Banks, Inc. since July 2004; Senior Vice
President and Chief Financial Officer of First Banks, Inc. since
August 31, 2005; Director of First Bank from April 2001 to October
2004; Senior Vice President - Private Banking, Wealth Management
and Trust Services of First Bank from November 2000 to August 31,
2005; From May 1999 to November 2000, Mr. Schepman was employed in
various other senior management capacities with First Banks, Inc.
Gordon A. Gundaker (2) 72 2001 President and Chief Executive Officer of Coldwell Banker Gundaker,
a full-service real estate brokerage company, in St. Louis,
Missouri.
David L. Steward (2) 54 2000 Chairman of the Board of Directors of World Wide Technology
Holding Co., Inc., an electronic procurement and logistics company
in the information technology industry, in St. Louis, Missouri;
Director of Centene Corporation, Civic Progress of St.
Louis, the St. Louis Regional Commerce and Growth Association,
the Regional Business Council, Webster University, Barnes Jewish
Hospital, St. Louis Science Center, the United Way of Greater St.
Louis, Greater St. Louis Area Council - Boy Scouts of America and
Harris-Stowe State College African American Business Leadership
Council.
Hal J. Upbin (2)(4) 67 2001(4) Director of Kellwood Company, a manufacturer and marketer of
apparel and related soft goods, in St. Louis, Missouri from 1995
to January 31, 2006; Chairman of the Board of Directors of
Kellwood Company from 1999 to January 31, 2006; Chief Executive
Officer of Kellwood Company from December 1997 to June 2, 2005;
President of Kellwood Company from 1994 to December 2003; Director
of Brown Shoe Company.
Douglas H. Yaeger (2)(3) 57 2000 Chairman of the Board of Directors, President and Chief Executive
Officer of The Laclede Group, Inc., an exempt public utility
holding company in St. Louis, Missouri since 2001; Chairman of the
Board of Directors, President and Chief Executive Officer of
Laclede Gas Company since 1999; President of Laclede Gas Company
since 1997; Director and Chief Operating Officer of Laclede Gas
Company from 1997 to 1999; Executive Vice President - Operations
and Marketing of Laclede Gas Company from 1995 to 1997; Director
and immediate past Chairman of the Board of Directors of the St.
Louis Regional Commerce and Growth Association; Director and
immediate past Chairman of Southern Gas Association; Trustee of
the St. Louis Science Center; Director of Barnes-Jewish Hospital,
Greater St. Louis Area Council - Boy Scouts of America, The
Municipal Theatre Association of St. Louis, the United Way of
Greater St. Louis and Webster University; President of Civic
Progress.
- -----------------------------------
(1) Mr. Steven F. Schepman is the son-in-law of Mr. James F. Dierberg.
(2) Member of the Audit Committee.
(3) Mr. Douglas H. Yaeger serves as Chairman of the Audit Committee and the audit committee financial expert.
(4) Mr. Hal J. Upbin resigned his positions as a Director of the Board and as an independent member of the
Audit Committee at the regular meeting of the First Banks Board of Directors held on January 27, 2006.
Committees and Meetings of the Board of Directors
Three members of our Board of Directors currently serve on the Audit
Committee, all of whom the Board of Directors determined to be independent;
there are no other committees of the Board of Directors. The Audit Committee
assists the Board of Directors in fulfilling the Board's oversight
responsibilities with respect to the quality and integrity of the consolidated
financial statements, financial reporting process and systems of internal
controls. The Audit Committee also assists the Board of Directors in monitoring
the independence and performance of the independent auditors, the internal audit
department and the operation of ethics programs. The Audit Committee operates
under a written charter adopted by the Board of Directors.
The members of the Audit Committee as of March 27, 2006 were Mr. Gordon
A. Gundaker, Mr. David L. Steward and Mr. Douglas H. Yaeger, who serves as the
Chairman of the Audit Committee and the audit committee financial expert. As
previously discussed, Mr. Hal J. Upbin resigned his positions as a Director of
the Board and as an independent member of the Audit Committee at the regular
meeting of our Board of Directors held on January 27, 2006.
Audit Committee Report
The Audit Committee is responsible for oversight of our financial
reporting process on behalf of the Board of Directors. Management has primary
responsibility for our financial statements and financial reporting, including
internal controls, subject to the oversight of the Audit Committee and the Board
of Directors. In fulfilling its responsibilities, the Audit Committee reviewed
the audited consolidated financial statements with management and discussed the
acceptability of the accounting principles used, the reasonableness of
significant judgments made and the clarity of the disclosures.
The Audit Committee reviewed with the Independent Registered Public
Accounting Firm who is responsible for planning and carrying out a proper audit
and expressing an opinion on the conformity of our audited consolidated
financial statements with U.S. generally accepted accounting principles, their
judgments as to the acceptability of the accounting principles we use, and such
other matters as are required to be discussed with the Audit Committee by
Statement on Auditing Standards No. 61, Communications with Audit Committees, as
amended. In addition, the Audit Committee discussed with the Independent
Registered Public Accounting Firm its independence from management and the
Company, including the matters required by Standard No. 1 of the Independence
Standards Board, and the Audit Committee considered the compatibility of
non-audit services provided by the Independent Registered Public Accounting Firm
with the firm's independence. KPMG LLP has provided the Audit Committee with the
written disclosures and letter required by Standard No. 1 of the Independent
Standards Board.
The Audit Committee discussed with our Internal Audit Department and
Independent Registered Public Accounting Firm the overall scope and plans for
their respective audits. The Audit Committee met with the Internal Audit
Department and Independent Registered Public Accounting Firm with and without
management present to discuss the results of their examinations, their
evaluations of our internal controls and the overall quality of our financial
reporting.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited consolidated
financial statements be included in the Annual Report on Form 10-K as of and for
the year ended December 31, 2005 for filing with the SEC.
Audit Committee
---------------
Douglas H. Yaeger, Chairman of the Audit Committee
Gordon A. Gundaker
David L. Steward
Code of Ethics for Principal Executive Officer and Financial Professionals
The Board of Directors has approved a Code of Ethics for Principal
Executive Officer and Financial Professionals that covers the Principal
Executive Officer, the Chief Financial Officer, the Chief Operating Officer, the
Chief Credit Officer, the Chief Investment Officer, the Senior Vice President
and Controller, the Senior Vice President - Director of Taxes, the Senior Vice
President - Director of Management Accounting, and all professionals serving in
a Corporate Finance, Accounting, Treasury, Tax or Investor Relations role. These
individuals are also subject to the policies and procedures adopted by First
Banks that govern the conduct of all of its employees. The Code of Ethics for
Principal Executive Officer and Financial Professionals is included as an
exhibit to this Annual Report on Form 10-K.
Code of Conduct for Employees, Officers and Directors
The Board of Directors has approved a Code of Conduct applicable to all
employees, officers and directors of First Banks that addresses conflicts of
interest, honesty and fair dealing, accounting and auditing matters, political
activities and application and enforcement of the Code of Conduct. The Code of
Conduct is available on First Banks' website, www.firstbanks.com, under "About
us." ------------------
Executive Officers
Our executive officers, each of whom was elected to the office(s)
indicated by the Board of Directors, as of March 27, 2006, were as follows:
Current First Banks Principal Occupation(s)
Name Age Office(s) Held During Last Five Years
---- --- -------------- ----------------------
James F. Dierberg 68 Chairman of the Board of Directors. See "Item 10 - Directors and Executive
Officers of the Registrant - Board of
Directors."
Allen H. Blake 63 President, Chief Executive Officer See "Item 10 - Directors and Executive
and Director. Officers of the Registrant - Board of
Directors."
Terrance M. McCarthy 51 Senior Executive Vice President, See "Item 10 - Directors and Executive
Chief Operating Officer and Officers of the Registrant - Board of
Director; Chairman of the Board of Directors."
Directors, President and Chief
Executive Officer of First Bank.
Steven F. Schepman 33 Senior Vice President, Chief See "Item 10 - Directors and Executive
Financial Officer and Director. Officers of the Registrant - Board of
Directors."
Russell L. Goldammer 49 Executive Vice President and Chief Executive Vice President and Chief
Information Officer. Information Officer since November
2004; Chief Information Officer of
Outsourcing Solutions, Inc., St. Louis,
Missouri, from April 2001 to October
2004; Senior Vice President of U.S.
Bank in Milwaukee, Wisconsin, from
October 1999 to April 2001.
Daniel W. Jasper 60 Executive Vice President and Chief Executive Vice President and Chief
Credit Officer; Director and Credit Officer of First Banks, Inc.
Executive Vice President of First since October 2003; Senior Vice
Bank. President and Acting Chief Credit
Officer of First Banks, Inc. from May
2003 to October 2003; Senior Vice
President - Credit Administration of
First Banks, Inc. from 1995 to May 2003.
F. Christopher McLaughlin 52 Executive Vice President and Executive Vice President and Director of
Director of Sales, Marketing and Sales, Marketing and Products of First
Products; Director of First Bank. Banks,Inc. since September 2003;
Director of First Bank since October
2004; Executive Vice President-Personal
Division, HSBC Bank USA in Buffalo, New
York from 1998 to June 2002; Independent
Consultant from July 2002 to August
2003.
Mary P. Sherrill 51 Executive Vice President and Executive Vice President and Director
Director of Operations; Director of of Operations of First Banks, Inc.
First Bank. since April 2003; Director of First
Bank since April 2003: Director, Vice
Chairman and Chief of Bank Operations,
Southwest Bank in St. Louis, Missouri
from April 1999 to March 2003.
Item 11. Executive Compensation
The following table sets forth certain information regarding
compensation earned by the named executive officers for the years ended December
31, 2005, 2004 and 2003:
SUMMARY COMPENSATION TABLE
--------------------------
All Other
Name and Principal Position(s) Year Salary Bonus Compensation (1)
------------------------------ ---- ------ ----- ----------------
James F. Dierberg 2005 $ 610,000 -- 5,300
Chairman of the Board of Directors 2004 610,000 -- 6,200
2003 610,000 -- 6,000
Allen H. Blake 2005 448,800 154,800 5,300
President and Chief Executive Officer 2004 426,000 -- 4,200
2003 397,300 -- 6,000
Terrance M. McCarthy 2005 395,000 170,000 5,300
Senior Executive Vice President and Chief Operating Officer 2004 367,500 -- 4,200
2003 323,500 -- 6,000
Daniel W. Jasper 2005 231,300 100,000 5,600
Executive Vice President and Chief Credit Officer 2004 209,500 -- 4,500
2003 152,000 15,000 4,700
F. Christopher McLaughlin (2) 2005 199,300 70,000 5,300
Executive Vice President and Director of Sales, Marketing 2004 180,300 32,500 51,900 (3)
and Products 2003 55,100 -- 29,000 (3)
- -----------------------
(1) All other compensation reported includes matching contributions to our 401(k) Plan for the year
indicated.
(2) Mr. McLaughlin became an Executive Officer of the Company in September 2003.
(3) All other compensation reportedfor Mr. McLaughlin in 2004 and 2003 includes $46,700 and $29,000,
respectively, associated with a corporate relocation package. Additionally, for 2004, all other
compensation includes matching contributions to our 401(K) Plan of $5,000 and a single ownership
interest in the amount of $200 granted in Star Lane Trust, our former unit investment trust.
Compensation of Directors. Only those directors who are neither our employees
nor employees of any of our subsidiaries receive remuneration for their services
as directors. Such non-employee directors (Messrs. Gordon Gundaker, David
Steward, Hal Upbin and Douglas Yaeger) received a fee of $3,000 for each Board
meeting attended and $1,000 for each Audit Committee meeting attended in 2005.
Messr. Yaeger also received a fee of $4,000 per calendar quarter for his service
as Chairman of the Audit Committee, and Messrs. Gundaker, Steward and Upbin also
received a fee of $3,000 per calendar quarter for their service as members of
the Audit Committee. The Audit Committee is currently the only committee of our
Board of Directors. Messrs. Gundaker, Steward, Upbin and Yaeger received
$31,000, $31,000, $31,000 and $35,000, respectively, in director's compensation
in 2005. Our non-employee directors are also eligible to participate in our
nonqualified deferred compensation plan. As further discussed under "Item 10 -
Directors and Executive Officers of the Registrant - Board of Directors and
Committees of the Board," Mr. Hal J. Upbin resigned his positions as a Director
of the Board and as an independent member of the Audit Committee at the regular
meeting of our Board of Directors held on January 27, 2006.
Our executive officers that are also directors do not receive
remuneration other than salaries and bonuses for serving on our Board of
Directors.
Compensation Committee Interlocks and Insider Participation. Messrs. Dierberg,
Blake, McCarthy and Schepman serve as executive officers and members of our
Board of Directors. First Banks does not have a compensation committee, but its
Board of Directors performs the functions of such a committee. Except for the
foregoing, none of our executive officers served during 2005 as a member of the
compensation committee, or any other committee performing similar functions, or
as a director of another entity, any of whose executive officers or directors
served on our Board of Directors.
See further information regarding transactions with related parties in
Note 19 to our Consolidated Financial Statements appearing on pages 101 and 102
of this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth, as of March 27, 2006, certain
information with respect to the beneficial ownership of all classes of our
voting capital stock by each person known to us to be the beneficial owner of
more than five percent of the outstanding shares of the respective classes of
our stock:
Percent of
Number of Total
Title of Class Shares Percent Voting
and Name of Owner Owned of Class Power
----------------- ----- -------- -----
Common Stock ($250.00 par value)
- --------------------------------
James F. Dierberg II Family Trust (1)........................ 7,714.677 (2) 32.605% *
Ellen C. Dierberg Family Trust (1)........................... 7,714.676 (2) 32.605 *
Michael J. Dierberg Family Trust (1)......................... 4,255.319 (2) 17.985 *
Michael J. Dierberg Irrevocable Trust (1).................... 3,459.358 (2) 14.621 *
First Trust (Mary W. Dierberg and First Bank, Trustees) (1).. 516.830 (3) 2.184 *
Class A Convertible Adjustable Rate Preferred Stock
- ---------------------------------------------------
($20.00 par value)
- ------------------
James F. Dierberg, Trustee of the James F. Dierberg
Living Trust (1)......................................... 641,082 (4)(5) 100% 77.7%
Class B Non-Convertible Adjustable Rate Preferred Stock
- -------------------------------------------------------
($1.50 par value)
- -----------------
James F. Dierberg, Trustee of the James F. Dierberg
Living Trust (1)......................................... 160,505 (5) 100% 19.4%
All executive officers and directors
other than Mr. James F. Dierberg
and members of his immediate family.......................... 0 0% 0.0%
- ---------------
* Represents less than 1.0%.
(1) Each of the above-named trustees and beneficial owners are United States citizens, and the business
address for each such individual is 135 North Meramec, Clayton, Missouri 63105. Mr. James F.
Dierberg, our Chairman of the Board, and Mrs. Mary W. Dierberg, are husband and wife, and Messrs.
James F. Dierberg II, Michael J. Dierberg and Mrs. Ellen D. Schepman, formerly Ms. Ellen C.
Dierberg, are their adult children.
(2) Due to the relationship between Mr. James F. Dierberg, his wife and their children, Mr. Dierberg is
deemed to share voting and investment power over these shares.
(3) Due to the relationship between Mr. James F. Dierberg, his wife and First Bank, Mr. Dierberg is
deemed to share voting and investment power over these shares.
(4) Convertible into common stock, based on the appraised value of the common stock at the date of
conversion. Assuming an appraised value of the common stock equal to the book value, the number of
shares of common stock into which the Class A Preferred Stock is convertible at December 31, 2005
is 456, which shares are not included in the above table.
(5) Sole voting and investment power.
Item 13. Certain Relationships and Related Transactions
Outside of normal customer relationships, no directors, executive
officers or shareholders holding over 5% of our voting securities, and no
corporations or firms with which such persons or entities are associated,
currently maintain or have maintained since the beginning of the last full
fiscal year, any significant business or personal relationship with our
subsidiaries or us, other than that which arises by virtue of such position or
ownership interest in our subsidiaries or us, except as set forth in "Item 11 -
Executive Compensation - Compensation of Directors," or as described in the
following paragraphs.
First Bank has had in the past, and may have in the future, loan
transactions and related banking services in the ordinary course of business
with our directors or their affiliates. These loan transactions have been made
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. First Bank does not extend credit to our officers or to officers of
First Bank, except extensions of credit secured by mortgages on personal
residences, loans to purchase automobiles and personal credit card accounts.
Certain of our shareholders, directors and officers and their
respective affiliates have deposit accounts and related banking services with
First Bank. It is First Bank's policy not to permit any of its officers or
directors or their affiliates to overdraw their respective deposit accounts.
Deposit account overdraft protection may be approved for persons under a plan
whereby a credit limit has been established in accordance with First Bank's
standard credit criteria.
Transactions with related parties, including transactions with
affiliated persons and entities, are described in Note 19 to our Consolidated
Financial Statements on pages 101 and 102 of this report.
Item 14. Principal Accountant Fees and Services
Fees of Independent Registered Public Accounting Firm
During 2005 and 2004, KPMG LLP served as our Independent Registered
Public Accounting Firm and provided additional services to our affiliates and
us. The following table sets forth fees for professional audit services rendered
by KPMG LLP for the audit of our consolidated financial statements and other
audit services in 2005 and 2004:
2005 2004
---- ----
Audit fees, excluding audit related fees (1)......................... $ 820,500 781,550
Audit related fees................................................... -- --
Tax fees (2)......................................................... 111,676 87,221
All other fees....................................................... -- --
--------- --------
Total......................................................... $ 932,176 868,771
========= ========
--------------
(1) For 2005, audit fees include the audits of the consolidated financial statements of First
Banks and SBLS LLC, and Hillside and subsidiaries, as well as services provided for
reporting requirements under FDICIA and mortgage banking activities, which are included in
the audit fees of First Banks, as these services are closely related to the audit of First
Banks' consolidated financial statements. Audit fees also include other accounting and
reporting consultations. For 2004, audit fees include the audits of the consolidated
financial statements of First Banks and Star Lane Trust, SBLS LLC and Hillside, as well as
services provided for reporting requirements under FDICIA and mortgage banking activities.
Audit fees also include additional fees related to work performed under FDICIA
requirements as of December 31, 2003 but billed in 2004, and other accounting and
reporting consultations.
(2) For 2005, tax services include preparation of amended income tax returns, tax compliance
and general tax planning and advice. For 2004, tax services include tax compliance and
general tax planning and advice.
Policy Regarding the Approval of Independent Auditor Provision of Audit and
Non-Audit Services
Consistent with the Securities and Exchange Commission requirements
regarding auditor independence, the Audit Committee recognizes the importance of
maintaining the independence, in fact and appearance, of our independent
auditors. As such, the Audit Committee has adopted a policy for pre-approval of
all audit and permissible non-audit services provided by the independent
auditor. Under the policy, the Audit Committee, or its designated member, must
pre-approve services prior to commencement of the specified service. The
requests for pre-approval are submitted to the Audit Committee or its designated
member by the Director of Audit with a statement as to whether in his/her view
the request is consistent with the Securities and Exchange Commission's rules on
auditor independence. The Audit Committee reviews the pre-approval requests and
the fees paid for such services at their regularly scheduled quarterly meetings
or at special meetings.
PART IV
Item 15. Exhibits, Financial Statements Schedules.
(a) 1. Financial Statements and Supplementary Data - The financial
statements and supplementary data filed as part of this
this Report are included in Item 8.
2. Financial Statement Schedules - These schedules are omitted
for the reason they are not required or are not applicable.
3. Exhibits - The exhibits are listed in the index of exhibits
required by Item 601 of Regulation S-K at Item (b) below and
are incorporated herein by reference.
(b) The index of required exhibits is included beginning on page 112
of this Report.
(c) Not Applicable.
FIRST BANKS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
________________________________________________________________________________
The Board of Directors and Stockholders
First Banks, Inc.:
We have audited the accompanying consolidated balance sheets of First Banks,
Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Banks, Inc.
and subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
------------
St. Louis, Missouri
March 17, 2006
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands, except share and per share data)
December 31,
----------------------------
2005 2004
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks............................................................ $ 212,667 149,605
Short-term investments............................................................. 73,985 117,505
---------- ---------
Total cash and cash equivalents............................................... 286,652 267,110
---------- ---------
Investment securities:
Trading............................................................................ 3,389 --
Available for sale................................................................. 1,311,289 1,788,063
Held to maturity (fair value of $25,791 and $25,586, respectively)................. 26,105 25,286
---------- ---------
Total investment securities................................................... 1,340,783 1,813,349
---------- ---------
Loans:
Commercial, financial and agricultural............................................. 1,619,822 1,575,232
Real estate construction and development........................................... 1,564,255 1,318,413
Real estate mortgage............................................................... 3,469,788 3,061,581
Consumer and installment........................................................... 64,724 54,546
Loans held for sale................................................................ 315,134 133,065
---------- ---------
Total loans................................................................... 7,033,723 6,142,837
Unearned discount.................................................................. (12,952) (4,869)
Allowance for loan losses.......................................................... (135,330) (150,707)
---------- ---------
Net loans..................................................................... 6,885,441 5,987,261
---------- ---------
Bank premises and equipment, net of accumulated depreciation and amortization........... 144,941 144,486
Goodwill................................................................................ 167,056 156,849
Bank-owned life insurance............................................................... 111,442 106,788
Deferred income taxes................................................................... 128,938 127,397
Other assets............................................................................ 105,080 129,601
---------- ---------
Total assets.................................................................. $9,170,333 8,732,841
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand......................................................... $1,299,350 1,194,662
Interest-bearing demand............................................................ 981,837 875,489
Savings............................................................................ 2,106,470 2,249,644
Time deposits of $100 or more...................................................... 1,076,908 807,220
Other time deposits................................................................ 2,077,266 2,024,955
---------- ---------
Total deposits................................................................ 7,541,831 7,151,970
Other borrowings........................................................................ 539,174 594,750
Notes payable........................................................................... 100,000 15,000
Subordinated debentures................................................................. 215,461 273,300
Deferred income taxes................................................................... 27,104 34,812
Accrued expenses and other liabilities.................................................. 61,762 62,116
Minority interest in subsidiary......................................................... 6,063 --
---------- ---------
Total liabilities............................................................. 8,491,395 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....................................................................... 673,956 577,836
Accumulated other comprehensive loss.................................................... (19,906) (1,831)
---------- ---------
Total stockholders' equity.................................................... 678,938 600,893
---------- ---------
Total liabilities and stockholders' equity.................................... $9,170,333 8,732,841
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands, except share and per share data)
Years Ended December 31,
----------------------------------
2005 2004 2003
---- ---- ----
Interest income:
Interest and fees on loans.......................................... $ 424,095 341,479 355,472
Investment securities:
Taxable........................................................... 65,895 50,170 32,442
Nontaxable........................................................ 1,739 1,490 1,737
Short-term investments.............................................. 2,211 1,643 1,502
--------- -------- --------
Total interest income.......................................... 493,940 394,782 391,153
--------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand........................................... 4,398 3,472 5,470
Savings........................................................... 29,592 20,128 23,373
Time deposits of $100 or more..................................... 28,010 13,762 13,075
Other time deposits............................................... 65,157 35,705 41,201
Other borrowings.................................................... 18,240 6,102 2,243
Notes payable....................................................... 2,305 506 785
Subordinated debentures............................................. 20,557 15,092 17,879
--------- -------- --------
Total interest expense......................................... 168,259 94,767 104,026
--------- -------- --------
Net interest income............................................ 325,681 300,015 287,127
Provision for loan losses.............................................. (4,000) 25,750 49,000
--------- -------- --------
Net interest income after provision for loan losses............ 329,681 274,265 238,127
--------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees....... 39,776 38,230 36,113
Gain on loans sold and held for sale................................ 20,804 18,497 15,645
Net (loss) gain on sales of available-for-sale
investment securities............................................. (2,873) 257 8,761
Gain on sales of branches, net of expenses.......................... -- 1,000 3,992
Bank-owned life insurance investment income......................... 4,860 5,201 5,469
Investment management income........................................ 8,573 6,870 4,762
Other............................................................... 23,603 13,431 12,966
--------- -------- --------
Total noninterest income....................................... 94,743 83,486 87,708
--------- -------- --------
Noninterest expense:
Salaries and employee benefits...................................... 139,764 117,492 95,441
Occupancy, net of rental income..................................... 22,081 19,882 20,940
Furniture and equipment............................................. 16,015 17,017 18,286
Postage, printing and supplies...................................... 5,743 5,010 5,100
Information technology fees......................................... 35,472 32,019 32,136
Legal, examination and professional fees............................ 9,319 7,412 8,131
Amortization of intangibles associated with the
purchase of subsidiaries.......................................... 4,850 2,912 2,506
Communications...................................................... 2,012 1,866 2,667
Advertising and business development................................ 7,043 5,493 4,271
Charitable contributions............................................ 5,922 577 5,334
Other............................................................... 28,075 19,825 32,257
--------- -------- --------
Total noninterest expense...................................... 276,296 229,505 227,069
--------- -------- --------
Income before provision for income taxes and minority
interest in loss of subsidiary............................... 148,128 128,246 98,766
Provision for income taxes............................................. 52,509 45,338 35,955
--------- -------- --------
Income before minority interest in loss of subsidiary.......... 95,619 82,908 62,811
Minority interest in loss of subsidiary................................ (1,287) -- --
--------- -------- --------
Net income..................................................... 96,906 82,908 62,811
Preferred stock dividends.............................................. 786 786 786
--------- -------- --------
Net income available to common stockholders.................... $ 96,120 82,122 62,025
========= ======== ========
Basic earnings per common share........................................ $4,062.36 3,470.80 2,621.39
========= ======== ========
Diluted earnings per common share...................................... $4,007.46 3,421.58 2,588.31
========= ======== ========
Weighted average shares of common stock outstanding.................... 23,661 23,661 23,661
========= ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Three Years Ended December 31, 2005
- ------------------------------------------------------------------------------------------------------------------------------
(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, January 1, 2003............... $12,822 241 5,915 5,910 433,689 60,464 519,041
-------
Year ended December 31, 2003:
Comprehensive income:
Net income..................................... -- -- -- -- 62,811 -- 62,811
Other comprehensive loss, net of tax:
Unrealized losses on investment securities... -- -- -- -- -- (4,291) (4,291)
Reclassification adjustment for gains
included in net income..................... -- -- -- -- -- (5,695) (5,695)
Derivative instruments:
Current period transactions................ -- -- -- -- -- (21,265) (21,265)
-------
Total comprehensive income....................... 31,560
Class A preferred stock dividends,
$1.20 per share................................ -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share................................ -- -- -- -- (17) -- (17)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2003............. 12,822 241 5,915 5,910 495,714 29,213 549,815
-------
Year ended December 31, 2004:
Comprehensive income:
Net income..................................... -- -- -- -- 82,908 -- 82,908
Other comprehensive loss, net of tax:
Unrealized losses on investment securities... -- -- -- -- -- (5,711) (5,711)
Reclassification adjustment for gains
included in net income..................... -- -- -- -- -- (167) (167)
Derivative instruments:
Current period transactions................ -- -- -- -- -- (25,166) (25,166)
-------
Total comprehensive income....................... 51,864
Class A preferred stock dividends,
$1.20 per share................................ -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share................................ -- -- -- -- (17) -- (17)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2004............. 12,822 241 5,915 5,910 577,836 (1,831) 600,893
-------
Year ended December 31, 2005:
Comprehensive income:
Net income..................................... -- -- -- -- 96,906 -- 96,906
Other comprehensive loss, net of tax:
Unrealized losses on investment securities... -- -- -- -- -- (15,659) (15,659)
Reclassification adjustment for losses
included in net income..................... -- -- -- -- -- 1,867 1,867
Derivative instruments:
Current period transactions................ -- -- -- -- -- (4,283) (4,283)
-------
Total comprehensive income....................... 78,831
Class A preferred stock dividends,
$1.20 per share................................ -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share................................ -- -- -- -- (17) -- (17)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2005............. $12,822 241 5,915 5,910 673,956 (19,906) 678,938
======= === ===== ===== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands)
Years ended December 31,
--------------------------------------
2005 2004 2003
---- ---- ----
Cash flows from operating activities:
Net income.............................................................. $ 96,906 82,908 62,811
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of bank premises and equipment....... 17,381 18,579 20,068
Amortization, net of accretion..................................... 16,111 17,102 24,996
Originations and purchases of loans held for sale.................. (1,327,890) (1,036,548) (2,013,902)
Proceeds from sales of loans held for sale......................... 1,201,695 1,104,254 2,201,977
Provision for loan losses.......................................... (4,000) 25,750 49,000
Provision for deferred income taxes................................ (1,216) (747) (16,956)
(Increase) decrease in accrued interest receivable................. (2,280) (696) 4,614
Net increase in trading securities................................. (3,389) -- --
Gain on loans sold and held for sale............................... (20,804) (18,497) (15,645)
Net loss (gain) on sales of available-for-sale
investment securities............................................ 2,873 (257) (8,761)
Gain on sales of branches, net of expenses......................... -- (1,000) (3,992)
Other operating activities, net.................................... 26,438 14,874 36,002
Minority interest in loss of subsidiary............................ (1,287) -- --
---------- ---------- ----------
Net cash provided by operating activities..................... 538 205,722 340,212
---------- ---------- ----------
Cash flows from investing activities:
Cash (paid) received for acquired entities, net of cash and
cash equivalents received (paid)...................................... (11,579) 21,098 14,870
Proceeds from sales of investment securities available for sale......... 147,120 26,340 6,019
Maturities of investment securities available for sale.................. 658,803 680,631 1,298,682
Maturities of investment securities held to maturity.................... 5,635 4,632 5,573
Purchases of investment securities available for sale................... (325,642) (1,029,993) (1,209,592)
Purchases of investment securities held to maturity..................... (6,509) (19,031) (103)
Proceeds from sale of leases............................................ -- 35,544 --
Net increase in loans................................................... (569,255) (211,104) (146,270)
Recoveries of loans previously charged-off.............................. 19,757 25,876 23,028
Purchases of bank premises and equipment................................ (17,128) (10,960) (4,359)
Sale of minority interest in subsidiary................................. 7,350 -- --
Other investing activities, net......................................... 1,834 15,358 3,357
---------- ---------- ----------
Net cash used in investing activities......................... (89,614) (461,609) (8,795)
---------- ---------- ----------
Cash flows from financing activities:
(Decrease) increase in demand and savings deposits...................... (50,119) 23,355 13,287
Increase (decrease) in time deposits.................................... 199,255 (11,521) (223,555)
Decrease in Federal Home Loan Bank advances............................. (6,144) (29,020) (8,548)
Decrease in federal funds purchased..................................... (78) -- (55,000)
(Decrease) increase in securities sold under agreements to repurchase... (59,232) 286,928 69,835
Advances drawn on notes payable......................................... 100,000 15,000 34,500
Repayments of notes payable............................................. (15,000) (17,000) (24,500)
Proceeds from issuance of subordinated debentures....................... -- 61,857 70,907
Repayments of subordinated debentures................................... (59,278) -- (136,341)
Cash paid for sales of branches, net of cash and cash equivalents sold.. -- (19,353) (60,930)
Payment of preferred stock dividends.................................... (786) (786) (786)
---------- ---------- ----------
Net cash provided by (used in) financing activities........... 108,618 309,460 (321,131)
---------- ---------- ----------
Net increase in cash and cash equivalents..................... 19,542 53,573 10,286
Cash and cash equivalents, beginning of year................................. 267,110 213,537 203,251
---------- ---------- ----------
Cash and cash equivalents, end of year....................................... $ 286,652 267,110 213,537
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on liabilities............................................... $ 162,144 93,406 107,295
Income taxes.......................................................... 56,591 42,701 43,632
========== ========== ==========
Noncash investing and financing activities:
Loans transferred to other real estate................................ $ 3,737 5,142 13,525
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies
followed by First Banks, Inc. and subsidiaries (First Banks or the Company):
Basis of Presentation. The accompanying consolidated financial
statements of First Banks have been prepared in accordance with 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.
Principles of Consolidation. 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 19 to the Consolidated Financial Statements. All significant
intercompany accounts and transactions have been eliminated. Certain
reclassifications of 2004 and 2003 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, First Bank Business Capital, Inc., Missouri Valley Partners, Inc.
(MVP) and Small Business Loan Source LLC (SBLS LLC) which, except for SBLS LLC,
are wholly owned subsidiaries.
On December 31, 2003, First Banks implemented Financial Accounting
Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51, resulting in the deconsolidation of
First Banks' statutory and business trusts, which were created for the sole
purpose of issuing trust preferred securities. The implementation of this
Interpretation had no material effect on the Company's consolidated financial
position or results of operations.
Cash and Cash Equivalents. Cash, due from banks and short-term
investments, which include federal funds sold and interest-bearing deposits, are
considered to be cash and cash equivalents for purposes of the consolidated
statements of cash flows. Federal funds sold were $65.0 million and $102.2
million at December 31, 2005 and 2004, respectively, and interest-bearing
deposits were $9.0 million and $15.3 million at December 31, 2005 and 2004,
respectively.
First Bank is required to maintain certain daily reserve balances on
hand in accordance with regulatory requirements. These reserve balances
maintained in accordance with such requirements were $24.3 million and $30.2
million at December 31, 2005 and 2004, respectively.
Investment Securities. The classification of investment securities as
trading, available for sale or held to maturity is determined at the date of
purchase.
Investment securities designated as trading, which represent any
security held for near term sale, are stated at fair value. Realized and
unrealized gains and losses are included in noninterest income.
Investment securities designated as available for sale, which represent
any security that First Banks has no immediate plan to sell but which may be
sold in the future under different circumstances, are stated at fair value.
Amortization of premiums and accretion of discounts is computed on the
level-yield method taking into consideration the level of current and
anticipated prepayments. Realized gains and losses are included in noninterest
income, based on the amortized cost of the individual security sold. Unrealized
gains and losses, net of related income tax effects, are recorded in accumulated
other comprehensive income. All previous fair value adjustments included in the
separate component of accumulated other comprehensive income are reversed upon
sale.
Investment securities designated as held to maturity, which represent
any security that First Banks has the positive intent and ability to hold to
maturity, are stated at cost, net of amortization of premiums and accretion of
discounts computed on the level-yield method taking into consideration the level
of current and anticipated prepayments.
A decline in the market value of any available-for-sale or
held-to-maturity investment security below its carrying value that is deemed to
be other-than-temporary results in a reduction in cost basis of the carrying
value to fair value. The other-than-temporary impairment is charged to
noninterest income and a new cost basis is established. When determining
other-than-temporary impairment, consideration is given as to whether First
Banks has the ability and intent to hold the investment security until a market
price recovery and whether evidence indicating the carrying value of the
investment security is recoverable outweighs evidence to the contrary.
Loans Held for Portfolio. Loans held for portfolio are carried at cost,
adjusted for amortization of premiums and accretion of discounts using the
interest method. Interest and fees on loans are recognized as income using the
interest method. Loan origination fees are deferred and accreted to interest
income over the estimated life of the loans using the interest method. Loans
held for portfolio are stated at cost as First Banks has the ability and it is
management's intention to hold them to maturity.
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal course of
business or once principal or interest payments become 90 days past due under
the contractual terms of the loan agreement. Generally, payments received on
nonaccrual and impaired loans are recorded as principal reductions. Interest
income is recognized after all delinquent principal has been repaid or an
improvement in the condition of the loan has occurred which would warrant
resumption of interest accruals.
A loan is considered impaired when it is probable that First Banks will
be unable to collect all amounts due, both principal and interest, according to
the contractual terms of the loan agreement. Loans on nonaccrual status are
considered to be impaired loans. When measuring impairment, the expected future
cash flows of an impaired loan or lease are discounted at the loan's effective
interest rate. Alternatively, impairment is measured by reference to an
observable market price, if one exists, or the fair value of the collateral for
a collateral-dependent loan. Regardless of the historical measurement method
used, First Banks measures impairment based on the fair value of the collateral
when foreclosure is probable. Additionally, impairment of a restructured loan is
measured by discounting the total expected future cash flows at the loan's
effective rate of interest as stated in the original loan agreement.
Loans Held for Sale. Loans held for sale are comprised of residential
mortgage loans held for sale in the secondary mortgage market, frequently in the
form of a mortgage-backed security, U.S. Small Business Administration (SBA)
loans awaiting sale of the guaranteed portion to the SBA, and commercial real
estate loans which may be identified for sale to specific buyers due to credit
or loan concentration objectives. Loans held for sale are carried at the lower
of cost or market value, which is determined on an individual loan basis.
Additionally, the carrying value of the residential mortgage loans held for sale
also includes the cost of hedging the loans held for sale. The amount by which
cost exceeds market value is recorded in a valuation allowance as a reduction of
loans held for sale. Changes in the valuation allowance are reflected as part of
the gain on loans sold and held for sale in the consolidated statements of
income in the periods in which the changes occur. Gains or losses on the sale of
loans held for sale are determined on a specific identification method and
reflect the difference between the value received upon sale and the carrying
value of the loans held for sale, including the cost of hedging the residential
mortgage loans held for sale. Loans held for sale transferred to loans held for
portfolio or available-for-sale investment securities are transferred at fair
value.
Loan Servicing Income. Loan servicing income is included in noninterest
income and represents fees earned for servicing real estate mortgage loans owned
by investors and originated by First Bank's mortgage banking operation, as well
as SBA loans to small business concerns that are originated by SBLS LLC, First
Bank's majority-owned subsidiary that originates, sells and services SBA loans.
These fees are net of federal agency guarantee fees, interest shortfall,
amortization of loan servicing rights and impairment valuation allowances. Such
fees are generally calculated on the outstanding principal balance of the loans
serviced and are recorded as income when earned.
Allowance for Loan Losses. The allowance for loan losses is maintained
at a level considered adequate to provide for probable losses. The provision for
loan losses is based on a periodic analysis of the loans held for portfolio,
considering, among other factors, current economic conditions, loan portfolio
composition, past loan loss experience, independent appraisals, loan collateral,
payment experience and selected key financial ratios. As adjustments become
necessary, they are reflected in the results of operations in the periods in
which they become known. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses. Such agencies may require First Banks to modify its allowance
for loan losses based on their judgment about information available to them at
the time of their examination.
Derivative Instruments and Hedging Activities. First Banks utilizes
derivative instruments and hedging activities to assist in the management of
interest rate sensitivity and to modify the repricing, maturity and option
characteristics of certain assets and liabilities. First Banks uses such
derivative instruments solely to reduce its interest rate risk exposure. First
Banks accounts for derivative instruments and hedging activities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 133 -- Accounting
for Derivative Instruments and Hedging Activities, as amended, which requires
all derivative instruments to be recorded in the consolidated balance sheets and
measured at fair value.
At inception of a derivative transaction, First Banks designates the
derivative instrument as either a hedge of the fair value of a recognized asset
or liability or of an unrecognized firm commitment (fair value hedges) or a
hedge of a forecasted transaction or the variability of cash flows to be
received or paid related to a recognized asset or liability (cash flow hedges).
For all hedging relationships, First Banks formally documents the hedging
relationship and its risk-management objectives and strategy for entering into
the hedging relationship including the hedging instrument, the hedged item(s),
the nature of the risk being hedged, how the hedging instrument's effectiveness
in offsetting the hedged risk will be assessed and a description of the method
the Company will utilize to measure hedge ineffectiveness. This process also
includes linking all derivative instruments that are designated as fair value
hedges or cash flow hedges to the underlying assets and liabilities or to
specific firm commitments or forecasted transactions. First Banks also assesses,
both at the hedge's inception and on an ongoing basis, whether the derivative
instruments that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of the hedged item(s).
First Banks discontinues hedge accounting prospectively when it is
determined that the derivative instrument is no longer effective in offsetting
changes in the fair value or cash flows of the hedged item(s), the derivative
instrument expires or is sold, terminated, or exercised, the derivative
instrument is de-designated as a hedging instrument because it is unlikely that
a forecasted transaction will occur, a hedged firm commitment no longer meets
the definition of a firm commitment, or management determines that designation
of the derivative instrument as a hedging transaction is no longer appropriate.
A summary of First Banks' accounting policies for its various
derivative instruments and hedging activities is as follows:
>> Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate
swap agreements designated as cash flow hedges are accounted for
at fair value. The effective portion of the change in the cash
flow hedge's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into
noninterest income when the underlying transaction affects
earnings. The ineffective portion of the change in the cash flow
hedge's gain or loss is recorded in noninterest income on each
monthly measurement date. The net interest differential is
recognized as an adjustment to interest income or interest
expense of the related asset or liability being hedged. In the
event of early termination, the net proceeds received or paid on
the interest rate swap agreements are recognized immediately in
noninterest income.
>> Interest Rate Swap Agreements - Fair Value Hedges. Interest rate
swap agreements designated as fair value hedges are accounted for
at fair value. Changes in the fair value of the swap agreements
are recognized currently in noninterest income. The change in the
fair value of the underlying hedged item is recognized as an
adjustment to the carrying amount of the underlying hedged item
and is also reflected currently in noninterest income. All
changes in fair value are measured on a monthly basis. The net
interest differential is recognized as an adjustment to interest
income or interest expense of the related asset or liability
being hedged. In the event of early termination or
ineffectiveness, the net proceeds received or paid on the
interest rate swap agreements are recognized immediately in
noninterest income and the future net interest differential, if
any, is recognized prospectively in noninterest income. The
cumulative change in the fair value of the underlying hedged item
is deferred and amortized or accreted to interest income or
interest expense over the weighted average life of the related
asset or liability. If, however, the underlying hedged item is
repaid, the cumulative change in the fair value of the underlying
hedged item is recognized immediately in noninterest income.
>> Interest Rate Cap and Floor Agreements. Interest rate cap and
floor agreements are accounted for at fair value. Changes in the
fair value of interest rate cap and floor agreements are
recognized in noninterest income on each monthly measurement
date.
>> Interest Rate Lock Commitments. Commitments to originate loans
for subsequent sale in the secondary market (interest rate lock
commitments), which primarily consist of commitments to originate
fixed rate residential mortgage loans, are recorded at fair
value. Changes in the fair value are recognized in noninterest
income on a monthly basis.
>> Forward Commitments to Sell Mortgage-Backed Securities. Forward
commitments to sell mortgage-backed securities are recorded at
fair value. Changes in the fair value of forward commitments to
sell mortgage-backed securities are recognized in noninterest
income on a monthly basis.
Bank Premises and Equipment, Net. Bank premises and equipment are
carried at cost less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful lives of the
related assets. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the useful life of the related asset or
term of the lease. Bank premises and improvements are depreciated over five to
40 years and equipment over three to seven years.
Intangibles Associated With the Purchase of Subsidiaries and Branch
Offices. Intangibles associated with the purchase of subsidiaries and branch
offices include goodwill and core deposit intangibles.
First Banks accounts for intangibles associated with the purchase of
subsidiaries and branch offices in accordance with SFAS No. 142 -- Goodwill and
Other Intangible Assets, and SFAS No. 144 -- Accounting for the Impairment or
Disposal of Long-Lived Assets. Pursuant to SFAS No. 142, goodwill and intangible
assets with indefinite useful lives are not amortized, but instead tested for
impairment at least annually. Intangible assets with definite useful lives are
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144.
First Banks amortizes, on a straight-line basis, its core deposit intangibles
and goodwill associated with transactions structured as purchases of certain
assets and assumption of selected liabilities (P&A Transactions). Core deposit
intangibles are amortized over the estimated periods to be benefited, which has
been estimated at seven years, and goodwill associated with P&A Transactions is
amortized over the estimated periods to be benefited, which has been estimated
to be 15 years. Goodwill associated with the purchase of subsidiaries is not
amortized, but instead, is tested annually for impairment following First Banks'
existing methods of measuring and recording impairment losses, as described
below.
First Banks reviews intangible assets for impairment whenever events or
changes in circumstances indicate the carrying value of an underlying asset may
not be recoverable. First Banks measures recoverability based upon the future
cash flows expected to result from the use of the underlying asset and its
eventual disposition. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying value of the underlying
asset, First Banks recognizes an impairment loss. The impairment loss recognized
represents the amount by which the carrying value of the underlying asset
exceeds the fair value of the underlying asset. If an asset being tested for
recoverability was acquired in a business combination accounted for using the
purchase method, goodwill that arose in the transaction is included as part of
the asset grouping in determining recoverability. If some but not all of the
assets acquired in that transaction are being tested, goodwill is allocated to
the assets being tested for recoverability on a pro rata basis using the
relative fair values of the long-lived assets and identifiable intangibles
acquired at the acquisition dates. In instances where goodwill is identified
with assets that are subject to an impairment loss, the carrying amount of the
identified goodwill is eliminated before reducing the carrying amounts of
impaired long-lived assets and identifiable intangibles. As such adjustments
become necessary, they are reflected in the results of operations in the periods
in which they become known.
Mortgage Servicing Rights. Mortgage servicing rights are capitalized by
allocating the total cost of the mortgage loans to mortgage servicing rights and
the loans (without mortgage servicing rights) based on the relative fair values
of the two components. Upon capitalizing the mortgage servicing rights, they are
amortized, in proportion to the related estimated net servicing income on a
basis that approximates the disaggregated, discounted basis, over the expected
lives of the related loans, which is approximately five years. The weighted
average amortization period of mortgage servicing rights is approximately five
years.
The value of mortgage servicing rights is adversely affected when
mortgage interest rates decline which normally causes mortgage loan prepayments
to increase. When loans are prepaid or refinanced, the related unamortized
balance of the mortgage servicing rights is charged to amortization expense. The
determination of the fair value of the mortgage servicing rights is performed
quarterly based upon an independent third party valuation. Based on these
analyses, a comparison of the fair value of the mortgage servicing rights with
the carrying value of the mortgage servicing rights is made, with impairment, if
any, recognized at that time. The impairment analyses are prepared using
stratifications of the mortgage servicing rights based on the predominant risk
characteristics of the underlying mortgage loans, including size, interest rate,
weighted average original term, weighted average remaining term and estimated
prepayment speeds. As part of these analyses, the fair value of the mortgage
servicing rights for each stratum is compared to the carrying value of the
mortgage servicing rights for each stratum. To the extent the carrying value of
the mortgage servicing rights exceeds the fair value of the mortgage servicing
rights for a stratum, First Banks recognizes impairment equal to the amount by
which the carrying value of the mortgage servicing rights for a stratum exceeds
the fair value. Impairment is recognized through a valuation allowance that is
recorded as a reduction of mortgage servicing rights. The valuation allowance
may be reversed based upon subsequent improvement in the fair value of a
stratum; however, First Banks does not, recognize fair value of the mortgage
servicing rights in excess of the carrying value of mortgage servicing rights
for any stratum. Changes in the valuation allowance are reflected in the
consolidated statements of income in the periods in which the change occurs.
SBA Servicing Rights. SBA servicing rights are capitalized by
allocating the total cost of the SBA loans to servicing rights and the loans
(without servicing rights) based on the relative fair values of the two
components. The fair value of servicing rights is computed using the present
value of the estimated future servicing income in excess of such income
estimated at a normal servicing fee rate. The servicing rights, net of valuation
allowance, are amortized in proportion to, and over the period of, the estimated
net servicing revenue of the underlying SBA loans, which range from nine to 25
years. The weighted average amortization period of the SBA servicing rights is
approximately 20 years. The determination of the fair value of the SBA servicing
rights is performed monthly based upon an independent third party valuation.
Based on these analyses, a comparison of the fair value of the SBA servicing
rights with the carrying value of the SBA servicing rights is made, with
impairment, if any, recognized at that time. The predominant risk
characteristics of the underlying SBA loans used to stratify SBA servicing
rights for purposes of measuring impairment include size, interest rate,
weighted average original term, weighted average remaining term and estimated
prepayment speeds. To the extent the carrying value of the SBA servicing rights
exceeds the fair value of the SBA servicing rights, First Banks recognizes
impairment equal to the amount by which the carrying value of the SBA servicing
rights exceeds the fair value. Impairment is recognized through a valuation
allowance that is recorded as a reduction of SBA servicing rights. Changes in
the valuation allowance are reflected in the consolidated statements of income
in the periods in which the change occurs. First Banks does not, however,
recognize fair value of the SBA servicing rights in excess of the carrying value
of SBA servicing rights for any stratum.
Other Real Estate. Other real estate, consisting of real estate
acquired through foreclosure or deed in lieu of foreclosure, is stated at the
lower of cost or fair value less applicable selling costs. The excess of cost
over fair value of the property at the date of acquisition is charged to the
allowance for loan losses. Subsequent reductions in carrying value, to reflect
current fair value or costs incurred in maintaining the properties, are charged
to expense as incurred. Other real estate was $2.0 million and $4.0 million at
December 31, 2005 and 2004, respectively.
Income Taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in the tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. First Banks,
Inc. and its eligible subsidiaries file a consolidated federal income tax return
and unitary or consolidated state income tax returns in all applicable states.
Financial Instruments With Off-Balance Sheet Risk. A financial
instrument is defined as cash, evidence of an ownership interest in an entity,
or a contract that conveys or imposes on an entity the contractual right or
obligation to either receive or deliver cash or another financial instrument.
First Banks utilizes financial instruments to reduce the interest rate risk
arising from its financial assets and liabilities. These instruments involve, in
varying degrees, elements of interest rate risk and credit risk in excess of the
amount recognized in the consolidated balance sheets. "Interest rate risk" is
defined as the possibility that interest rates may move unfavorably from the
perspective of First Banks due to maturity and/or interest rate adjustment
timing differences between interest-earning assets and interest-bearing
liabilities. The risk that a counterparty to an agreement entered into by First
Banks may default is defined as "credit risk."
First Banks is a party to commitments to extend credit and commercial
and standby letters of credit in the normal course of business to meet the
financing needs of its customers. These commitments involve, in varying degrees,
elements of interest rate risk and credit risk in excess of the amount reflected
in the consolidated balance sheets.
Earnings Per Common Share. Basic earnings per common share (EPS) are
computed by dividing the income available to common stockholders (the numerator)
by the weighted average number of shares of common stock outstanding (the
denominator) during the year. The computation of dilutive EPS is similar except
the denominator is increased to include the number of additional shares of
common stock that would have been outstanding if the dilutive potential shares
had been issued. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back any convertible preferred
dividends.
(2) ACQUISITIONS AND INTEGRATION COSTS
Completed Acquisitions
During the three years ended December 31, 2005, First Banks completed
the following acquisitions:
Total Purchase
Entity Date Assets Price Goodwill
------ ---- ------ ----- --------
(dollars expressed in thousands)
2005
- ----
Northway State Bank
Grayslake, Illinois October 31, 2005 $ 50,400 10,300 3,800
International Bank of California
Los Angeles, California September 30, 2005 151,600 33,700 12,000
Bank and Trust Company
Roodhouse, Illinois
Branch Office (1) September 23, 2005 5,000 -- --
FBA Bancorp, Inc.
Chicago, Illinois April 29, 2005 73,300 10,500 2,800
---------- ------- -------
$ 280,300 54,500 18,600
========== ======= =======
2004
- ----
Hillside Investors, Ltd.
Hillside, Illinois November 30, 2004 $1,196,700 67,400 --
Small Business Loan Source, Inc.
Houston, Texas August 31, 2004 47,100 45,600 5,900
Continental Mortgage
Corporation - Delaware
Aurora, Illinois July 30, 2004 140,700 4,200 (2) 100
---------- ------- -------
$1,384,500 117,200 6,000
========== ======= =======
2003
- ----
Bank of Ste. Genevieve
Ste. Genevieve, Missouri March 31, 2003 $ 115,100 15,400 900
========== ======= =======
- --------------
(1) The Roodhouse, Illinois branch of Bank and Trust Company was acquired by First Bank through a purchase
of certain assets and assumption of certain liabilities of the branch office. Total assets consist
primarily of cash received upon assumption of the deposit liabilities.
(2) In conjunction with the acquisition of Continental Mortgage Corporation - Delaware (CMC), First Banks
redeemed in full all of the outstanding subordinated promissory notes of CMC, including accumulated
accrued and unpaid interest, totaling $4.5 million in aggregate.
Goodwill associated with the acquisitions included in the table above
is not deductible for tax purposes, with the exception of the goodwill
associated with the purchase of assets and assumption of liabilities of Small
Business Loan Source, Inc. (SBLS), which is deductible for tax purposes. For
2005, 2004 and 2003 acquisitions, goodwill in the amounts of $18.6 million, $6.0
million and $900,000, respectively, was assigned to First Bank.
The consolidated financial statements include the financial position
and results of operations of the aforementioned transactions for the periods
subsequent to the respective acquisition dates, and the assets acquired and
liabilities assumed were recorded at fair value at the acquisition dates. These
fair value adjustments for the acquisitions completed in 2005 represent current
estimates and are subject to further adjustments as the valuation data is
finalized. These acquisitions were funded from available cash reserves,
borrowings under First Banks' term loan and revolving credit agreements,
proceeds from the issuance of subordinated debentures, dividends from
subsidiaries, and/or exchanges of available-for-sale investment securities.
On March 31, 2003, First Banks completed its acquisition of Bank of
Ste. Genevieve (BSG), Ste. Genevieve, Missouri, from Allegiant Bancorp, Inc.
(Allegiant), in exchange for approximately 974,150 shares of Allegiant common
stock previously held. The purpose of the transaction was to further expand the
Midwest banking franchise. At the time of the acquisition, BSG had $115.1
million in assets, $43.7 million in loans, net of unearned discount, $47.8
million in investment securities and $93.7 million in deposits, and operated two
locations in Ste. Genevieve, Missouri. First Banks recorded a gain of $6.3
million on the exchange of the Allegiant common stock. Preliminary goodwill of
approximately $3.4 million was subsequently adjusted to approximately $900,000
as a result of a litigation settlement between the parties that occurred in the
fourth quarter of 2005 pertaining to the acquisition. The core deposit
intangibles, which are not deductible for tax purposes, were approximately $3.5
million and are being amortized over seven years utilizing the straight-line
method. BSG was merged with and into First Bank. Subsequent to the acquisition,
First Banks continued to own 231,779 shares, or approximately 1.52% of the
issued and outstanding shares of Allegiant common stock. In October 2003, the
remaining shares of Allegiant common stock were contributed to a previously
established charitable foundation. In conjunction with this transaction,
charitable contribution expense was recorded of $5.1 million, which was
partially offset by a gain on the contribution of these available-for-sale
investment securities of $2.3 million, representing the difference between the
cost basis and the fair value of the common stock on the date of the
contribution. In addition, First Banks recognized a tax benefit of $2.5 million
associated with this transaction. The contribution of this stock eliminated the
Company's investment in Allegiant. However, in conjunction with the settlement
that occurred during the fourth quarter of 2005, First Banks received 75,758
shares of common stock of National City Corporation, successor to Allegiant,
with a fair value of approximately $2.5 million at the time of the settlement,
which was treated as an adjustment to the purchase price of the acquisition.
On July 30, 2004, First Banks completed its acquisition of CMC and its
wholly owned banking subsidiary, Continental Community Bank and Trust Company
(CCB) for $4.2 million in cash, and redeemed in full all of the outstanding
subordinated promissory notes of CMC, including accumulated accrued and unpaid
interest, totaling $4.5 million in aggregate. The acquisition served to expand
First Banks' banking franchise in Chicago, Illinois. The transaction was funded
through internally generated funds. CMC, through CCB, operated two banking
offices in the Chicago suburban communities of Aurora and Villa Park. At the
time of the transaction, CMC had assets of $140.7 million, loans, net of
unearned discount, of $73.6 million and deposits of $104.6 million. Preliminary
goodwill of $1.5 million was subsequently adjusted to approximately $100,000
during the third quarter of 2005, and the core deposit intangibles, which are
not deductible for tax purposes and are being amortized over seven years
utilizing the straight-line method, were approximately $2.0 million. CMC was
merged with and into SFC and CCB was merged with and into First Bank.
On August 31, 2004, SBLS LLC, a Nevada-based limited liability company
and subsidiary of First Bank, purchased substantially all of the assets and
assumed certain liabilities of 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, as further described in Note 24 to the
Consolidated Financial Statements. The transaction was funded through internally
generated funds. At the time of the transaction, SBLS LLC purchased from SBLS
assets of $47.1 million, including $24.0 million of SBA loans, net of unearned
discount, and $15.1 million of SBA servicing rights, and assumed $1.5 million of
liabilities, resulting in a net cash payment of $45.6 million. Goodwill was
approximately $5.9 million and is deductible for tax purposes. In conjunction
with this transaction, on August 30, 2004, First Bank granted to First Capital
America, Inc. (FCA), a corporation owned by First Banks' Chairman and members of
his immediate family, an option to purchase Membership Interests of SBLS LLC.
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, effective June 30, 2005, FCA's
ownership interest is recognized as minority interest in subsidiary in the
consolidated balance sheets and, beginning July 1, 2006, the related minority
interest in income or loss of subsidiary is recognized in the consolidated
statements of income.
On November 30, 2004, First Banks completed its acquisition of Hillside
Investors, Ltd. (Hillside) and its wholly owned banking subsidiary, CIB Bank
(collectively, CIB Bank), headquartered in Hillside, Illinois, for approximately
$67.4 million in cash. The acquisition served to significantly expand First
Banks' banking franchise in Chicago, Illinois. The transaction was funded
through the issuance of subordinated debentures associated with two private
placements of $60.0 million in aggregate of trust preferred securities through
newly formed affiliated statutory trusts, as further discussed in Note 12 to the
Consolidated Financial Statements. The acquisition was also funded through
borrowings under the Company's revolving line of credit with a group of
unaffiliated financial institutions. CIB Bank operated 16 banking offices in the
Chicago, Illinois metropolitan area, including ten offices in Cook County, three
offices in Lake County, two offices in Will County and one office in DuPage
County. At the time of the transaction, CIB Bank had assets of $1.20 billion,
loans, net of unearned discount, of $683.3 million, investment securities of
$393.2 million and deposits of $1.10 billion. Preliminary goodwill was
approximately $4.3 million and the core deposit intangibles, which are not
deductible for tax purposes and are being amortized over seven years utilizing
the straight-line method, were approximately $13.4 million. As further described
below, goodwill and core deposit intangibles were subsequently adjusted during
the first quarter of 2005. Hillside was merged with and into SFC and CIB Bank
was merged with and into First Bank.
The following table summarizes the estimated fair value of the Hillside
assets acquired and liabilities assumed at the date of acquisition. As
previously discussed, the fair value adjustments represented current estimates
and were subject to further adjustment as the valuation data was finalized, as
further described below.
November 30, 2004
(dollars expressed in thousands)
Cash and cash equivalents............................................. $ 123,829
Investment securities................................................. 392,651
Loans, net of unearned discount....................................... 662,588
Allowance for loan losses............................................. (26,373)
----------
Net loans............................................................. 636,215
Bank premises and equipment........................................... 11,449
Goodwill.............................................................. 4,285
Core deposit intangibles.............................................. 13,395
Deferred income taxes................................................. 13,348
Other assets.......................................................... 20,836
----------
Total assets acquired............................................. $1,216,008
==========
Deposits.............................................................. $1,102,041
Other borrowings...................................................... 33,199
Deferred income taxes................................................. 1,375
Accrued expenses and other liabilities................................ 12,010
----------
Total liabilities assumed......................................... 1,148,625
----------
Net assets acquired............................................... $ 67,383
==========
During the first quarter of 2005, First Banks recorded certain
acquisition-related adjustments pertaining to its acquisition of Hillside and
CIB Bank. 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 not deductible for tax purposes and 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.
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 and deposits of $55.7 million. Preliminary goodwill,
which is not deductible for tax purposes, was approximately $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
approximately $1.7 million. FBA was merged with and into SFC, and FBOTA was
merged with and into First Bank.
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.
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 11 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 and deposits of $132.1
million. Preliminary goodwill, which is not deductible for tax purposes, was
approximately $12.0 million, and the core deposit intangibles, which are not
deductible for tax purposes and are being amortized over seven years utilizing
the straight-line method, were approximately $3.8 million. IBOC was merged with
and into First Bank.
On October 31, 2005, First Banks completed its acquisition of Northway
State Bank (NSB) 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. NSB was headquartered in Grayslake,
Illinois, and operated one banking office located in Lake County in the northern
Chicago metropolitan area. At the time of the acquisition, NSB had assets of
$50.4 million, loans, net of unearned discount, of $41.8 million and deposits of
$45.2 million. Preliminary goodwill, which is not deductible for tax purposes,
was approximately $3.8 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 approximately $909,000. NSB was merged with and
into First Bank.
Pending Acquisitions
On August 1, 2005, First Banks executed 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
provided for First Banks to acquire the outstanding common stock of FNBS for
$45.62 per share. FNBS operated one banking office in Sachse, Texas, located in
the northeast Dallas metropolitan area. As further described in Note 25 to the
Consolidated Financial Statements, First Banks completed its acquisition of FNBS
on January 3, 2006.
On November 18, 2005, First Bank executed a Branch Purchase and
Assumption Agreement that provided for First Bank to acquire the branch office
of Dallas National Bank located at 4251 East Renner Road, in Richardson, Texas
(East Renner Branch). As further described in Note 25 to the Consolidated
Financial Statements, First Bank completed its purchase of assets and assumption
of liabilities of the East Renner Branch on January 20, 2006.
On December 19, 2005, First Banks executed an Agreement and Plan of
Reorganization providing for the acquisition of Pittsfield Community Bancorp,
Inc. (Bancorp) and its wholly owned banking subsidiary, Community Bank of
Pittsfield (Pittsfield), for approximately $4.9 million in cash. Pittsfield is
headquartered in Pittsfield, Illinois and operates two banking offices, one in
Pittsfield, Illinois, and one in Mount Sterling, Illinois. The transaction,
which is subject to regulatory approvals, is expected to be completed during the
second quarter of 2006. At December 31, 2005, Pittsfield reported assets of
approximately $17.0 million, loans, net of unearned discount, of approximately
$10.7 million, deposits of approximately $13.7 million and stockholders' equity
of approximately $2.7 million. As further described in Note 25 to the
Consolidated Financial Statements, on March 7, 2006, First Bank executed a
Purchase and Assumption Agreement providing for the sale of the banking office
located in Mount Sterling, Illinois to Beardstown Savings, s.b. (Beardstown)
following the completion of First Banks' acquisition of Bancorp.
Subsequent to December 31, 2005, First Banks and/or First Bank entered
into three agreements related to acquisition transactions, as more fully
described in Note 25 to the Consolidated Financial Statements.
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 two to 15 years and
are triggered as a result of the change in control of the acquired entity. Other
severance benefits for employees that are terminated in conjunction with the
integration of the acquired entities into First Banks' existing operations are
normally paid to the recipients within 90 days of the respective consummation
date and are expensed in the consolidated statements of income as incurred. The
accrued severance balance of $542,000, as summarized in the following table, is
comprised of contractual obligations under salary continuation agreements to six
individuals with remaining terms ranging from approximately one to ten 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 integration 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, 2002........................ $ 2,351 28 2,379
Year Ended December 31, 2003:
Amounts accrued at acquisition date............... 100 350 450
Reversal to goodwill.............................. (39) (108) (147)
Payments.......................................... (1,000) (270) (1,270)
------- ------ ------
Balance at December 31, 2003........................ 1,412 -- 1,412
------- ------ ------
Year Ended December 31, 2004:
Amounts accrued at acquisition date............... 180 496 676
Payments.......................................... (831) (496) (1,327)
------- ------ ------
Balance at December 31, 2004........................ 761 -- 761
------- ------ ------
Year Ended December 31, 2005:
Amounts accrued at acquisition date............... 785 1,265 2,050
Payments.......................................... (1,004) (1,131) (2,135)
------- ------ ------
Balance at December 31, 2005........................ $ 542 134 676
======= ====== ======
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities Available for Sale. The amortized cost, contractual
maturity, gross unrealized gains and losses and fair value of investment
securities available for sale at December 31, 2005 and 2004 were as follows:
Maturity
-----------------------------------------
Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized -------------- Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2005:
Carrying value:
U.S. Government sponsored
agencies.................... $212,869 181,800 4,400 -- 399,069 -- (4,725) 394,344 3.32%
Mortgage-backed securities..... 281 9,899 52,121 783,831 846,132 149 (22,156) 824,125 4.60
State and political
subdivisions................ 5,574 17,242 8,864 710 32,390 293 (109) 32,574 3.79
Corporate debt securities...... 7,721 -- -- -- 7,721 -- (15) 7,706 4.58
Equity investments ............ 156 -- -- 16,995 17,151 961 -- 18,112 4.64
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)........ 34,428 -- -- -- 34,428 -- -- 34,428 4.87
-------- ------- ------- ------- --------- ----- ------- ---------
Total................... $261,029 208,941 65,385 801,536 1,336,891 1,403 (27,005) 1,311,289 4.21
======== ======= ======= ======= ========= ===== ======= ========= ====
Fair value:
Debt securities................ $224,429 206,076 64,207 764,037
Equity securities.............. 34,584 -- -- 17,956
-------- ------- ------- -------
Total................... $259,013 206,076 64,207 781,993
======== ======= ======= =======
Weighted average yield............ 3.27% 3.72% 4.33% 4.62%
======== ======= ======= =======
December 31, 2004:
Carrying value:
U.S. Treasury.................. $ 9,977 -- -- -- 9,977 -- (3) 9,974 2.31%
U.S. Government sponsored
agencies.................... 165,551 486,621 12,556 -- 664,728 529 (2,736) 662,521 3.11
Mortgage-backed securities..... 244 12,435 77,558 941,140 1,031,377 3,661 (6,863) 1,028,175 4.55
State and political
subdivisions................ 4,467 20,149 13,492 2,479 40,587 650 (10) 41,227 3.63
Corporate debt securities...... 6,218 -- -- -- 6,218 26 (1) 6,243 5.40
Equity investments ............ 367 -- -- 10,230 10,597 383 -- 10,980 6.72
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)........ 28,943 -- -- -- 28,943 -- -- 28,943 4.98
-------- ------- ------- ------- --------- ----- ------- ---------
Total................... $215,767 519,205 103,606 953,849 1,792,427 5,249 (9,613) 1,788,063 4.01
======== ======= ======= ======= ========= ===== ======= ========= ====
Fair value:
Debt securities................ $186,472 517,273 103,989 940,406
Equity securities.............. 29,310 -- -- 10,613
-------- ------- ------- -------
Total................... $215,782 517,273 103,989 951,019
======== ======= ======= =======
Weighted average yield............ 2.82% 3.28% 4.55% 4.61%
======== ======= ======= =======
Securities Held to Maturity. The amortized cost, contractual maturity,
gross unrealized gains and losses and fair value of investment securities held
to maturity at December 31, 2005 and 2004 were as follows:
Maturity
--------------------------------------
Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized ---------------- Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2005:
Carrying value:
Mortgage-backed securities..... $ -- -- 6,970 8,495 15,465 9 (321) 15,153 5.09%
State and political
subdivisions................. 1,350 8,331 695 264 10,640 67 (69) 10,638 4.20
------- ----- ----- ------ ------ --- ---- ------ ----
Total...................... $ 1,350 8,331 7,665 8,759 26,105 76 (390) 25,791 4.73
======= ===== ===== ====== ====== === ==== ====== ====
Fair value:
Debt securities................ $ 1,355 8,328 7,509 8,599
======= ===== ===== ======
Weighted average yield............ 4.40% 4.20% 5.03% 5.02%
======= ===== ===== ======
December 31, 2004:
Carrying value:
Mortgage-backed securities..... $ -- -- 7,060 10,288 17,348 96 (1) 17,443 5.01%
State and political
subdivisions................. 545 5,150 1,977 266 7,938 211 (6) 8,143 4.52
------- ----- ----- ------ ------ --- ---- ------ ----
Total...................... $ 545 5,150 9,037 10,554 25,286 307 (7) 25,586 4.86
======= ===== ===== ====== ====== === ==== ====== ====
Fair value:
Debt securities................ $ 556 5,340 9,080 10,610
======= ===== ===== ======
Weighted average yield............ 4.93% 4.13% 5.22% 4.89%
======= ===== ===== ======
There were no sales of trading securities for the year ended December
31, 2005. Proceeds from sales of available-for-sale investment securities were
$147.1 million, $26.3 million and $6.0 million for the years ended December 31,
2005, 2004 and 2003, respectively. There were no gross gains realized on sales
of available-for-sale investment securities in 2005. Gross gains of $257,100 and
$576,600 were realized on these sales during the years ended December 31, 2004
and 2003, respectively. Gross losses of $2.9 million were realized on sales of
available-for-sale investment securities during the year ended December 31,
2005. The gross loss of $2.9 million resulted from the sale of $150.0 million of
available-for-sale investment securities for liquidity purposes, including the
related termination of a $50.0 million term repurchase agreement on November 22,
2005, as further described in Note 5 and Note 10 to the Consolidated Financial
Statements. There were no gross losses realized on sales of available-for-sale
investment securities in 2004 and 2003.
In 2003, First Banks also recognized noncash gains of $6.3 million on
the partial exchange of Allegiant common stock for a 100% ownership interest in
BSG, and a $2.3 million gain on the subsequent contribution of the remaining
shares of Allegiant common stock to a charitable foundation. In addition, First
Banks recognized a $431,000 impairment loss due to an other-than-temporary
decline in the fair value of an equity fund investment.
Proceeds from calls of investment securities were $16.6 million, $63.1
million and $41.5 million for the years ended December 31, 2005, 2004 and 2003,
respectively. There were no gross gains realized on called securities in 2005
and 2004. Gross gains of $11,200 were realized on these called securities during
the year ended December 31, 2003. Gross losses of $3,800 and $1,900 were
realized on these called securities during the years ended December 31, 2005 and
2003, respectively. There were no gross losses realized on called securities in
2004.
First Bank is a member of the Federal Home Loan Bank (FHLB) system and
the Federal Reserve Bank (FRB) system and maintains investments in FHLB and FRB
stock. These investments are recorded at cost, which represents redemption
value. The investment in FRB stock is maintained at a minimum of 6% of First
Bank's capital stock and capital surplus. The investment in FHLB of Chicago
stock is maintained at a minimum of 5% of advances. The investment in FHLB of
Des Moines stock is maintained at an amount equal to 0.12% of First Bank's total
assets as of December 31, 2004, up to a maximum of $10.0 million, plus 4.45% of
advances and 0.15% of outstanding standby letters of credit.
Investment securities with a carrying value of approximately $619.4
million and $731.8 million at December 31, 2005 and 2004, respectively, were
pledged in connection with deposits of public and trust funds, securities sold
under agreements to repurchase and for other purposes as required by law.
Gross unrealized losses on investment securities and the fair value of
the related securities, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position,
at December 31, 2005 and 2004, were as follows:
December 31, 2005
---------------------------------------------------------------------------
Less than 12 months 12 months or more Total
----------------------- ------------------------ -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------- ---------- ---------- ---------- ---------- ----------
(dollars expressed in thousands)
Available for sale:
U.S. Government sponsored
agencies................... $ 206,641 (2,374) 187,702 (2,351) 394,343 (4,725)
Mortgage-backed securities... 375,462 (8,368) 411,640 (13,788) 787,102 (22,156)
State and political
subdivisions............... 11,653 (97) 833 (12) 12,486 (109)
Corporate debt securities.... 7,706 (15) -- -- 7,706 (15)
---------- ------- ------- ------- --------- -------
Total.................. $ 601,462 (10,854) 600,175 (16,151) 1,201,637 (27,005)
========== ======= ======= ======= ========= =======
Held to maturity:
Mortgage-backed securities... $ 14,828 (321) -- -- 14,828 (321)
State and political
subdivisions............... 4,462 (58) 365 (11) 4,827 (69)
---------- ------- ------- ------- --------- -------
Total.................. $ 19,290 (379) 365 (11) 19,655 (390)
========== ======= ======= ======= ========= =======
December 31, 2004
---------------------------------------------------------------------------
Less than 12 months 12 months or more Total
----------------------- ----------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------- ---------- ---------- ---------- ---------- ----------
(dollars expressed in thousands)
Available for sale:
U.S. Treasury................ $ 9,974 (3) -- -- 9,974 (3)
U.S. Government sponsored
agencies................... 480,912 (2,736) -- -- 480,912 (2,736)
Mortgage-backed securities... 657,939 (6,863) -- -- 657,939 (6,863)
State and political
subdivisions............... 1,964 (10) -- -- 1,964 (10)
Corporate debt securities.... 510 (1) -- -- 510 (1)
---------- ------- ------- ------- --------- -------
Total.................. $1,151,299 (9,613) -- -- 1,151,299 (9,613)
========== ======= ======= ======= ========= =======
Held to maturity:
Mortgage-backed securities... $ 3,161 (1) -- -- 3,161 (1)
State and political
subdivisions............... 926 (6) -- -- 926 (6)
---------- ------- ------- ------- --------- -------
Total.................. $ 4,087 (7) -- -- 4,087 (7)
========== ======= ======= ======= ========= =======
U.S. Treasury, U.S. Government sponsored agencies and mortgage-backed
securities - The unrealized losses on investments in mortgage-backed securities,
U.S. Treasury securities and other agency securities were caused by fluctuations
in interest rates. The contractual terms of these securities are guaranteed by
government-sponsored enterprises. It is expected that the securities would not
be settled at a price less than the amortized cost. Because First Banks has the
ability and intent to hold these investments until a market price recovery or
maturity, these investments are not considered other-than-temporarily impaired.
However, First Banks may choose to sell certain available-for-sale investment
securities at a loss for liquidity or other purposes, if deemed necessary. At
December 31, 2005, the unrealized losses for U.S. government sponsored agencies
for 12 months or more included 14 securities, and the unrealized losses for
mortgage-backed securities for 12 months or more included 62 securities.
State and political subdivisions and corporate debt securities - The
unrealized losses on investments in state and political subdivisions and
corporate debt securities were caused by fluctuations in interest rates. It is
expected that the securities would not be settled at a price less than the
amortized cost. Because the decline in fair value is attributable to changes in
interest rates and not credit quality, and because First Banks has the ability
and intent to hold these investments until a market price recovery or maturity,
these investments are not considered other-than-temporarily impaired. At
December 31, 2005, the unrealized losses for state and political subdivisions
for 12 months or more included seven securities.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December
31, 2005, 2004 and 2003 were as follows:
2005 2004 2003
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year.............................. $ 150,707 116,451 99,439
Acquired allowances for loan losses..................... 1,989 33,752 757
Other adjustments (1)(2)................................ -- (479) --
--------- ------- -------
152,696 149,724 100,196
--------- ------- -------
Loans charged-off....................................... (33,123) (50,643) (55,773)
Recoveries of loans previously charged-off.............. 19,757 25,876 23,028
--------- ------- -------
Net loans charged-off................................ (13,366) (24,767) (32,745)
--------- ------- -------
Provision for loan losses............................... (4,000) 25,750 49,000
--------- ------- -------
Balance, end of year.................................... $ 135,330 150,707 116,451
========= ======= =======
---------------
(1) In December 2003, First Bank 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 the
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, First Bank reclassified $1.5 million from the allowance for loan losses to
accrued and other liabilities to establish a specific reserve associated with the commercial
leasing portfolio sale and related recourse obligations for certain leases sold. This
liability has been reduced to $500,000 at December 31, 2005, as further described in Note 24
to the Consolidated Financial Statements.
At December 31, 2005 and 2004, First Banks had $97.2 million and $85.8
million of impaired loans, consisting of loans on nonaccrual status. Interest on
nonaccrual loans that would have been recorded under the original terms of the
loans was $9.9 million, $4.4 million and $5.9 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Of these amounts, $3.4 million,
$716,000 and $2.6 million was recorded as interest income on such loans in 2005,
2004 and 2003, respectively. The allowance for loan losses includes an
allocation for each impaired loan. The aggregate allocation of the allowance for
loan losses related to impaired loans was approximately $20.1 million and $21.4
million at December 31, 2005 and 2004, respectively. The average recorded
investment in impaired loans was $79.9 million, $77.3 million and $69.6 million
for the years ended December 31, 2005, 2004 and 2003, respectively. The amount
of interest income recognized using a cash basis method of accounting during the
time these loans were impaired was $3.6 million, $717,000 and $2.6 million in
2005, 2004 and 2003, respectively. At December 31, 2005 and 2004, First Banks
had $5.6 million and $28.7 million, respectively, of loans past due 90 days or
more and still accruing interest. First Banks did not have any acquired problem
loans that are being accounted for under SOP 03-3 at December 31, 2005.
First Banks' primary market areas are the states of Missouri, Illinois,
Texas and California. At December 31, 2005 and 2004, approximately 91% and 90%
of the total loan portfolio, respectively, and 83% and 82% of the commercial,
financial and agricultural loan portfolio, respectively, were made to borrowers
within these states.
Real estate lending constituted the only significant concentration of
credit risk. Real estate loans comprised approximately 76% and 74% of the loan
portfolio at December 31, 2005 and 2004, respectively, of which 27% and 22%,
respectively, were made to consumers in the form of residential real estate
mortgages and home equity lines of credit. First Bank also offers residential
real estate mortgage loans with terms that require interest only payments. At
December 31, 2005, the balance of such loans was $332.3 million, of which $194.6
million were held for portfolio and $137.7 million were held for sale.
In general, First Banks is a secured lender. At December 31, 2005 and
2004, 99% of the loan portfolio was collateralized. Collateral is required in
accordance with the normal credit evaluation process based upon the
creditworthiness of the customer and the credit risk associated with the
particular transaction.
Loans to directors, their affiliates and executive officers of First
Banks, Inc. were approximately $37.9 million and $31.0 million at December 31,
2005 and 2004, respectively, as further discussed in Note 19 to the Consolidated
Financial Statements.
(5) DERIVATIVE INSTRUMENTS
First Banks utilizes derivative financial instruments to assist in the
management of interest rate sensitivity by modifying the repricing, maturity and
option characteristics of certain assets and liabilities. Derivative financial
instruments held by First Banks at December 31, 2005 and 2004 are summarized as
follows:
December 31,
------------------------------------------------
2005 2004
----------------------- -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges........................ $ 300,000 114 500,000 1,233
Fair value hedges....................... 25,000 748 276,200 9,609
Interest rate floor agreement........... 100,000 70 -- --
Interest rate lock commitments.......... 5,900 -- 5,400 --
Forward commitments to sell
mortgage-backed securities........... 47,000 -- 34,000 --
========= === ======= =====
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
First Banks' credit exposure through its use of these instruments. The credit
exposure represents the loss First Banks would incur in the event the
counterparties failed completely to perform according to the terms of the
derivative financial instruments and the collateral held to support the credit
exposure was of no value.
For the years ended December 31, 2005, 2004 and 2003, First Banks
realized net interest income of $2.2 million, $50.1 million and $64.6 million,
respectively, on its derivative financial instruments. First Banks recorded net
losses on derivative instruments, which are included in noninterest income in
the consolidated statements of income, of $1.1 million and $1.5 million for the
years ended December 31, 2005 and 2004, respectively, in comparison to a net
gain of $496,000 for the year ended December 31, 2003.
Cash Flow Hedges. First Banks entered into the following interest rate
swap agreements, designated as cash flow hedges, to effectively lengthen the
repricing characteristics of certain interest-earning assets to correspond more
closely with their funding source with the objective of stabilizing cash flow,
and accordingly, net interest income over time:
>> During September 2000, March 2001, April 2001, March 2002 and
July 2003, First Banks 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. The underlying
hedged assets are certain loans within First Banks' commercial
loan portfolio. The swap agreements, which have been designated
as cash flow hedges, provide for First Banks to receive a fixed
rate of interest and pay an adjustable rate of interest
equivalent to the weighted average prime lending rate minus
2.70%, 2.82%, 2.82%, 2.80% and 2.85%, respectively. The terms of
the swap agreements provide for First Banks to pay and receive
interest on a quarterly basis. In November 2001, First Banks
terminated $75.0 million notional amount of the swap agreements
originally entered into in April 2001, which would have expired
in April 2006, in order to appropriately modify its overall hedge
position in accordance with its interest rate risk management
program. In addition, the $150.0 million notional swap agreement
that was entered into in March 2002 matured in March 2004, the
$600.0 million notional swap agreements that were entered into in
September 2000 matured in September 2004, and the $200.0 million
notional swap agreement that was entered into in March 2001
matured on March 21, 2005. The amount receivable by First Banks
under the swap agreements was $2.4 million and $2.7 million at
December 31, 2005 and 2004, respectively, and the amount payable
by First Banks under the swap agreements was $2.5 million and
$1.4 million at December 31, 2005 and 2004, respectively.
In October 2004, First Banks implemented the guidance required by the
FASB's Derivatives Implementation Group on SFAS 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 (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. First Banks 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 First Banks'
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 First Banks' interest rate swap agreements designated as cash
flow hedges as of December 31, 2005 and 2004 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2005:
April 2, 2006............. $ 100,000 4.43% 5.45% $ 205
July 31, 2007............. 200,000 4.40 3.08 (5,296)
--------- --------
$ 300,000 4.41 3.87 $ (5,091)
========= ==== ==== ========
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. First Banks entered into the following interest rate
swap agreements, designated as fair value hedges, to effectively shorten the
repricing characteristics of certain interest-bearing liabilities to correspond
more closely with their funding source with the objective of stabilizing net
interest income over time:
>> During January 2001, First Banks entered into $50.0 million
notional amount of three-year interest rate swap agreements and
$150.0 million notional amount of five-year interest rate swap
agreements that provided for First Banks to receive a fixed rate
of interest and pay an adjustable rate of interest equivalent to
the three-month London Interbank Offering Rate (LIBOR). The
underlying hedged liabilities were a portion of First Banks'
other time deposits. The terms of the swap agreements provided
for First Banks to pay interest on a quarterly basis and receive
interest on a semiannual basis. The amount receivable by First
Banks under the swap agreements was $3.9 million at December 31,
2004, and the amount payable by First Banks under the swap
agreements was $695,000 at December 31, 2004. During September
2003, First Banks discontinued hedge accounting treatment on the
$50.0 million notional amount of three-year swap agreements due
to the loss of the highly correlated hedge positions between the
swap agreements and the underlying hedged liabilities. The
related $1.3 million basis adjustment of the underlying hedged
liabilities was recorded as a reduction of interest expense over
the remaining weighted average maturity of the underlying hedged
liabilities, which was approximately three months. In addition,
the effect of the loss of the highly correlated hedge position on
the swap agreements resulted in the recognition of a net loss of
$291,000, which was included in noninterest income. The $50.0
million notional swap agreement matured in January 2004.
Effective February 25, 2005, First Banks terminated the remaining
$150.0 million notional 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 was recorded as interest expense over the
remaining weighted average maturity of the underlying hedged
liabilities of approximately ten months. At December 31, 2005,
the basis adjustments associated with these swap agreements were
fully amortized.
>> During May 2002, June 2002, March 2003 and April 2003, First
Banks entered into $55.2 million, $46.0 million, $25.0 million
and $46.0 million notional amount, respectively, of interest rate
swap agreements that provide for First Banks to receive a fixed
rate of interest and pay an adjustable rate of interest
equivalent to the three-month LIBOR plus 2.30%, 1.97%, 2.55% and
2.58%, respectively. The underlying hedged liabilities are a
portion of First Banks' subordinated debentures. The terms of the
swap agreements provide for First Banks to pay and receive
interest on a quarterly basis. The amounts receivable and payable
by First Banks under the swap agreements at December 31, 2005
were $506,000 and $420,000, respectively. There were no amounts
receivable or payable under the swap agreements at December 31,
2004. The $46.0 million notional amount interest rate swap
agreement that was entered into in June 2002 was called by its
counterparty in May 2003 resulting in final settlement of this
interest rate swap agreement in June 2003. Effective May 27,
2005, First Banks terminated the $55.2 million and $46.0 million
notional swap agreements in order to appropriately modify future
hedge positions in accordance with First Banks' 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 ranged
from 26 to 28 years at the time of the termination. As further
discussed in Note 25 to the Consolidated Financial Statements,
effective February 16, 2006, First Banks terminated the remaining
$25.0 million notional swap agreement.
The maturity dates, notional amounts, interest rates paid and received
and fair value of First Banks' interest rate swap agreements designated as fair
value hedges as of December 31, 2005 and 2004 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2005:
March 20, 2033 (1)......... $ 25,000 6.57% 8.10% $(1,460)
========= ==== ==== =======
December 31, 2004:
January 9, 2006 (2)........ $ 150,000 2.06% 5.51% $ 3,610
December 31, 2031 (3)...... 55,200 4.27 9.00 2,171
March 20, 2033............. 25,000 4.52 8.10 (929)
June 30, 2033 (3).......... 46,000 4.55 8.15 (1,689)
--------- -------
$ 276,200 3.14 6.88 $ 3,163
========= ==== ==== =======
--------------
(1) The interest rate swap agreement was terminated effective February 16, 2006, as further
discussed in Note 25 to the Consolidated Financial Statements.
(2) The interest rate swap agreement was terminated effective February 25, 2005.
(3) The interest rate swap agreements were terminated effective May 27, 2005.
Interest Rate Floor and Cap Agreements. On September 9, 2005, First
Bank entered into a $100.0 million notional amount three-year interest rate
floor agreement in conjunction with its interest rate risk management program.
The interest rate floor agreement provides for First Bank to receive a quarterly
fixed rate of interest of 5.00% should the three-month LIBOR 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 the consolidated balance sheets,
was $70,000 at December 31, 2005.
During 2003 and 2004, First Bank entered into five term repurchase
agreements under master repurchase agreements with unaffiliated third parties,
as further discussed in Note 10 to the 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 net interest margin against
changes in interest rates. The interest rate floor agreements included within
the term repurchase agreements (and the interest rate cap agreements previously
included within the term repurchase agreements) represent embedded derivative
instruments which, in accordance with existing accounting literature governing
derivative instruments, are not required to be separated from the term
repurchase agreements and accounted for separately as a derivative financial
instrument. As such, the term repurchase agreements are reflected in other
borrowings in the consolidated balance sheets and the related interest expense
is reflected as interest expense on other borrowings in the consolidated
statements of income. As further described in Note 10 to the Consolidated
Financial Statements, on March 21, 2005, 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 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. First Bank 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. As further described in Note 3
and Note 10 to the Consolidated Financial Statements, on November 22, 2005,
First Bank terminated its $50.0 million term repurchase agreement with a
maturity date of August 15, 2006, and simultaneously recognized a loss of $2.9
million on the sale of the underlying securities associated with the term
repurchase agreement. In addition, as further described in Note 25 to the
Consolidated Financial Statements, on February 14, 2006, First Bank terminated
its two $50.0 million term repurchase agreements with maturity dates of June 14,
2007.
Pledged Collateral. At December 31, 2005 and 2004, First Banks had a
$2.0 million and a $5.0 million letter of credit, respectively, issued on its
behalf to the counterparty and had pledged investment securities available for
sale with a fair value of $5.1 million and $527,000, respectively, in connection
with its interest rate swap agreements. At December 31, 2005, First Banks had
pledged cash of $1.8 million as collateral in connection with its interest rate
swap agreements. At December 31, 2004, First Banks had accepted cash of $6.0
million as collateral in connection with its interest rate swap agreements.
Interest Rate Lock Commitments / Forward Commitments to Sell
Mortgage-Backed Securities. Derivative financial instruments issued by First
Banks consist of interest rate lock commitments to originate fixed-rate loans to
be sold. Commitments to originate fixed-rate loans consist primarily of
residential real estate loans. These net loan commitments and loans held for
sale are hedged with forward contracts to sell mortgage-backed securities. The
carrying value of these interest rate lock commitments included in other assets
in the consolidated balance sheets was ($49,000) and $20,000 at December 31,
2005 and 2004, respectively.
(6) SERVICING RIGHTS
Mortgage Banking Activities. At December 31, 2005 and 2004, First Banks
serviced mortgage loans for others amounting to $1.01 billion and $1.06 billion,
respectively. Borrowers' escrow balances held by First Banks on such loans were
$5.0 million and $4.4 million at December 31, 2005 and 2004, respectively.
Changes in mortgage servicing rights, net of amortization, for the years ended
December 31, 2005 and 2004 were as follows:
2005 2004
---- ----
(dollars expressed in thousands)
Balance, beginning of year....................................... $ 10,242 15,408
Servicing rights acquired during the period...................... 435 155
Originated mortgage servicing rights............................. 904 1,221
Amortization..................................................... (4,958) (6,542)
-------- ------
Balance, end of year............................................. $ 6,623 10,242
======== ======
First Banks did not incur any impairment of mortgage servicing rights
during the years ended December 31, 2005 and 2004. During 2003, First Banks
recognized impairment of $800,000 through a valuation allowance associated with
a decline in the fair value of an individual mortgage servicing rights stratum
below its carrying value, net of the valuation allowance. First Banks
subsequently reversed the impairment valuation allowance in 2003 based upon an
increase in the fair value of the mortgage servicing rights stratum above the
carrying value, net of the valuation allowance.
Amortization of mortgage servicing rights at December 31, 2005 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2006........................................................................ $ 3,266
2007........................................................................ 1,991
2008........................................................................ 881
2009........................................................................ 352
2010........................................................................ 133
-------
Total................................................................... $ 6,623
=======
Other Servicing Activities. At December 31, 2005 and 2004, First Banks
serviced SBA loans for others amounting to $163.4 million and $174.7 million,
respectively. Changes in SBA servicing rights, net of amortization, for the
years ended December 31, 2005 and 2004 were as follows:
2005 2004
---- ----
(dollars expressed in thousands)
Balance, beginning of year.............................................. $ 13,013 --
Servicing rights acquired during the year............................... -- 13,983
Originated servicing rights............................................. 1,065 373
Amortization............................................................ (2,230) (884)
Changes in impairment valuation allowance............................... (2,359) (459)
-------- ------
Balance, end of year.................................................... $ 9,489 13,013
======== ======
First Banks recognized impairment of $2.4 million and $459,000 for the
years ended December 31, 2005 and 2004, respectively. The impairment of $2.4
million recorded for the year ended December 31, 2005 resulted from a decline in
the fair value of the SBA servicing assets below the carrying value primarily
related to substantial damage to several shrimping vessels within the servicing
portfolio caused by the effects of Hurricane Katrina, as well as continued
distress affecting the U.S. shrimping industry and the ability of these
borrowers to repay their loans.
Amortization of SBA servicing rights at December 31, 2005 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2006........................................................................ $ 1,640
2007........................................................................ 1,382
2008........................................................................ 1,161
2009........................................................................ 974
2010........................................................................ 816
Thereafter.................................................................. 3,516
-------
Total................................................................... $ 9,489
=======
(7) BANK PREMISES AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION AND
AMORTIZATION
Bank premises and equipment were comprised of the following at December
31, 2005 and 2004:
2005 2004
---- ----
(dollars expressed in thousands)
Land.................................................................... $ 33,191 29,566
Buildings and improvements.............................................. 118,426 114,447
Furniture, fixtures and equipment....................................... 111,238 109,756
Leasehold improvements.................................................. 25,494 24,348
Construction in progress................................................ 2,269 4,074
--------- -------
Total.............................................................. 290,618 282,191
Less accumulated depreciation and amortization.......................... 145,677 137,705
--------- -------
Bank premises and equipment, net................................... $ 144,941 144,486
========= =======
Depreciation and amortization expense for the years ended December 31,
2005, 2004 and 2003 totaled $17.4 million, $18.6 million and $20.1 million,
respectively.
First Banks leases land, office properties and equipment under
operating leases. Certain of the leases contain renewal options and escalation
clauses. Total rent expense was $15.5 million, $13.2 million and $14.1 million
for the years ended December 31, 2005, 2004 and 2003, respectively. Future
minimum lease payments under noncancellable operating leases extend through 2084
as follows:
(dollars expressed in thousands)
Year ending December 31:
2006......................................................................... $ 11,356
2007......................................................................... 9,375
2008......................................................................... 8,492
2009......................................................................... 7,431
2010......................................................................... 5,562
Thereafter................................................................... 18,231
--------
Total future minimum lease payments...................................... $ 60,447
========
First Banks also leases to unrelated parties a portion of its banking
facilities. Total rental income was $6.4 million, $5.8 million and $6.1 million
for the years ended December 31, 2005, 2004 and 2003, respectively.
(8) 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 December
31, 2005 and 2004:
2005 2004
--------------------------- --------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles............. $ 36,555 (11,710) 32,823 (7,003)
Goodwill associated with
purchases of branch offices........ 2,210 (1,146) 2,210 (1,003)
--------- ------- ------- ------
Total............................ $ 38,765 (12,856) 35,033 (8,006)
========= ======= ======= ======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries........... $ 165,992 155,642
========= =======
Amortization of intangibles associated with the purchase of
subsidiaries was $4.9 million, $2.9 million and $2.5 million for the years ended
December 31, 2005, 2004 and 2003, respectively. As of December 31, 2005, the
remaining estimated life of the amortization period for core deposit intangibles
and goodwill associated with purchases of branch offices was seven years and
nine years, respectively. Amortization of intangibles associated with the
purchase of subsidiaries and branch offices, including amortization of core
deposit intangibles and branch office purchases, has been estimated in the
following table, and does not take into consideration any potential future
acquisitions or branch office purchases.
(dollars expressed in thousands)
Year ending December 31:
2006......................................................................... $ 5,349
2007......................................................................... 5,349
2008......................................................................... 5,349
2009......................................................................... 3,446
2010......................................................................... 2,986
Thereafter................................................................... 3,430
--------
Total.................................................................... $ 25,909
========
Changes in the carrying amount of goodwill for the years ended December
31, 2005 and 2004 were as follows:
2005 2004
---- ----
(dollars expressed in thousands)
Balance, beginning of year...................... $ 156,849 145,548
Goodwill acquired during the year............... 18,579 11,665
Acquisition-related adjustments (1)............. (8,229) (222)
Amortization - purchases of branch offices...... (143) (142)
--------- -------
Balance, end of year............................ $ 167,056 156,849
========= =======
---------------
(1) Acquisition-related adjustments recorded in 2005, as further described in Note 2 to the
Consolidated Financial Statements, included $4.3 million recorded in the first quarter of
2005 pertaining to the acquisition of CIB Bank, $1.4 million recorded in the third quarter
of 2005 pertaining to the acquisition of CMC, and $2.5 million recorded in the fourth
quarter of 2005 pertaining to the acquisition of BSG.
(9) MATURITIES OF TIME DEPOSITS
A summary of maturities of time deposits of $100,000 or more and other
time deposits as of December 31, 2005 is as follows:
Time deposits of Other time
$100,000 or more deposits Total
---------------- -------- -----
(dollars expressed in thousands)
Year ending December 31:
2006........................................ $ 834,105 1,436,632 2,270,737
2007........................................ 157,022 425,765 582,787
2008........................................ 33,984 103,622 137,606
2009........................................ 13,576 47,263 60,839
2010........................................ 17,897 58,330 76,227
Thereafter.................................. 20,324 5,654 25,978
---------- --------- ---------
Total.................................. $1,076,908 2,077,266 3,154,174
========== ========= =========
(10) OTHER BORROWINGS
Other borrowings were comprised of the following at December 31, 2005
and 2004:
2005 2004
---- ----
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily........................................................ $ 199,874 209,106
Term......................................................... 300,000 350,000
FHLB advances.................................................... 39,300 35,644
--------- -------
Total................................................... $ 539,174 594,750
========= =======
The average balance of other borrowings was $571.7 million and $486.0
million, respectively, and the maximum month-end balance of other borrowings was
$604.3 million and $605.6 million, respectively, for the years ended December
31, 2005 and 2004. The average rates paid on other borrowings during the years
ended December 31, 2005, 2004 and 2003 were 3.19%, 1.26% and 1.02%,
respectively. Interest expense on securities sold under agreements to repurchase
was $16.5 million, $5.4 million and $1.6 million for the years ended December
31, 2005, 2004 and 2003, respectively. Interest expense on FHLB advances was
$1.6 million, $716,000 and $535,000 for the years ended December 31, 2005, 2004
and 2003, respectively. The assets underlying the daily securities sold under
agreements to repurchase and the FHLB advances are held by First Banks. 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. As
further discussed in Note 5 to the Consolidated Financial Statements, 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. 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
December 31, 2005 and 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)
December 31, 2005:
January 12, 2007............................ 150,000 LIBOR + 0.0050% 3.00% / Floor
June 14, 2007 (3)........................... 50,000 LIBOR - 0.3300% 3.00% / Floor
June 14, 2007 (3)........................... 50,000 LIBOR - 0.3400% 3.00% / Floor
August 1, 2007.............................. 50,000 LIBOR + 0.0800% 3.00% / Floor
---------
$ 300,000
=========
December 31, 2004:
August 15, 2006 (4)......................... $ 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 December 31, 2005, the interest rates paid on the term repurchase agreements were based on the
three-month LIBOR reset in arrears plus or minus the spread amount shown above minus a floating amount
equal to the differential between the three-month LIBOR reset in arrears and the strike price shown
above, if the three-month LIBOR 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 LIBOR reset in arrears minus the spread amount shown above plus a floating amount equal to
the differential between the three-month LIBOR reset in arrears and the strike price shown above, if
the three-month LIBOR reset in arrears exceeded the strike price associated with the interest rate cap
agreements.
(3) First Bank terminated these repurchase agreements on February 14, 2006, as further described in Note
25 to the Consolidated Financial Statements.
(4) First Bank terminated this term repurchase agreement on November 22, 2005, resulting in a prepayment
penalty of $281,000 and the recognition of a $2.9 million loss on the related sale of the underlying
securities associated with the term repurchase agreement, as further described in Note 3 to the
Consolidated Financial Statements.
(11) NOTES PAYABLE
Notes payable were comprised of the following at December 31, 2005 and
2004:
2005 2004
---- ----
(dollars expressed in thousands)
Revolving credit......................................................... $ -- 15,000
Term loan................................................................ 100,000 --
--------- ------
Total.............................................................. $ 100,000 15,000
========= ======
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 (collectively, the Credit
Agreements). 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 under the Revolving Credit at a
floating rate equal to either the lender's prime rate or, at First Banks'
option, LIBOR 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 LIBOR, interest is payable based on the one, two, three
or six-month LIBOR, as selected by First Banks. Interest is payable on
outstanding principal loan balances of the Term Loan at a floating rate equal to
LIBOR plus a margin determined by the outstanding loan balances and First Banks'
net income for the preceding four calendar quarters. First Banks has not drawn
any advances on the Revolving Credit. 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. 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 is
secured by First Banks' ownership interest in the capital stock of its
subsidiaries. Under the Credit Agreements, there were outstanding borrowings of
$100.0 million and $15.0 million at December 31, 2005 and 2004, respectively.
The interest rate for outstanding borrowings under the Credit Agreement at
December 31, 2005 and 2004 was 5.38% and 3.44%, respectively. Letters of credit
issued to unaffiliated third parties on behalf of First Banks under the Credit
Agreements were $2.9 million and $6.3 million at December 31, 2005 and 2004,
respectively, and had not been drawn on by the counterparties.
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.
First Banks and First Bank were in compliance with all restrictions and
requirements of the Credit Agreements at December 31, 2005 and 2004.
The average balance and maximum month-end balance of borrowings
outstanding under the Credit Agreements during the years ended December 31, 2005
and 2004 were as follows:
2005 2004
---- ----
(dollars expressed in thousands)
Average balance.................................................. $ 36,849 3,657
Maximum month-end balance........................................ 100,000 15,000
======== ======
The average rates paid on the outstanding borrowings during the years
ended December 31, 2005, 2004 and 2003 were 6.26%, 13.84% and 5.09%,
respectively. Interest expense recognized on borrowings under the Credit
Agreement includes commitment, arrangement and renewal fees. During 2004, the
average rate paid on the outstanding borrowings reflects a marginal increased
level of commitment, arrangement and renewal fees on a much smaller base of
borrowings outstanding during the year, thereby causing the average rate paid to
be significantly higher than in 2005 and 2003.
(12) SUBORDINATED DEBENTURES
In February 1997, First Preferred Capital Trust (First Preferred I), a
newly formed Delaware business trust, issued 3.45 million shares of 9.25%
cumulative trust preferred securities at $25 per share in an underwritten public
offering, and issued 106,702 shares of common securities to First Banks at $25
per share. First Banks owned all of First Preferred I's common securities. The
gross proceeds of the offering were used by First Preferred I to purchase $88.9
million of 9.25% subordinated debentures from First Banks, maturing on March 31,
2027. The maturity date could have been shortened, at the option of First Banks,
to a date not earlier than March 31, 2002 or extended to a date not later than
March 31, 2046 if certain conditions were met. The subordinated debentures were
the sole asset of First Preferred I. In connection with the issuance of the
preferred securities, First Banks made certain guarantees and commitments that,
in the aggregate, constituted a full and unconditional guarantee by First Banks
of the obligations of First Preferred I under the First Preferred I preferred
securities. First Banks' proceeds from the issuance of the subordinated
debentures to First Preferred I, net of underwriting fees and offering expenses,
were $85.8 million. On May 5, 2003, First Banks redeemed the cumulative trust
preferred securities at the liquidate value of $25 per preferred security,
together with distributions accumulated and unpaid to the redemption date. In
conjunction with this transaction, First Banks paid in full the $88.9 million of
subordinated debentures. The funds necessary for the redemption were provided by
the net proceeds from the issuance of additional subordinated debentures to
First Bank Statutory Trust and First Preferred Capital Trust IV of $25.3 million
and $45.6 million, respectively, as further discussed below, and approximately
$18.0 million of available cash reserves. First Banks' distributions on the
subordinated debentures, which were payable quarterly in arrears, were $2.9
million for the year ended December 31, 2003.
In July 1998, First America Capital Trust (FACT), a newly formed
Delaware business trust, issued 1.84 million shares of 8.50% cumulative trust
preferred securities at $25 per share in an underwritten public offering, and
issued 56,908 shares of common securities to First Banks at $25 per share. First
Banks owned all of FACT's common securities. The gross proceeds of the offering
were used by FACT to purchase $47.4 million of 8.50% subordinated debentures
from First Banks, maturing on June 30, 2028. The maturity date could have been
shortened, at the option of First Banks, to a date not earlier than June 30,
2003 or extended to a date not later than June 30, 2037 if certain conditions
were met. The subordinated debentures were the sole asset of FACT. In connection
with the issuance of the FACT preferred securities, First Banks made certain
guarantees and commitments that, in the aggregate, constituted a full and
unconditional guarantee by First Banks of the obligations of FACT under the FACT
preferred securities. First Banks' proceeds from the issuance of the
subordinated debentures to FACT, net of underwriting fees and offering expenses,
were $45.4 million. On June 30, 2003, First Banks redeemed the cumulative trust
preferred securities at the liquidation value of $25 per preferred security,
together with distributions accumulated and unpaid to the redemption date. In
conjunction with this transaction, First Banks paid in full the $47.4 million of
subordinated debentures. The funds necessary for the redemption were provided
from available cash reserves of $12.9 million and an advance of $34.5 million on
First Banks' note payable. First Banks' distributions on the subordinated
debentures, which were payable quarterly in arrears, were $2.0 million for the
year ended December 31, 2003.
In October 2000, First Preferred Capital Trust II (First Preferred II),
a newly formed Delaware business trust, issued 2.3 million shares of 10.24%
cumulative trust preferred securities at $25 per share in an underwritten public
offering, and issued 71,135 shares of common securities to First Banks at $25
per share. First Banks owned all of First Preferred II's common securities. The
gross proceeds of the offering were used by First Preferred II to purchase $59.3
million of 10.24% subordinated debentures from First Banks, maturing on
September 30, 2030. The maturity date could have been shortened, at the option
of First Banks, to a date not earlier than September 30, 2005, if certain
conditions were met. The subordinated debentures were the sole asset of First
Preferred II. In connection with the issuance of the preferred securities, First
Banks made certain guarantees and commitments that, in the aggregate,
constituted a full and unconditional guarantee by First Banks of the obligations
of First Preferred II under the First Preferred II preferred securities. First
Banks' proceeds from the issuance of the subordinated debentures to First
Preferred II, net of underwriting fees and offering expenses, were $56.9
million. On September 30, 2005, First Banks redeemed the cumulative trust
preferred securities at the liquidation value of $25 per preferred security,
together with distributions accumulated and unpaid to the redemption date. In
conjunction with this transaction, First Banks paid in full its outstanding
$59.3 million of subordinated debentures that were issued by First Banks to
First Preferred II. The funds necessary for the redemption of the subordinated
debentures were provided from a portion of the proceeds of First Banks' Term
Loan. First Banks' distributions on the subordinated debentures issued to First
Preferred II, which were payable quarterly in arrears, were $4.6 million for the
year ended December 31, 2005 and $6.1 million for the years ended December 31,
2004 and 2003.
In November 2001, First Preferred Capital Trust III (First Preferred
III), a newly formed Delaware business trust, issued 2.2 million shares of 9.00%
cumulative trust preferred securities at $25 per share in an underwritten public
offering, and issued 68,290 shares of common securities to First Banks at $25
per share. First Banks owns all of First Preferred III's common securities. The
gross proceeds of the offering were used by First Preferred III to purchase
$56.9 million of 9.00% subordinated debentures from First Banks, maturing on
December 31, 2031. The maturity date may be shortened, at the option of First
Banks, to a date not earlier than December 31, 2006, if certain conditions are
met. The subordinated debentures are the sole asset of First Preferred III. In
connection with the issuance of the preferred securities, First Banks made
certain guarantees and commitments that, in the aggregate, constitute a full and
unconditional guarantee by First Banks of the obligations of First Preferred III
under the First Preferred III preferred securities. First Banks' proceeds from
the issuance of the subordinated debentures to First Preferred III, net of
underwriting fees and offering expenses, were $54.6 million. First Banks'
distributions on the subordinated debentures issued to First Preferred III,
which are payable quarterly in arrears, were $5.1 million for the years ended
December 31, 2005, 2004 and 2003.
In April 2002, First Bank Capital Trust (FBCT), a newly formed Delaware
business trust, issued 25,000 shares of variable rate cumulative trust preferred
securities at $1,000 per share in a private placement, and issued 774 shares of
common securities to First Banks at $1,000 per share. First Banks owns all of
the common securities of FBCT. The gross proceeds of the offering were used by
FBCT to purchase $25.8 million of variable rate subordinated debentures from
First Banks, maturing on April 22, 2032. The maturity date of the subordinated
debentures may be shortened, at the option of First Banks to a date not earlier
than April 22, 2007, if certain conditions are met. The subordinated debentures
are the sole asset of FBCT. In connection with the issuance of the FBCT
preferred securities, First Banks made certain guarantees and commitments that,
in the aggregate, constitute a full and unconditional guarantee by First Banks
of the obligations of FBCT under the FBCT preferred securities. First Banks'
proceeds from the issuance of the subordinated debentures to FBCT, net of
offering expenses, were $25.0 million. The distribution rate on the FBCT
securities is equivalent to the six-month LIBOR plus 387.5 basis points, and is
payable semi-annually in arrears on April 22 and October 22. First Banks'
distributions on the subordinated debentures issued to FBCT were $1.9 million
for the year ended December 31, 2005 and $1.4 million for the years ended
December 31, 2004 and 2003.
In March 2003, First Bank Statutory Trust (FBST), a newly formed
Connecticut statutory trust, issued 25,000 shares of 8.10% cumulative trust
preferred securities at $1,000 per share in a private placement, and issued 774
shares of common securities to First Banks at $1,000 per share. First Banks owns
all of the common securities of FBST. The gross proceeds of the offering were
used by FBST to purchase $25.8 million of 8.10% subordinated debentures from
First Banks, maturing on March 20, 2033. The maturity date of the subordinated
debentures may be shortened, at the option of First Banks, to a date not earlier
than March 20, 2008, if certain conditions are met. The subordinated debentures
are the sole asset of FBST. In connection with the issuance of the FBST
preferred securities, First Banks made certain guarantees and commitments that,
in the aggregate, constitute a full and unconditional guarantee by First Banks
of the obligations of FBST under the FBST preferred securities. First Banks'
proceeds from the issuance of the subordinated debentures to FBST, net of
offering expenses, were $25.3 million. First Banks' distributions on the
subordinated debentures issued to FBST, which are payable quarterly in arrears,
were $2.1 million for the years ended December 31, 2005 and 2004, and $1.7
million for the year ended December 31, 2003.
In April 2003, First Preferred Capital Trust IV (First Preferred IV), a
newly formed Delaware business trust, issued 1.84 million shares of 8.15%
cumulative trust preferred securities at $25 per share in an underwritten public
offering, and issued 56,908 shares of common securities to First Banks at $25
per share. First Banks owns all of First Preferred IV's common securities. The
gross proceeds of the offering were used by First Preferred IV to purchase
approximately $47.4 million of 8.15% subordinated debentures from First Banks,
maturing on June 30, 2033. The maturity date may be shortened, at the option of
First Banks, to a date not earlier than June 30, 2008, if certain conditions are
met. The subordinated debentures are the sole asset of First Preferred IV. In
connection with the issuance of the preferred securities, First Banks made
certain guarantees and commitments that, in the aggregate, constitute a full and
unconditional guarantee by First Banks of the obligations of First Preferred IV
under the First Preferred IV preferred securities. First Banks' proceeds from
the issuance of the subordinated debentures to First Preferred IV, net of
underwriting fees and offering expenses, were approximately $45.6 million. First
Banks' distributions on the subordinated debentures issued to First Preferred
IV, which are payable quarterly in arrears, were $3.9 million for the years
ended December 31, 2005 and 2004, and $2.9 million for the year ended December
31, 2003.
In September 2004, First Bank Statutory Trust II (FBST II), a newly
formed Delaware statutory trust, issued 20,000 shares of variable rate trust
preferred securities at $1,000 per share in a private placement, and issued 619
shares of common securities to First Banks at $1,000 per share. First Banks owns
all of the common securities of FBST II. The gross proceeds of the offering were
used by FBST II to purchase $20.6 million of variable rate subordinated
debentures from First Banks, maturing on September 20, 2034. The maturity date
of the subordinated debentures may be shortened, at the option of First Banks,
to a date not earlier than September 20, 2009, if certain conditions are met.
The subordinated debentures are the sole asset of FBST II. In connection with
the issuance of the FBST II preferred securities, First Banks made certain
guarantees and commitments that, in the aggregate, constitute a full and
unconditional guarantee by First Banks of the obligations of FBST II under the
FBST II preferred securities. Proceeds from the issuance of the subordinated
debentures to FBST II, net of offering expenses, were $20.6 million. The
distribution rate on the FBST II securities is equivalent to the three-month
LIBOR plus 205.0 basis points. First Banks' distributions on the subordinated
debentures issued to FBST II, which are payable quarterly in arrears, were $1.1
million and $236,000 for the years ended December 31, 2005 and 2004,
respectively.
In November 2004, First Bank Statutory Trust III (FBST III), a newly
formed Delaware statutory trust, issued 40,000 shares of variable rate trust
preferred securities at $1,000 per share in a private placement, and issued
1,238 shares of common securities to First Banks at $1,000 per share. First
Banks owns all of the common securities of FBST III. The gross proceeds of the
offering were used by FBST III to purchase $41.2 million of variable rate
subordinated debentures from First Banks, maturing on December 15, 2034. The
maturity date of the subordinated debentures may be shortened, at the option of
First Banks, to a date not earlier than December 15, 2009, if certain conditions
are met. The subordinated debentures are the sole asset of FBST III. In
connection with the issuance of the FBST III preferred securities, First Banks
made certain guarantees and commitments that, in the aggregate, constitute a
full and unconditional guarantee by First Banks of the obligations of FBST III
under the FBST III preferred securities. Proceeds from the issuance of the
subordinated debentures to FBST III, net of offering expenses, were $41.2
million. The distribution rate on the FBST III securities is equivalent to the
three-month LIBOR plus 218.0 basis points. First Banks' distributions on the
subordinated debentures issued to FBST III, which are payable quarterly in
arrears, were $2.3 million and $203,000 for the years ended December 31, 2005
and 2004, respectively.
The distributions payable on all of First Banks' subordinated
debentures are included in interest expense in the consolidated statements of
income. Deferred issuance costs associated with First Banks' subordinated
debentures are included as a reduction of subordinated debentures in the
consolidated balance sheets and are amortized on a straight-line basis.
The subordinated debentures were issued to First Banks in conjunction
with the formation of various financing entities and the issuance of trust
preferred securities by the financing entities. First Banks has six issues of
trust preferred securities as of December 31, 2005. Subsequent to December 31,
2005, First Banks, through a newly formed statutory trust affiliate, issued
$40.0 million of subordinated debentures, as more fully described in Note 25 to
the Consolidated Financial Statements. The structure of the trust preferred
securities currently satisfies the regulatory requirements for inclusion,
subject to certain limitations, in First Banks' capital base.
(13) INCOME TAXES
Provision for income taxes attributable to income from continuing
operations for the years ended December 31, 2005, 2004 and 2003 consists of:
2005 2004 2003
---- ---- ----
(dollars expressed in thousands)
Current provision for taxes:
Federal................................................ $48,306 36,578 40,194
State.................................................. 5,419 9,507 12,717
------- ------ -------
53,725 46,085 52,911
------- ------ -------
Deferred provision for taxes:
Federal................................................ 116 236 (12,463)
State.................................................. (1,332) (983) (4,493)
------- ------ -------
(1,216) (747) (16,956)
------- ------ -------
Total............................................. $52,509 45,338 35,955
======= ====== =======
The effective rates of federal income taxes for the years ended
December 31, 2005, 2004 and 2003 differ from the federal statutory rates of
taxation as follows:
Years Ended December 31,
----------------------------------------------------------
2005 2004 2003
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Income before provision for income taxes and
minority interest in loss of subsidiary...... $148,128 $128,246 $ 98,766
======== ======== ========
Provision for income taxes calculated
at federal statutory income tax rates........ $ 51,845 35.0% $ 44,886 35.0% $ 34,568 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income, net of
tax preference adjustment................ (814) (0.5) (791) (0.6) (911) (0.9)
State income taxes........................... 4,773 3.2 5,541 4.3 5,346 5.4
Reduction in prior year contingency reserve.. (2,116) (1.4) (2,825) (2.2) -- --
Bank owned life insurance, net of premium.... (1,602) (1.1) (1,670) (1.3) (1,762) (1.8)
Other, net................................... 423 0.3 197 0.2 (1,286) (1.3)
-------- ---- -------- ---- -------- ----
Provision for income taxes............. $ 52,509 35.5% $ 45,338 35.4% $ 35,955 36.4%
======== ==== ======== ==== ======== ====
The $2.1 million and $2.8 million reductions in the prior year
contingency reserve, reflected in the years 2005 and 2004, respectively,
resulted from reversals of state tax reserves no longer deemed necessary.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2005 and 2004 were as follows:
December 31,
------------
2005 2004
---- ----
(dollars expressed in thousands)
Deferred tax assets:
Net operating loss carryforwards................................ $ 35,513 38,786
Deferred built-in loss carryforward............................. 3,824 8,988
Allowance for loan losses....................................... 57,137 64,866
Loans held for sale............................................. 5,562 175
Alternative minimum tax credits................................. 2,770 2,667
Interest on nonaccrual loans.................................... 3,582 4,346
Servicing rights................................................ 10,081 8,366
Deferred compensation........................................... 6,462 4,541
Net fair value adjustment for available-for-sale
investment securities....................................... 8,954 1,527
Net fair value adjustment for derivative instruments............ 1,782 --
Partnership investments......................................... 4,161 1,244
State taxes..................................................... 515 1,996
Other........................................................... 6,349 7,662
--------- -------
Gross deferred tax assets................................... 146,692 145,164
--------- -------
Valuation allowance............................................. (17,754) (17,767)
--------- -------
Deferred tax assets, net of valuation allowance............. 128,938 127,397
--------- -------
Deferred tax liabilities:
Depreciation on bank premises and equipment..................... 8,407 11,567
Net fair value adjustment for derivative instruments............ -- 524
Unrealized gains on investment securities....................... 144 3,386
Core deposit intangibles........................................ 6,491 7,859
Discount on loans............................................... 4,878 4,412
Equity investments.............................................. 6,331 6,970
Other .......................................................... 853 94
--------- -------
Deferred tax liabilities.................................... 27,104 34,812
--------- -------
Net deferred tax assets..................................... $ 101,834 92,585
========= =======
The realization of First Banks' net deferred tax assets is based on the
availability of carrybacks to prior taxable periods, the expectation of future
taxable income and the utilization of tax planning strategies. Based on these
factors, management believes it is more likely than not that First Banks will
realize the recognized net deferred tax assets of $101.8 million at December 31,
2005.
There were no changes in the deferred tax asset valuation allowance for
the year ended December 31, 2003. Changes in the deferred tax asset valuation
allowance for the years ended December 31, 2005 and 2004 were as follows:
2005 2004
---- ----
(dollars expressed in thousands)
Balance, beginning of year..................................... $ 17,767 --
Purchase acquisitions.......................................... -- 17,767
Adjustment to prior year purchase acquisitions................. (13) --
-------- ------
Balance, end of year........................................... $ 17,754 17,767
======== ======
Upon completion of the acquisition of CIB Bank, the net deferred tax
assets associated with the acquisition were evaluated to determine whether it is
more likely than not that the net deferred tax assets will be recognized in the
future. The ability to utilize the net deferred tax assets recorded in
connection with the acquisition is subject to a number of limitations. Among
these limitations is the restriction that any built-in loss (the fair value was
less than the tax basis) that existed at the date of acquisition, if realized
within the first five years subsequent to the date of acquisition, will be
disallowed and must be carried forward and subjected to rules similar to the
rules for carrying forward net operating losses. Based upon these factors,
management determined that a valuation allowance should be established for CIB
Bank in the amount of $17.8 million. Subsequent reductions in the valuation
allowance will be credited to intangible assets associated with the purchase of
subsidiaries.
At December 31, 2005 and 2004, the accumulation of prior years'
earnings representing tax bad debt deductions was approximately $29.8 million.
If these tax bad debt reserves were charged for losses other than bad debt
losses, First Banks would be required to recognize taxable income in the amount
of the charge. It is not contemplated that such tax-restricted retained earnings
will be used in a manner that would create federal income tax liabilities.
At December 31, 2005 and 2004, for federal income taxes purposes, First
Banks had net operating loss carryforwards relating to pre-acquisition tax
losses of acquired entities of approximately $101.5 million and $110.8 million,
respectively. At December 31, 2005, the net operating loss carryforwards for
First Banks expire as follows:
(dollars expressed in thousands)
Year ending December 31:
2006...................................................................... $ 1,654
2007...................................................................... 4,356
2008...................................................................... 19,881
2009...................................................................... 9,714
2010 - 2025............................................................... 65,862
---------
Total................................................................ $ 101,467
=========
During 2004, First Banks recognized built-in losses associated with the
acquisition of CIB Bank. A portion of the recognized built-in losses was
disallowed for 2004 and is required to be carried forward subject to rules
similar to the rules for carrying forward net operating losses. Utilization of
the recognized built-in losses is allowed subsequent to the utilization of any
net operating loss carryforwards associated with the acquisition of CIB Bank.
Consequently, at December 31, 2005, First Banks had deferred built-in loss
carryforwards of approximately $9.1 million. Utilization of the deferred
built-in loss carryforwards is allowed beginning in the year 2016, and such
losses will expire in the year 2024.
(14) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted EPS
computations for the years ended December 31, 2005, 2004 and 2003:
Per Share
Income Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Year ended December 31, 2005:
Basic EPS - income available to common stockholders........ $ 96,120 23,661 $ 4,062.36
Effect of dilutive securities:
Class A convertible preferred stock...................... 769 516 (54.90)
-------- ------- ----------
Diluted EPS - income available to common stockholders...... $ 96,889 24,177 $ 4,007.46
======== ======= ==========
Year ended December 31, 2004:
Basic EPS - income available to common stockholders........ $ 82,123 23,661 $ 3,470.80
Effect of dilutive securities:
Class A convertible preferred stock...................... 769 565 (49.22)
-------- ------- ----------
Diluted EPS - income available to common stockholders...... $ 82,892 24,226 $ 3,421.58
======== ======= ==========
Year ended December 31, 2003:
Basic EPS - income available to common stockholders........ $ 62,025 23,661 $ 2,621.39
Effect of dilutive securities:
Class A convertible preferred stock...................... 769 600 (33.08)
-------- ------- ----------
Diluted EPS - income available to common stockholders...... $ 62,794 24,261 $ 2,588.31
======== ======= ==========
(15) CREDIT COMMITMENTS
First Banks is a party to commitments to extend credit and commercial
and standby letters of credit in the normal course of business to meet the
financing needs of its customers. These instruments involve, in varying degrees,
elements of credit risk and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The interest rate risk associated
with these credit commitments relates primarily to the commitments to originate
fixed-rate loans. As more fully discussed in Note 5 to the Consolidated
Financial Statements, the interest rate risk of the commitments to originate
fixed-rate loans has been hedged with forward commitments to sell
mortgage-backed securities. The credit risk amounts are equal to the contractual
amounts, assuming the amounts are fully advanced and the collateral or other
security is of no value. First Banks uses the same credit policies in granting
commitments and conditional obligations as it does for on-balance sheet items.
Commitments to extend fixed and variable rate credit, and commercial
and standby letters of credit at December 31, 2005 and 2004 were as follows:
December 31,
-------------------------
2005 2004
---- ----
(dollars expressed in thousands)
Commitments to extend credit...................................... $ 2,785,028 2,311,529
Commercial and standby letters of credit.......................... 191,634 180,785
----------- ---------
$ 2,976,662 2,492,314
=========== =========
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, income-producing commercial properties or
single family residential properties. In the event of nonperformance, First
Banks may obtain and liquidate the collateral to recover amounts paid under its
guarantees on these financial instruments.
Commercial and standby letters of credit are conditional commitments
issued to guarantee the performance of a customer to a third party. The letters
of credit are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. Most letters of credit extend for less than one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Upon issuance of the
commitments, First Banks typically holds marketable securities, certificates of
deposit, inventory, real property or other assets as collateral supporting those
commitments for which collateral is deemed necessary. The standby letters of
credit at December 31, 2005 expire, at various dates, all within 11 years.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is management's estimate of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including servicing
assets, deferred income tax assets, bank premises and equipment and intangible
assets associated with the purchase of subsidiaries and branch offices.
Furthermore, the income taxes that would be incurred if First Banks were to
realize any of the unrealized gains or unrealized losses indicated between the
estimated fair values and corresponding carrying values could have a significant
effect on the fair value estimates and have not been considered in any of the
estimates.
The estimated fair value of First Banks' financial instruments at
December 31, 2005 and 2004 were as follows:
2005 2004
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(dollars expressed in thousands)
Financial Assets:
Cash and cash equivalents...................... $ 286,652 286,652 267,110 267,110
Investment securities:
Trading.................................... 3,389 3,389 -- --
Available for sale......................... 1,311,289 1,311,289 1,788,063 1,788,063
Held to maturity........................... 26,105 25,791 25,286 25,586
Net loans...................................... 6,885,441 6,847,421 5,987,261 5,986,880
Derivative instruments......................... (6,530) (6,530) 4,681 4,681
Bank-owned life insurance...................... 111,442 111,442 102,239 102,239
Accrued interest receivable.................... 43,280 43,280 39,776 39,776
Interest rate lock commitments................. (49) (49) 20 20
Forward commitments to sell
mortgage-backed securities................. (538) (538) (99) (99)
========== ========= ========= =========
Financial Liabilities:
Deposits:
Noninterest-bearing demand................. $1,299,350 1,299,350 1,194,662 1,194,662
Interest-bearing demand.................... 981,837 981,837 875,489 875,489
Savings.................................... 2,106,470 2,106,470 2,249,644 2,249,644
Time deposits.............................. 3,154,174 3,154,174 2,832,175 2,832,175
Other borrowings............................... 539,174 539,174 594,750 594,750
Notes payable.................................. 100,000 100,000 15,000 15,000
Accrued interest payable....................... 21,023 21,023 14,376 14,376
Subordinated debentures........................ 215,461 219,675 273,300 283,337
========== ========= ========= =========
Off-Balance Sheet Financial Instruments........... $ -- -- -- --
========== ========= ========= =========
The following methods and assumptions were used in estimating the fair
value of financial instruments:
Cash and cash equivalents and accrued interest receivable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Investment securities: The fair value of trading and available-for-sale
investment securities is the amount reported in the consolidated balance sheets.
The fair value of held-to-maturity investment securities is based on quoted
market prices where available. If quoted market prices were not available, the
fair value was based on quoted market prices of comparable instruments.
Net loans: The fair value of most loans held for portfolio was
estimated utilizing discounted cash flow calculations that applied interest
rates currently being offered for similar loans to borrowers with similar risk
profiles. The fair value of loans held for sale, which is the amount reported in
the consolidated balance sheets, is based on quoted market prices where
available. If quoted market prices were not available, the fair value was based
on quoted market prices of comparable instruments. The carrying value of loans
is net of the allowance for loan losses and unearned discount.
Derivative instruments and bank-owned life insurance: The fair value of
derivative instruments, including cash flow hedges, fair value hedges, interest
rate floor and cap agreements, and interest rate lock commitments, and
bank-owned life insurance is based on quoted market prices where available. If
quoted market prices were not available, the fair value was based on quoted
market prices of comparable instruments.
Forward commitments to sell mortgage-backed securities: The fair value
of forward commitments to sell mortgage-backed securities is based on quoted
market prices. The fair value of these commitments has been reflected in the
consolidated balance sheets in the carrying value of the loans held for sale
portfolio.
Deposits: The fair value of deposits generally payable on demand (i.e.,
noninterest-bearing and interest-bearing demand and savings accounts) is
considered equal to their respective carrying amounts as reported in the
consolidated balance sheets. The fair value of demand deposits does not include
the benefit that results from the low-cost funding provided by deposit
liabilities compared to the cost of borrowing funds in the market. The fair
value disclosed for time deposits was estimated utilizing a discounted cash flow
calculation that applied interest rates currently being offered on similar
deposits to a schedule of aggregated monthly maturities of time deposits.
Other borrowings, notes payable and accrued interest payable: The
carrying values reported in the consolidated balance sheets approximate fair
value.
Subordinated debentures: The fair value is based on quoted market
prices.
Off-Balance Sheet Financial Instruments: The fair value of commitments
to extend credit, standby letters of credit and financial guarantees is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements, the likelihood of the
counterparties drawing on such financial instruments and the credit worthiness
of the counterparties. These fees in aggregate are not considered material, and
as such, were not assigned a value for purposes of this disclosure.
(17) EMPLOYEE BENEFITS
First Banks' 401(k) plan is a self-administered savings and incentive
plan covering substantially all employees. Employer match contributions are
determined annually under the plan by First Banks' Board of Directors. Employee
contributions were limited to $14,000 of gross compensation for 2005. Total
employer contributions under the plan were $2.4 million, $2.1 million and $1.7
million for the years ended December 31, 2005, 2004 and 2003, respectively. The
plan assets are held and managed under a trust agreement with First Bank's trust
department.
(18) PREFERRED STOCK
First Banks has two classes of preferred stock outstanding. The Class A
preferred stock is convertible into shares of common stock at a rate based on
the ratio of the par value of the preferred stock to the current market value of
the common stock at the date of conversion, to be determined by independent
appraisal at the time of conversion. Shares of Class A preferred stock may be
redeemed by First Banks at any time at 105.0% of par value. The Class B
preferred stock may not be redeemed or converted. The redemption of any issue of
preferred stock requires the prior approval of the Board of Governors of the
Federal Reserve System (Federal Reserve).
The holders of the Class A and Class B preferred stock have full voting
rights. Dividends on the Class A and Class B preferred stock are adjustable
quarterly based on the highest of the Treasury Bill Rate or the Ten Year
Constant Maturity Rate for the two-week period immediately preceding the
beginning of the quarter. This rate shall not be less than 6.0% nor more than
12.0% on the Class A preferred stock, or less than 7.0% nor more than 15.0% on
the Class B preferred stock. The annual dividend rates for the Class A and Class
B preferred stock were 6.0% and 7.0%, respectively, for the years ended December
31, 2005, 2004 and 2003.
(19) TRANSACTIONS WITH RELATED PARTIES
Outside of normal customer relationships, no directors or officers of
First Banks, no shareholders holding over 5% of First Banks' voting securities
and no corporations or firms with which such persons or entities are associated
currently maintain or have maintained, since the beginning of the last full
fiscal year, any significant business or personal relationships with First Banks
or its subsidiaries, other than that which arises by virtue of such position or
ownership interest in First Banks or its subsidiaries, except as described in
the following paragraphs.
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
$29.6 million, $26.6 million and $26.8 million for the years ended December 31,
2005, 2004 and 2003, respectively. First Services, L.P. leases information
technology and other equipment from First Bank. During 2005, 2004 and 2003,
First Services, L.P. paid First Bank $4.3 million, $4.3 million and $4.2
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 $2.6 million, $3.3 million and $3.2 million for the years ended
December 31, 2005, 2004 and 2003, respectively, in commissions paid by
unaffiliated third-party companies. The commissions received were primarily in
connection with the sales of annuities, securities and other insurance products
to customers of First Bank.
First Title Guaranty LLC D/B/A First Banc Insurors (First Title), a
limited liability company established and administered by First Banks' Chairman
and members of his immediate family, received approximately $379,000, $514,000
and $492,000 for the years ended December 31, 2005, 2004 and 2003, respectively,
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 $335,000, $297,000 and $255,000 for the years
ended December 31, 2005, 2004 and 2003, respectively.
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 $37.9 million and $31.0 million at December 31, 2005 and 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.
First Banks pays compensation to its Chairman and certain members of
his immediate family. Mr. Steven F. Schepman, the son-in-law of First Banks'
Chairman, and Director of First Banks since July 2004 and Senior Vice President
and Chief Financial Officer of First Banks since August 2005, received salary
and bonus compensation of $195,000 and $182,100 for the years ended December 31,
2005 and 2004, respectively. Mr. Michael J. Dierberg, the son of First Banks'
Chairman, and Director and General Counsel of First Banks until July 2004,
received salary and bonus compensation of $62,300 for the year ended December
31, 2004.
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 49.0% 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., physical 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 $31.4
million at December 31, 2005. Interest expense recorded under the Agreement by
SBLS LLC since its inception on June 30, 2005 was $1.9 million. However, the
balance of the advances under the Agreement and the related interest expense
recognized by SBLS LLC are fully eliminated for purposes of the Consolidated
Financial Statements.
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. Prior to entering
into this contract, 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 ended December 31, 2005. As of December 31, 2005, First
Bank had made payments of $471,000 under the contract.
During 2005, First Bank contributed $2.5 million and $1.5 million to
The Dierberg Foundation and the Dierberg Operating Foundation, Inc.,
respectively, charitable foundations created by First Banks' Chairman and
members of his immediate family. There were no charitable contributions to these
organizations during 2004. During 2003, First Banks contributed 231,779 shares
of Allegiant common stock with a fair value of $5.1 million to The Dierberg
Foundation. In conjunction with this transaction, First Banks recorded
charitable contribution expense of $5.1 million, which was partially offset by a
gain on the contribution of these available-for-sale investment securities of
$2.3 million, representing the difference between the cost basis and the fair
value of the common stock on the date of the contribution. In addition, First
Banks recognized a tax benefit of $2.5 million associated with this transaction.
The contribution of the common stock eliminated First Banks' investment in
Allegiant.
First Banks periodically purchases various products from Hermannhof,
Inc. and Dierberg Star Lane Vineyards, entities that were created by First
Banks' Chairman and members of his immediate family. First Banks utilizes these
products primarily for customer and employee events and promotions, and business
development functions. During the years ended December 31, 2005, 2004 and 2003,
First Banks purchased products of approximately $320,000, $189,000 and $150,000,
in aggregate, respectively, from these entities.
(20) 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 and Dallas, 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 predominant practices within the banking industry.
Such principles and practices are summarized in Note 1 to the Consolidated
Financial Statements. The business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
-------------------------------- ---------------------------- -------------------------------
2005 2004 2003 2005 2004 2003 2005 2004 2003
---- ---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities.............. $1,324,219 1,803,454 1,042,809 16,564 9,895 6,905 1,340,783 1,813,349 1,049,714
Loans, net of unearned discount.... 7,020,771 6,137,968 5,328,075 -- -- -- 7,020,771 6,137,968 5,328,075
Goodwill........................... 167,056 156,849 145,548 -- -- -- 167,056 156,849 145,548
Total assets....................... 9,148,931 8,720,331 7,097,635 21,402 12,510 9,305 9,170,333 8,732,841 7,106,940
Deposits........................... 7,601,162 7,161,636 5,977,042 (59,331) (9,666) (15,427) 7,541,831 7,151,970 5,961,615
Notes payable...................... -- -- -- 100,000 15,000 17,000 100,000 15,000 17,000
Subordinated debentures............ -- -- -- 215,461 273,300 209,320 215,461 273,300 209,320
Stockholders' equity............... 931,192 877,473 766,397 (252,254) (276,580) (216,582) 678,938 600,893 549,815
========== ========= ========= ======== ======== ======== ========= ========= =========
Income statement information:
Interest income.................... $ 493,182 394,196 390,340 758 586 813 493,940 394,782 391,153
Interest expense................... 145,608 79,260 85,524 22,651 15,507 18,502 168,259 94,767 104,026
---------- --------- --------- -------- -------- -------- --------- --------- ---------
Net interest income........... 347,574 314,936 304,816 (21,893) (14,921) (17,689) 325,681 300,015 287,127
Provision for loan losses.......... (4,000) 25,750 49,000 -- -- -- (4,000) 25,750 49,000
---------- --------- --------- -------- -------- -------- --------- --------- ---------
Net interest income after
provision for loan losses... 351,574 289,186 255,816 (21,893) (14,921) (17,689) 329,681 274,265 238,127
Noninterest income................. 95,529 84,077 79,813 (786) (591) 7,895 94,743 83,486 87,708
Noninterest expense................ 273,142 226,183 216,373 3,154 3,322 10,696 276,296 229,505 227,069
---------- --------- --------- -------- -------- -------- --------- --------- ---------
Income before provision for
income taxes and minority
interest in loss of
subsidiary.................. 173,961 147,080 119,256 (25,833) (18,834) (20,490) 148,128 128,246 98,766
Provision for income taxes......... 61,517 54,682 44,871 (9,008) (9,344) (8,916) 52,509 45,338 35,955
---------- --------- --------- -------- -------- -------- --------- --------- ---------
Income before minority
interest in loss of
subsidiary.................. 112,444 92,398 74,385 (16,825) (9,490) (11,574) 95,619 82,908 62,811
Minority interest in loss
of subsidiary................. (1,287) -- -- -- -- -- (1,287) -- --
---------- --------- --------- -------- -------- -------- --------- --------- ---------
Net income.................... $ 113,731 92,398 74,385 (16,825) (9,490) (11,574) 96,906 82,908 62,811
========== ========= ========= ======== ======== ======== ========= ========= =========
- ---------------
(1) Corporate and other includes $13.4 million, $9.8 million and $11.6 million of interest expense on subordinated debentures,
after applicable income tax benefit of $7.2 million, $5.3 million and $6.3 million for the years ended December 31, 2005,
2004 and 2003, respectively.
(21) 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 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 2005 and 2004, First Banks and First Bank were each
well capitalized. As of December 31, 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 1 risk-based and Tier 1 leverage ratios as set
forth in the following table.
At December 31, 2005 and 2004, First Banks' and First Bank's required
and actual capital ratios were as follows:
To be Well
Actual Capitalized Under
------------------ For Capital Prompt Corrective
2005 2004 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.14% 10.61% 8.0% 10.0%
First Bank.............................. 10.66 10.73 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 8.88 8.43 4.0 6.0
First Bank.............................. 9.41 9.47 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 8.13 7.89 3.0 5.0
First Bank.............................. 8.61 8.86 3.0 5.0
On March 1, 2005, the 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 Federal Reserve'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 to be 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 Federal
Reserve'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 8.47% and 7.74%, respectively, as of December 31, 2005. In October
2005, the Federal Reserve, 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 ended in January 2006. First Banks is awaiting
further guidance from the Board pending the outcome of the newly proposed
revisions, and is continuing to evaluate the proposed changes and their overall
impact on the Company's financial condition and results of operations.
(22) DISTRIBUTION OF EARNINGS OF FIRST BANK
First Bank is restricted by various state and federal regulations as to
the amount of dividends that are available for payment to First Banks, Inc.
Under the most restrictive of these requirements, the future payment of
dividends from First Bank is limited to approximately $81.5 million at December
31, 2005, unless prior permission of the regulatory authorities is obtained.
(23) PARENT COMPANY ONLY FINANCIAL INFORMATION
Following are condensed balance sheets of First Banks, Inc. as of
December 31, 2005 and 2004, and condensed statements of income and cash flows
for the years ended December 31, 2005, 2004 and 2003:
CONDENSED BALANCE SHEETS
December 31,
-----------------
2005 2004
---- ----
(dollars expressed in thousands)
Assets
------
Cash deposited in First Bank........................................... $ 59,036 8,359
Cash deposited in unaffiliated financial institutions.................. 1,789 --
---------- -------
Total cash........................................................ 60,825 8,359
Investment securities.................................................. 16,564 9,895
Investment in subsidiaries............................................. 931,690 879,316
Other assets........................................................... 3,425 2,665
---------- -------
Total assets...................................................... $1,012,504 900,235
========== =======
Liabilities and Stockholders' Equity
------------------------------------
Notes payable.......................................................... $ 100,000 15,000
Subordinated debentures................................................ 215,461 273,300
Accrued expenses and other liabilities................................. 18,105 11,042
---------- -------
Total liabilities................................................. 333,566 299,342
Stockholders' equity................................................... 678,938 600,893
---------- -------
Total liabilities and stockholders' equity........................ $1,012,504 900,235
========== =======
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
2005 2004 2003
---- ---- ----
(dollars expressed in thousands)
Income:
Dividends from subsidiaries..................................... $ 94,050 40,000 67,000
Management fees from subsidiaries............................... 31,975 27,853 23,992
Gain on sale of available-for-sale investment securities........ -- -- 8,218
Other........................................................... 1,049 710 1,301
-------- ------ -------
Total income................................................. 127,074 68,563 100,511
-------- ------ -------
Expense:
Interest........................................................ 22,860 15,597 18,664
Salaries and employee benefits.................................. 23,238 20,699 19,366
Legal, examination and professional fees........................ 3,959 2,943 3,903
Charitable contributions........................................ 100 43 5,134
Other........................................................... 8,687 8,114 6,852
-------- ------ -------
Total expense................................................ 58,844 47,396 53,919
-------- ------ -------
Income before benefit for income taxes and equity
in undistributed earnings of subsidiaries.................. 68,230 21,167 46,592
Benefit for income taxes........................................... (9,004) (9,344) (8,891)
-------- ------ -------
Income before equity in undistributed earnings
of subsidiaries............................................ 77,234 30,511 55,483
Equity in undistributed earnings of subsidiaries................... 19,672 52,397 7,328
-------- ------ -------
Net income................................................... $ 96,906 82,908 62,811
======== ====== =======
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------
2005 2004 2003
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
Net income...................................................... $ 96,906 82,908 62,811
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income of subsidiaries................................. (113,722) (92,397) (74,328)
Dividends from subsidiaries................................ 94,050 40,000 67,000
Other, net................................................. 4,882 (3,262) 292
--------- ------- --------
Net cash provided by operating activities................ 82,116 27,249 55,775
--------- ------- --------
Cash flows from investing activities:
Increase in investment securities............................... (5,304) (915) --
Investment in common securities of affiliated business
and statutory trusts......................................... -- (1,857) (2,197)
Payments from redemption of investment in common securities
of affiliated business and statutory trusts.................. 1,778 -- 4,090
Acquisitions of subsidiaries.................................... (52,400) (76,067) --
Capital (contributions) reductions (to) from subsidiaries....... -- (15,000) 10,000
Other, net...................................................... 1,340 (39) --
--------- ------- --------
Net cash (used in) provided by investing activities...... (54,586) (93,878) 11,893
--------- ------- --------
Cash flows from financing activities:
Advances drawn on notes payable................................. 100,000 15,000 34,500
Repayments of notes payable..................................... (15,000) (17,000) (24,500)
Proceeds from issuance of subordinated debentures............... -- 61,857 70,907
Repayments of subordinated debentures........................... (59,278) -- (136,341)
Payment of preferred stock dividends............................ (786) (786) (786)
--------- ------- --------
Net cash provided by (used in) financing activities...... 24,936 59,071 (56,220)
--------- ------- --------
Net increase (decrease)in cash........................... 52,466 (7,558) 11,448
Cash, beginning of year........................................... 8,359 15,917 4,469
--------- ------- --------
Cash, end of year................................................. $ 60,825 8,359 15,917
========= ======= ========
Noncash investing activities:
Cash paid for interest.......................................... $ 18,690 13,527 16,489
========= ======= ========
(24) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty
contracts. For value received, and for the purpose of inducing a pension fund
and its trustees and a welfare fund and its trustees (the Funds) to conduct
business with 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 December 31, 2005, 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 recorded a liability of $2.0 million for
recourse obligations related to the completion of the sale of a significant
portion of the leases in its commercial leasing portfolio. 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 December 31, 2005 and 2004, this liability
was $500,000 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, as further discussed in Note 2 to the
Consolidated Financial Statements. 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 December 31, 2005 and 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.
In the ordinary course of business, First Banks and its subsidiaries
become involved in legal proceedings. Management, in consultation with legal
counsel, believes the ultimate resolution of these proceedings will not have a
material adverse effect on the financial condition or results of operations of
First Banks and/or its subsidiaries.
(25) SUBSEQUENT EVENTS (UNAUDITED)
On January 3, 2006, First Banks completed its acquisition of a majority
of the outstanding common stock of FNBS, Sachse, Texas, for approximately $20.8
million in cash. The acquisition served to expand First Banks' banking franchise
in Texas. The transaction was funded through internally generated funds. At the
time of the acquisition, FNBS had assets of $76.2 million, loans, net of
unearned discount, of $49.3 million, deposits of $66.2 million and stockholders'
equity of $9.9 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 $9.0 million, and the core
deposit intangibles, which are not deductible for tax purposes and will be
amortized over five years utilizing the straight-line method, were approximately
$3.6 million. FNBS was merged with and into First Bank.
On January 18, 2006, First Banks executed a Stock Purchase Agreement
providing for the acquisition of First Independent National Bank (First
Independent) for approximately $19.2 million in cash. First Independent is
headquartered in Plano, Texas and operates two banking offices in Plano, Texas,
located in Collin County. In addition, First Independent is in the process of
opening a de novo branch banking office located in the Preston Forest Shopping
Center in Dallas County. The transaction, which is subject to regulatory
approvals, is expected to be completed during the second quarter of 2006. At
December 31, 2005, First Independent had assets of approximately $75.4 million,
loans, net of unearned discount, of approximately $61.1 million, deposits of
approximately $66.1 million and stockholders' equity of approximately $8.0
million.
On January 20, 2006, First Bank completed its acquisition of the East
Renner Branch. At the time of the acquisition, the East Renner Branch had assets
of approximately $667,000, including loans, net of unearned discount, of
approximately $144,000, and deposits of approximately $1.1 million.
First Banks transferred approximately $59.7 million of nonperforming
loans to its held for sale portfolio on December 31, 2005 and actively marketed
the loans for sale through an independent third party. On January 30, 2006,
First Banks received a payoff on one of these nonaccrual loans held for sale
that had a carrying value of $12.4 million at December 31, 2005. This credit
relationship was acquired with the acquisition of CIB Bank. In conjunction with
this loan payoff, First Banks recognized a loan recovery of $5.0 million and
interest income and late fees of $2.0 million. In March 2006, First Banks
completed the sale of a majority of the remaining nonaccrual loans that had a
carrying value of approximately $32.5 million in aggregate, at December 31,
2005. First Bank recorded a gain, before applicable income taxes, of
approximately $1.7 million on the sale of these loans. First Bank continues to
actively market the remaining nonaccrual loans that had a carrying value of
approximately $14.9 million at December 31, 2005.
On January 31, 2006, First Bank executed a Stock Purchase Agreement
providing for the acquisition of KIF, Inc. (KIF), an Iowa corporation, and its
wholly owned subsidiaries, Universal Premium Acceptance Corporation, a Missouri
corporation, and UPAC of California, Inc., a California corporation,
(collectively, UPAC) for approximately $52.8 million in cash. In conjunction
with the acquisition of UPAC, First Banks will repay in full the outstanding
balance of the subordinated notes of UPAC, which was approximately $114.2
million at December 31, 2005. UPAC is an insurance premium finance company
headquartered in the Kansas City suburb of Lenexa, Kansas and operates in 49
states, including offices in St. Louis, Chicago, Los Angeles, Dallas, Boston,
Cleveland, Fort Lauderdale, Minneapolis, New York City, Philadelphia and
Portland. The transaction, which is subject to certain state approvals, is
expected to be completed during the second quarter of 2006. At December 31,
2005, UPAC had assets of approximately $146.6 million, loans of approximately
$144.2 million and stockholders' equity of approximately $17.3 million.
On February 14, 2006, First Bank terminated its two $50.0 million term
repurchase agreements with maturity dates of June 14, 2007, and recognized a
$1.6 million loss on the related sale of the underlying securities associated
with the term repurchase agreements.
On February 16, 2006, First Banks terminated its single remaining $25.0
million notional fair value interest rate swap agreement. The underlying hedged
liabilities were a portion of First Banks' subordinated debentures. In
conjunction with this transaction, First Banks recorded the resulting $1.7
million basis adjustment of the underlying hedged liabilities and the remaining
balance of the basis adjustments associated with the fair value interest rate
swap agreements that were terminated effective May 27, 2005, totaling $834,000,
in its consolidated statements of income. The recognition of the net basis
adjustments on all of the terminated fair value interest rate swap agreements
resulted in a pre-tax loss of $849,000.
On March 1, 2006, First Bank Statutory Trust IV (FBST IV), a newly
formed Delaware statutory trust, issued 40,000 shares of variable rate trust
preferred securities at $1,000 per share in a private placement, and issued
1,238 shares of common securities to First Banks at $1,000 per share. First
Banks owns all of the common securities of FBST IV. The gross proceeds of the
offering were used by FBST IV to purchase $41.2 million of variable rate
subordinated debentures from First Banks, maturing on March 15, 2036. The
maturity date of the subordinated debentures may be shortened, at the option of
First Banks, to a date not earlier than March 15, 2011, if certain conditions
are met. The subordinated debentures are the sole asset of FBST IV. In
connection with the issuance of the FBST IV preferred securities, First Banks
made certain guarantees and commitments that, in the aggregate, constitute a
full and unconditional guarantee by First Banks of the obligations of FBST IV
under the FBST IV preferred securities. Proceeds from the issuance of the
subordinated debentures to FBST IV, net of offering expenses, were $41.2
million. The distribution rate on the FBST IV securities is equivalent to the
three-month LIBOR plus 142.0 basis points, and is payable quarterly in arrears
beginning June 15, 2006.
On March 7, 2006, First Bank executed a Purchase and Assumption
Agreement providing for the sale of the Pittsfield banking office in Mount
Sterling, Illinois to Beardstown following the completion of First Banks'
acquisition of Bancorp, as further described in Note 2 to the Consolidated
Financial Statements. The transaction, which is subject to regulatory approvals,
is expected to be completed during the second quarter of 2006.
FIRST BANKS, INC.
QUARTERLY CONDENSED FINANCIAL DATA -- UNAUDITED
- ----------------------------------------------------------------------------------------------------------------------
2005 Quarter Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands, except per share data)
Interest income............................................ $ 112,228 117,188 127,801 136,723
Interest expense........................................... 34,149 39,367 45,155 49,588
--------- -------- -------- --------
Net interest income..................................... 78,079 77,821 82,646 87,135
Provision for loan losses.................................. -- (8,000) -- 4,000
--------- -------- -------- --------
Net interest income after provision for loan losses..... 78,079 85,821 82,646 83,135
Noninterest income......................................... 21,101 25,803 24,535 23,304
Noninterest expense........................................ 63,755 69,773 67,439 75,329
--------- -------- -------- --------
Income before provision for income taxes and minority
interest in loss of subsidiary........................ 35,425 41,851 39,742 31,110
Provision for income taxes................................. 13,298 15,005 13,265 10,941
--------- -------- -------- --------
Income before minority interest in loss of subsidiary... 22,127 26,846 26,477 20,169
Minority interest in loss of subsidiary.................... -- -- (1,036) (251)
--------- -------- -------- --------
Net income.............................................. $ 22,127 26,846 27,513 20,420
========= ======== ======== ========
Earnings per common share:
Basic................................................... $ 926.87 1,129.05 1,154.52 851.91
========= ======== ======== ========
Diluted................................................. $ 915.04 1,110.42 1,139.46 846.12
========= ======== ======== ========
2004 Quarter Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands, except per share data)
Interest income............................................ $ 96,127 96,585 99,461 102,609
Interest expense........................................... 21,474 20,979 23,853 28,461
--------- -------- -------- --------
Net interest income..................................... 74,653 75,606 75,608 74,148
Provision for loan losses.................................. 12,750 3,000 7,500 2,500
--------- -------- -------- --------
Net interest income after provision for loan losses..... 61,903 72,606 68,108 71,648
Noninterest income......................................... 20,559 20,104 21,982 20,841
Noninterest expense........................................ 52,602 55,405 58,391 63,107
--------- -------- -------- --------
Income before provision for income taxes................ 29,860 37,305 31,699 29,382
Provision for income taxes................................. 11,591 11,302 11,951 10,494
--------- -------- -------- --------
Net income.............................................. $ 18,269 26,003 19,748 18,888
========= ======== ======== ========
Earnings per common share:
Basic................................................... $ 763.81 1,093.42 826.33 787.25
========= ======== ======== ========
Diluted................................................. $ 753.93 1,074.06 815.20 780.71
========= ======== ======== ========
FIRST BANKS, INC.
INVESTOR INFORMATION
- --------------------------------------------------------------------------------
FIRST BANKS, INC. PREFERRED SECURITIES
- --------------------------------------
The preferred securities of First Preferred Capital Trust III are
traded on the Nasdaq National Market System with the ticker symbol "FBNKM." The
preferred securities of First Preferred Capital Trust III are represented by a
global security that has been deposited with and registered in the name of The
Depository Trust Company, New York, New York (DTC). The beneficial ownership
interests of these preferred securities are recorded through the DTC book-entry
system. The high and low preferred securities prices and the dividends declared
for 2005 and 2004 are summarized as follows:
FIRST PREFERRED CAPITAL TRUST III (ISSUE DATE - NOVEMBER 2001) - FBNKM
2005 2004
------------------ ----------------- Dividend
High Low High Low Declared
---- --- ---- --- ----------
First quarter................................... $ 27.50 26.25 27.95 27.00 $ 0.562500
Second quarter.................................. 27.05 26.00 27.00 25.55 0.562500
Third quarter................................... 27.09 25.75 29.10 26.04 0.562500
Fourth quarter.................................. 26.40 25.75 27.55 26.55 0.562500
----------
$ 2.250000
==========
The preferred securities of First Preferred Capital Trust IV are traded
on the New York Stock Exchange with the ticker symbol "FBSPrA." The preferred
securities of First Preferred Capital Trust IV are represented by a global
security that has been deposited with and registered in the name of DTC. The
beneficial ownership interests of these preferred securities are recorded
through the DTC book-entry system. The high and low preferred securities prices
and the dividends declared for 2005 and 2004 are summarized as follows:
FIRST PREFERRED CAPITAL TRUST IV (ISSUE DATE - APRIL 2003) - FBSPrA
2005 2004
------------------ ---------------- Dividend
High Low High Low Declared
---- --- ---- --- ----------
First quarter................................... $ 27.80 26.00 28.60 27.35 $ 0.509375
Second quarter.................................. 27.55 25.75 28.00 25.70 0.509375
Third quarter................................... 27.40 26.28 28.00 25.80 0.509375
Fourth quarter.................................. 27.61 25.97 28.00 26.81 0.509375
----------
$ 2.037500
==========
FOR INFORMATION CONCERNING FIRST BANKS, PLEASE CONTACT:
Allen H. Blake Terrance M. McCarthy Steven F. Schepman
President and Senior Executive Vice President Senior Vice President
Chief Executive Officer and Chief Operating Officer and Chief Financial Officer
600 James S. McDonnell Blvd. 600 James S. McDonnell Blvd. 600 James S. McDonnell Blvd.
Mail Code - M1-199-014 Mail Code - M1-199-071 Mail Code - M1-199-014
Hazelwood, Missouri 63042 Hazelwood, Missouri 63042 Hazelwood, Missouri 63042
Telephone - (314) 592-5000 Telephone - (314) 592-5000 Telephone - (314) 592-5000
www.firstbanks.com www.firstbanks.com www.firstbanks.com
------------------ ------------------ ------------------
TRANSFER AGENTS:
FBNKM FBSPrA
----- ------
U.S. Bank Corporate Trust Services Computershare Investor Services, LLC
One Federal Street, Third Floor 2 North LaSalle Street
Boston, Massachusetts 02110 Chicago, Illinois 60602
Telephone - (800) 934-6802 Telephone - (312) 588-4990
www.usbank.com www.computershare.com
-------------- ---------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANKS, INC.
By: /s/ Allen H. Blake
-------------------------------------
Allen H. Blake
President and Chief Executive
Officer
(Principal Executive Officer)
By: /s/ Steven F. Schepman
-------------------------------------
Steven F. Schepman
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 27, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
Signatures Title Date
- --------------------------------------------------------------------------------
/s/ James F. Dierberg Director March 27, 2006
- -------------------------------------
James F. Dierberg
/s/ Allen H. Blake Director March 27, 2006
- -------------------------------------
Allen H. Blake
/s/ Terrance M. McCarthy Director March 27, 2006
- -------------------------------------
Terrance M. McCarthy
/s/ Steven F. Schepman Director March 27, 2006
- -------------------------------------
Steven F. Schepman
/s/ Gordon A. Gundaker Director March 27, 2006
- -------------------------------------
Gordon A. Gundaker
/s/ David L. Steward Director March 27, 2006
- -------------------------------------
David L. Steward
/s/ Douglas H. Yaeger Director March 27, 2006
- -------------------------------------
Douglas H. Yaeger
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
2.1 Stock Purchase Agreement by and among First Banks, Inc.,
The San Francisco Company, CIB Marine Bancshares, Inc.,
Hillside Investors, Ltd., and CIB Bank, dated August 12,
2004 (incorporated herein by reference to Exhibit 10.6 to
the Company's Current Report on Form 8-K dated August 12,
2004).
3.1 Restated Articles of Incorporation of the Company, as
amended (incorporated herein by reference to Exhibit 3(i)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993).
3.2 By-Laws of the Company (incorporated herein by reference to
Exhibit 3.2 to Amendment No. 2 to the Company's
Registration Statement on Form S-1, File No. 33-50576,
dated September 15, 1992).
4.1 Agreement as to Expenses and Liabilities between First
Banks, Inc. and First Preferred Capital Trust III, dated
November 15, 2001 (relating to First Preferred Capital
Trust III ("First Preferred III")) (filed as Exhibit 4.8 to
the Company's Registration Statement on Form S-2, File No.
333-71652, dated October 15, 2001).
4.2 Agreement as to Expenses and Liabilities between First
Banks, Inc. and First Preferred Capital Trust IV, dated
April 1, 2003 (relating to First Preferred Capital Trust IV
("First Preferred IV")) (incorporated herein by reference
to Exhibit 10.20 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).
4.3 Preferred Securities Guarantee Agreement by and between
First Banks, Inc. and State Street Bank and Trust Company
of Connecticut, National Association, dated November 15,
2001 (relating to First Preferred III) (filed as Exhibit
4.7 to the Company's Registration Statement on Form S-2,
File No. 333-71652, dated October 15, 2001).
4.4 Preferred Securities Guarantee Agreement by and between
First Banks, Inc. and Fifth Third Bank, dated April 1, 2003
(relating to First Preferred IV) (incorporated herein by
reference to Exhibit 10.21 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003).
4.5 Indenture between First Banks, Inc. and State Street Bank
and Trust Company of Connecticut, National Association, as
Trustee, dated November 15, 2001 (relating to First
Preferred III) (filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-2, File No. 333-71652,
dated October 15, 2001).
4.6 Indenture between First Banks, Inc. and Fifth Third Bank,
as Trustee, dated April 1, 2003 (relating to First
Preferred IV) (incorporated herein by reference to Exhibit
10.22 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003).
4.7 Amended and Restated Trust Agreement among First Banks,
Inc., as Depositor, State Street Bank and Trust Company of
Connecticut, National Association, as Property Trustee,
Wilmington Trust Company, as Delaware Trustee, and the
Administrative Trustees, dated November 15, 2001 (relating
to First Preferred III) (filed as Exhibit 4.5 to the
Company's Registration Statement on Form S-2, File No.
333-71652, dated October 15, 2001).
4.8 Amended and Restated Trust Agreement among First Banks,
Inc., as Depositor, Fifth Third Bank, as Property Trustee,
Wilmington Trust Company, as Delaware Trustee, and the
Administrative Trustees, dated April 1, 2003 (relating to
First Preferred IV) (incorporated herein by reference to
Exhibit 10.23 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).
4.9 Indenture between First Banks, Inc., as Issuer, and
Wilmington Trust Company, as Trustee, dated as of April 10,
2002 (incorporated herein by reference to Exhibit 4.15 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).
4.10 Guarantee Agreement for First Bank Capital Trust, dated as
of April 10, 2002 (incorporated herein by reference to
Exhibit 4.16 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002).
4.11 Amended and Restated Declaration of Trust of First Bank
Capital Trust, dated as of April 10, 2002 (incorporated
herein by reference to Exhibit 4.17 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2002).
4.12 Floating Rate Junior Subordinated Debt Security Certificate
of First Banks, Inc., dated April 10, 2002 (incorporated
herein by reference to Exhibit 4.18 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2002).
4.13 Capital Security Certificate of First Bank Capital Trust,
dated as of April 10, 2002 (incorporated herein by
reference to Exhibit 4.19 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002).
4.14 Indenture between First Banks, Inc., as Issuer, and U.S.
Bank National Association, as Trustee, dated as of March
20, 2003 (incorporated herein by reference to Exhibit 10.6
to Amendment No. 4 to the Company's Registration Statement
on Form S-2, File No. 333-102549, dated March 24, 2003).
4.15 Amended and Restated Declaration of Trust by and among U.S.
Bank National Association, as Institutional Trustee, First
Banks, Inc., as Sponsor, and Allen H. Blake, Terrance M.
McCarthy and Lisa K. Vansickle, as Administrators, dated as
of March 20, 2003 (incorporated herein by reference to
Exhibit 10.7 to Amendment No. 4 to the Company's
Registration Statement on Form S-2, File No. 333-102549,
dated March 24, 2003).
4.16 Guarantee Agreement by and between First Banks, Inc. and
U.S. Bank National Association, dated as of March 20, 2003
(incorporated herein by reference to Exhibit 10.8 to
Amendment No. 4 to the Company's Registration Statement on
Form S-2, File No. 333-102549, dated March 24, 2003).
4.17 Placement Agreement by and among First Banks, Inc., First
Bank Statutory Trust and SunTrust Capital Markets, Inc.,
dated as of March 20, 2003 (incorporated herein by
reference to Exhibit 10.9 to Amendment No. 4 to the
Company's Registration Statement on Form S-2, File No.
333-102549, dated March 24, 2003).
4.18 Junior Subordinated Debenture of First Banks, Inc., dated
as of March 20, 2003 (incorporated herein by reference to
Exhibit 10.10 to Amendment No. 4 to the Company's
Registration Statement on Form S-2, File No. 333-102549,
dated March 24, 2003).
4.19 Capital Securities Subscription Agreement by and among
First Bank Statutory Trust, First Banks, Inc. and STI
Investment Management, Inc., dated as of March 20, 2003
(incorporated herein by reference to Exhibit 10.11 to
Amendment No. 4 to the Company's Registration Statement on
Form S-2, File No. 333-102549, dated March 24, 2003).
4.20 Common Securities Subscription Agreement by and between
First Bank Statutory Trust and First Banks, Inc., dated as
of March 20, 2003 (incorporated herein by reference to
Exhibit 10.12 to Amendment No. 4 to the Company's
Registration Statement on Form S-2, File No. 333-102549,
dated March 24, 2003).
4.21 Debenture Subscription Agreement by and between First
Banks, Inc. and First Bank Statutory Trust, dated as of
March 20, 2003 (incorporated herein by reference to Exhibit
10.13 to Amendment No. 4 to the Company's Registration
Statement on Form S-2, File No. 333-102549, dated March 24,
2003).
4.22 Indenture between First Banks, Inc., as Issuer, and
Wilmington Trust Company, as Trustee, dated as of September
20, 2004 (incorporated herein by reference to Exhibit 4.26
to the Company's Annual Report on Form 10-K for the year
ended December 31, 2004).
4.23 Amended and Restated Declaration of Trust by and among
Wilmington Trust Company, as Delaware Trustee, and the
Institutional Trustee, First Banks, Inc., as Sponsor, and
Allen H. Blake, Terrance M. McCarthy and Lisa K. Vansickle,
as Administrators, dated as of September 20, 2004
(incorporated herein by reference to Exhibit 4.27 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
4.24 Guarantee Agreement by and between First Banks, Inc. and
Wilmington Trust Company, dated as of September 20, 2004
(incorporated herein by reference to Exhibit 4.28 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
4.25 Placement Agreement by and among First Banks, Inc., First
Bank Statutory Trust II and FTN Financial Capital Markets
and Keefe, Bruyette & Woods, as Placement Agents, dated as
of September 10, 2004 (incorporated herein by reference to
Exhibit 4.29 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004).
4.26 Floating Rate Junior Subordinated Deferrable Interest
Debenture of First Banks, Inc., dated as of September 20,
2004 (incorporated herein by reference to Exhibit 4.30 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
4.27 Capital Securities Subscription Agreement by and among
First Bank Statutory Trust II, First Banks, Inc. and First
Tennessee Bank National Association, dated as of September
20, 2004 (incorporated herein by reference to Exhibit 4.31
to the Company's Annual Report on Form 10-K for the year
ended December 31, 2004).
4.28 Capital Securities Subscription Agreement by and between
First Bank Statutory Trust II, First Banks, Inc. and
Preferred Term Securities XV, Ltd., dated as of September
20, 2004 (incorporated herein by reference to Exhibit 4.32
to the Company's Annual Report on Form 10-K for the year
ended December 31, 2004).
4.29 Capital Securities Certificate P-1 of First Bank Statutory
Trust II, dated September 20, 2004 (incorporated herein by
reference to Exhibit 4.33 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
4.30 Capital Securities Certificate P-2 of First Bank Statutory
Trust II, dated September 20, 2004 (incorporated herein by
reference to Exhibit 4.34 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
4.31 Indenture between First Banks, Inc., as Issuer, and
Wilmington Trust Company, as Trustee, dated as of November
23, 2004 (incorporated herein by reference to Exhibit 4.35
to the Company's Annual Report on Form 10-K for the year
ended December 31, 2004).
4.32 Amended and Restated Declaration of Trust by and among
Wilmington Trust Company, as Delaware Trustee, and the
Institutional Trustee, First Banks, Inc., as Sponsor, and
Terrance M. McCarthy, Peter D. Wimmer and Lisa K.
Vansickle, as Administrators, dated as of November 23, 2004
(incorporated herein by reference to Exhibit 4.36 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
4.33 Guarantee Agreement by and between First Banks, Inc. and
Wilmington Trust Company, dated as of November 23, 2004
(incorporated herein by reference to Exhibit 4.37 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
4.34 Placement Agreement by and among First Banks, Inc., First
Bank Statutory Trust III and FTN Financial Capital Markets
and Keefe, Bruyette & Woods, as Placement Agents, dated as
of November 22, 2004 (incorporated herein by reference to
Exhibit 4.38 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004).
4.35 Floating Rate Junior Subordinated Deferrable Interest
Debenture of First Banks, Inc., dated as of November 23,
2004 (incorporated herein by reference to Exhibit 4.39 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
4.36 Capital Securities Subscription Agreement by and among
First Bank Statutory Trust III, First Banks, Inc. and First
Tennessee Bank National Association, dated as of November
23, 2004 (incorporated herein by reference to Exhibit 4.40
to the Company's Annual Report on Form 10-K for the year
ended December 31, 2004).
4.37 Capital Securities Certificate P-1 of First Bank Statutory
Trust III, dated November 23, 2004 (incorporated herein by
reference to Exhibit 4.41 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
10.1 Shareholders' Agreement by and among James F. Dierberg II
and Mary W. Dierberg, Trustees under the Living Trust of
James F. Dierberg II, dated July 24, 1989, Michael James
Dierberg and Mary W. Dierberg, Trustees under the Living
Trust of Michael James Dierberg, dated July 24, 1989; Ellen
C. Dierberg and Mary W. Dierberg, Trustees under the Living
Trust of Ellen C. Dierberg dated July 17, 1992, and First
Banks, Inc. (incorporated herein by reference to Exhibit
10.3 to the Company's Registration Statement on Form S-1,
File No 33-50576, dated August 6, 1992).
10.2 AFS Customer Agreement by and between First Banks, Inc. and
Advanced Financial Solutions, Inc., dated January 29, 2004
(incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004).
10.3 Management Services Agreement by and between First Banks,
Inc. and First Bank, dated February 28, 2004 (incorporated
herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 2004).
10.4 Service Agreement by and between First Services, L.P. and
First Banks, Inc., dated May 1, 2004 (incorporated herein
by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
10.5 Service Agreement by and between First Services, L.P. and
First Bank, dated May 1, 2004 (incorporated herein by
reference to Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004).
10.6 Service Agreement by and between First Banks, Inc. and
First Services, L.P., dated May 1, 2004 (incorporated
herein by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2004).
10.7* First Banks, Inc. Executive Incentive Compensation Plan
(incorporated herein by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
10.8* First Banks, Inc. Nonqualified Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
10.9* First Amendment to First Banks, Inc. Nonqualified Deferred
Compensation Plan (incorporated herein by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004).
10.10 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 (incorporated herein by reference to Exhibit 10
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005).
14.1 Code of Ethics for Principal Executive Officer and
Financial Professionals (incorporated herein by reference
to Exhibit 14 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003).
21.1 Subsidiaries of the Company - 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.
* Exhibits designated by an asterisk in the Index to Exhibits
relate to management contracts and/or compensatory plans or
arrangements.
EXHIBIT 21.1
FIRST BANKS, INC.
SUBSIDIARIES
The following is a list of our subsidiaries and the jurisdiction of incorporation or organization:
Jurisdiction of Incorporation
Name of Subsidiary of Organization
------------------ ---------------
The San Francisco Company Delaware
First Bank Missouri
First Land Trustee Corp. Missouri
First Bank Business Capital, Inc. (1) Missouri
Missouri Valley Partners, Inc. Missouri
Bank of San Francisco Realty Investors, Inc. California
Small Business Loan Source LLC (2) Nevada
Small Business Loan Source Funding Corporation Delaware
---------------
(1) Formerly FB Commercial Finance, Inc.
(2) First Bank owns 51% of Small Business Loan Source LLC.
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 Annual Report on Form 10-K (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: March 27, 2006
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 Annual Report on Form 10-K (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: March 27, 2006
FIRST BANKS, INC.
By: /s/ Steven F. Schepman
-----------------------------------------
Steven F. Schepman
Senior Vice President and
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 Annual Report on Form 10-K of the Company for the annual
period ended December 31, 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: March 27, 2006
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, Senior Vice President and Chief Financial
Officer of First Banks, Inc. (the "Company"), certify, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Annual Report on Form 10-K of the Company for the annual
period ended December 31, 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: March 27, 2006
By: /s/ Steven F. Schepman
----------------------------------------
Steven F. Schepman
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)