UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
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 Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares Outstanding
Class at April 30, 2006
----- -----------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS............................................................... 1
CONSOLIDATED STATEMENTS OF INCOME......................................................... 2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME.............................................................. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................. 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 35
ITEM 4. CONTROLS AND PROCEDURES................................................................... 36
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.................................................................................. 37
SIGNATURES........................................................................................... 38
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
March 31, December 31,
2006 2005
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................... $ 192,156 212,667
Short-term investments............................................................ 54,562 73,985
---------- ---------
Total cash and cash equivalents.............................................. 246,718 286,652
---------- ---------
Investment securities:
Trading........................................................................... 49,875 3,389
Available for sale................................................................ 1,381,879 1,311,289
Held to maturity (fair value of $24,360 and $25,791, respectively)................ 24,720 26,105
---------- ---------
Total investment securities.................................................. 1,456,474 1,340,783
---------- ---------
Loans:
Commercial, financial and agricultural............................................ 1,658,700 1,619,822
Real estate construction and development.......................................... 1,644,222 1,564,255
Real estate mortgage.............................................................. 3,596,256 3,469,788
Consumer and installment.......................................................... 62,078 64,724
Loans held for sale............................................................... 223,545 315,134
---------- ---------
Total loans.................................................................. 7,184,801 7,033,723
Unearned discount................................................................. (13,518) (12,952)
Allowance for loan losses......................................................... (140,235) (135,330)
---------- ---------
Net loans.................................................................... 7,031,048 6,885,441
---------- ---------
Bank premises and equipment, net of accumulated depreciation and amortization.......... 145,819 144,941
Goodwill............................................................................... 181,955 167,056
Bank-owned life insurance.............................................................. 112,984 111,442
Deferred income taxes.................................................................. 117,042 128,938
Other assets........................................................................... 106,649 105,080
---------- ---------
Total assets................................................................. $9,398,689 9,170,333
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand........................................................ $1,257,849 1,299,350
Interest-bearing demand........................................................... 955,133 981,837
Savings........................................................................... 2,165,035 2,106,470
Time deposits of $100 or more..................................................... 1,267,396 1,076,908
Other time deposits............................................................... 2,248,080 2,077,266
---------- ---------
Total deposits............................................................... 7,893,493 7,541,831
Other borrowings....................................................................... 347,644 539,174
Notes payable.......................................................................... 95,000 100,000
Subordinated debentures................................................................ 257,601 215,461
Deferred income taxes.................................................................. 27,595 27,104
Accrued expenses and other liabilities................................................. 66,031 61,762
Minority interest in subsidiary........................................................ 5,905 6,063
---------- ---------
Total liabilities............................................................ 8,693,269 8,491,395
---------- ---------
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...................................................................... 702,763 673,956
Accumulated other comprehensive loss................................................... (22,231) (19,906)
---------- ---------
Total stockholders' equity................................................... 705,420 678,938
---------- ---------
Total liabilities and stockholders' equity................................... $9,398,689 9,170,333
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
Three Months Ended
March 31,
-------------------------
2006 2005
---- ----
Interest income:
Interest and fees on loans..................................................... $ 131,334 94,170
Investment securities.......................................................... 14,777 17,549
Short-term investments......................................................... 1,123 509
--------- ---------
Total interest income..................................................... 147,234 112,228
--------- ---------
Interest expense:
Deposits:
Interest-bearing demand...................................................... 1,828 888
Savings...................................................................... 11,183 5,744
Time deposits of $100 or more................................................ 11,556 5,354
Other time deposits.......................................................... 20,034 13,979
Other borrowings............................................................... 4,695 3,300
Notes payable.................................................................. 1,420 138
Subordinated debentures........................................................ 5,652 4,746
--------- ---------
Total interest expense.................................................... 56,368 34,149
--------- ---------
Net interest income....................................................... 90,866 78,079
Provision for loan losses........................................................... 1,000 --
--------- ---------
Net interest income after provision for loan losses....................... 89,866 78,079
--------- ---------
Noninterest income:
Service charges on deposit accounts and customer service fees.................. 10,232 9,299
Gain on loans sold and held for sale........................................... 6,821 4,516
Net loss on investment securities.............................................. (2,771) --
Bank-owned life insurance investment income.................................... 1,115 1,260
Investment management income................................................... 2,301 2,026
Other.......................................................................... 7,799 4,114
--------- ---------
Total noninterest income.................................................. 25,497 21,215
--------- ---------
Noninterest expense:
Salaries and employee benefits................................................. 39,494 32,930
Occupancy, net of rental income................................................ 6,235 5,239
Furniture and equipment........................................................ 3,963 4,024
Postage, printing and supplies................................................. 1,426 1,628
Information technology fees.................................................... 9,061 8,150
Legal, examination and professional fees....................................... 2,097 2,371
Amortization of intangibles associated with the purchase of subsidiaries....... 1,517 1,209
Communications................................................................. 554 509
Advertising and business development........................................... 1,727 1,647
Charitable contributions....................................................... 1,617 106
Other.......................................................................... 7,124 6,056
--------- ---------
Total noninterest expense................................................. 74,815 63,869
--------- ---------
Income before provision for income taxes and minority interest in
loss of subsidiary.................................................... 40,548 35,425
Provision for income taxes.......................................................... 11,703 13,298
--------- ---------
Income before minority interest in loss of subsidiary..................... 28,845 22,127
Minority interest in loss of subsidiary............................................. (158) --
--------- ---------
Net income................................................................ 29,003 22,127
Preferred stock dividends........................................................... 196 196
--------- ---------
Net income available to common stockholders............................... $ 28,807 21,931
========= =========
Basic earnings per common share..................................................... $1,217.49 926.87
========= =========
Diluted earnings per common share................................................... $1,202.46 915.04
========= =========
Weighted average shares of common stock outstanding................................. 23,661 23,661
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Three Months Ended March 31, 2006 and 2005 and Nine Months 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, December 31, 2004........... $12,822 241 5,915 5,910 577,836 (1,831) 600,893
-------
Three months ended March 31, 2005:
Comprehensive income:
Net income.................................... -- -- -- -- 22,127 -- 22,127
Other comprehensive loss, net of tax:
Unrealized losses on investment securities.. -- -- -- -- -- (14,189) (14,189)
Derivative instruments:
Current period transactions............... -- -- -- -- -- (3,427) (3,427)
-------
Total comprehensive income...................... 4,511
Class A preferred stock dividends,
$0.30 per share............................... -- -- -- -- (192) -- (192)
Class B preferred stock dividends,
$0.03 per share............................... -- -- -- -- (4) -- (4)
------- --- ----- ----- ------- ------- -------
Consolidated balances, March 31, 2005.............. 12,822 241 5,915 5,910 599,767 (19,447) 605,208
-------
Nine months ended December 31, 2005:
Comprehensive income:
Net income.................................... -- -- -- -- 74,779 -- 74,779
Other comprehensive loss, net of tax:
Unrealized losses on investment securities.. -- -- -- -- -- (1,470) (1,470)
Reclassification adjustment for losses
included in net income.................... -- -- -- -- -- 1,867 1,867
Derivative instruments:
Current period transactions............... -- -- -- -- -- (856) (856)
-------
Total comprehensive income...................... 74,320
Class A preferred stock dividends,
$0.90 per share............................... -- -- -- -- (577) -- (577)
Class B preferred stock dividends,
$0.08 per share............................... -- -- -- -- (13) -- (13)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2005........... 12,822 241 5,915 5,910 673,956 (19,906) 678,938
-------
Three months ended March 31, 2006:
Comprehensive income:
Net income.................................... -- -- -- -- 29,003 -- 29,003
Other comprehensive loss, net of tax:
Unrealized losses on investment securities.. -- -- -- -- -- (3,560) (3,560)
Reclassification adjustment for losses
included in net income.................... -- -- -- -- -- 1,538 1,538
Derivative instruments:
Current period transactions............... -- -- -- -- -- (303) (303)
-------
Total comprehensive income...................... 26,678
Class A preferred stock dividends,
$0.30 per share............................... -- -- -- -- (192) -- (192)
Class B preferred stock dividends,
$0.03 per share............................... -- -- -- -- (4) -- (4)
------- --- ----- ----- ------- ------- -------
Consolidated balances, March 31, 2006.............. $12,822 241 5,915 5,910 702,763 (22,231) 705,420
======= === ===== ===== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Three Months Ended
March 31,
-----------------------
2006 2005
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 29,003 22,127
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment..................... 4,458 4,353
Amortization, net of accretion................................................... 3,288 3,892
Originations of loans held for sale.............................................. (137,837) (267,654)
Proceeds from sales of loans held for sale....................................... 220,255 255,427
Provision for loan losses........................................................ 1,000 --
Provision for deferred income taxes.............................................. 5,062 (5,646)
Decrease in accrued interest receivable.......................................... 574 2,059
Increase (decrease) in accrued interest payable.................................. 1,126 (302)
Purchases of trading securities.................................................. (46,957) --
Gain on loans sold and held for sale............................................. (6,821) (4,516)
Net loss on investment securities................................................ 2,771 --
Other operating activities, net.................................................. 30,463 36,163
Minority interest in loss of subsidiary.......................................... (158) --
--------- --------
Net cash provided by operating activities..................................... 106,227 45,903
--------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received......... (20,532) --
Proceeds from sales of investment securities available for sale.................... 147,439 --
Maturities of investment securities available for sale............................. 151,539 177,214
Maturities of investment securities held to maturity............................... 1,497 580
Purchases of investment securities available for sale.............................. (281,704) (99,249)
Purchases of investment securities held to maturity................................ (120) (210)
Net increase in loans.............................................................. (275,150) (7,583)
Recoveries of loans previously charged-off......................................... 6,774 6,083
Purchases of bank premises and equipment........................................... (4,197) (3,188)
Other investing activities, net.................................................... (833) 2,437
--------- --------
Net cash (used in) provided by investing activities........................... (275,287) 76,084
--------- --------
Cash flows from financing activities:
Decrease in demand and savings deposits............................................ (58,267) (49,509)
Increase (decrease) in time deposits............................................... 342,881 (49,902)
Decrease in Federal Home Loan Bank advances........................................ (24,500) (6,000)
Decrease in securities sold under agreements to repurchase......................... (167,030) (32,741)
Repayments of notes payable........................................................ (5,000) (11,000)
Proceeds from issuance of subordinated debentures.................................. 41,238 --
Payment of preferred stock dividends............................................... (196) (196)
--------- --------
Net cash provided by (used in) financing activities........................... 129,126 (149,348)
--------- --------
Net decrease in cash and cash equivalents..................................... (39,934) (27,361)
Cash and cash equivalents, beginning of period.......................................... 286,652 267,110
--------- --------
Cash and cash equivalents, end of period................................................ $ 246,718 239,749
========= ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest on liabilities.......................................................... $ 55,242 34,451
Income taxes..................................................................... 36 (3,044)
========= ========
Noncash investing and financing activities:
Loans transferred to other real estate........................................... $ 1,557 357
========= ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of First Banks, Inc. and
subsidiaries (First Banks or the Company) are unaudited and should be read in
conjunction with the consolidated financial statements contained in the 2005
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles and
conform to predominant practices within the banking industry. Management of
First Banks has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare the consolidated financial statements in conformity with
U.S. generally accepted accounting principles. Actual results could differ from
those estimates. In the opinion of management, all adjustments, consisting of
normal recurring accruals considered necessary for a fair presentation of the
results of operations for the interim periods presented herein, have been
included. Operating results for the three months ended March 31, 2006 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2006.
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 6 to the Consolidated
Financial Statements. All significant intercompany accounts and transactions
have been eliminated. Certain reclassifications of 2005 amounts have been made
to conform to the 2006 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. (formerly FB Commercial Finance,
Inc.), Missouri Valley Partners, Inc. (MVP), Adrian N. Baker & Company (Adrian
Baker) and Small Business Loan Source LLC (SBLS LLC) which, except for SBLS LLC,
which is 51.0% owned by First Bank and 49.0% owned by First Capital America,
Inc. (FCA), as further discussed in Note 6 to the Consolidated Financial
Statements, are wholly owned subsidiaries.
(2) ACQUISITIONS AND INTEGRATION COSTS
Completed Acquisitions
On January 3, 2006, First Banks completed its acquisition of the
majority of the outstanding common stock of First National Bank of Sachse (FNBS)
and subsequently completed its acquisition of the remaining outstanding common
stock of FNBS in January 2006 for $20.8 million in cash, in aggregate. FNBS was
headquartered and operated one banking office in Sachse, Texas, located in the
northeast Dallas metropolitan area. 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 are being amortized over five years utilizing the straight-line
method, were approximately $3.6 million. FNBS was merged with and into First
Bank.
On January 20, 2006, First Bank completed its acquisition of the branch
office of Dallas National Bank located at 4251 East Renner Road, in Richardson,
Texas (Richardson Branch). At the time of the acquisition, the Richardson Branch
had assets of $667,000, including loans, net of unearned discount, of $144,000,
and deposits of $1.1 million.
On March 31, 2006, First Bank completed its acquisition of Adrian Baker
for $7.0 million in cash and certain payments contingent on the future earnings
of Adrian Baker for each of the years in the three-year period following the
closing date of the transaction. Adrian Baker is an insurance brokerage company
based in Clayton, Missouri that provides a comprehensive range of employee
benefits, commercial and personal insurance services on a nationwide basis. The
acquisition served to diversify First Banks' products and services in the
highly-specialized financial services industry. The transaction was funded
through internally generated funds. At the time of acquisition, Adrian Baker had
assets of $3.1 million and stockholders' equity of $1.1 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 $5.9 million. Adrian Baker operates as a wholly owned subsidiary
of First Bank.
Pending Acquisitions
On December 19, 2005, First Banks executed an Agreement and Plan of
Reorganization providing for the acquisition of Pittsfield Community Bancorp,
Inc. and its wholly owned banking subsidiary, Community Bank of Pittsfield
(collectively, Community Bank). Community Bank was headquartered in Pittsfield,
Illinois and operated two banking offices, one in Pittsfield, Illinois, and one
in Mount Sterling, Illinois. As further described in Note 13 to the Consolidated
Financial Statements, First Banks completed its acquisition of Community Bank on
April 28, 2006. As previously announced on March 7, 2006, First Bank executed a
Purchase and Assumption Agreement providing for the sale of the Community Bank
banking office in Mount Sterling, Illinois to Beardstown Savings, s.b. This
transaction is expected to be completed in June 2006.
On January 18, 2006, First Banks executed a Stock Purchase Agreement
providing for the acquisition of First Independent National Bank (First
Independent). First Independent was headquartered in Plano, Texas and operated
two banking offices in Plano, Texas, located in Collin County. In addition,
First Independent was in the process of opening a de novo branch banking office
located in the Preston Forest Shopping Center in Dallas County. As further
described in Note 13 to the Consolidated Financial Statements, First Banks
completed its acquisition of First Independent on May 1, 2006.
On January 31, 2006, First Bank executed a Stock Purchase Agreement
providing for the acquisition of KIF, Inc., 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
subordinated notes of KIF, Inc. and the outstanding senior notes of Universal
Premium Acceptance Corporation, which were approximately $2.2 million and $116.7
million, respectively, at March 31, 2006. UPAC is an insurance premium finance
company headquartered in the Kansas City suburb of Lenexa, Kansas and operates
in 49 states. The transaction, which is subject to certain state approvals, is
expected to be completed during the second quarter of 2006. At March 31, 2006,
UPAC had assets of approximately $147.5 million, loans of approximately $144.7
million and stockholders' equity of approximately $17.9 million.
Subsequent to March 31, 2006, First Banks entered into one agreement
related to an acquisition transaction, as more fully described in Note 13 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 five 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 $481,000, 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 11 years. As
the obligation to make payments under these agreements is accrued at the
consummation date, such payments do not have any impact on the consolidated
statements of income. First Banks also incurs 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, 2005......................... $ 542 134 676
Three Months Ended March 31, 2006:
Amounts accrued at acquisition date................ 306 379 685
Payments........................................... (367) (513) (880)
----- ---- ----
Balance at March 31, 2006............................ $ 481 -- 481
===== ==== ====
(3) INTANGIBLE ASSETS ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES AND
BRANCH OFFICES
Intangible assets associated with the purchase of subsidiaries and
branch offices, net of amortization, were comprised of the following at March
31, 2006 and December 31, 2005:
March 31, 2006 December 31, 2005
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles............... $ 40,146 (13,192) 36,555 (11,710)
Goodwill associated with
purchases of branch offices.......... 2,210 (1,181) 2,210 (1,146)
-------- ------- ------- -------
Total.............................. $ 42,356 (14,373) 38,765 (12,856)
======== ======= ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............. $180,926 165,992
======== =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $1.5 million and $1.2 million for the three
months ended March 31, 2006 and 2005, respectively. Amortization of intangibles
associated with the purchase of subsidiaries, including amortization of core
deposit intangibles and goodwill associated with branch office purchases, has
been estimated in the following table, and does not take into consideration any
pending or potential future acquisitions or branch office purchases.
(dollars expressed in thousands)
Year ending December 31:
2006 remaining........................................................ $ 4,550
2007.................................................................. 6,067
2008.................................................................. 6,067
2009.................................................................. 4,164
2010.................................................................. 3,704
2011.................................................................. 2,616
Thereafter............................................................ 815
-------
Total............................................................. $27,983
=======
Changes in the carrying amount of goodwill for the three months ended
March 31, 2006 and 2005 were as follows:
Three Months Ended
March 31,
----------------------
2006 2005
---- ----
(dollars expressed in thousands)
Balance, beginning of period............................................. $167,056 156,849
Goodwill acquired during the period...................................... 14,896 --
Acquisition-related adjustments (1)...................................... 38 (4,285)
Amortization - purchases of branch offices............................... (35) (35)
-------- -------
Balance, end of period................................................... $181,955 152,529
======== =======
------------------
(1) Acquisition-related adjustments of $4.3 million recorded in the first quarter of 2005 pertain to
the acquisition of CIB Bank. Acquisition-related adjustments included additional purchase
accounting adjustments necessary to appropriately adjust preliminary goodwill recorded
at the time of acquisition, which was based upon current estimates available at that time, to
reflect the receipt of additional valuation data.
(4) SERVICING RIGHTS
Mortgage Banking Activities. At March 31, 2006 and December 31, 2005,
First Banks serviced mortgage loans for others amounting to $1.04 billion and
$1.01 billion, respectively. Changes in mortgage servicing rights, net of
amortization, for the three months ended March 31, 2006 and 2005 were as
follows:
Three Months Ended
March 31,
----------------------
2006 2005
---- ----
(dollars expressed in thousands)
Balance, beginning of period............................................. $6,623 10,242
Originated mortgage servicing rights (1)................................. 1,458 213
Amortization............................................................. (1,047) (1,274)
------ ------
Balance, end of period................................................... $7,034 9,181
====== ======
------------------
(1) In March 2006, First Banks capitalized mortgage servicing rights of $1.2 million associated with
the securitization of $77.1 million of certain residential mortgage loans held in the Company's
loan portfolio, resulting in the recognition of $1.2 million in loan servicing income related to
the future servicing of the underlying loans.
First Banks did not incur any impairment of mortgage servicing rights
during the three months ended March 31, 2006 and 2005.
Amortization of mortgage servicing rights at March 31, 2006 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2006 remaining.............................................................. $2,464
2007........................................................................ 2,152
2008........................................................................ 1,064
2009........................................................................ 553
2010........................................................................ 337
2011........................................................................ 207
Thereafter.................................................................. 257
------
Total................................................................... $7,034
======
Other Servicing Activities. At March 31, 2006 and December 31, 2005,
First Banks serviced United States Small Business Administration (SBA) loans for
others amounting to $155.4 million and $163.4 million, respectively. Changes in
SBA servicing rights, net of amortization and impairment, for the three months
ended March 31, 2006 and 2005 were as follows:
Three Months Ended
March 31,
----------------------
2006 2005
---- ----
(dollars expressed in thousands)
Balance, beginning of period............................................. $9,489 13,013
Originated SBA servicing rights.......................................... 172 191
Amortization............................................................. (441) (609)
Change in impairment valuation allowance................................. (278) --
------ ------
Balance, end of period................................................... $8,942 12,595
====== ======
First Banks recognized impairment of $278,000 for the three months
ended March 31, 2006 primarily resulting from certain loans placed on nonaccrual
status and payoffs received on certain existing loans. First Banks did not incur
any impairment of SBA servicing rights during the three months ended March 31,
2005. At March 31, 2006 and 2005, First Banks had an impairment valuation
allowance of $3.1 million and $459,000, respectively.
Amortization of SBA servicing rights at March 31, 2006 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2006 remaining............................................................. $1,187
2007....................................................................... 1,360
2008....................................................................... 1,143
2009....................................................................... 960
2010....................................................................... 804
2011....................................................................... 671
Thereafter................................................................. 2,817
------
Total.................................................................. $8,942
======
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted earnings per
share (EPS) computations for the three months ended March 31, 2006 and 2005:
Per Share
Income Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Three months ended March 31, 2006:
Basic EPS - income available to common stockholders...... $28,807 23,661 $1,217.49
Effect of dilutive securities:
Class A convertible preferred stock.................... 192 456 (15.03)
------- ------ ---------
Diluted EPS - income available to common stockholders.... $28,999 24,117 $1,202.46
======= ====== =========
Three months ended March 31, 2005:
Basic EPS - income available to common stockholders...... $21,931 23,661 $ 926.87
Effect of dilutive securities:
Class A convertible preferred stock.................... 192 516 (11.83)
------- ------ ---------
Diluted EPS - income available to common stockholders.... $22,123 24,177 $ 915.04
======= ====== =========
(6) TRANSACTIONS WITH RELATED PARTIES
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and members of his immediate family, provides information
technology, item processing and various related services to First Banks, Inc.
and its subsidiaries. Fees paid under agreements with First Services, L.P. were
$7.7 million and $6.7 million for the three months ended March 31, 2006 and
2005, respectively. First Services, L.P. leases information technology and other
equipment from First Bank. During the three months ended March 31, 2006 and
2005, First Services, L.P. paid First Bank $1.2 million and $1.1 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 $547,000 and $704,000 for the three months ended March 31, 2006
and 2005, 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 $75,000 and $87,000
for the three months ended March 31, 2006 and 2005, 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 $86,000 and $79,000 for the three months
ended March 31, 2006 and 2005, 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 $36.7 million and $37.9 million at March 31, 2006 and December 31,
2005, 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.
In June 2005, FCA, a corporation owned by First Banks' Chairman and
members of his immediate family, became a 49.0% owner of SBLS LLC in exchange
for $7.4 million in cash pursuant to a written option agreement with First Bank.
In June 2005, SBLS LLC executed a Multi-Party Agreement by and among
SBLS LLC, First Bank, Colson Services Corp., fiscal transfer agent for the SBA,
and the SBA, in addition to a Loan and Security Agreement by and among First
Bank and the SBA (collectively, the Agreement) that provides a $50.0 million
warehouse line of credit for loan funding purposes. 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 $32.5 million and $31.4 million at March 31, 2006 and
December 31, 2005, respectively. Interest expense recorded under the Agreement
by SBLS LLC for the three months ended March 31, 2006 was $580,000.
In August 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 provided for WWT to provide information technology
services associated with the upgrade of personal computers for First Bank
employees in an ongoing effort to further standardize 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 March 31,
2006 and December 31, 2005, First Bank had made payments of $478,000 and
$471,000, respectively, under the contract.
During the three months ended March 31, 2006, First Bank contributed
$500,000 to the Dierberg Operating Foundation, Inc., a charitable foundation
created by and for the benefit of First Banks' Chairman and members of his
immediate family. There were no charitable contributions made to this
organization during the three months ended March 31, 2005.
(7) REGULATORY CAPITAL
First Banks and First Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
First Banks and First Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and First Bank to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of March 31, 2006, First Banks and First Bank were each well
capitalized. As of March 31, 2006, the most recent notification from First
Banks' primary regulator categorized First Banks and First Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, First Banks and First Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the following table.
At March 31, 2006 and December 31, 2005, First Banks' and First Bank's
required and actual capital ratios were as follows:
Actual For To Be Well
------------------------- Capital Capitalized Under
March 31, December 31, Adequacy Prompt Corrective
2006 2005 Purposes Action Provisions
---- ---- -------- -----------------
Total capital (to risk-weighted assets):
First Banks................................. 10.63% 10.14% 8.0% 10.0%
First Bank.................................. 10.93 10.66 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks................................. 9.27 8.88 4.0 6.0
First Bank.................................. 9.68 9.41 4.0 6.0
Tier 1 capital (to average assets):
First Banks................................. 8.44 8.13 3.0 5.0
First Bank.................................. 8.81 8.61 3.0 5.0
On March 1, 2005, the Board of Governors of the Federal Reserve System
(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 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 8.53% and 7.77%, respectively, as of March 31, 2006. 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.
First Banks is awaiting further guidance from the Federal Reserve and is
continuing to evaluate the overall impact on the Company's financial condition
and results of operations.
(8) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business
segment is consistent with the management structure of First Banks, First Bank
and the internal reporting system that monitors performance. First Bank provides
similar products and services in its defined geographic areas through its branch
network. The products and services offered include a broad range of commercial
and personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, First Bank markets combined basic services for
various customer groups, including packaged accounts for more affluent
customers, and sweep accounts, lock-box deposits and cash management products
for commercial customers. First Bank also offers both consumer and commercial
loans. Consumer lending includes residential real estate, home equity and
installment lending. Commercial lending includes commercial, financial and
agricultural loans, real estate construction and development loans, commercial
real estate loans, asset-based loans and trade financing. Other financial
services include mortgage banking, debit cards, brokerage services,
credit-related insurance, employee benefits, commercial and personal insurance
services, 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 practices predominant within the banking industry. The
business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------- ------------------------- ------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2006 2005 2006 2005 2006 2005
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities............... $1,437,088 1,324,219 19,386 16,564 1,456,474 1,340,783
Loans, net of unearned discount..... 7,171,283 7,020,771 -- -- 7,171,283 7,020,771
Goodwill............................ 181,955 167,056 -- -- 181,955 167,056
Total assets........................ 9,374,726 9,148,931 23,963 21,402 9,398,689 9,170,333
Deposits............................ 7,953,494 7,601,162 (60,001) (59,331) 7,893,493 7,541,831
Notes payable....................... -- -- 95,000 100,000 95,000 100,000
Subordinated debentures............. -- -- 257,601 215,461 257,601 215,461
Stockholders' equity................ 979,199 931,192 (273,779) (252,254) 705,420 678,938
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------- ------------------------- ------------------------
Three Months Ended Three Months Ended Three Months Ended
March 31, March 31, March 31,
------------------------- ------------------------- ------------------------
2006 2005 2006 2005 2006 2005
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income..................... $ 147,024 112,062 210 166 147,234 112,228
Interest expense.................... 49,384 29,279 6,984 4,870 56,368 34,149
---------- --------- -------- -------- --------- ---------
Net interest income.............. 97,640 82,783 (6,774) (4,704) 90,866 78,079
Provision for loan losses........... 1,000 -- -- -- 1,000 --
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses..... 96,640 82,783 (6,774) (4,704) 89,866 78,079
---------- --------- -------- -------- --------- ---------
Noninterest income.................. 25,741 21,466 (244) (251) 25,497 21,215
Noninterest expense................. 73,169 62,178 1,646 1,691 74,815 63,869
---------- --------- -------- -------- --------- ---------
Income before provision for
income taxes and minority
interest in loss
of subsidiary................. 49,212 42,071 (8,664) (6,646) 40,548 35,425
Provision for income taxes.......... 14,738 15,620 (3,035) (2,322) 11,703 13,298
---------- --------- -------- -------- --------- ---------
Income before minority interest
in loss of subsidiary......... 34,474 26,451 (5,629) (4,324) 28,845 22,127
Minority interest in loss
of subsidiary................. (158) -- -- -- (158) --
---------- --------- -------- -------- --------- ---------
Net income....................... $ 34,632 26,451 (5,629) (4,324) 29,003 22,127
========== ========= ======== ======== ========= =========
- ------------------
(1) Corporate and other includes $3.7 million and $3.1 million of interest expense on subordinated debentures, after
applicable income tax benefit of $2.0 million and $1.6 million, for the three months ended March 31, 2006 and
2005, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at March 31, 2006 and
December 31, 2005:
March 31, December 31,
2006 2005
---------- ------------
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily........................................................ $182,844 199,874
Term......................................................... 150,000 300,000
FHLB advances (1)................................................. 14,800 39,300
-------- --------
Total.................................................... $347,644 539,174
======== ========
-----------------
(1) On March 17, 2006, First Bank prepaid $20.5 million of FHLB advances that were assumed in
conjunction with previous acquisitions. First Bank did not incur any losses associated with
the prepayment of the FHLB advances.
The maturity dates, par amounts, interest rate spreads and interest
rate floor strike prices on First Bank's term repurchase agreements as of March
31, 2006 and December 31, 2005 were as follows:
Par Interest Rate Interest Rate Floor
Maturity Date Amount Spread (1) Strike Price (1)
------------- ------ ---------- ----------------
(dollars expressed in thousands)
March 31, 2006:
January 12, 2007 (2).............. $ 150,000 LIBOR + 0.0050% 3.00% / Floor
=========
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 (4)................ 50,000 LIBOR + 0.0800% 3.00% / Floor
---------
$ 300,000
=========
------------------
(1) The interest rate paid on the term repurchase agreement is based on the three-month London
Interbank Offering Rate (LIBOR) reset in arrears plus 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) First Bank terminated $50.0 million of this term repurchase agreement on April 28, 2006,
resulting in an $83,000 prepayment penalty and the recognition of a $310,000 loss on the sale
of $50.0 million of available-for-sale investment securities associated with the termination
of the term repurchase agreement, as further discussed in Note 13 to the Consolidated Financial
Statements.
(3) First Bank terminated these term repurchase agreements on February 14, 2006, and recognized a
$1.6 million loss on the related sale of $100.0 million of available-for-sale investment
securities associated with the termination of the term repurchase agreements.
(4) First Bank terminated this term repurchase agreement on March 28, 2006, resulting in a
prepayment penalty of $223,000, and the recognition of a $746,000 loss on the related sale of
$50.0 million of available-for-sale investment securities associated with the termination of
the term repurchase agreement.
(10) NOTES PAYABLE
Notes payable were comprised of the following at March 31, 2006 and
December 31, 2005:
March 31, December 31,
2006 2005
------------- --------------
(dollars expressed in thousands)
Term loan (1)......................... $95,000 100,000
======= =======
------------------
(1) The outstanding principal balance of the Term Loan Facility
portion of the Amended and Secured Credit Agreement is payable in
ten equal quarterly installments of $5.0 million, which commenced
on March 31, 2006, with the remainder of the Term Loan Facility
balance to be repaid in full, including any unpaid interest, upon
maturity on August 10, 2008.
First Banks' $122.5 million Amended and Restated Secured Credit
Agreement, dated August 11, 2005, with a group of unaffiliated financial
institutions (Credit Agreement) is secured by First Banks' ownership interest in
the capital stock of its subsidiaries. Letters of credit issued to unaffiliated
third parties on behalf of First Banks under the $7.5 million Letter of Credit
Facility portion of the Credit Agreement were $900,000 and $2.9 million at March
31, 2006 and December 31, 2005, respectively, and had not been drawn on by the
counterparties. First Banks did not have any outstanding advances under the
$15.0 million Revolving Credit Facility portion of the Credit Agreement at March
31, 2006 and December 31, 2005.
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 March 31, 2006 and December 31, 2005.
(11) SUBORDINATED DEBENTURES
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 preferred securities is equivalent
to the three-month LIBOR plus 142.0 basis points, and is payable quarterly in
arrears beginning June 15, 2006.
Subsequent to March 31, 2006, First Banks, through a newly formed
statutory trust affiliate, issued $20.0 million of subordinated debentures, as
more fully described in Note 13 to the Consolidated Financial Statements.
(12) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty
contracts. For value received, and for the purpose of inducing a pension fund
and its trustees and a welfare fund and its trustees (the Funds) to conduct
business with MVP, First Bank's institutional investment management subsidiary,
First Banks irrevocably and unconditionally guaranteed payment of and promised
to pay to each of the Funds any amounts up to the sum of $5.0 million to the
extent MVP is liable to the Funds for a breach of the Investment Management
Agreements (including the Investment Policy Statement and Investment
Guidelines), by and between MVP and the Funds and/or any violation of the
Employee Retirement Income Security Act by MVP resulting in liability to the
Funds. The guaranties are continuing guaranties of all obligations that may
arise for transactions occurring prior to termination of the Investment
Management Agreements and are coexistent with the term of the Investment
Management Agreements. The Investment Management Agreements have no specified
term but may be terminated at any time upon written notice by the Trustees or,
at First Banks' option, upon thirty days written notice to the Trustees. In the
event of termination of the Investment Management Agreements, such termination
shall have no effect on the liability of First Banks with respect to obligations
incurred before such termination. The obligations of First Banks are joint and
several with those of MVP. First Banks does not have any recourse provisions
that would enable it to recover from third parties any amounts paid under the
contracts nor does First Banks hold any assets as collateral that, upon
occurrence of a required payment under the contract, could be liquidated to
recover all or a portion of the amount(s) paid. At March 31, 2006 and 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.
In August 2004, SBLS LLC acquired substantially all of the assets and
assumed certain liabilities of Small Business Loan Source, Inc. 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 March 31, 2006 and
December 31, 2005, SBLS LLC had not recorded a liability for the obligations
associated with these contingent payments, as the likelihood that SBLS LLC will
be required to make future payments under the Asset Purchase Agreement is not
ascertainable at the present time.
(13) SUBSEQUENT EVENTS
On April 28, 2006, First Bank Statutory Trust V (FBST V), 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 V. The gross proceeds of the offering were
used by FBST V to purchase $20.6 million of variable rate subordinated
debentures from First Banks, maturing on June 15, 2036. The maturity date of the
subordinated debentures may be shortened, at the option of First Banks, to a
date not earlier than June 15, 2011, if certain conditions are met. The
subordinated debentures are the sole asset of FBST V. In connection with the
issuance of the FBST V 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 V under the FBST V preferred
securities. Proceeds from the issuance of the subordinated debentures to FBST V,
net of offering expenses, were $20.6 million. The distribution rate on the FBST
V preferred securities is equivalent to the three-month LIBOR plus 145.0 basis
points, and is payable quarterly in arrears beginning June 15, 2006.
On April 28, 2006, First Banks completed its acquisition of Community
Bank, located in Pittsfield, Illinois, for $5.1 million in cash. The acquisition
served to expand First Banks' banking franchise in Illinois. The transaction was
funded through internally generated funds. At the time of the acquisition,
Community Bank had assets of $20.3 million, loans, net of unearned discount, of
$13.5 million, deposits of $16.0 million and stockholder's equity of $3.9
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 $634,000, 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 $517,000. Community Bank
was merged with and into First Bank. The planned sale of the Community Bank
banking office in Mount Sterling, Illinois to Beardstown Savings, s.b. is
expected to be completed in June 2006. At the time of the acquisition of
Community Bank, the Mount Sterling banking office had assets of $2.9 million,
loans, net of unearned discount, of $2.5 million and deposits of $4.2 million.
On April 28, 2006, First Bank terminated $50.0 million of the $150.0
million term repurchase agreement with a maturity date of January 12, 2007,
resulting in a prepayment penalty of $83,000 and the recognition of a $310,000
loss on the sale of $50.0 million of available-for-sale investment securities
associated with the termination of the term repurchase agreement.
On May 1, 2006, First Banks completed its acquisition of First
Independent, Plano, Texas, for $19.2 million in cash. The acquisition served to
expand First Banks' banking franchise in Texas. The transaction was funded
through internally generated funds and the issuance of subordinated debentures
associated with a private placement of $40.0 million of trust preferred
securities through a newly formed affiliated statutory trust, as further
discussed in Note 11 to the Consolidated Financial Statements. At the time of
the acquisition, First Independent had assets of $68.1 million, loans, net of
unearned discount, of $59.4 million, deposits of $55.5 million and stockholder's
equity of $7.3 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 $9.4 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
$2.5 million. First Independent will be merged with and into First Bank on May
16, 2006.
On May 10, 2006, First Banks executed an Agreement and Plan of
Reorganization providing for the acquisition of San Diego Community Bank (SDCB),
located in San Diego, California, for approximately $25.5 million in cash. SDCB
operates three banking offices in the San Diego community, with its headquarters
in Chula Vista and two other banking offices in Kearny Mesa and Otay Mesa. The
transaction, which is subject to regulatory and shareholder approvals, is
expected to be completed during the third quarter of 2006. At March 31, 2006,
SDCB had assets of $92.4 million, loans, net of unearned discount, of $74.4
million, deposits of $76.4 million and stockholders' equity of $12.5 million.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. Generally, forward looking statements may be identified through the
use of words such as: "believe," "expect," "anticipate," "intend," "plan,"
"estimate," or words of similar meaning or future or conditional terms such as:
"will," "would," "should," "could," "may," "likely," "probably," or "possibly."
Examples of forward looking statements include, but are not limited to,
estimates or projections with respect to our future financial condition,
expected or anticipated revenues with respect to our results of operations and
our business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause our actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and in the economy, including the threat of future terrorist activities,
existing and potential wars and/or military actions related thereto, and
domestic responses to terrorism or threats of terrorism; the impact of laws and
regulations applicable to us and changes therein; the impact of accounting
pronouncements applicable to us and changes therein; competitive conditions in
the markets in which we conduct our operations, including competition from
banking and non-banking companies with substantially greater resources than us,
some of which may offer and develop products and services not offered by us; our
ability to control the composition of our loan portfolio without adversely
affecting interest income; the credit risk associated with consumers who may not
repay loans; the geographic dispersion of our offices; the impact our hedging
activities may have on our operating results; the highly regulated environment
in which we operate; and our ability to respond to changes in technology. With
regard to our efforts to grow through acquisitions, factors that could affect
the accuracy or completeness of forward-looking statements contained herein
include the competition of larger acquirers with greater resources; fluctuations
in the prices at which acquisition targets may be available for sale; the impact
of making acquisitions without using our common stock; and possible asset
quality issues, unknown liabilities or integration issues with the businesses
that we have acquired. We do not have a duty to and will not update these
forward-looking statements. Readers of this Quarterly Report on Form 10-Q should
therefore consider these risks and uncertainties in evaluating forward looking
statements and should not place undo reliance on these statements.
General
We are a registered bank holding company incorporated in Missouri in
1978 and headquartered in St. Louis, Missouri. We operate through our wholly
owned subsidiary bank holding company, The San Francisco Company, or SFC,
headquartered in San Francisco, California, and its wholly owned subsidiary
bank, First Bank, headquartered in St. Louis, Missouri. First Bank operates
through its branch banking offices and subsidiaries, First Bank Business
Capital, Inc. (formerly FB Commercial Finance, Inc.), Missouri Valley Partners,
Inc., or MVP, Adrian N. Baker & Company, or Adrian Baker, and Small Business
Loan Source LLC, or SBLS LLC, which, except for SBLS LLC, are wholly owned
subsidiaries. First Bank currently operates 182 branch banking offices in
California, Illinois, Missouri and Texas. At March 31, 2006, we had assets of
$9.40 billion, loans, net of unearned discount, of $7.17 billion, deposits of
$7.89 billion and stockholders' equity of $705.4 million.
Through First Bank, we offer a broad range of commercial and personal
deposit products, including demand, savings, money market and time deposit
accounts. In addition, we market combined basic services for various customer
groups, including packaged accounts for more affluent customers, and sweep
accounts, lock-box deposits and cash management products for commercial
customers. We also offer 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, asset-based loans and trade financing. Other financial
services include mortgage banking, debit cards, brokerage services,
credit-related insurance, employee benefits, commercial and personal insurance
services, internet banking, automated teller machines, telephone banking, safe
deposit boxes and trust, private banking and institutional money management
services.
Primary responsibility for managing our banking unit rests with the
officers and directors of each unit, but we centralize 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.
Financial Condition
Total assets were $9.40 billion at March 31, 2006, reflecting a $228.4
million increase from $9.17 billion at December 31, 2005. The increase in our
total assets is primarily attributable to internal growth and acquisitions of
banks in our target markets. Funds available from deposit growth and excess
short-term investments, which include federal funds sold and interest-bearing
deposits, as well as the maturities of available-for-sale investment securities,
were utilized to fund internal loan growth and to reinvest in higher-yielding
available-for-sale investment securities. The increase in assets reflects a
$150.5 million increase in our loans, net of unearned discount, to $7.17 billion
at March 31, 2006, from $7.02 billion at December 31, 2005, attributable to
internal growth, our acquisitions in 2006, partially offset by the sale of
certain nonperforming loans. The increase in assets also reflects a $115.7
million net increase in our investment securities portfolio to $1.46 billion.
The increase in our investment securities portfolio is primarily attributable to
a $46.5 million increase in our trading securities and the investment of excess
federal funds sold in U.S. Treasury Bills, partially offset by the sale of
$150.0 million of securities associated with the termination of certain term
repurchase agreements and maturities of investment securities during the first
quarter of 2006. In March 2006, we completed the securitization of $77.1 million
of certain residential mortgage loans held in our loan portfolio, which resulted
in a change in our overall asset mix from residential mortgage loans to
available-for-sale investment securities, as further described under "--Loans
and Allowance for Loan Losses." The increase in our assets was partially offset
by a decrease of $11.9 million in our deferred tax assets to $117.0 million at
March 31, 2006, from $128.9 million at December 31, 2005. The reduction is
primarily attributable to our loan sales completed in March 2006. Deposits
increased $351.7 million to $7.89 billion at March 31, 2006, from $7.54 billion
at December 31, 2005, reflecting internal growth through enhanced product and
service offerings and marketing campaigns. Our subordinated debentures increased
$42.1 million during the first quarter of 2006 primarily due to the issuance of
$41.2 million of subordinated debentures, as further discussed below. In
addition, we terminated $150.0 million of term repurchase agreements in the
first quarter of 2006 to better position our overall interest rate risk, and
sold $150.0 million of available-for-sale investment securities associated with
the termination of the term repurchase agreements. Our acquisitions of First
National Bank of Sachse, or FNBS, the Richardson branch office of Dallas
National Bank, or Richardson Branch, and Adrian Baker provided assets, in
aggregate, of $80.4 million, loans, net of unearned discount, of $49.5 million
and deposits of $67.3 million. Goodwill increased $14.9 million to $182.0
million at March 31, 2006 and reflects our acquisitions of FNBS and Adrian
Baker, as further discussed in Note 2 to our Consolidated Financial Statements.
Our acquisition of FNBS on January 3, 2006 provided 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. Our acquisition of Adrian Baker on March
31, 2006 provided assets of $3.1 million and stockholders' equity of $1.1
million. Our purchase of the Richardson Branch on January 20, 2006 provided
assets and deposits of $1.1 million.
Total deposits, as discussed above, increased $351.7 million to $7.89
billion at March 31, 2006, from $7.54 billion at December 31, 2005. Our time
deposits increased $361.3 million and our savings deposits increased $58.6
million, partially offset by a $41.5 million decrease in our noninterest-bearing
demand accounts and a $26.7 million decline in our interest-bearing demand
accounts. Our acquisition of FNBS and our Richardson Branch purchase provided
deposits of $66.2 million and $1.1 million, respectively, on the respective
acquisition dates. Our continued deposit marketing focus and efforts to further
develop multiple account relationships with our customers, coupled with slightly
higher deposit rates on certain products, contributed to our deposit growth
despite continued aggressive competition within our market areas and an
anticipated level of attrition associated with our recent acquisitions.
Other borrowings decreased $191.5 million to $347.6 million at March
31, 2006, from $539.2 million at December 31, 2005. This reduction primarily
resulted from the termination of $100.0 million and $50.0 million of term
repurchase agreements on February 14, 2006 and March 28, 2006, respectively, as
further described in Note 9 to our Consolidated Financial Statements. The
decrease also reflects a $24.5 million decrease in Federal Home Loan Bank, or
FHLB, advances, primarily attributable to the prepayment of $20.5 million of
advances in March 2006 that were assumed with several of our previous bank
acquisitions, as further described in Note 9 to our Consolidated Financial
Statements, and a $17.0 million decrease in daily securities sold under
agreements to repurchase resulting from changes in the cash management activity
and demand of our commercial deposit customers.
Our notes payable decreased $5.0 million to $95.0 million at March 31,
2006 following payment of the first scheduled $5.0 million quarterly principal
installment on our $100.0 million term loan facility, as further described in
Note 10 to our Consolidated Financial Statements.
Our subordinated debentures increased $42.1 million to $257.6 million
at March 31, 2006, from $215.5 million at December 31, 2005. On March 1, 2006,
we issued $41.2 million of variable rate subordinated debentures to First Bank
Statutory Trust IV, or FBST IV, a newly formed Delaware statutory trust, as
further described in Note 11 to our Consolidated Financial Statements. The
proceeds from the issuance of these subordinated debentures will be used to fund
future acquisitions as well as for general corporate purposes. The increase in
our subordinated debentures was also attributable to the continued amortization
of debt issuance costs and changes in the fair value of our interest rate swap
agreements designated as fair value hedges, following the termination of our
single, remaining fair value interest rate swap agreement that hedged certain of
our subordinated debentures, as further discussed under "--Interest Rate Risk
Management."
Stockholders' equity was $705.4 million and $678.9 million at March 31,
2006 and December 31, 2005, respectively, reflecting an increase of $26.5
million. The increase is primarily attributable to net income of $29.0 million,
partially offset by a $2.3 million decrease in accumulated other comprehensive
income, comprised of $303,000 associated with changes in the fair value of our
derivative financial instruments and $2.0 million associated with changes in
unrealized gains and losses on our available-for-sale investment securities
portfolio.
Results of Operations
Net Income
Net income was $29.0 million and $22.1 million for the three months
ended March 31, 2006 and 2005, respectively, reflecting an increase of 31.1%.
Our return on average assets increased to 1.26% for the three months ended March
31, 2006, compared to 1.04% for the comparable period in 2005. Our return on
average stockholders' equity increased to 16.91% for the three months ended
March 31, 2006, compared to 14.67% for the comparable period in 2005. Net income
for the three months ended March 31, 2006 reflects earnings driven by increased
net interest income and net interest margin, increased noninterest income and a
reduced provision for income taxes, partially offset by higher noninterest
expense.
The increase in earnings in 2006 reflects our continuing efforts to
strengthen earnings and simultaneously improve asset quality. The increase in
earnings for the three months ended March 31, 2006 compared to the comparable
period in 2005 reflects a 16.4% increase in net interest income and a 33 basis
point increase in our net interest margin; a 20.2% increase in noninterest
income; partially offset by a 17.1% increase in our noninterest expense levels.
Our net interest-earning assets provided by internal loan growth coupled with
higher interest rates on loans, higher-yielding investment securities, and our
2005 and 2006 acquisitions have contributed to an increase in our interest
income. In addition, interest expense increased as a result of higher interest
rates on an increasing deposit base driven by internal growth, marketing
campaigns and our 2005 and 2006 acquisitions. Higher interest rates paid on
other borrowings, our term loan and our subordinated debentures also contributed
to an increase in interest expense. In addition, our net interest income was
adversely affected by a decline in earnings on our interest rate swap agreements
that were entered into in conjunction with our interest rate risk management
program, which declined primarily as a result of an increase in prevailing
interest rates and the maturity and termination of certain interest rate swap
agreements, as further discussed under "--Interest Rate Risk Management."
Despite the increasing interest rate environment, overall conditions within our
markets and the impact of the decline in earnings on our interest rate swap
agreements continue to exert pressure on our net interest income and net
interest margin.
Our ongoing efforts to improve our overall asset quality levels are
reflected by a 29.1% decrease in our nonperforming assets, which decreased to
$70.4 million at March 31, 2006 from $99.2 million at December 31, 2005.
Nonperforming loans decreased to $67.1 million at March 31, 2006, from $97.2
million at December 31, 2005 and $79.8 million at March 31, 2005. Nonperforming
loans represented 0.94% of loans, net of unearned discount, at March 31, 2006,
compared to 1.38% at December 31, 2005 and 1.30% at March 31, 2005. Loans past
due 90 days or more and still accruing interest were $2.2 million at March 31,
2006, compared to $5.6 million at December 31, 2005 and $8.8 million at March
31, 2005. The 29.1% reduction in the level of nonperforming assets during the
three months ended March 31, 2006 primarily resulted from the sale of certain
acquired nonperforming loans, loan payoffs and/or external refinancing of
various credits. We recorded a provision for loan losses of $1.0 million for the
three months ended March 31, 2006. We did not record a provision for loan losses
for the comparable period in 2005. Our net loan recoveries were $3.3 million for
the three months ended March 31, 2006, compared to net loan charge-offs of $6.6
million for the comparable period in 2005. We continue to closely monitor our
loan portfolio and consider these factors in our overall assessment of the
adequacy of the allowance for loan losses, as further discussed under
"--Provision for Loan Losses" and "--Loans and Allowance for Loan Losses."
Noninterest income increased 20.2% to $25.5 million for the three
months ended March 31, 2006, compared to $21.2 million for the comparable period
in 2005. The increase for the first quarter of 2006 is primarily attributable to
increased gains on loans sold and held for sale, including a $1.7 million gain
on the sale of certain nonperforming loans, as further discussed under "--Loans
and Allowance for Loan Losses," and increased service charges on deposit
accounts and customer service fees related to higher deposit balances.
Noninterest income for 2006 also includes $1.2 million associated with increased
loan servicing income generated from the capitalization of mortgage servicing
rights related to the securitization of certain residential mortgage loans and a
$1.5 million gain on the sale of a parcel of other real estate. The increase in
noninterest income was partially offset by a $2.4 million pre-tax loss on sales
of available-for-sale investment securities associated with the termination of
$150.0 million of term repurchase agreements, as further described in Note 9 to
our Consolidated Financial Statements.
Noninterest expense was $74.8 million and $63.9 million for the three
months ended March 31, 2006 and 2005, respectively. Our efficiency ratio was
64.29% and 64.32% for the three months ended March 31, 2006 and 2005,
respectively. The overall increase in our noninterest expenses was attributable
to increased expense levels associated with our growth in 2005 and 2006, which
expanded our employee base and added two branch offices in 2006, nine branch
offices in 2005 and the addition of one de novo branch office in early 2005.
This growth contributed to a $6.6 million increase in salaries and employee
benefits expense and a $935,000 increase in our occupancy and furniture and
equipment expenditures. The increase in salaries and employee benefits expense
also resulted from continued costs associated with employing and retaining
qualified personnel, including increased costs driven by enhanced incentive
compensation programs and other employee benefits plans. Our system conversions
associated with recent acquisitions and the expansion of technological
equipment, networks and communication channels, contributed to an increase in
information technology fees of 11.2%. In addition, charitable contributions
expense increased $1.5 million for the first quarter of 2006 compared to the
same period in 2005. We continue to closely monitor noninterest expense levels
following our recent acquisitions and have implemented certain expense reduction
measures in an effort to improve our efficiency ratio in future periods.
Net Interest Income
Net interest income (expressed on a tax-equivalent basis) increased to
$91.2 million for the three months ended March 31, 2006, compared to $78.4
million for the comparable period in 2005, reflecting continued growth. Our net
interest margin increased 33 basis points to 4.30% for the three months ended
March 31, 2006, from 3.97% for the three months ended March 31, 2005. Net
interest income is the difference between interest earned on our
interest-earning assets, such as loans and securities, and interest paid on our
interest-bearing liabilities, such as deposits and borrowings. Net interest
income is affected by the level and composition of assets, liabilities and
stockholders' equity, as well as the general level of interest rates and changes
in interest rates. Interest income on a tax-equivalent basis includes the
additional amount of interest income that would have been earned if our
investment in certain tax-exempt interest-earning assets had been made in assets
subject to federal, state and local income taxes yielding the same after-tax
income. Net interest margin is determined by dividing net interest income on a
tax-equivalent basis by average interest-earning assets. The interest rate
spread is the difference between the average equivalent yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
We primarily credit the increase in our net interest income to an
increase in interest-earning assets provided by internal growth and our 2005 and
2006 acquisitions, higher interest rates on loans, and higher-yielding
investment securities, partially offset by increased interest expense associated
with higher interest rates on an increasing deposit base and increased interest
rates paid on our other borrowings, including our term loan. Average
interest-earning assets increased to $8.61 billion for the three months ended
March 31, 2006, from $8.01 billion for the three months ended March 31, 2005.
The increase is attributable to internal growth and interest-earning assets
provided by our acquisitions completed in 2005 and 2006, which provided assets
of $280.3 million and $80.4 million in aggregate, respectively. Net interest
income was adversely impacted by a decline in earnings on our interest rate swap
agreements that were entered into in conjunction with our interest rate risk
management program. The impact of these derivative financial instruments reduced
net interest income by $1.4 million for the three months ended March 31, 2006,
compared to providing increased net interest income of $3.6 million for the
comparable period in 2005, reflecting a decline in our earnings on our interest
rate swap agreements of $5.0 million, as further discussed under "--Interest
Rate Risk Management." Despite the rising interest rate environment, overall
competitive conditions within our market areas, and the impact of the maturity
and termination of certain interest rate swap agreements, as discussed above and
under "--Interest Rate Risk Management," continue to exert pressure on our net
interest income and net interest margin.
Average loans, net of unearned discount, were $7.16 billion for the
three months ended March 31, 2006, in comparison to $6.18 billion for the
comparable period in 2005. The yield on our loan portfolio increased to 7.45%
for the three months ended March 31, 2006, in comparison to 6.18% for the
comparable period in 2005. Although our loan portfolio yields increased with
rising interest rates during 2005 and 2006, total interest income on our loan
portfolio was adversely impacted by decreased earnings on our interest rate swap
agreements designated as cash flow hedges. Higher interest rates and the
maturities of interest rate swap agreements designated as cash flow hedges of
$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 reduction of our net interest income of $2.7 million for the three months
ended March 31, 2006, compared to the comparable period in 2005. Interest income
on our loan portfolio for 2006 reflects a $2.0 million recovery of interest and
fees from the payoff of a single nonaccrual loan, as further described under
"--Loans and Allowance for Loan Losses." We primarily attribute the increase in
average loans of $972.7 million for the three months ended March 31, 2006, over
the comparable period in 2005, to internal growth, our acquisitions completed in
2005 and 2006, partially offset by a $77.1 million reduction related to the
securitization of certain of our residential mortgage loans held in our loan
portfolio, and reductions in our nonperforming loan portfolio due to the sale of
certain nonperforming loans, loan payoffs and/or external refinancing of various
credits, as further described under "--Loans and Allowance for Loan Losses." Our
acquisitions completed during 2005 and 2006 provided loans, net of unearned
discount, of $209.6 million and $49.5 million, in aggregate, on the dates of
acquisition, respectively. The components of the increase in average loans for
2006 compared to the first quarter of 2005 were primarily comprised of a $537.8
million increase in average real estate mortgage loans, a $256.8 million
increase in average real estate construction and development loans, a $92.9
million increase in average loans held for sale, and an $83.0 million increase
in average commercial, financial and agricultural loans. The increase in
residential real estate mortgage loans resulted from our recent acquisitions and
our business strategy decision to retain a portion of our residential mortgage
loan production that would have previously been sold in the secondary market.
Average investment securities were $1.35 billion and $1.74 billion for
the three months ended March 31, 2006 and 2005, respectively. The yield on our
investment portfolio was 4.51% for the three months ended March 31, 2006,
compared to 4.14% for the comparable period in 2005. Investment securities
provided by our acquisitions completed in 2005 and 2006 were $20.1 million and
$14.4 million, in aggregate, respectively, as of the respective acquisition
dates. Funds available from deposit growth and excess short-term investments, as
well as the maturities of investment securities were utilized to fund internal
loan growth and to reinvest in higher-yielding available-for-sale investment
securities, including $200.0 million of U.S. Treasury Bills. In March 2006, our
investment securities increased $77.1 million due to the securitization of $77.1
million of certain of our residential mortgage loans held in our loan portfolio.
Additionally, as further described in Note 9 to our Consolidated Financial
Statements, we terminated two $50.0 million term repurchase agreements on
February 14, 2006 and recognized a $1.6 million loss on the sale of $100.0
million of available-for-sale investment securities associated with the
termination of the term repurchase agreements. We also terminated a $50.0
million term repurchase agreement on March 28, 2006 and recognized a $969,000
loss on the sale of $50.0 million of available-for-sale investment securities
associated with the termination of the term repurchase agreement.
Average deposits increased to $7.73 billion for the three months ended
March 31, 2006, from $7.09 billion for the comparable period in 2005. For the
three months ended March 31, 2006, the aggregate weighted average rate paid on
our deposit portfolio increased 101 basis points to 2.80%, from 1.79% for the
comparable period in 2005, and is primarily attributable to the current rising
interest rate environment. In addition, the decreased earnings associated with
certain of our interest rate swap agreements designated as fair value hedges, as
well as the termination of $150.0 million of fair value hedges in February 2005,
resulted in a decrease in our net interest income of $354,000 for 2006, compared
to the comparable period in 2005. The increase in average deposits is reflective
of internal growth stemming from our deposit development programs and our
acquisitions completed during 2005 and 2006, which provided deposits, in
aggregate, of $238.1 million and $67.3 million, respectively. Average demand and
savings deposits were $4.37 billion and $4.29 billion for the three months ended
March 31, 2006 and 2005, respectively. Average time deposits were $3.35 billion
and $2.80 billion for the three months ended March 31, 2006 and 2005,
respectively.
Average other borrowings decreased to $460.7 million for the three
months ended March 31, 2006, compared to $578.0 million for the comparable
period in 2005. The aggregate weighted average rate paid on our other borrowings
was 4.13% for the three months ended March 31, 2006, compared to 2.32% for the
comparable period in 2005. The increased rate paid on our other borrowings
reflects the rising short-term interest rate environment that began in mid-2004.
The $117.2 million decrease in average other borrowings is primarily
attributable to the termination of $100.0 million and $50.0 million of term
repurchase agreements on February 14, 2006 and March 28, 2006, respectively, as
further described in Note 9 to our Consolidated Financial Statements. In
addition, on March 17, 2006, we prepaid $20.5 million of FHLB advances that were
acquired with several previous bank acquisitions. The remaining decrease is
attributable to a decrease in our average daily securities sold under agreements
to repurchase, principally in connection with the cash management activities of
our commercial deposit customers.
Our notes payable averaged $99.9 million and $7.7 million for the three
months ended March 31, 2006 and 2005, respectively. The aggregate weighted
average rate paid on our notes payable was 5.76% and 7.30% for the three months
ended March 31, 2006 and 2005, respectively. The weighted average rate paid
reflects unused credit commitment and letter of credit facility fees on our
secured credit agreement. Exclusive of these fees, the weighted average rate
paid on our notes payable was 5.69% and 3.76% for the three months ended March
31, 2006 and 2005, respectively. In August 2005, we entered into an Amended and
Restated Secured Credit Agreement and restructured our overall financing
arrangement. In conjunction with this transaction, we borrowed $80.0 million on
the term loan in August 2005 and borrowed the remaining $20.0 million on the
term loan in November 2005. The proceeds of the term loan were used to fund our
acquisition of International Bank of California, or IBOC, and to partially fund
the redemption of our 10.24% subordinated debentures issued to First Preferred
Capital Trust II in September 2005, as further discussed below. The outstanding
balance of our former $100.0 million credit facility was repaid in full in June
2005 through dividends from our subsidiary bank.
Average subordinated debentures were $230.0 million and $273.8 million
for the three months ended March 31, 2006 and 2005, respectively. The aggregate
weighted average rate paid on our subordinated debentures was 9.97% and 7.03%
for the three months ended March 31, 2006 and 2005, respectively. Interest
expense on our subordinated debentures was $5.7 million and $4.7 million for the
three months ended March 31, 2006 and 2005, respectively. As previously
discussed, we issued $41.2 million of variable rate subordinated debentures in
March 2006 to partially fund our bank acquisitions. In addition, in September
2005, we repaid in full our outstanding $59.3 million of 10.24% subordinated
debentures that we previously issued in October 2000. The reduction of these
outstanding subordinated debentures improved future net interest income and net
interest margin, especially considering the high interest rate associated with
them. However, the earnings impact of our interest rate swap agreements had a
declining impact in the reduction of our interest expense associated with our
subordinated debentures. These interest rate swap agreements increased interest
expense by $814,000 for the three months ended March 31, 2006, and reduced
noninterest expense by $1.1 million for the three months ended March 31, 2005.
As further discussed under "--Interest Rate Risk Management," on February 14,
2006, we terminated our single remaining $25.0 million notional fair value
interest rate swap agreement associated with our subordinated debentures, and
recognized additional expense of $849,000 on the net basis adjustment associated
with this swap agreement and the remaining net basis adjustments associated with
the fair value interest rate swap agreements that were terminated in May 2005.
The following table sets forth, on a tax-equivalent basis, certain
information relating to our average balance sheets, and reflects the average
yield earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting net interest income for the periods indicated:
Three Months Ended March 31,
----------------------------------------------------------
2006 2005
---------------------------- ----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1)(2)(3)(4)............................... $7,156,860 131,461 7.45% $6,184,119 94,270 6.18%
Investment securities (4)........................ 1,351,287 15,033 4.51 1,741,900 17,785 4.14
Short-term investments........................... 97,784 1,123 4.66 83,303 509 2.48
---------- ------- ---------- -------
Total interest-earning assets.............. 8,605,931 147,617 6.96 8,009,322 112,564 5.70
------- -------
Nonearning assets.................................... 705,925 654,435
---------- ----------
Total assets............................... $9,311,856 $8,663,757
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand deposits.............. $ 970,032 1,828 0.76% $ 885,555 888 0.41%
Savings deposits.............................. 2,129,488 11,183 2.13 2,198,086 5,744 1.06
Time deposits of $100 or more................. 1,179,410 11,556 3.97 807,398 5,354 2.69
Other time deposits (3)....................... 2,175,064 20,034 3.74 1,990,790 13,979 2.85
---------- ------- ---------- -------
Total interest-bearing deposits............ 6,453,994 44,601 2.80 5,881,829 25,965 1.79
Other borrowings................................. 460,748 4,695 4.13 577,997 3,300 2.32
Notes payable (5)................................ 99,944 1,420 5.76 7,667 138 7.30
Subordinated debentures (3)...................... 229,981 5,652 9.97 273,801 4,746 7.03
---------- ------- ---------- -------
Total interest-bearing liabilities......... 7,244,667 56,368 3.16 6,741,294 34,149 2.05
------- -------
Noninterest-bearing liabilities:
Demand deposits.................................. 1,271,153 1,207,253
Other liabilities................................ 100,517 103,387
---------- ----------
Total liabilities.......................... 8,616,337 8,051,934
Stockholders' equity................................. 695,519 611,823
---------- ----------
Total liabilities and
stockholders' equity..................... $9,311,856 $8,663,757
========== ==========
Net interest income.................................. 91,249 78,415
======= =======
Interest rate spread................................. 3.80 3.65
Net interest margin (6).............................. 4.30% 3.97%
==== ====
- ------------------
(1) For purposes of these calculations, nonaccrual loans are included in 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 $383,000 and $336,000 for the three months ended March 31, 2006 and 2005, respectively.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees. Exclusive of these
fees, the interest rates paid were 5.69% and 3.76% for the three months ended March 31, 2006 and 2005,
respectively.
(6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average
interest-earning assets.
Provision for Loan Losses
We recorded a provision for loan losses of $1.0 million for the three
months ended March 31, 2006. We did not record a provision for loan losses for
the three months ended March 31, 2005. We recorded net loan recoveries of $3.3
million for the three months ended March 31, 2006, compared to net loan
charge-offs of $6.6 million for the comparable period in 2005. Net loan
recoveries for the first quarter of 2006 included a loan recovery of $5.0
million on the payoff of a single loan that was transferred to our held for sale
portfolio on December 31, 2005. Excluding this transaction, our net loan
charge-offs for 2006 declined $4.9 million from the comparable period in 2005.
The provision for loan losses recorded during 2006 reflects significant
improvement in nonperforming loans from December 31, 2005 to March 31, 2006, as
well as a significant reduction in net loan charge-offs. Nonperforming loans
decreased $30.1 million, or 31.0%, to $67.1 million at March 31, 2006, from
$97.2 million at December 31, 2005. Loans past due 90 days or more and still
accruing interest decreased to $2.2 million at March 31, 2006, compared to $5.6
million at December 31, 2005 and $8.8 million at March 31, 2005. The decrease in
nonperforming loans and past due loans during the three months ended March 31,
2006 reflects improvement in asset quality resulting from the sale of
nonperforming loans that were transferred to the held for sale portfolio on
December 31, 2005, loan payoffs and/or external refinancing of various credits,
and a significant reduction in net loan charge-offs, as further discussed under
"--Loans and Allowance for Loan Losses." Our allowance for loan losses was
$140.2 million at March 31, 2006, compared to $135.3 million at December 31,
2005 and $144.2 million at March 31, 2005. Our allowance for loan losses as a
percentage of loans, net of unearned discount, was 1.96% at March 31, 2006,
compared to 1.93% and 2.34% at December 31, 2005 and March 31, 2005,
respectively. Our allowance for loan losses as a percentage of nonperforming
loans was 209.00% at March 31, 2006, compared to 139.23% and 180.71% at December
31, 2005 and March 31, 2005, respectively. Management has closely monitored its
operations to address the ongoing challenges posed by the significant level of
nonperforming loans acquired with our CIB Bank acquisition completed in November
2004. The level of nonperforming loans associated with our purchase of CIB Bank
has decreased to $18.2 million, or 27.1% of nonperforming loans at March 31,
2006. These levels are down significantly from $55.0 million, or 56.6% of
nonperforming loans at December 31, 2005, and $43.7 million, or 54.8% of
nonperforming loans at March 31, 2005. While nonperforming loans added by our
recent acquisitions have contributed to the overall level of nonperforming
assets, such increases have been offset by improvements both in the remainder of
our loan portfolio and in the acquired loan portfolios subsequent to their
acquisition dates. Management considers these factors in its overall assessment
of the adequacy of the allowance for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $25.5 million and $21.2 million for the three
months ended March 31, 2006 and 2005, respectively. Noninterest income consists
primarily of service charges on deposit accounts and customer service fees,
mortgage-banking revenues, investment management income and other income.
Service charges on deposit accounts and customer service fees were
$10.2 million and $9.3 million for the three months ended March 31, 2006 and
2005, 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 First Bank of the Americas, s.s.b.,
or FBA, IBOC, Northway State Bank, or NSB, and FNBS completed in April 2005,
September 2005, October 2005 and January 2006, respectively. The increase is
also attributable to additional products and services available and utilized by
our retail and commercial customer base, increased fee income from customer
service charges for non-sufficient fund and returned check fees, as well as
pricing increases on certain service charges and customer service fees
instituted to reflect current market conditions.
The gain on loans sold and held for sale was $6.8 million and $4.5
million for the three months ended March 31, 2006 and 2005, respectively. The
increase in 2006 is partially attributable to a $1.7 million gain, before
applicable income taxes, on the sale of certain nonperforming loans in March
2006 that were transferred to the loans held for sale portfolio on December 31,
2005. The increase is also attributable to the recognition of $1.2 million in
loan servicing income generated from the capitalization of mortgage servicing
rights pertaining to the securitization of $77.1 million of residential mortgage
loans held in our loan portfolio, as further discussed in Note 4 to our
Consolidated Financial Statements.
Noninterest income includes a net loss on investment securities of $2.8
million for the three months ended March 31, 2006. The net loss in 2006 resulted
primarily from the sales of certain investment securities associated with the
termination of three $50.0 million term repurchase agreements during the first
quarter of 2006, as further discussed in Note 9 to our Consolidated Financial
Statements. The net loss also includes a net loss of $405,000 related to the
mark-to-market adjustments on our trading securities portfolio. There were no
gains or losses on investment securities recorded for the three months ended
March 31, 2005.
Bank-owned life insurance investment income was $1.1 million and $1.3
million for the three months ended March 31, 2006 and 2005, respectively. The
decrease in investment income reflects a reduced return on the performance of
the underlying investments surrounding the insurance contracts which is
primarily attributable to the portfolio mix of investments and overall market
conditions.
Investment management income was $2.3 million and $2.0 million for the
three months ended March 31, 2006 and 2005, respectively, reflecting increased
portfolio management fees generated by MVP, our institutional money management
subsidiary, primarily attributable to new business development and overall
growth in assets under management.
Other income was $7.8 million and $4.1 million for the three months
ended March 31, 2006 and 2005, respectively. We attribute the primary components
of the increase in other income to:
>> an increase of $1.5 million in gains on the sale of other real
estate. Gains on the sale of other real estate were $1.6 million
for the three months ended March 31, 2006, and included a $1.5
million gain recorded on the sale of a parcel of other real
estate acquired with our acquisition of CIB Bank. Gains on the
sale of other real estate for the three months ended March 31,
2005 were $114,000;
>> a release fee of $938,000 received on funds collected during the
first quarter of 2006 from a loan previously sold in March 2005,
of which First Bank was entitled to 25% of any future fees
collected on the loan under a defined release fee agreement that
was entered into in conjunction with the loan sale;
>> a decrease of $524,000 in net losses on our derivative
instruments;
>> an increase of $289,000 in income associated with standby letters
of credit;
>> a net increase of $262,000 in gains on the valuation or sale of
certain repossessed assets, primarily attributable to a gain of
$310,000 on the sale of five shrimping vessels that were
partially or entirely damaged as a result of Hurricane Katrina in
2005; and
>> our acquisitions of FBA, IBOC and NSB, completed during 2005, and
FNBS , completed in January 2006; partially offset by
>> a net increase in losses, net of gains, on the disposition of
certain assets, primarily attributable to a $241,000 net loss
resulting from the charitable donation of a branch facility.
Noninterest Expense
Noninterest expense was $74.8 million and $63.9 million for the three
months ended March 31, 2006 and 2005, respectively. Our efficiency ratio
decreased slightly to 64.29% for the three months ended March 31, 2006 from
64.32% for the comparable period in 2005. The efficiency ratio is used by the
financial services industry to measure an organization's operating efficiency.
The efficiency ratio represents the ratio of noninterest expense to net interest
income and noninterest income. The increase in noninterest expense was primarily
attributable to increases in expenses resulting from our 2005 and 2006
acquisitions, and increases in salaries and employee benefits expense, occupancy
expense, net of rental income, information technology fees, charitable
contributions expense and other expense.
Salaries and employee benefits expense was $39.5 million and $32.9
million for the three months ended March 31, 2006 and 2005, respectively. We
attribute the overall increase to increased salaries and employee benefits
expenses associated with an aggregate of 11 additional branches acquired in 2005
and 2006, one de novo branch opened in 2005, in addition to generally higher
salary and employee benefit costs associated with employing and retaining
qualified personnel, including the implementation of enhanced incentive
compensation and employee benefits plans. Our number of employees on a full-time
equivalent basis increased to approximately 2,350 at March 31, 2006, from
approximately 2,200 at March 31, 2005.
Occupancy, net of rental income, and furniture and equipment expense
totaled $10.2 million and $9.3 million for the three months ended March 31, 2006
and 2005, respectively. The increase is primarily attributable to higher levels
of expense resulting from our acquisitions in 2005 and 2006, which added 11
branch offices, and the opening of one de novo branch office in 2005, as
discussed above. The increase is also attributable to increased technology
equipment expenditures, continued expansion and renovation of certain corporate
and branch offices, and increased depreciation expense associated with
acquisitions and capital expenditures.
Information technology fees were $9.1 million and $8.2 million for the
three months ended March 31, 2006 and 2005, respectively. As more fully
described in Note 6 to our Consolidated Financial Statements, First Services,
L.P., a limited partnership indirectly owned by our Chairman and members of his
immediate family, provides information technology and 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 2005, as well as the achievement of certain efficiencies associated
with the implementation of various technology projects. The information
technology conversions of FBA, IBOC, NSB and FNBS were completed in June 2005,
October 2005, December 2005 and February 2006, respectively.
Legal, examination and professional fees were $2.1 million and $2.4
million for the three months ended March 31, 2006 and 2005, respectively. The
decrease is primarily attributable to higher professional fees paid in 2005
related to 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. The reduction in 2006 is also
attributable to the settlement and final resolution of certain defense
litigation in the fourth quarter of 2005. The continued expansion of overall
corporate activities, the ongoing professional services utilized by certain of
our acquired entities, and increased legal fees associated with commercial loan
documentation, collection efforts and certain defense litigation costs primarily
related to acquired entities have all contributed to the overall expense levels
in 2005 and 2006.
Amortization of intangibles associated with the purchase of
subsidiaries was $1.5 million and $1.2 million for the three months ended March
31, 2006 and 2005, respectively. The increase is attributable to core deposit
intangibles associated with our acquisitions of FBA, IBOC and NSB completed in
2005 and our acquisition of FNBS completed in January 2006.
Charitable contributions expense was $1.6 million and $106,000 for the
three months ended March 31, 2006 and 2005, respectively. The increase is
primarily attributable to First Bank's charitable contributions to the Dierberg
Operating Foundation, Inc., a charitable foundation created by our Chairman and
members of his immediate family, as further discussed in Note 6 to our
Consolidated Financial Statements.
Other expense was $7.1 million and $6.1 million for the three months
ended March 31, 2006 and 2005, 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:
>> a $617,000 specific reserve established in March 2006 for the
estimated loss associated with a $3.1 million unfunded letter of
credit acquired with the acquisition of CIB Bank; and
>> expenses associated with continued growth and expansion of our
banking franchise, including our de novo branch office and our
acquisitions completed during 2005 and 2006.
Provision for Income Taxes
The provision for income taxes was $11.7 million and $13.3 million for
the three months ended March 31, 2006 and 2005, representing an effective tax
rate of 28.9% and 37.5%, respectively. The decrease in the effective tax rate is
primarily attributable to a $3.2 million reduction of the provision for federal
and state income taxes in the first quarter of 2006 resulting from the reversal
of certain tax reserves no longer deemed necessary. Exclusive of this
nonrecurring transaction, the reduced effective tax rate of 36.8% for the three
months ended March 31, 2006 reflects our utilization of certain state tax
credits.
Interest Rate Risk Management
We utilize derivative financial instruments to assist in our management
of interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The derivative financial
instruments we held as of March 31, 2006 and December 31, 2005 are summarized as
follows:
March 31, 2006 December 31, 2005
---------------------- -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................ $ 300,000 -- 300,000 114
Fair value hedges........................... -- -- 25,000 748
Interest rate floor agreement............... 100,000 4 100,000 70
Interest rate lock commitments.............. 6,700 -- 5,900 --
Forward commitments to sell
mortgage-backed securities................ 47,000 -- 47,000 --
========= === ======= ===
The notional amounts of our derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
our credit exposure through our use of these instruments. The credit exposure
represents the loss we would incur in the event the counterparties failed
completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value.
During the three months ended March 31, 2006 and 2005, we realized net
interest expense of $1.4 million and net interest income of $3.6 million,
respectively, on our derivative financial instruments. The decreased earnings
are primarily attributable to continued increases in prevailing interest rates,
the maturity of $200.0 million notional amount of interest rate swap agreements
designated as cash flow hedges in March 2005 and the termination of $150.0
million, $101.2 million and $25.0 million of interest rate swap agreements
designated as fair value hedges in February 2005, May 2005 and February 2006,
respectively, as further discussed below. Although the Company has implemented
other methods to mitigate the reduction in net interest income, the maturity and
termination of the swap agreements has resulted in a compression of our net
interest margin of approximately 23 basis points for the three months ended
March 31, 2006, in comparison to the comparable period in 2005. We recorded net
losses on derivative instruments, which are included in noninterest income in
our consolidated statements of income, of $66,000 and $590,000 for the three
months ended March 31, 2006 and 2005, respectively. The net losses recorded in
2006 reflect changes in the value of our interest rate floor agreement entered
into in September 2005, as further discussed below. The net losses recorded in
2005 reflect valuation changes in the fair value of our fair value hedges and
the underlying hedged liabilities.
Cash Flow Hedges. We entered into the following interest rate swap agreements,
designated as cash flow hedges, to effectively lengthen the repricing
characteristics of certain interest-earning assets to correspond with their
funding source with the objective of stabilizing cash flow, and accordingly, net
interest income over time:
>> During March 2001, April 2001, and July 2003, we entered into
interest rate swap agreements of $200.0 million, $175.0 million
and $200.0 million notional amount, respectively. The underlying
hedged assets are certain loans within our commercial loan
portfolio. The swap agreements, which have been designated as
cash flow hedges, provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
weighted average prime lending rate minus 2.82%, 2.82% and 2.85%,
respectively. The terms of the swap agreements provide for us to
pay and receive interest on a quarterly basis. In November 2001,
we terminated $75.0 million notional amount of the swap
agreements originally entered into in April 2001 in order to
appropriately modify our overall hedge position in accordance
with our interest rate risk management program, and on April 2,
2006, the remaining $100.0 million notional amount of these swap
agreements matured. In addition, the $200.0 million notional
amount swap agreement that we entered into in March 2001 matured
on March 21, 2005. The amount receivable by us under the swap
agreements was $2.4 million at March 31, 2006 and December 31,
2005 and the amount payable by us under the swap agreements was
$2.7 million and $2.5 million at March 31, 2006 and December 31,
2005, respectively.
The maturity dates, notional amounts, interest rates paid and received
and fair value of our interest rate swap agreements designated as cash flow
hedges as of March 31, 2006 and December 31, 2005 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
March 31, 2006:
April 2, 2006......................... $100,000 4.93% 5.45% $ (10)
July 31, 2007......................... 200,000 4.90 3.08 (5,547)
-------- -------
$300,000 4.91 3.87 $(5,557)
======== ==== ==== =======
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)
======== ==== ==== =======
Fair Value Hedges. We entered into the following interest rate swap agreements,
designated as fair value hedges, to effectively shorten the repricing
characteristics of certain interest-bearing liabilities to correspond more
closely with their funding source with the objective of stabilizing net interest
income over time:
>> During January 2001, we entered into $150.0 million notional
amount of five-year interest rate swap agreements that provided
for us to receive a fixed rate of interest and pay an adjustable
rate of interest equivalent to the three-month London Interbank
Offering Rate, or LIBOR. The underlying hedged liabilities were a
portion of our other time deposits. The terms of the swap
agreements provided for us to pay interest on a quarterly basis
and receive interest on a semiannual basis. In February 2005, we
terminated the 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 adjustments of the underlying hedged
liabilities were 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, March 2003 and April 2003, we entered into $55.2
million, $25.0 million and $46.0 million notional amount,
respectively, of interest rate swap agreements that provided for
us to receive a fixed rate of interest and pay an adjustable rate
of interest equivalent to the three-month LIBOR plus 2.30%, 2.55%
and 2.58%, respectively. The underlying hedged liabilities were a
portion of our subordinated debentures. The terms of the swap
agreements provided for us to pay and receive interest on a
quarterly basis. The amounts receivable and payable by us under
the swap agreements at December 31, 2005 were $506,000 and
$420,000, respectively. In May 2005, we terminated the $55.2
million and $46.0 million notional swap agreements in order to
appropriately modify future hedge positions in accordance with
our interest rate risk management program. The resulting $854,000
basis adjustment of the underlying hedged liabilities, in
aggregate, was 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. Effective February 16, 2006, we terminated the
remaining $25.0 million notional swap agreement. In conjunction
with this transaction, we recorded the resulting $1.7 million
basis adjustment of the underlying hedged liabilities and the
remaining balance of the basis adjustments associated with the
swap agreements that were terminated in May 2005, totaling
$834,000, in our 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.
Interest Rate Floor Agreement. In September 2005, we entered into a $100.0
million notional amount three-year interest rate floor agreement in conjunction
with our interest rate risk management program. The interest rate floor
agreement provides for us to receive a quarterly fixed rate of interest of 5.00%
should the three-month 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 our consolidated balance sheets, was $4,000 and $70,000 at March 31,
2006 and December 31, 2005, respectively.
During 2003 and 2004, we entered into five term repurchase agreements
under master repurchase agreements with unaffiliated third parties, as further
described in Note 9 to our Consolidated Financial Statements. The underlying
securities associated with the term repurchase agreements are mortgage-backed
securities and callable U.S. Government agency securities and are held by other
financial institutions under safekeeping agreements. The term repurchase
agreements were entered into with the objective of stabilizing net interest
income over time and further protecting our net interest margin against changes
in interest rates. The interest rate floor agreements included within the term
repurchase agreements (and the interest rate cap agreements previously included
within the term repurchase agreements) represent embedded derivative instruments
which, in accordance with existing accounting literature governing derivative
instruments, are not required to be separated from the term repurchase
agreements and accounted for separately as a derivative financial instrument. As
such, the term repurchase agreements are reflected in other borrowings in our
consolidated balance sheets and the related interest expense is reflected as
interest expense on other borrowings in our consolidated statements of income.
In March 2005, in accordance with our interest rate risk management program, we
modified our term repurchase agreements to terminate the interest rate cap
agreements embedded within the agreements and simultaneously enter into interest
rate floor agreements, also embedded within the agreements. These modifications
resulted in adjustments to the existing interest rate spread to LIBOR for the
underlying agreements. The modified terms of the term repurchase agreements
became effective during the second quarter of 2005. We did not incur any costs
associated with the modifications of the agreements nor did the modifications
result in a change to the accounting treatment of the embedded derivative
instruments. In November 2005, we terminated a $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 available-for-sale investment securities
associated with the termination of the term repurchase agreement. As further
discussed in Note 9 to our Consolidated Financial Statements, on February 14,
2006, we terminated the two $50.0 million term repurchase agreements with
maturity dates of June 14, 2007, and simultaneously recognized a $1.6 million
loss on the sale of $100.0 million of available-for-sale investment securities
associated with the termination of the term repurchase agreements. In addition,
as further discussed in Note 9 to our Consolidated Financial Statements, on
March 28, 2006, we terminated the $50.0 million term repurchase agreement with a
maturity date of August 1, 2007, and simultaneously recognized a $746,000 loss
on the sale of $50.0 million of available-for-sale investment securities
associated with the termination of the term repurchase agreement.
Pledged Collateral. At March 31, 2006 and December 31, 2005, we had a $2.0
million letter of credit issued on our behalf to the counterparty and had
pledged investment securities available for sale with a fair value of $5.8
million and $5.1 million, respectively, in connection with our interest rate
swap agreements. In addition, at December 31, 2005, we had pledged cash of $1.8
million as collateral in connection with our interest rate swap agreements.
Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed
Securities. Derivative financial instruments issued by us consist of interest
rate lock commitments to originate fixed-rate loans to be sold. Commitments to
originate fixed-rate loans consist primarily of residential real estate loans.
These net loan commitments and loans held for sale are hedged with forward
contracts to sell mortgage-backed securities. The carrying value of these
interest rate lock commitments included in other assets in our consolidated
balance sheets was $563,000 and ($49,000) at March 31, 2006 and December 31,
2005, respectively.
Loans and Allowance for Loan Losses
Interest and fees on loans, which represents the principal source of
income for First Banks, were 89.2% of total interest income for the three months
ended March 31, 2006, in comparison to 83.9% for the comparable period in 2005.
Total loans, net of unearned discount, increased $150.5 million to $7.17
billion, or 76.3% of total assets, at March 31, 2006, compared to $7.02 billion,
or 76.6% of total assets, at December 31, 2005. The overall increase in loans,
net of unearned discount, in 2006 is primarily attributable to internal loan
growth and our acquisition of FNBS, which provided loans, net of unearned
discount, of $49.3 million, partially offset by the securitization of $77.1
million of certain residential mortgage loans and the sale and payoff of certain
of our nonperforming loans that were held for sale at December 31, 2005. The net
increase is attributable to:
>> an increase of $126.5 million in our real estate mortgage
portfolio primarily attributable to internal growth within our
loan portfolio and our acquisitions completed during 2006. Our
acquisition of FNBS provided real estate mortgage loans of $39.5
million. The securitization of $77.1 million of certain
residential mortgage loans in March 2006 resulted in a change in
our asset structure from residential mortgage loans to
available-for-sale investment securities. Exclusive of these
transactions, our portfolio increased $164.1 million from
internal growth, largely attributable to management's business
strategy decision in the third quarter of 2005 to retain certain
mortgage loan 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 $80.0 million in our real estate construction and
development portfolio resulting primarily from new loan
originations and seasonal fluctuations on existing and available
credit lines, as well as $3.9 million of loans provided by our
acquisition of FNBS; and
>> an increase of $38.9 million in our commercial, financial and
agricultural portfolio, primarily attributable to internal loan
production, including $4.8 million of loans provided by our
acquisition of FNBS; partially offset by
>> a $91.6 million decrease in our loans held for sale portfolio
resulting from the timing of loan sales in the secondary mortgage
market, the sale of certain nonperforming loans that were
transferred to our held for sale portfolio on December 31, 2005,
and the payoff of a single nonperforming loan in January 2006
that was included in our held for sale portfolio at December 31,
2005, as further discussed below.
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 March 31, 2006 and December 31, 2005:
March 31, December 31,
2006 2005
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual....................................................... $ 18,762 4,937
Real estate construction and development:
Nonaccrual....................................................... 3,670 11,137
Real estate mortgage:
One-to-four family residential:
Nonaccrual.................................................... 9,941 9,576
Restructured.................................................. 10 10
Multi-family residential loans:
Nonaccrual.................................................... 719 740
Commercial real estate loans:
Nonaccrual.................................................... 33,789 70,625
Lease financing:
Nonaccrual....................................................... 10 11
Consumer and installment:
Nonaccrual....................................................... 197 160
---------- ---------
Total nonperforming loans................................. 67,098 97,196
Other real estate.................................................. 3,288 2,025
---------- ---------
Total nonperforming assets................................ $ 70,386 99,221
========== =========
Loans, net of unearned discount.................................... $7,171,283 7,020,771
========== =========
Loans past due 90 days or more and still accruing.................. $ 2,211 5,576
========== =========
Ratio of:
Allowance for loan losses to loans............................... 1.96% 1.93%
Nonperforming loans to loans..................................... 0.94 1.38
Allowance for loan losses to nonperforming loans................. 209.00 139.23
Nonperforming assets to loans and other real estate.............. 0.98 1.41
========== =========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, decreased to $67.1 million at March 31, 2006, from
$97.2 million at December 31, 2005 and $79.8 million at March 31, 2005. Other
real estate owned was $3.3 million, $2.0 million and $1.8 million at March 31,
2006, December 31, 2005 and March 31, 2005, respectively. Our nonperforming
assets, consisting of nonperforming loans and other real estate owned, improved
by $28.8 million, or 29.1%, during the first quarter of 2006 to $70.4 million at
March 31, 2006, compared to $99.2 million at December 31, 2005 and $81.6 million
at March 31, 2005. A significant portion of our nonperforming assets includes
nonperforming loans associated with our acquisition of CIB Bank in November
2004, which have decreased to $18.2 million, or 27.1% of our total nonperforming
loans at March 31, 2006, from $55.0 million, or 56.6% of our nonperforming loans
at December 31, 2005, and $43.7 million, or 54.8% of our nonperforming loans at
March 31, 2005. Nonperforming loans were 0.94% of loans, net of unearned
discount, at March 31, 2006, compared to 1.38% at December 31, 2005 and 1.30% at
March 31, 2005. Additionally, loans past due 90 days or more and still accruing
interest decreased to $2.2 million at March 31, 2006, from $5.6 million at
December 31, 2005 and $8.8 million at March 31, 2005. The decrease in
nonperforming loans and past due loans during the three months ended March 31,
2006 primarily resulted from our continued emphasis on improving asset quality,
the sale of certain nonperforming loans, loan payoffs and/or external
refinancing of various credits. We had been actively marketing approximately
$59.7 million of nonperforming loans that were transferred to our held for sale
portfolio on December 31, 2005. In January 2006, we received a payoff on one of
the loans held for sale that had a carrying value of $12.4 million at December
31, 2005. In conjunction with this transaction, we recognized a loan recovery of
$5.0 million and interest and late fees of $2.0 million on the payoff of the
loan. In March 2006, we completed the sale of the majority of the remaining
loans held for sale that had a carrying value of approximately $32.5 million, in
aggregate, at December 31, 2005, and recorded a pre-tax gain of approximately
$1.7 million on the sale of these loans. We continue to actively market the
remaining nonaccrual loans in our held for sale portfolio. The overall decrease
in our nonperforming loans during 2006 was partially offset by the addition of
an $8.9 million loan in our southern California market that was placed on
nonaccrual status in March 2006 due to deterioration of the financial position
of the borrower.
We recorded net loan recoveries of $3.3 million for the three months
ended March 31, 2006, compared to net loan charge-offs of $6.6 million for the
comparable period in 2005. Net loan recoveries for 2006 included a loan recovery
of $5.0 million on the payoff of a single loan, as discussed above. Our
allowance for loan losses was $140.2 million at March 31, 2006, compared to
$135.3 million at December 31, 2005 and $144.2 million at March 31, 2005. Our
allowance for loan losses as a percentage of loans, net of unearned discount,
was 1.96% at March 31, 2006, compared to 1.93% at December 31, 2005 and 2.34% at
March 31, 2005. Our allowance for loan losses as a percentage of nonperforming
loans was 209.00% at March 31, 2006, compared to 139.23% at December 31, 2005
and 180.71% at March 31, 2005. 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.
In addition, although we have experienced continued improvement in our
nonperforming asset levels, we continue our efforts to reduce the overall level
of these assets.
Each month, the credit administration department provides management
with detailed lists of loans on the watch list and summaries of the entire loan
portfolio by risk rating. These are coupled with analyses of changes in the risk
profile of the portfolio, changes in past-due and nonperforming loans and
changes in watch list and classified loans over time. In this manner, we
continually monitor the overall increases or decreases in the level of risk in
the portfolio. Factors are applied to the loan portfolio for each category of
loan risk to determine acceptable levels of allowance for loan losses. In
addition, a quarterly evaluation of each lending unit is performed based on
certain factors, such as lending personnel experience, recent credit reviews,
loan concentrations and other factors. Based on this evaluation, changes to the
allowance for loan losses may be required due to the perceived risk of
particular portfolios. The calculated allowance required for the portfolio is
then compared to the actual allowance balance to determine the adjustments
necessary to maintain the allowance at appropriate levels. In addition,
management exercises a certain degree of judgment in its analysis of the overall
adequacy of the allowance for loan losses. In its analysis, management considers
the change in the portfolio, including growth, composition, the ratio of net
loans to total assets, and the economic conditions of the regions in which we
operate. Based on this quantitative and qualitative analysis, adjustments are
made to the allowance for loan losses. Such adjustments are reflected in our
consolidated statements of income.
Changes in the allowance for loan losses for the three months ended
March 31, 2006 and 2005 were as follows:
Three Months Ended
March 31,
---------------------
2006 2005
---- ----
(dollars expressed in thousands)
Balance, beginning of period........................................... $135,330 150,707
Acquired allowances for loan losses.................................... 576 --
-------- -------
135,906 150,707
-------- -------
Loans charged-off...................................................... (3,445) (12,636)
Recoveries of loans previously charged-off............................. 6,774 6,083
-------- -------
Net loan recoveries (charge-offs).................................. 3,329 (6,553)
-------- -------
Provision for loan losses.............................................. 1,000 --
-------- -------
Balance, end of period................................................. $140,235 144,154
======== =======
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 FHLB and other borrowings, including our term
loan and our revolving credit line. The aggregate funds acquired from these
sources were $1.71 billion and $1.72 billion at March 31, 2006 and December 31,
2005, 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 March 31, 2006:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less.......................... $ 353,074 187,844 540,918
Over three months through six months.......... 241,554 5,000 246,554
Over six months through twelve months......... 421,449 162,000 583,449
Over twelve months............................ 251,319 87,800 339,119
---------- ------- ---------
Total.................................... $1,267,396 442,644 1,710,040
========== ======= =========
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
March 31, 2006 and December 31, 2005, First Bank's borrowing capacity under the
agreement was approximately $641.6 million and $743.6 million, respectively. In
addition, First Bank's borrowing capacity through its relationship with the FHLB
was approximately $729.1 million and $679.3 million at March 31, 2006 and
December 31, 2005, respectively. Exclusive of the FHLB advances outstanding of
$14.8 million and $39.3 million at March 31, 2006 and December 31, 2005,
respectively, which represent advances assumed in conjunction with various
acquisitions, First Bank had no amounts outstanding under its borrowing
arrangement with the FHLB at March 31, 2006 and December 31, 2005. On March 17,
2006, First Bank prepaid $20.5 million of FHLB advances, as further discussed in
Note 9 to our Consolidated Financial Statements.
In addition to our owned banking facilities, we have entered into
long-term leasing arrangements to support our ongoing activities. The required
payments under such commitments and other contractual obligations at March 31,
2006 were as follows:
Less than 1-3 3-5 Over
1 Year Years Years 5 Years Total
------ ----- ----- ------- -----
(dollars expressed in thousands)
Operating leases...................... $ 11,349 18,260 12,422 18,973 61,004
Certificates of deposit (1)........... 2,581,110 770,153 149,983 14,230 3,515,476
Other borrowings...................... 334,844 2,000 10,800 -- 347,644
Notes payable (1)..................... 20,000 75,000 -- -- 95,000
Subordinated debentures (1)........... -- -- -- 257,601 257,601
Other contractual obligations......... 1,098 206 16 17 1,337
---------- ------- ------- ------- ---------
Total............................ $2,948,401 865,619 173,221 290,821 4,278,062
========== ======= ======= ======= =========
-------------------
(1) Amounts exclude the related interest expense accrued on these obligations as of March 31, 2006.
Management believes the available liquidity and operating results of
First Bank will be sufficient to provide funds for growth and to permit the
distribution of dividends to us sufficient to meet our operating and debt
service requirements, both on a short-term and long-term basis, and to pay
interest on the subordinated debentures that we issued to our affiliated
statutory and business financing trusts.
Effects of New Accounting Standards
In November 2003, the Emerging Issues Task Force, or EITF, reached a
consensus on certain disclosure requirements under EITF Issue No 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The new disclosure requirements apply to 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. In June
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.
In November 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. On January 1, 2006, we implemented the
requirements of FSP FAS 115-1 and FAS 124-1, which did not 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. 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, in March 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 7 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 8.52% and 7.77%,
respectively, as of March 31, 2006. 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 Federal Reserve 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 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. On January 1, 2006, we implemented the requirements of SFAS No.
154, which did not 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
reporting considerations. The final interpretation is expected to be issued in
June 2006 and the requirements, as currently proposed, would be effective in
fiscal years beginning after December 15, 2006. We are currently evaluating the
requirements of the exposure draft to determine their impact on our financial
condition and results of operations.
In March 2006, the FASB issued SFAS No. 156 - Accounting for Servicing
of Financial Assets. SFAS No. 156, an amendment of FASB SFAS No. 140 -
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, allows mark-to-market accounting for servicing rights resulting
in reporting that is similar to fair value hedge accounting, but without the
effort and system costs needed to identify effective hedging instruments and
document hedging relationships. SFAS No. 156 is effective for fiscal years
beginning after September 15, 2006. Early adoption is permitted as of the
beginning of a company's fiscal year unless the company has already issued
interim financial statements during that fiscal year. We are currently
evaluating the requirements of SFAS No. 156 to determine its impact on our
financial condition and results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2005, our risk management program's simulation model
indicated a loss of projected net interest income in the event of a decline in
interest rates. We are "asset-sensitive," indicating that our assets would
generally reprice with changes in rates more rapidly than our liabilities. While
a decline in interest rates of less than 100 basis points was projected to have
a relatively minimal impact on our net interest income, an instantaneous
parallel decline in the interest yield curve of 100 basis points indicated a
pre-tax projected loss of approximately 6.4% of net interest income, based on
assets and liabilities at December 31, 2005. At March 31, 2006, we remain in an
"asset-sensitive" position and thus, remain subject to a higher level of risk in
a declining interest rate environment. Although we do not anticipate that
instantaneous shifts in the yield curve as projected in our simulation model are
likely, these are indications of the effects that changes in interest rates
would have over time. Our asset-sensitive position, coupled with declines in
income associated with our interest rate swap agreements and increases in
prevailing interest rates, is reflected in our net interest margin for the three
months ended March 31, 2006 as compared to the comparable period in 2005 and
further discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations." During the three
months ended March 31, 2006, our asset-sensitive position and overall
susceptibility to market risks have not changed materially. However, prevailing
interest rates have continued to increase during the three months ended March
31, 2006.
ITEM 4 - CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer have
evaluated the effectiveness of our "disclosure controls and procedures" (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, or the Exchange Act), as of the end of the period covered by this report.
Based on such evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act. There have not been any changes in the Company's internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that have materially effected, or are reasonably likely to materially
affect, the Company's disclosure controls and procedures over financial
reporting.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit Number Description
-------------- -----------
4.1 Indenture between First Banks, Inc., as Issuer, and
Wilmington Trust Company, as Trustee, dated as of March 1,
2006 - filed herewith.
4.2 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, Peter D. Wimmer and Lisa K. Vansickle, as
Administrators, dated as of March 1, 2006 - file herewith.
4.3 Guarantee Agreement by and between First Banks, Inc. and
Wilmington Trust Company, dated as of March 1, 2006 - filed
herewith.
4.4 Placement Agreement by and among First Banks, Inc., First
Bank Statutory Trust IV and FTN Financial Capital Markets
and Keefe, Bruyette & Woods, Inc. as Placement Agents, dated
as of February 16, 2006 - filed herewith.
4.5 Floating Rate Junior Subordinated Deferrable Interest
Debenture of First Banks, Inc., dated as of March 1, 2006 -
filed herewith.
4.6 Capital Securities Subscription Agreement by and among First
Bank Statutory Trust IV, First Banks, Inc. and First
Tennessee Bank National Association, dated as of March 1,
2006 - file herewith.
4.7 Capital Securities Subscription Agreement by and among First
Bank Statutory Trust IV, First Banks, Inc. and Preferred
Term Securities XXI, Ltd., dated as of March 1, 2006 - file
herewith.
4.8 Capital Securities Certificate P-1 of First Bank Statutory
Trust IV, dated March 1, 2006 - filed herewith.
4.9 Capital Securities Certificate P-2 of First Bank Statutory
Trust IV, dated March 1, 2006 - filed herewith.
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive
Officer - filed herewith.
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial
Officer - filed herewith.
32.1 Section 1350 Certifications of Chief Executive Officer -
filed herewith.
32.2 Section 1350 Certifications of Chief Financial Officer -
filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: May 12, 2006
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)