UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
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 July 31, 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............................................................... 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................. 40
ITEM 4. CONTROLS AND PROCEDURES..................................................................... 41
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 42
ITEM 6. EXHIBITS.................................................................................... 43
SIGNATURES............................................................................................... 44
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2006 2005
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks.......................................................... $ 208,012 212,667
Short-term investments........................................................... 29,205 73,985
---------- ---------
Total cash and cash equivalents............................................. 237,217 286,652
---------- ---------
Investment securities:
Trading.......................................................................... 50,928 3,389
Available for sale............................................................... 1,111,233 1,311,289
Held to maturity (fair value of $24,180 and $25,791, respectively)............... 24,898 26,105
---------- ---------
Total investment securities................................................. 1,187,059 1,340,783
---------- ---------
Loans:
Commercial, financial and agricultural........................................... 1,846,153 1,619,822
Real estate construction and development......................................... 1,808,995 1,564,255
Real estate mortgage............................................................. 3,561,815 3,469,788
Consumer and installment......................................................... 69,654 64,724
Loans held for sale.............................................................. 332,411 315,134
---------- ---------
Total loans................................................................. 7,619,028 7,033,723
Unearned discount................................................................ (18,437) (12,952)
Allowance for loan losses........................................................ (147,383) (135,330)
---------- ---------
Net loans................................................................... 7,453,208 6,885,441
---------- ---------
Bank premises and equipment, net of accumulated depreciation and amortization......... 154,614 144,941
Goodwill.............................................................................. 226,811 167,056
Bank-owned life insurance............................................................. 113,612 111,442
Deferred income taxes................................................................. 126,313 128,938
Other assets.......................................................................... 116,393 105,080
---------- ---------
Total assets................................................................ $9,615,227 9,170,333
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand....................................................... $1,296,101 1,299,350
Interest-bearing demand.......................................................... 953,791 981,837
Savings.......................................................................... 2,161,286 2,106,470
Time deposits of $100 or more.................................................... 1,328,387 1,076,908
Other time deposits.............................................................. 2,326,380 2,077,266
---------- ---------
Total deposits.............................................................. 8,065,945 7,541,831
Other borrowings...................................................................... 327,996 539,174
Notes payable......................................................................... 85,000 100,000
Subordinated debentures............................................................... 304,270 215,461
Deferred income taxes................................................................. 28,855 27,104
Accrued expenses and other liabilities................................................ 77,965 61,762
Minority interest in subsidiary....................................................... 5,823 6,063
---------- ---------
Total liabilities........................................................... 8,895,854 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..................................................................... 724,717 673,956
Accumulated other comprehensive loss.................................................. (30,232) (19,906)
---------- ---------
Total stockholders' equity.................................................. 719,373 678,938
---------- ---------
Total liabilities and stockholders' equity.................................. $9,615,227 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 Six Months Ended
June 30, June 30,
-------------------- -------------------
2006 2005 2006 2005
---- ---- ---- ----
Interest income:
Interest and fees on loans........................................ $ 141,728 99,442 273,062 193,612
Investment securities............................................. 14,856 17,395 29,633 34,944
Short-term investments............................................ 1,147 351 2,270 860
--------- -------- -------- --------
Total interest income........................................ 157,731 117,188 304,965 229,416
--------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand......................................... 1,947 932 3,775 1,820
Savings......................................................... 12,255 6,331 23,438 12,075
Time deposits of $100 or more................................... 14,258 6,246 25,814 11,600
Other time deposits............................................. 23,146 16,156 43,180 30,135
Other borrowings.................................................. 3,246 4,234 7,941 7,534
Notes payable..................................................... 1,477 103 2,897 241
Subordinated debentures........................................... 5,722 5,365 11,374 10,111
--------- -------- -------- --------
Total interest expense....................................... 62,051 39,367 118,419 73,516
--------- -------- -------- --------
Net interest income.......................................... 95,680 77,821 186,546 155,900
Provision for loan losses.............................................. 5,000 (8,000) 6,000 (8,000)
--------- -------- -------- --------
Net interest income after provision for loan losses.......... 90,680 85,821 180,546 163,900
--------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees..... 10,996 10,177 21,228 19,476
Gain on loans sold and held for sale.............................. 6,099 6,844 12,920 11,360
Net loss on investment securities................................. (1,216) -- (3,987) --
Bank-owned life insurance investment income....................... 652 1,274 1,767 2,534
Investment management income...................................... 2,296 2,220 4,597 4,246
Other............................................................. 7,052 5,676 14,851 9,790
--------- -------- -------- --------
Total noninterest income..................................... 25,879 26,191 51,376 47,406
--------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits.................................... 42,610 34,548 82,104 67,478
Occupancy, net of rental income................................... 6,425 5,226 12,660 10,465
Furniture and equipment........................................... 4,116 3,814 8,079 7,838
Postage, printing and supplies.................................... 1,988 1,324 3,414 2,952
Information technology fees....................................... 9,190 9,395 18,251 17,545
Legal, examination and professional fees.......................... 2,408 2,082 4,505 4,453
Amortization of intangibles associated with the purchase
of subsidiaries................................................. 1,680 1,146 3,197 2,355
Communications.................................................... 604 466 1,158 975
Advertising and business development.............................. 2,150 1,748 3,877 3,395
Charitable contributions.......................................... 1,707 1,572 3,324 1,678
Other............................................................. 8,173 8,840 15,297 14,896
--------- -------- -------- --------
Total noninterest expense.................................... 81,051 70,161 155,866 134,030
--------- -------- -------- --------
Income before provision for income taxes and minority
interest in loss of subsidiary............................ 35,508 41,851 76,056 77,276
Provision for income taxes............................................. 13,500 15,005 25,203 28,303
--------- -------- -------- --------
Income before minority interest in loss of subsidiary........ 22,008 26,846 50,853 48,973
Minority interest in loss of subsidiary................................ (78) -- (236) --
--------- -------- -------- --------
Net income................................................... 22,086 26,846 51,089 48,973
Preferred stock dividends.............................................. 132 132 328 328
--------- -------- -------- --------
Net income available to common stockholders.................. $ 21,954 26,714 50,761 48,645
========= ======== ======== ========
Basic earnings per common share........................................ $ 927.86 1,129.05 2,145.35 2,055.92
========= ======== ======== ========
Diluted earnings per common share...................................... $ 916.31 1,110.42 2,118.11 2,025.30
========= ======== ======== ========
Weighted average common stock outstanding.............................. 23,661 23,661 23,661 23,661
========= ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Six Months Ended June 30, 2006 and 2005 and Six 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
-------
Six months ended June 30, 2005:
Comprehensive income:(1)
Net income................................... -- -- -- -- 48,973 -- 48,973
Other comprehensive loss, net of tax:
Unrealized losses on investment
securities............................. -- -- -- -- -- (3,571) (3,571)
Derivative instruments:
Current period transactions.......... -- -- -- -- -- (2,743) (2,743)
-------
Total comprehensive income...................... 42,659
Class A preferred stock dividends,
$0.50 per share............................... -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share............................... -- -- -- -- (7) -- (7)
------- --- ----- ----- ------- ------- -------
Consolidated balances, June 30, 2005............... 12,822 241 5,915 5,910 626,481 (8,145) 643,224
-------
Six months ended December 31, 2005:
Comprehensive income:
Net income................................... -- -- -- -- 47,933 -- 47,933
Other comprehensive loss, net of tax:
Unrealized losses on investment
securities............................. -- -- -- -- -- (12,088) (12,088)
Reclassification adjustment for
investment securities losses
included in net income................. -- -- -- -- -- 1,867 1,867
Derivative instruments:
Current period transactions.......... -- -- -- -- -- (1,540) (1,540)
-------
Total comprehensive income...................... 36,172
Class A preferred stock dividends,
$0.70 per share............................... -- -- -- -- (448) -- (448)
Class B preferred stock dividends,
$0.07 per share............................... -- -- -- -- (10) -- (10)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2005........... 12,822 241 5,915 5,910 673,956 (19,906) 678,938
-------
Six months ended June 30, 2006:
Comprehensive income:(1)
Net income................................... -- -- -- -- 51,089 -- 51,089
Other comprehensive loss, net of tax:
Unrealized losses on investment
securities............................. -- -- -- -- -- (11,903) (11,903)
Reclassification adjustment for
investment securities losses
included in net income................. -- -- -- -- -- 1,739 1,739
Derivative instruments:
Current period transactions.......... -- -- -- -- -- (162) (162)
-------
Total comprehensive income...................... 40,763
Class A preferred stock dividends,
$0.50 per share............................... -- -- --. -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share............................... -- -- -- -- (7) -- (7)
------- --- ----- ----- ------- ------- -------
Consolidated balances, June 30, 2006............... $12,822 241 5,915 5,910 724,717 (30,232) 719,373
======= === ===== ===== ======= ======= =======
- -------------------------
(1) Disclosure of comprehensive income (loss):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2006 2005 2006 2005
---- ---- ---- ----
Comprehensive income:
Net income........................................................ $22,086 26,846 51,089 48,973
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on investment securities............ (8,343) 10,618 (11,903) (3,571)
Reclassification adjustment for investment securities
losses included in net income............................... 201 -- 1,739 --
Derivative instruments:
Current period transactions............................... 141 684 (162) (2,743)
------- ------ ------- -------
Total comprehensive income.......................................... $14,085 38,148 40,763 42,659
======= ====== ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Six Months Ended
June 30,
-----------------------
2006 2005
---- ----
Cash flows from operating activities:
Net income.......................................................................... $ 51,089 48,973
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment...................... 8,975 8,591
Amortization, net of accretion.................................................... 7,018 7,458
Originations of loans held for sale............................................... (369,752) (647,942)
Proceeds from sales of loans held for sale........................................ 444,231 600,315
Provision for loan losses......................................................... 6,000 (8,000)
Provision for deferred income taxes............................................... 3,060 (124)
Decrease in accrued interest receivable........................................... 153 3,721
Increase in accrued interest payable.............................................. 527 769
Proceeds from sales of trading securities......................................... 4,463 --
Purchases of trading securities................................................... (53,580) --
Gain on loans sold and held for sale.............................................. (12,920) (11,360)
Net loss on investment securities................................................. 3,987 --
Other operating activities, net................................................... 38,825 14,369
Minority interest in loss of subsidiary........................................... (236) --
--------- --------
Net cash provided by operating activities...................................... 131,840 16,770
--------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received.......... (221,092) (3,311)
Proceeds from sales of investment securities available for sale..................... 197,027 --
Maturities of investment securities available for sale.............................. 659,466 284,203
Maturities of investment securities held to maturity................................ 2,053 1,130
Purchases of investment securities available for sale............................... (515,951) (219,227)
Purchases of investment securities held to maturity................................. (865) (509)
Net increase in loans............................................................... (543,069) (69,292)
Recoveries of loans previously charged-off.......................................... 8,450 12,059
Purchases of bank premises and equipment............................................ (10,670) (6,718)
Other investing activities, net..................................................... (1,820) 9,577
--------- --------
Net cash (used in) provided by investing activities............................ (426,471) 7,912
--------- --------
Cash flows from financing activities:
Decrease in demand and savings deposits............................................. (53,534) (6,397)
Increase in time deposits........................................................... 442,740 7,306
Decrease in Federal Home Loan Bank advances......................................... (18,328) (6,000)
Decrease in securities sold under agreements to repurchase.......................... (197,985) (42,259)
Repayments of notes payable......................................................... (15,000) (15,000)
Proceeds from issuance of subordinated debentures................................... 87,631 --
Payment of preferred stock dividends................................................ (328) (328)
--------- --------
Net cash provided by (used in) financing activities............................ 245,196 (62,678)
--------- --------
Net decrease in cash and cash equivalents...................................... (49,435) (37,996)
Cash and cash equivalents, beginning of period........................................... 286,652 267,110
--------- --------
Cash and cash equivalents, end of period................................................. $ 237,217 229,114
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on liabilities........................................................... $ 117,892 72,747
Income taxes...................................................................... 11,290 32,193
========= ========
Noncash investing and financing activities:
Securitization and transfer of loans to investment securities..................... $ 138,944 --
Loans transferred to other real estate............................................ 3,452 1,247
========= ========
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 and six months ended June 30, 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); Universal Premium Acceptance Corporation (UPAC) and its wholly owned
subsidiary, UPAC of California, Inc.; and Small Business Loan Source LLC (SBLS
LLC). All of the subsidiaries are wholly owned, 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.
(2) ACQUISITIONS AND INTEGRATION COSTS
Completed Acquisitions
On January 3, 2006, First Banks acquired the majority of the
outstanding common stock of First National Bank of Sachse (FNBS), and
subsequently acquired 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 $8.8 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 24, 2006.
On January 20, 2006, First Bank completed its acquisition of the branch
office of Dallas National Bank in Richardson, Texas (Richardson Branch). At the
time of the acquisition, the Richardson Branch had assets of $1.1 million,
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
benefit and 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 the acquisition, Adrian Baker
had assets of $3.0 million and stockholders' equity of $810,000. The assets
acquired and liabilities assumed were recorded at their estimated fair value on
the acquisition date. Goodwill, which is not deductible for tax purposes, was
approximately $3.9 million. The customer list and related intangibles of
approximately $3.7 million, which are not deductible for tax purposes, are being
amortized over 15 years utilizing the straight-line method. Adrian Baker
operates as a wholly owned subsidiary of First Bank.
On April 28, 2006, First Banks completed its acquisition of Pittsfield
Community Bancorp, Inc. and its wholly owned banking subsidiary, Community Bank
of Pittsfield (collectively, Community Bank) for $5.1 million in cash. Community
Bank was headquartered in Pittsfield, Illinois and operated two banking offices,
one in Pittsfield, Illinois, and one in Mount Sterling, Illinois. On June 16,
2006, First Bank completed its sale of the Mount Sterling office to Beardstown
Savings, s.b. The acquisition served to expand First Banks' banking franchise in
Pittsfield, Illinois. The transaction was funded through internally generated
funds. At the time of the acquisition, after giving effect to the sale of the
Mount Sterling office, Community Bank had assets of $17.6 million, loans, net of
unearned discount, of $11.1 million, deposits of $12.3 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. Goodwill, which
is not deductible for tax purposes, was approximately $783,000, 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
$517,000. Community Bank was merged with and into First Bank.
On May 1, 2006, First Banks acquired the majority of the outstanding
common stock of First Independent National Bank (FINB), and subsequently
acquired the remaining outstanding common stock in May 2006, for $19.2 million
in cash, in aggregate. FINB was headquartered in Plano, Texas and operated two
banking offices in Plano, Texas, located in Collin County. In addition, FINB was
in the process of opening a de novo branch banking office located in the Preston
Forest Shopping Center in Dallas County. 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, FINB had
assets of $68.2 million, loans, net of unearned discount, of $59.6 million,
deposits of $55.5 million and stockholders' equity of $7.3 million. The assets
acquired and liabilities assumed were recorded at their estimated fair value on
the acquisition date. Goodwill, which is not deductible for tax purposes, was
approximately $9.3 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 $2.5 million. FINB was merged with
and into First Bank on May 16, 2006.
On May 31, 2006, First Bank completed its acquisition of KIF, Inc.
(KIF), an Iowa corporation, and its wholly owned subsidiaries, UPAC, a Missouri
corporation, and UPAC of California, Inc., a California corporation, for $52.7
million in cash. In conjunction with the acquisition of KIF, First Banks repaid
in full the outstanding subordinated notes of KIF and the outstanding senior
notes of UPAC, which were $2.2 million and $123.7 million, respectively, at the
time of the acquisition. UPAC is an insurance premium finance company
headquartered in the Kansas City suburb of Lenexa, Kansas and operates in 49
states. 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 and a $52.0 million short-term Federal
Home Loan Bank advance. At the time of the acquisition, KIF had assets of $152.8
million, loans, net of unearned discount, of $149.2 million and stockholders'
equity of $18.3 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 $37.1 million. KIF was merged
with and into UPAC on June 30, 2006. UPAC of California, Inc. operates as a
wholly owned subsidiary of UPAC, which operates as a wholly owned subsidiary of
First Bank.
Pending Acquisitions
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, which is approximately ten miles south of downtown San Diego,
and two other banking offices in Kearny Mesa and Otay Mesa. The transaction is
expected to be completed during the third quarter of 2006. At June 30, 2006,
SDCB had assets of $94.4 million, loans, net of unearned discount, of $76.3
million, deposits of $75.0 million and stockholders' equity of $12.8 million.
On June 14, 2006, First Banks executed an Agreement and Plan of
Reorganization providing for the acquisition of TeamCo, Inc. and its wholly
owned banking subsidiary, Oak Lawn Bank (collectively, Oak Lawn), for
approximately $13.9 million in cash. Oak Lawn operates its headquarters in Oak
Lawn, Illinois, which is approximately 15 miles southwest of the Chicago Loop in
Chicago Southland, and a second banking office in Orland Park, Illinois, which
is approximately 39 miles southwest of downtown Chicago. The transaction, which
is subject to regulatory approvals, is expected to be completed during the third
quarter of 2006. At June 30, 2006, Oak Lawn had assets of $72.1 million, loans,
net of unearned discount, of $43.7 million, deposits of $62.8 million and
stockholders' equity of $6.5 million.
Subsequent to June 30, 2006, First Banks entered into two agreements
related to acquisition transactions, 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 generally ranging from two to 15
years and are triggered as a result of the change in control of the acquired
entity. Other severance benefits for employees that are terminated in
conjunction with the integration of the acquired entities into First Banks'
existing operations are normally paid to the recipients within 90 days of the
respective consummation date and are expensed in the consolidated statements of
income as incurred. The accrued severance balance of $627,000, as summarized in
the following table, is comprised of contractual obligations under salary
continuation agreements to seven individuals with remaining terms ranging from
approximately one to 10 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
Six Months Ended June 30, 2006:
Amounts accrued at acquisition date.................... 1,702 963 2,665
Payments............................................... (1,617) (1,097) (2,714)
------ ------ ------
Balance at June 30, 2006................................. $ 627 -- 627
====== ====== ======
(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 June 30,
2006 and December 31, 2005:
June 30, 2006 December 31, 2005
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles................. $ 43,175 (14,774) 36,555 (11,710)
Customer list and related intangibles.... 3,745 (62) -- --
Goodwill associated with
purchases of branch offices........... 2,210 (1,217) 2,210 (1,146)
-------- ------- ------- -------
Total............................... $ 49,130 (16,053) 38,765 (12,856)
======== ======= ======= =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries.............. $225,818 165,992
======== =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $1.7 million and $3.2 million for the three
and six months ended June 30, 2006, respectively, and $1.1 million and $2.4
million for the comparable periods in 2005. Amortization of intangibles
associated with the purchase of subsidiaries, including amortization of core
deposit intangibles, customer list and related 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...................................................... $ 3,461
2007................................................................ 6,923
2008................................................................ 6,923
2009................................................................ 5,019
2010................................................................ 4,559
2011................................................................ 3,067
Thereafter.......................................................... 3,125
--------
Total........................................................... $ 33,077
========
Changes in the carrying amount of goodwill for the three and six months
ended June 30, 2006 and 2005 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $ 181,955 152,529 167,056 156,849
Goodwill acquired during period..................... 44,910 2,217 59,806 2,217
Acquisition-related adjustments (1)................. (18) (46) 20 (4,331)
Amortization - purchases of branch offices.......... (36) (36) (71) (71)
--------- ------- ------- -------
Balance, end of period.............................. $ 226,811 154,664 226,811 154,664
========= ======= ======= =======
------------------
(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 the
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 June 30, 2006 and December 31, 2005,
First Banks serviced mortgage loans for others amounting to $1.10 billion and
$1.01 billion, respectively. Changes in mortgage servicing rights, net of
amortization, for the three and six months ended June 30, 2006 and 2005 were as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $ 7,034 9,181 6,623 10,242
Servicing rights acquired........................... -- 435 -- 435
Originated mortgage servicing rights (1)(2)......... 1,270 188 2,728 401
Amortization........................................ (1,067) (1,302) (2,114) (2,576)
------- ------ ------ ------
Balance, end of period.............................. $ 7,237 8,502 7,237 8,502
======= ====== ====== ======
-------------------
(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.
(2) In April 2006, First Banks capitalized mortgage servicing rights of $927,000 associated with the
securitization of $61.8 million of certain residential mortgage loans held in the Company's loan
portfolio, resulting in the recognition of $927,000 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 and six months ended June 30, 2006 and 2005.
Amortization of mortgage servicing rights at June 30, 2006 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2006 remaining...................................................... $ 1,632
2007................................................................ 2,279
2008................................................................ 1,214
2009................................................................ 721
2010................................................................ 511
2011................................................................ 384
Thereafter.......................................................... 496
-------
Total........................................................... $ 7,237
=======
Other Servicing Activities. At June 30, 2006 and December 31, 2005,
First Banks serviced United States Small Business Administration (SBA) loans for
others amounting to $145.3 million and $163.4 million, respectively. Changes in
SBA servicing rights, net of amortization and impairment, for the three and six
months ended June 30, 2006 and 2005 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2006 2005 2006 2005
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $ 8,942 12,595 9,489 13,013
Originated SBA servicing rights..................... 146 348 318 539
Amortization........................................ (417) (592) (858) (1,201)
Impairment.......................................... (462) -- (740) --
------- ------ ----- ------
Balance, end of period.............................. $ 8,209 12,351 8,209 12,351
======= ====== ===== ======
First Banks recognized impairment of $462,000 and $740,000 for the
three and six months ended June 30, 2006, respectively, 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 and six months ended June 30, 2005.
Amortization of SBA servicing rights at June 30, 2006 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2006 remaining...................................................... $ 763
2007................................................................ 1,332
2008................................................................ 1,115
2009................................................................ 932
2010................................................................ 777
2011................................................................ 646
Thereafter.......................................................... 2,644
-------
Total........................................................... $ 8,209
=======
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted earnings per
share (EPS) computations for the three and six months ended June 30, 2006 and
2005:
Per Share
Income Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Three months ended June 30, 2006:
Basic EPS - income available to common stockholders......... $21,954 23,661 $ 927.86
Effect of dilutive securities:
Class A convertible preferred stock....................... 128 438 (11.55)
------- ------- ----------
Diluted EPS - income available to common stockholders....... $22,082 24,099 $ 916.31
======= ======= ==========
Three months ended June 30, 2005:
Basic EPS - income available to common stockholders......... $26,714 23,661 $ 1,129.05
Effect of dilutive securities:
Class A convertible preferred stock....................... 128 512 (18.63)
------- ------- ----------
Diluted EPS - income available to common stockholders....... $26,842 24,173 $ 1,110.42
======= ======= ==========
Six months ended June 30, 2006:
Basic EPS - income available to common stockholders......... $50,761 23,661 $ 2,145.35
Effect of dilutive securities:
Class A convertible preferred stock....................... 321 456 (27.24)
------- ------- ----------
Diluted EPS - income available to common stockholders....... $51,082 24,117 $ 2,118.11
======= ======= ==========
Six months ended June 30, 2005:
Basic EPS - income available to common stockholders......... $48,645 23,661 $ 2,055.92
Effect of dilutive securities:
Class A convertible preferred stock....................... 321 516 (30.62)
------- ------- ----------
Diluted EPS - income available to common stockholders....... $48,966 24,177 $ 2,025.30
======= ======= ==========
(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
$7.3 million and $15.0 million for the three and six months ended June 30, 2006,
respectively, and $7.9 million and $14.7 million for the comparable periods in
2005. First Services, L.P. leases information technology and other equipment
from First Bank. During the three months ended June 30, 2006 and 2005, First
Services, L.P. paid First Bank $1.0 million and $1.1 million, respectively, and
during the six months ended June 30, 2006 and 2005, First Services, L.P. paid
First Bank $2.2 million in rental fees for the use of that equipment.
First Brokerage America, L.L.C., a limited liability company indirectly
owned by First Banks' Chairman and members of his immediate family, received
approximately $809,000 and $1.4 million for the three and six months ended June
30, 2006, respectively, and $544,000 and $1.2 million for the comparable periods
in 2005, in commissions paid by unaffiliated third-party companies. The
commissions received were primarily in connection with 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 $42,000 and $117,000
for the three and six months ended June 30, 2006, respectively, and $96,000 and
$183,000 for the comparable periods in 2005, 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 $105,000 and $191,000 for the three and six
months ended June 30, 2006, respectively, and $91,000 and $169,000 for the
comparable periods in 2005.
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 $55.9 million and $37.9 million at June 30, 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. The Agreement provided for
an initial maturity date of June 30, 2008, which was extended on June 15, 2006
by First Bank to June 30, 2009. 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 $33.8 million and $31.4 million at June 30, 2006 and December 31,
2005, respectively. Interest expense recorded under the Agreement by SBLS LLC
for the three and six months ended June 30, 2006 was $652,000 and $1.2 million.
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 this phase of the project. As of June 30, 2006, First
Bank had made payments of $478,000 under the contract.
On May 31, 2006, Adrian Baker, a newly acquired subsidiary of First
Bank, purchased the personal and commercial insurance book of business from
First Title. The revenue associated with the personal and commercial insurance
book of business was estimated at approximately $300,000, subject to an
adjustment based upon the receipt of an evaluation of the book of business by an
independent third party. First Bank has engaged an independent third party to
perform a business valuation of the personal and commercial insurance book of
business of First Title. Upon completion of the business valuation by the
independent third party, Adrian Baker and First Title expect to adjust the
estimated $300,000 recorded on May 31, 2006 to the valuation amount as provided
by the independent third party.
During the three and six months ended June 30, 2006, First Bank
contributed $2.5 million and $3.0 million 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 comparable periods in 2005.
(7) REGULATORY CAPITAL
First Banks and First Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
First Banks and First Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and First Bank to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of June 30, 2006, First Banks and First Bank were each well
capitalized. As of June 30, 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 June 30, 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
June 30, December 31, Adequacy Prompt Corrective
2006 2005 Purposes Action Provisions
---- ---- -------- -----------------
Total capital (to risk-weighted assets):
First Banks................................... 10.38% 10.14% 8.0% 10.0%
First Bank.................................... 10.25 10.66 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks................................... 8.59 8.88 4.0 6.0
First Bank.................................... 9.00 9.41 4.0 6.0
Tier 1 capital (to average assets):
First Banks................................... 8.12 8.13 3.0 5.0
First Bank.................................... 8.52 8.61 3.0 5.0
In March, 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 7.72% and 7.30%, respectively, as of June 30, 2006.
(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 in the banking industry. The
business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------ ------------------------ -----------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2006 2005 2006 2005 2006 2005
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities............... $1,161,143 1,324,219 25,916 16,564 1,187,059 1,340,783
Loans, net of unearned discount..... 7,600,591 7,020,771 -- -- 7,600,591 7,020,771
Goodwill............................ 226,811 167,056 -- -- 226,811 167,056
Total assets........................ 9,584,833 9,148,931 30,394 21,402 9,615,227 9,170,333
Deposits............................ 8,157,836 7,601,162 (91,891) (59,331) 8,065,945 7,541,831
Notes payable....................... -- -- 85,000 100,000 85,000 100,000
Subordinated debentures............. -- -- 304,270 215,461 304,270 215,461
Stockholders' equity................ 1,002,010 931,192 (282,637) (252,254) 719,373 678,938
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------ ------------------------ -----------------------
Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30,
------------------------ ------------------------ -----------------------
2006 2005 2006 2005 2006 2005
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income..................... $ 157,503 117,008 228 180 157,731 117,188
Interest expense.................... 54,979 33,917 7,072 5,450 62,051 39,367
--------- -------- ------- ------- -------- --------
Net interest income.............. 102,524 83,091 (6,844) (5,270) 95,680 77,821
Provision for loan losses........... 5,000 (8,000) -- -- 5,000 (8,000)
--------- -------- ------- ------- -------- --------
Net interest income after
provision for loan losses..... 97,524 91,091 (6,844) (5,270) 90,680 85,821
--------- -------- ------- ------- -------- --------
Noninterest income.................. 26,015 26,376 (136) (185) 25,879 26,191
Noninterest expense................. 80,446 69,567 605 594 81,051 70,161
--------- -------- ------- ------- -------- --------
Income before provision for
income taxes and minority
interest in loss of
subsidiary.................... 43,093 47,900 (7,585) (6,049) 35,508 41,851
Provision for income taxes.......... 16,152 17,114 (2,652) (2,109) 13,500 15,005
--------- -------- ------- ------- -------- --------
Income before minority interest
in loss of subsidiary......... 26,941 30,786 (4,933) (3,940) 22,008 26,846
Minority interest in loss
of subsidiary................. (78) -- -- -- (78) --
--------- -------- ------- ------- -------- --------
Net income....................... $ 27,019 30,786 (4,933) (3,940) 22,086 26,846
========= ======== ======= ======= ======== ========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
------------------------ ------------------------ -----------------------
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
------------------------ ------------------------ -----------------------
2006 2005 2006 2005 2006 2005
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income..................... $ 304,527 229,070 438 346 304,965 229,416
Interest expense.................... 104,363 63,196 14,056 10,320 118,419 73,516
--------- -------- -------- ------- -------- --------
Net interest income.............. 200,164 165,874 (13,618) (9,974) 186,546 155,900
Provision for loan losses........... 6,000 (8,000) -- -- 6,000 (8,000)
--------- -------- -------- ------- -------- --------
Net interest income after
provision for loan losses..... 194,164 173,874 (13,618) (9,974) 180,546 163,900
--------- -------- -------- ------- -------- --------
Noninterest income.................. 51,756 47,842 (380) (436) 51,376 47,406
Noninterest expense................. 153,615 131,745 2,251 2,285 155,866 134,030
--------- -------- -------- ------- -------- --------
Income before provision for
income taxes and minority
interest in loss of
subsidiary.................... 92,305 89,971 (16,249) (12,695) 76,056 77,276
Provision for income taxes.......... 30,890 32,734 (5,687) (4,431) 25,203 28,303
--------- -------- -------- ------- -------- --------
Income before minority interest
in loss of subsidiary......... 61,415 57,237 (10,562) (8,264) 50,853 48,973
Minority interest in loss of (236) -- -- -- (236) --
subsidiary.................... --------- -------- -------- ------- -------- --------
Net income....................... $ 61,651 57,237 (10,562) (8,264) 51,089 48,973
========= ======== ======== ======= ======== ========
- ------------------
(1) Corporate and other includes $3.7 million and $3.5 million of interest expense on subordinated debentures, after
applicable income tax benefits of $2.0 million and $1.9 million, for the three months ended June 30, 2006 and
2005, respectively. For the six months ended June 30, 2006 and 2005, corporate and other includes $7.4 million
and $6.6 million of interest expense on subordinated debentures, after applicable income tax benefits of
$4.0 million and $3.5 million, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at June 30, 2006 and
December 31, 2005:
June 30, December 31,
2006 2005
--------------- ---------------
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily........................................................ $ 201,889 199,874
Term......................................................... 100,000 300,000
FHLB advances (1)................................................. 26,107 39,300
--------- --------
Total.................................................... $ 327,996 539,174
========= ========
------------------
(1) On March 17, 2006 and May 10, 2006, First Bank prepaid $20.5 million and $14.8 million, respectively,
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. These prepayments were partially
offset by a short-term advance of $25.0 million borrowed by First Bank in June 2006.
The maturity dates, par amounts, interest rate spreads and interest
rate floor strike prices on First Bank's term repurchase agreements as of June
30, 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)
June 30, 2006:
January 12, 2007 (2).............. $ 100,000 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.
(3) First Bank terminated these 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.
(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 sale of $50.0 million of available-
for-sale investment securities associated with the termination of the term repurchase agreement.
Subsequent to June 30, 2006, First Banks entered into a term repurchase
agreement, as more fully described in Note 13 to the Consolidated Financial
Statements.
(10) NOTES PAYABLE
Notes payable were comprised of the following at June 30, 2006 and
December 31, 2005:
June 30, December 31,
2006 2005
--------------- ---------------
(dollars expressed in thousands)
Term loan......................................................... $85,000 100,000
======= ========
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 June
30, 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 June
30, 2006 and December 31, 2005. The outstanding principal balance of the $100.0
million term loan facility portion of the Credit Agreement is payable in ten
equal quarterly installments of $5.0 million, at a minimum, 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.
As of June 30, 2006, First Banks had made payments of $15.0 million on the
outstanding principal balance of the term loan facility.
The Credit Agreement required 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 contained 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 Agreement at June 30, 2006 and
December 31, 2005.
Subsequent to June 30, 2006, First Banks entered into an amendment to
its Credit Agreement, as more fully described in Note 13 to the Consolidated
Financial Statements.
(11) SUBORDINATED DEBENTURES
During the six months ended June 30, 2006, First Banks, through three
newly formed statutory trusts: (a) First Bank Statutory Trust IV, or FBST IV;
(b) First Bank Statutory Trust V, or FBST V; and (c) First Bank Statutory Trust
VI, or FBST VI (collectively, the Trusts), issued variable rate trust preferred
securities in private placements. First Banks owns all of the common securities
of the Trusts. The gross proceeds of the offerings were used by the Trusts to
purchase variable rate subordinated debentures from First Banks. The
subordinated debentures are the sole asset of the Trusts. In connection with the
issuance of the trust 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 the Trusts under the trust
preferred securities. First Banks' distributions on the subordinated debentures
issued to FBST IV, FBST V and FBST VI, which are payable quarterly in arrears
beginning on June 15, 2006, June 15, 2006, and October 7, 2006, respectively,
were $933,000 in aggregate for the three and six months ended June 30, 2006.
A summary of the subordinated debentures issued to the Trusts in
conjunction with the trust preferred securities offerings, is as follows:
Proceeds, Net Spread Over
Date Maturity Call of Offering Three-Month
Trust Issued Date Date Expenses LIBOR
----- ------ ---- ---- -------- -----
(dollars expressed
in thousands)
FBST IV March 1, 2006 March 15, 2036 March 15, 2011 $ 41,238 LIBOR + 142.0 bp
FBST V April 28, 2006 April 28, 2036 June 15, 2011 20,619 LIBOR + 145.0 bp
FBST VI June 16, 2006 June 16, 2036 July 7, 2011 25,774 LIBOR + 165.0 bp
(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 June 30, 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 June 30, 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 July 10, 2006, First Bank entered into a Purchase and Assumption
Agreement providing for First Bank to acquire MidAmerica National Bank's three
banking offices located in Peoria and Bloomington, Illinois (collectively,
MidAmerica Offices). The transaction, which is subject to regulatory approvals,
is expected to be completed during the fourth quarter of 2006. At June 30, 2006,
the MidAmerica Offices had, on a combined basis, assets of approximately $155.3
million, loans, net of unearned discount, of approximately $152.6 million and
deposits of approximately $50.5 million.
On July 14, 2006, First Banks entered into a $100.0 million four-year
term repurchase agreement under a master repurchase agreement. Interest will be
paid quarterly, beginning October 18, 2006, and will be equivalent to the
three-month LIBOR plus 0.5475% minus a floating rate, subject to a 0% floor,
equal to two times the differential between the three-month LIBOR and the strike
price of 5.00%, if the three-month LIBOR is less than 5.00%. The underlying
securities associated with the term repurchase agreement are U.S. Government
agency collateralized mortgage obligation securities and are held by other
financial institutions under safekeeping agreements. In accordance with First
Banks' interest rate risk management program, the term repurchase agreement was
entered into with the objective of stabilizing net interest income over time and
further protecting net interest margin against changes in interest rates.
On August 7, 2006, First Bank entered into a Branch Purchase and
Assumption Agreement providing for First Bank to acquire First Bank of Beverly
Hills' banking office located in Beverly Hills, California (Beverly Drive
Office). The transaction, which is subject to regulatory approvals, is expected
to be completed during the fourth quarter of 2006. At June 30, 2006, the Beverly
Drive Office had assets of approximately $270,000 and deposits of approximately
$156.5 million.
On August 10, 2006, First Banks entered into an Amendment to its Credit
Agreement with a group of unaffiliated financial institutions (Amended Credit
Agreement) in the amount of $96.0 million. The Amended Credit Agreement amends
the existing Credit Agreement as further described in Note 10 to the
Consolidated Financial Statements. The primary changes to the structure of the
financing arrangement relate to a reduction of certain components of the secured
credit facilities, a reduction in the overall pricing structure of the secured
credit facilities, and the renewal of the existing revolving credit and letter
of credit facilities. The Amended Credit Agreement provides a $10.0 million
senior secured revolving credit facility (Revolving Credit) that matures on
August 9, 2007 and a $1.0 million senior secured standby letter of credit
facility (LC Facility) that matures on August 9, 2007, in addition to the $85.0
million existing senior secured term loan facility (Term Loan) that matures on
August 10, 2008. The Amended Credit Agreement also provides First Banks an
option to increase the Revolving Credit, which is limited to two increase
requests from August 10, 2006 until its maturity date, by an amount of up to
$40.0 million provided such increase will not cause the Revolving Credit to
exceed $50.0 million. Interest is payable on the outstanding principal loan
balances under the Revolving Credit at a floating rate equal to either the
lender's prime rate or, at First Banks' option, LIBOR plus a margin determined
by the outstanding loan balances and First Banks' net income for the preceding
four calendar quarters. If the loan balances outstanding under the Revolving
Credit are accruing at the prime rate, interest is payable quarterly in arrears.
If the loan balances outstanding under the Revolving Credit are accruing at
LIBOR, interest is payable based on the one, two, three or six-month LIBOR, as
selected by First Banks. First Banks is also subject to a quarterly commitment
fee on the unused portion of the Revolving Credit. First Banks has not drawn any
advances on the Revolving Credit. Interest is payable on the outstanding
principal loan balances of the Term Loan at a floating rate equal to LIBOR plus
a margin determined by the outstanding loan balances and First Banks' net income
for the preceding four calendar quarters. The outstanding principal balance of
the Term Loan is payable in quarterly installments of $5.0 million, at a
minimum, with the remainder of the Term Loan balance to be repaid in full,
including any unpaid interest, upon its maturity date.
The Amended Credit Agreement requires maintenance of certain minimum
capital ratios for First Banks and First Bank, certain maximum nonperforming
assets ratios for First Bank and a minimum return on assets ratio for First
Banks. In addition, it contains additional covenants, including a limitation on
the amount of dividends on First Banks' common stock that may be paid to
stockholders. The Amended Credit Agreement is secured by First Banks' ownership
interest in the capital stock of SFC and First Bank.
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 its subsidiaries, as listed below:
>> First Bank Business Capital, Inc. (formerly FB Commercial
Finance, Inc.);
>> Missouri Valley Partners, Inc., or MVP;
>> Adrian N. Baker & Company, or Adrian Baker;
>> Universal Premium Acceptance Corporation and UPAC of California,
Inc., collectively UPAC; and
>> Small Business Loan Source LLC, or SBLS LLC.
First Bank's subsidiaries are wholly owned except for SBLS LLC, which
is 51% owned by First Bank and 49% owned by First Capital America, Inc. First
Bank currently operates 181 branch banking offices in California, Illinois,
Missouri and Texas. At June 30, 2006, we had assets of $9.62 billion, loans, net
of unearned discount, of $7.60 billion, deposits of $8.07 billion and
stockholders' equity of $719.4 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, trade financing and insurance premium
financing. Other financial services include mortgage banking, debit cards,
brokerage services, credit-related insurance, employee benefit and 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 $9.62 billion at June 30, 2006, reflecting a $444.9
million increase from $9.17 billion at December 31, 2005. The increase in our
total assets primarily results from internal growth, acquisitions of banks in
our target markets, and acquisitions of two entities in new business lines.
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. We issued additional subordinated debentures, as further
described below, which provided a portion of the funds that we utilized for our
bank acquisitions in 2006. The increase in assets reflects a $579.8 million
increase in our loans, net of unearned discount, to $7.60 billion at June 30,
2006, from $7.02 billion at December 31, 2005. This increase is attributable to
internal growth of our loan portfolio and the acquisition of $269.5 million of
loans associated with our acquisitions completed in 2006, partially offset by
the securitization of $138.9 million of certain residential mortgage loans held
in our loan portfolio that were transferred to our investment portfolio, and the
sale of certain nonperforming loans. The overall increase in our assets was
partially offset by a decline of $153.7 million in our investment securities
portfolio to $1.19 billion at June 30, 2006, from $1.34 billion at December 31,
2005. The decrease in our investment securities portfolio primarily reflects:
maturities of investment securities of $661.5 million and reinvestment of
proceeds from maturities and excess funds in investment securities of $516.8
million; the sale of available-for-sale investment securities associated with
the termination of $200.0 million of term repurchase agreements in the first and
second quarters of 2006 to better position our overall interest rate risk
profile, as more fully described below; partially offset by the securitization
of $77.1 million and $61.8 million of certain residential mortgage loans held in
our loan portfolio in March 2006 and April 2006, respectively, 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." In addition, our trading securities portfolio
increased $47.5 million to $50.9 million at June 30, 2006, from $3.4 million at
December 31, 2005. Goodwill increased $59.8 million to $226.8 million at June
30, 2006 and reflects our acquisitions of First National Bank of Sachse, or
FNBS, First Independent National Bank, or FINB, Pittsfield Community Bancorp,
Inc., or Community Bank, Adrian Baker, UPAC, and the acquisition of a branch
office of Dallas National Bank, or Richardson Branch, as summarized in the
following table and further discussed in Note 2 to our Consolidated Financial
Statements. As shown in the following table, our acquisitions completed in the
first six months of 2006 provided assets of $318.9 million, loans, net of
unearned discount, of $269.3 million, and deposits of $135.1 million, in
aggregate.
Loans, Number
Net of of
Entity / Total Unearned Investment Purchase Preliminary Banking
Closing Date Assets Discount Securities Deposits Price Goodwill Locations
------------ ------ -------- ---------- -------- ----- -------- ---------
(dollars expressed in thousands)
First National Bank of Sachse
Sachse, Texas
January 3, 2006 $ 76,200 49,300 14,300 66,200 20,800 8,800 1
Dallas National Bank
Richardson, Texas
Branch Office (1)
January 20, 2006 1,100 100 -- 1,100 700 -- 1
Adrian N. Baker & Company
Clayton, Missouri
March 31, 2006 3,000 -- -- -- 7,000 3,900 --
Pittsfield Community Bancorp, Inc.
Pittsfield, Illinois (2)
April 28, 2006 17,600 11,100 3,300 12,300 5,100 800 --
First Independent National Bank
Plano, Texas
May 1, 2006 68,200 59,600 800 55,500 19,200 9,300 3
Universal Premium Acceptance
Corporation
Lenexa, Kansas (3)
May 31, 2006 152,800 149,200 -- -- 52,700 37,100 --
--------- -------- ------- -------- -------- ------- --
$ 318,900 269,300 18,400 135,100 105,500 59,900 5
========= ======== ======= ======== ======== ======= ==
------------------
(1) The Richardson Branch was acquired by First Bank through a purchase of certain assets and assumption of certain
liabilities of the branch office. Total assets consisted primarily of cash received upon assumption of the
deposit liabilities and loans.
(2) Community Bank operated two banking offices, one in Pittsfield, Illinois and one in Mount Sterling, Illinois. On
June 16, 2006, First Bank sold the Mount Sterling, Illinois banking office to Beardstown Savings, s.b. At the
time of the sale, the Mount Sterling banking office had assets of $2.7 million, loans, net of unearned discount,
of $2.4 million, and deposits of $3.7 million. First Bank consolidated its existing banking office in Pittsfield
with and into the acquired Pittsfield banking office.
(3) In conjunction with the acquisition of UPAC, First Bank repaid in full the outstanding senior notes of UPAC and
the outstanding subordinated notes of KIF, Inc., UPAC's parent company, including accumulated accrued and unpaid
interest, totaling $125.9 million in aggregate.
In 2005, we also experienced growth through acquisitions and branch
purchases that primarily increased our branch office network in the Chicago,
Illinois and Los Angeles, California market areas. Specifically, our
acquisitions of First Bank of the Americas, s.s.b., or FBA, International Bank
of California, or IBOC, and Northway State Bank, or NSB, in April 2005,
September 2005 and October 2005, respectively, and our purchase of the Roodhouse
branch office of Bank & Trust Company in September 2005, provided assets of
$280.3 million, loans, net of unearned discount, of $209.6 million and deposits
of $238.1 million, in aggregate.
Total deposits increased $524.1 million to $8.07 billion at June 30,
2006, from $7.54 billion at December 31, 2005, reflecting internal growth
through enhanced product and service offerings and marketing campaigns, as well
as $135.1 million of deposits acquired through acquisitions of banks in our
target market areas. During the six months ended June 30, 2006, our time and
savings deposits increased $500.6 million and $54.8 million, respectively, in
contrast to our interest-bearing demand and noninterest-bearing demand accounts,
which declined $28.0 million and $3.2 million, respectively. The growth in our
deposits for the six months ended June 30, 2006 reflects our continued deposit
marketing focus and efforts to further develop multiple account relationships
with our customers, coupled with higher deposit rates paid on certain products.
The overall growth was partially offset by an anticipated level of attrition
associated with our recent acquisitions and continued aggressive competition
within our market areas.
Other borrowings decreased $211.2 million to $328.0 million at June 30,
2006, from $539.2 million at December 31, 2005. We primarily attribute the
decrease to the termination of $200.0 million of term repurchase agreements to
better position our overall interest rate risk profile, and a $13.2 million net
reduction in the outstanding balance of our Federal Home Loan Bank, or FHLB,
advances. On February 14, 2006, March 28, 2006 and April 28, 2006, we terminated
$100.0 million, $50.0 million and $50.0 million of term repurchase agreements,
respectively, as further described in Note 9 to our Consolidated Financial
Statements. The decrease in our FHLB advances reflects prepayments of $20.5
million of advances in March 2006 and $14.8 million of advances in May 2006 that
were assumed with certain of our bank acquisitions, as further described in Note
9 to our Consolidated Financial Statements, partially offset by a short-term
advance of $25.0 million that we borrowed from the FHLB in June 2006.
Our notes payable decreased $15.0 million to $85.0 million at June 30,
2006 as a result of scheduled quarterly principal installment payments of $5.0
million, which commenced on March 31, 2006, as well as an additional prepayment
of $5.0 million on our $100.0 million term loan facility, as further described
in Note 10 to our Consolidated Financial Statements.
Our subordinated debentures increased $88.8 million to $304.3 million
at June 30, 2006, from $215.5 million at December 31, 2005, primarily due to the
issuance of $87.6 million of subordinated debentures in private placements
through three newly formed statutory trusts. On March 1, 2006, we issued $41.2
million of variable rate subordinated debentures to First Bank Statutory Trust
IV, or FBST IV; on April 28, 2006, we issued $20.6 million of variable rate
subordinated debentures to First Bank Statutory Trust V, or FBST V, and on June
16, 2006, we issued $25.8 million of variable rate subordinated debentures to
First Bank Statutory Trust VI, or FBST VI, 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, in February 2006, that hedged certain of our subordinated
debentures, as further discussed under "--Interest Rate Risk Management."
Stockholders' equity was $719.4 million and $678.9 million at June 30,
2006 and December 31, 2005, respectively, reflecting an increase of $40.4
million. We attribute the increase to net income of $51.1 million, partially
offset by dividends paid on our Class A and Class B preferred stock and a $10.3
million decrease in accumulated other comprehensive income, comprised of $10.2
million associated with changes in unrealized gains and losses on our
available-for-sale investment securities portfolio and $162,000 associated with
changes in the fair value of our derivative financial instruments.
Results of Operations
Net Income
Net income was $22.1 million and $26.8 million for the three months
ended June 30, 2006 and 2005, respectively. For the six months ended June 30,
2006 and 2005, net income was $51.1 million and $49.0 million, respectively,
reflecting an increase of 4.3%. Our return on average assets was 0.94% and 1.10%
for the three and six months ended June 30, 2006, respectively, compared to
1.25% and 1.14% for the comparable periods in 2005. Our return on average
stockholders' equity was 12.35% and 14.58% for the three and six months ended
June 30, 2006, respectively, compared to 17.43% and 16.06% for the comparable
periods in 2005. Net income for the three months ended June 30, 2006 reflects
increased net interest income and net interest margin, and relatively consistent
noninterest income, partially offset by an increase in our provision for loan
losses and higher noninterest expense. Net income for the six months ended June
30, 2006 reflects earnings driven by increased net interest income and net
interest margin, and increased noninterest income, partially offset by an
increase in our provision for loan losses and higher noninterest expense. We
recorded provisions for loan losses of $5.0 million and $6.0 million for the
three and six months ended June 30, 2006, respectively. For the comparable
periods in 2005, we recorded a negative provision for loan losses of $8.0
million to reduce the allowance for loan losses to a level commensurate with the
decreasing credit risk that existed in the loan portfolio during those periods.
The overall increase in our provision for loan losses in 2006 contributed to a
reduction in our earnings for the three and six months ended June 30, 2006, as
further discussed under "--Provision for Loan Losses."
The increase in earnings in 2006 reflects our continuing efforts to
strengthen net interest income and net interest margin while continuing our
focus on reducing the overall level of our nonperforming assets. For the three
and six months ended June 30, 2006, our earnings reflect increases of 22.9% and
19.7% in net interest income, and increases of 47 basis points and 40 basis
points in our net interest margin, respectively, compared to the comparable
periods in 2005. The increase in net interest income for the six months ended
June 30, 2006 was driven by an 8.6% increase in our interest-earning assets
attributable to internal loan growth coupled with higher interest rates on
loans, higher-yielding investment securities, and our acquisitions completed in
2005 and 2006. The overall increase was partially offset by increased interest
expense stemming from higher interest rates paid 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." While our earnings have
benefited from 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 20.9% decrease in our nonperforming assets for the first six
months of 2006, which decreased to $78.5 million at June 30, 2006 from $99.2
million at December 31, 2005. However, nonperforming assets at June 30, 2006
increased 11.5% from $70.4 million at March 31, 2006. Nonperforming loans were
$73.0 million at June 30, 2006, compared to $67.1 million at March 31, 2006 and
$97.2 million at December 31, 2005, and represented 0.96%, 0.94% and 1.38% of
loans, net of unearned discount, respectively. Loans past due 90 days or more
and still accruing interest were $5.7 million, $2.2 million and $5.6 million at
June 30, 2006, March 31, 2006 and December 31, 2005, respectively. The $20.7
million reduction in the level of nonperforming assets during the six months
ended June 30, 2006 primarily resulted from the sale of certain acquired
nonperforming loans, loan payoffs and/or external refinancing of various
credits. The $8.1 million increase in the level of nonperforming assets during
the second quarter of 2006 primarily resulted from the placement of a single
credit relationship on nonaccrual status. We recorded net loan charge-offs of
$1.2 million for the three months ended June 30, 2006 and net loan recoveries of
$2.1 million for the six months ended June 30, 2006. We recorded net loan
recoveries of $3.6 million for the three months ended June 30, 2005 and net loan
charge-offs of $3.0 million for the six months ended June 30, 2005. 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 was $25.9 million and $51.4 million for the three
and six months ended June 30, 2006, respectively, compared to $26.2 million and
$47.4 million for the comparable periods in 2005. Noninterest income for the
second quarter of 2006 was relatively constant and reflected increased service
charges on deposit accounts and customer service fees related to higher deposit
balances as well as increased commission fee income of $1.8 million associated
with our newly acquired insurance brokerage agency, Adrian Baker, on March 31,
2006. These increases in noninterest income were partially offset by reduced
gains on loans sold and held for sale, and $1.2 million of losses on sales of
available-for-sale investment securities associated with the termination of term
repurchase agreements, and mark-to-market adjustments on our trading securities
portfolio. The increase in noninterest income for the first six months of 2006
reflects increases in service charges on deposit accounts and customer service
fees related to higher deposit balances, and gains on loans sold and held for
sale, including a $1.7 million gain on the sale of certain nonperforming loans
in March 2006, as further discussed under "--Loans and Allowance for Loan
Losses." Noninterest income for 2006 also includes a $1.5 million gain on the
sale of a parcel of other real estate; $2.1 million of increased loan servicing
income associated with the capitalization of mortgage servicing rights related
to the securitization of certain residential mortgage loans in March and April
2006; partially offset by $2.7 million of losses on sales of available-for-sale
investment securities associated with the termination of $200.0 million of term
repurchase agreements, as further described in Note 9 to our Consolidated
Financial Statements; and a $1.3 million net loss related to changes in the fair
value of securities held in our trading portfolio.
Noninterest expense was $81.1 million and $155.9 million for the three
and six months ended June 30, 2006, respectively, compared to $70.2 million and
$134.0 million for the comparable periods in 2005. Our efficiency ratio was
66.68% and 65.51% for the three and six months ended June 30, 2006,
respectively, compared to 67.45% and 65.93% for the comparable periods in 2005.
The acquisition of UPAC, our insurance premium finance company, and Adrian
Baker, our insurance brokerage agency, in addition to our acquisitions of banks
completed in 2005 and 2006, resulted in significant expansion of our employee
base and branch office network, and contributed to the increase in overall
expense levels, specifically salaries and employee benefits expense and
occupancy and furniture and equipment expense. The expansion of our branch
office network through acquisitions, branch purchases and de novo branch
openings resulted in the addition of ten branch offices in 2005 and an
additional five branch offices in 2006. Our employee base increased to
approximately 2,560 employees at June 30, 2006, from approximately 2,230
employees at June 30, 2005. Salaries and employee benefits expense for the three
and six months ended June 30, 2006, increased $8.1 million and $14.6 million,
respectively, compared to the same periods in 2005. 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.
Occupancy and furniture and equipment expenditures for the three and six months
ended June 30, 2006 increased $1.5 million and $2.4 million, respectively,
compared to the same periods in 2005. Our system conversions associated with
recent acquisitions and the expansion of technological equipment, networks and
communication channels, contributed to the overall levels of information
technology fees. In addition, charitable contributions expense increased $1.6
million for the first six months 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) reflects
continued growth, increasing to $96.1 million and $187.3 million for the three
and six months ended June 30, 2006, respectively, compared to $78.1 million and
$156.6 million for the comparable periods in 2005. Our net interest margin
increased 47 basis points and 40 basis points to 4.41% and 4.36% for the three
and six months ended June 30, 2006, respectively, from 3.94% and 3.96% for the
comparable periods in 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 as well as higher interest rates on increased loan volumes.
The increase was partially offset by reduced interest income on a decreasing
portfolio of investment securities, increased interest expense associated with
higher interest rates paid on an increasing deposit base, increased interest
rates paid on our other borrowings, including our term loan, and increased
interest rates paid on recently issued subordinated debentures. Average
interest-earning assets increased to $8.73 billion and $8.67 billion for the
three and six months ended June 30, 2006, respectively, from $7.95 billion and
$7.98 billion for the comparable periods in 2005. The increase is primarily
attributable to internal growth and interest-earning assets provided by our
acquisitions completed in 2005 and during the first six months of 2006, which
provided assets of $280.3 million and $318.9 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 $990,000 and $2.3 million for the
three and six months ended June 30, 2006, respectively, in contrast to providing
increased net interest income of $297,000 and $3.9 million for the same periods
in 2005, reflecting a decline in our earnings on our interest rate swap
agreements of $1.3 million and $6.3 million for the three and six months ended
June 30 2006, respectively, 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 $7.35 billion and $7.25
billion for the three and six months ended June 30, 2006, respectively, in
comparison to $6.23 billion and $6.21 billion for the same periods in 2005. The
yield on our loan portfolio increased to 7.74% and 7.60% for the three and six
months ended June 30, 2006, respectively, in comparison to 6.41% and 6.30% for
the same periods 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
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 $1.6 million and $4.3 million for the three and six months ended June
30, 2006, respectively, compared to the same periods 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 $1.12 billion and $1.05 billion for the three and six months
ended June 30, 2006, respectively, over the comparable periods in 2005, to
internal growth and our acquisitions completed in 2005 and 2006, partially
offset by a $138.9 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 in 2005 and during the first six months of 2006 provided loans, net of
unearned discount, of $209.6 million and $269.3 million, in aggregate,
respectively, on the dates of acquisition. The components of the increase in
average loans for the first six months of 2006 compared to the same period in
2005 were primarily: a $504.4 million increase in average real estate mortgage
loans; a $336.4 million increase in average real estate construction and
development loans; a $145.1 million increase in average commercial, financial
and agricultural loans; and a $60.0 million increase in average loans held for
sale. The increase in residential real estate mortgage loans resulted from our
recent acquisitions and the retention of a portion of our residential mortgage
loan production that would have previously been sold in the secondary market.
Average investment securities were $1.29 billion and $1.32 billion for
the three and six months ended June 30, 2006, respectively, compared to $1.68
billion and $1.71 billion for the comparable periods in 2005. The yield on our
investment portfolio was 4.70% and 4.60% for the three and six months ended June
30, 2006, respectively, compared to 4.22% and 4.18% for the comparable periods
in 2005. Investment securities provided by our acquisitions completed in 2005
and during the first six months of 2006 were $20.1 million and $18.4 million, in
aggregate, respectively, as of the respective acquisition dates. Funds available
from deposit growth and excess short-term investments, as well as maturities of
investment securities, were utilized to fund internal loan growth and to
reinvest in higher-yielding available-for-sale investment securities. In March
2006 and April 2006, our investment securities increased $77.1 million and $61.8
million, respectively, due to the securitization of $138.9 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 $150.0 million of our term repurchase agreements during the first
quarter of 2006 and recognized a combined loss of $2.4 million on the sale of
$150.0 million of available-for-sale investment securities associated with the
termination of the term repurchase agreements. In addition, we terminated $50.0
million of our term repurchase agreements during the second quarter of 2006 and
recognized a loss of $310,000 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 $7.95 billion and $7.84 billion for the
three and six months ended June 30, 2006, respectively, from $7.04 billion and
$7.07 billion for the comparable periods in 2005. For the three and six months
ended June 30, 2006, the aggregate weighted average rate paid on our deposit
portfolio increased 104 basis points and 103 basis points to 3.09% and 2.95%,
respectively, from 2.05% and 1.92% for the comparable periods in 2005. This
increase is primarily attributable to the 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. The increase in average deposits is reflective of
internal growth stemming from our deposit development programs and our
acquisitions completed in 2005 and during the first six months of 2006, which
provided deposits, in aggregate, of $238.1 million and $135.1 million,
respectively. Average demand and savings deposits were $4.34 billion and $4.36
billion for the three and six months ended June 30, 2006, respectively, compared
to $4.21 billion and $4.25 billion for the comparable periods in 2005. Average
time deposits were $3.61 billion and $3.48 billion for the three and six months
ended June 30, 2006, respectively, compared to $2.83 billion and $2.82 billion
for the comparable periods in 2005.
Average other borrowings decreased to $311.8 million and $385.8 million
for the three and six months ended June 30, 2006, respectively, compared to
$569.2 million and $573.6 million for the comparable periods in 2005. The
aggregate weighted average rate paid on our other borrowings was 4.18% and 4.15%
for the three and six months ended June 30, 2006, respectively, compared to
2.98% and 2.65% for the comparable periods in 2005. The increased rate paid on
our other borrowings reflects the rising short-term interest rate environment
that began in mid-2004. The $187.7 million decrease in average other borrowings
for 2006 is primarily attributable to the termination of $150.0 million and
$50.0 million of term repurchase agreements in the first and second quarters of
2006, respectively, as further described in Note 9 to our Consolidated Financial
Statements. In addition, on March 17, 2006 and May 10, 2006, we prepaid $20.5
million and $14.8 million, respectively, of FHLB advances that were acquired
with certain bank acquisitions.
Our notes payable averaged $95.2 million and $97.5 million for the
three and six months ended June 30, 2006, respectively, compared to $4.0 million
and $5.8 million for the comparable periods in 2005. The aggregate weighted
average rate paid on our notes payable was 6.23% and 5.99% for the three and six
months ended June 30, 2006, respectively, compared to 10.44% and 8.38% for the
comparable periods in 2005. 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 6.17% and 5.93% for the three and six months ended June 30, 2006,
respectively, compared to 3.85% and 3.82% for the comparable periods in 2005. 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 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.
We subsequently repaid $15.0 million of the term loan during 2006, reducing the
balance to $85.0 million at June 30, 2006. The outstanding balance of our former
$100.0 million credit facility was repaid in full in June 2005 through dividends
from our subsidiary bank. As further described in Note 13 to our Consolidated
Financial Statements, we recently entered into an Amendment to our Amended and
Restated Secured Credit Agreement and reduced certain components of our
financing arrangement, including the overall pricing structure.
Average subordinated debentures were $276.5 million and $253.4 million
for the three and six months ended June 30, 2006, respectively, compared to
$273.8 million for the three and six months ended June 30, 2005. The aggregate
weighted average rate paid on our subordinated debentures was 8.30% and 9.05%
for the three and six months ended June 30, 2006, respectively, compared to
7.86% and 7.45% for the comparable periods in 2005. Interest expense on our
subordinated debentures was $5.7 million and $11.4 million for the three and six
months ended June 30, 2006, respectively, compared to $5.4 million and $10.1
million for the comparable periods in 2005. As previously discussed, we issued
$41.2 million of variable rate subordinated debentures in March 2006, $20.6
million of variable rate subordinated debentures in April 2006, and $25.8
million of variable rate subordinated debentures in June 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, which carried a high interest rate, improved future net interest
income and net interest margin. 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 and six months
ended June 30, 2006, and reduced interest expense by $649,000 and $1.8 million
for the three and six months ended June 30, 2005, respectively. 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. In February 2006, we
recognized additional expense of $849,000 in aggregate, representing the net
basis adjustment associated with the swap agreement terminated in February 2006
and the remaining net basis adjustments associated with the fair value interest
rate swap agreements that we 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 June 30, Six Months Ended June 30,
-------------------------------------------------- ------------------------------------------------
2006 2005 2006 2005
------------------------- ----------------------- ----------------------- -----------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1)(2)(3)(4).......... $7,349,881 141,876 7.74% $6,227,487 99,534 6.41% $7,253,904 273,337 7.60% $6,205,923 193,804 6.30%
Investment securities (4)... 1,289,270 15,112 4.70 1,676,866 17,629 4.22 1,320,108 30,145 4.60 1,709,203 35,414 4.18
Short-term investments...... 93,877 1,147 4.90 47,788 351 2.95 95,819 2,270 4.78 65,447 860 2.65
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total interest-earning
assets.............. 8,733,028 158,135 7.26 7,952,141 117,514 5.93 8,669,831 305,752 7.11 7,980,573 230,078 5.81
------- ------- ------- -------
Nonearning assets.............. 726,127 653,522 716,081 653,976
---------- ---------- ---------- ----------
Total assets.......... $9,459,155 $8,605,663 $9,385,912 $8,634,549
========== ========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits................ $ 960,951 1,947 0.81% $ 882,567 932 0.42% $ 965,467 3,775 0.79% $ 884,053 1,820 0.42%
Savings deposits.......... 2,119,269 12,255 2.32 2,082,986 6,331 1.22 2,124,351 23,438 2.22 2,140,218 12,075 1.14
Time deposits of $100
or more................. 1,315,690 14,258 4.35 846,317 6,246 2.96 1,247,926 25,814 4.17 826,965 11,600 2.83
Other time deposits (3)... 2,295,087 23,146 4.05 1,988,122 16,156 3.26 2,235,407 43,180 3.90 1,989,449 30,135 3.05
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
deposits............ 6,690,997 51,606 3.09 5,799,992 29,665 2.05 6,573,151 96,207 2.95 5,840,685 55,630 1.92
Other borrowings............ 311,753 3,246 4.18 569,222 4,234 2.98 385,839 7,941 4.15 573,585 7,534 2.65
Notes payable (5)........... 95,154 1,477 6.23 3,956 103 10.44 97,536 2,897 5.99 5,801 241 8.38
Subordinated debentures (3). 276,493 5,722 8.30 273,803 5,365 7.86 253,366 11,374 9.05 273,802 10,111 7.45
---------- ------- ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
liabilities......... 7,374,397 62,051 3.37 6,646,973 39,367 2.38 7,309,892 118,419 3.27 6,693,873 73,516 2.21
------- ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits............. 1,262,590 1,243,568 1,266,847 1,225,511
Other liabilities........... 104,851 97,246 102,695 100,299
---------- ---------- ---------- ----------
Total liabilities..... 8,741,838 7,987,787 8,679,434 8,019,683
Stockholders' equity........... 717,317 617,876 706,478 614,866
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity $9,459,155 $8,605,663 $9,385,912 $8,634,549
========== ========== ========== ==========
Net interest income............ 96,084 78,147 187,333 156,562
======= ====== ======= =======
Interest rate spread........... 3.89 3.55 3.84 3.60
Net interest margin (6)........ 4.41% 3.94% 4.36% 3.96%
==== ===== ==== ====
- --------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $404,000 and $787,000 for the three and six months ended June 30, 2006, and $326,000 and $662,000 for
the comparable periods in 2005, respectively.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees. Exclusive of these fees,
the interest rates paid were 6.17% and 5.93% for the three and six months ended June 30, 2006, and 3.85% and 3.82%
for the comparable periods in 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 provisions for loan losses of $5.0 million and $6.0 million
for the three and six months ended June 30, 2006, respectively. The provisions
recorded during 2006 were commensurate with growth within our loan portfolio, as
well as an increase in nonperforming loans during the three months ended June
30, 2006, following a significant reduction in our nonperforming loans from
December 31, 2005 to March 31, 2006, as further discussed under "--Loans and
Allowance for Loan Losses." We recorded a negative provision for loan losses of
$8.0 million for the three and six months ended June 30, 2005 commensurate with
the decreasing credit risk that existed in the loan portfolio during those
periods. During the three and six months ended June 30, 2005, we experienced
improvement in nonperforming loans that was primarily attributable to loan
payoffs and/or external refinancings, as well as a reduction in net loan
charge-offs during the first six months of 2005.
We recorded net loan charge-offs of $1.2 million for the three months
ended June 30, 2006, compared to net loan recoveries of $2.1 million for the six
months ended June 30, 2006. Net loan recoveries for the first six months 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. We recorded net
loan recoveries of $3.6 million for the three months ended June 30, 2005 and net
loan charge-offs of $3.0 million for the six months ended June 30, 2005. Our
nonperforming loans decreased $24.2 million, or 24.9%, to $73.0 million at June
30, 2006, from $97.2 million at December 31, 2005. However, our nonperforming
loans at June 30, 2006 increased $5.9 million, or 8.8%, from $67.1 million at
March 31, 2006. The decrease in the overall level of nonperforming loans during
the six months ended June 30, 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,"
partially offset by the placement of an $8.9 million loan on nonaccrual status
in the first quarter of 2006, and the placement of a $10.0 million loan on
nonaccrual status in the second quarter of 2006, which contributed to the
increase in nonperforming loans from March 31, 2006 to June 30, 2006. Loans past
due 90 days or more and still accruing interest were $5.7 million at June 30,
2006, compared to $2.2 million at March 31, 2006 and $5.6 million at December
31, 2005. The increase in loans past due 90 days or more and still accruing
interest during the second quarter of 2006 is primarily attributable to loans
acquired during the second quarter of 2006.
Our allowance for loan losses was $147.4 million at June 30, 2006,
compared to $140.2 million at March 31, 2006 and $135.3 million at December 31,
2005, representing 1.94%, 1.96% and 1.93% of loans, net of unearned discount,
respectively. Our allowance for loan losses as a percentage of nonperforming
loans was 201.81% at June 30, 2006, compared to 209.00% at March 31, 2006 and
139.23% at December 31, 2005. 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 $18.1 million, or 24.8% of nonperforming loans, at June 30, 2006.
These levels are down significantly from $55.0 million, or 56.6% of
nonperforming loans, at December 31, 2005. We continue our efforts to reduce the
overall level of nonperforming loans in 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 $25.9 million and $51.4 million for the three
and six months ended June 30, 2006, respectively, in comparison to $26.2 million
and $47.4 million for the comparable periods in 2005. 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
$11.0 million and $21.2 million for the three and six months ended June 30,
2006, respectively, in comparison to $10.2 million and $19.5 million for the
comparable periods in 2005. 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 FBA, IBOC, NSB, FNBS,
Community Bank and FINB completed in April 2005, September 2005, October 2005,
January 2006, April 2006 and May 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 $6.1 million and $12.9
million for the three and six months ended June 30, 2006, respectively, in
comparison to $6.8 million and $11.4 million for the comparable periods in 2005.
We attribute the decrease for the three months ended June 30, 2006, in
comparison to the comparable period in 2005, to a decrease in the volume of
mortgage loans originated and subsequently sold in the secondary market
primarily resulting from an increase in market interest rates. We attribute the
increase for the six months ended June 30, 2006, in comparison to the comparable
period in 2005, to a $1.7 million gain, before applicable income taxes, on the
sale of certain nonperforming loans in March 2006 that were transferred to our
loans held for sale portfolio on December 31, 2005, and the recognition of $1.2
million and $927,000 of income in March 2006 and April 2006, respectively,
generated from the capitalization of mortgage servicing rights pertaining to the
securitization of $77.1 million and $61.8 million, respectively, of residential
mortgage loans held in our loan portfolio, as further discussed in Note 4 to our
Consolidated Financial Statements. The increase was partially offset by a
decrease in the volume of mortgage loans originated and subsequently sold in the
secondary market primarily resulting from an increase in market interest rates.
Noninterest income includes a net loss on investment securities of $1.2
million and $4.0 million for the three and six months ended June 30, 2006,
respectively. The net loss in 2006 resulted primarily from sales of certain
available-for-sale investment securities associated with the termination of
three $50.0 million term repurchase agreements during the first quarter of 2006
and the termination of $50.0 million of a $150.0 million term repurchase
agreement in April 2006, as further discussed in Note 9 to our Consolidated
Financial Statements. The net loss also includes a net loss of $907,000 and $1.3
million for the three and six months ended June 30, 2006, respectively, related
to changes in the market value of securities held in our trading portfolio.
There were no gains or losses on investment securities recorded for the three
and six months ended June 30, 2005.
Bank-owned life insurance investment income was $652,000 and $1.8
million for the three and six months ended June 30, 2006, respectively, in
comparison to $1.3 million and $2.5 million for the comparable periods in 2005.
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 $4.6 million for the
three and six months ended June 30, 2006, respectively, in comparison to $2.2
million and $4.2 million for the comparable periods in 2005, 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. Despite the increase, we anticipate
the level of income generated by portfolio management fees will decline in
future months as a result of the loss of certain customers. However, we are
currently unable to predict the level of such decline.
Other income was $7.1 million and $14.9 million for the three and six
months ended June 30, 2006, respectively, in comparison to $5.7 million and $9.8
million for the comparable periods in 2005. We attribute the primary components
of the increase in other income to:
>> commission fee income of $1.8 million generated by Adrian Baker,
our insurance brokerage agency acquired on March 31, 2006, as
further described in Note 2 to our Consolidated Financial
Statements;
>> a decrease of $380,000 and an increase of $1.1 million in gains
on sales of other real estate for the three and six months ended
June 30, 2006, respectively, in comparison to the comparable
periods in 2005. Gains on sales of other real estate were $8,000
and $1.6 million for the three and six months ended June 30,
2006, respectively, and included a $1.5 million gain recognized
on the sale of a parcel of other real estate in January 2006
acquired with our acquisition of CIB Bank. Gains on sales of
other real estate for the three and six months ended June 30,
2005 were $388,000 and $502,000, respectively;
>> a release fee of $938,000 received on funds collected during the
first quarter of 2006 from a loan previously sold in March 2005,
in 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 $521,000 in net losses on our derivative
instruments; and
>> income associated with continued growth and expansion of our
banking franchise, including our de novo branch office and our
acquisitions completed during 2005 and 2006; partially offset by
>> a net decrease of $681,000 in loan servicing fees. The net
decrease is primarily attributable to a net decrease of $746,000
in fees from loans serviced for others and the recognition of
$740,000 of impairment charges on SBA servicing rights due to
payoffs received on existing loans, partially offset by a
decrease of $343,000 and $462,000 of amortization of SBA
servicing rights and mortgage servicing rights, respectively.
Noninterest Expense
Noninterest expense was $81.1 million and $155.9 million for the three
and six months ended June 30, 2006, respectively, in comparison to $70.2 million
and $134.0 million for the comparable periods in 2005. Our efficiency ratio
decreased slightly to 66.68% and 65.51% for the three and six months ended June
30, 2006, respectively, from 67.45% and 65.93% for the comparable periods 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 and charitable contributions expense.
Salaries and employee benefits expense was $42.6 million and $82.1
million for the three and six months ended June 30, 2006, respectively, in
comparison to $34.5 million and $67.5 million for the comparable periods in
2005. We attribute the overall increase to increased salaries and employee
benefits expenses associated with an aggregate of 14 additional branches
acquired in 2005 and 2006, one de novo branch opened in 2005, the acquisitions
of UPAC, our insurance premium finance company, and Adrian Baker, our insurance
brokerage agency, 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 2,560 employees at June 30, 2006, from approximately 2,230
employees at June 30, 2005.
Occupancy, net of rental income, and furniture and equipment expense
totaled $10.5 million and $20.7 million for the three and six months ended June
30, 2006, respectively, in comparison to $9.0 million and $18.3 million for the
comparable periods in 2005. The increase is primarily attributable to higher
levels of expense resulting from our acquisitions in 2005 and 2006, which added
14 branch offices, the opening of one de novo branch office in 2005, and our
acquisitions of UPAC and Adrian Baker, 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 $9.2 million and $18.3 million for the
three and six months ended June 30, 2006, respectively, in comparison to $9.4
million and $17.5 million for the comparable periods in 2005. 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. We primarily attribute the increased level of information
technology fees 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.
Legal, examination and professional fees were $2.4 million and $4.5
million for the three and six months ended June 30, 2006, respectively, in
comparison to $2.1 million and $4.5 million for the comparable periods in 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 have all contributed to the overall
expense levels in 2005 and 2006.
Amortization of intangibles associated with the purchase of
subsidiaries was $1.7 million and $3.2 million for the three and six months
ended June 30, 2006, respectively, in comparison to $1.1 million and $2.4
million for the comparable periods in 2005. 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, Community Bank and FINB completed
in January 2006, April 2006 and May 2006, and to the customer list and related
intangibles associated with our acquisition of Adrian Baker in March 2006, as
more fully described in Note 3 to our Consolidated Financial Statements.
Charitable contributions expense was $1.7 million and $3.3 million for
the three and six months ended June 30, 2006, respectively, in comparison to
$1.6 million and $1.7 million for the comparable periods in 2005. 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 $8.2 million and $15.3 million for the three and six
months ended June 30, 2006, respectively, in comparison to $8.8 million and
$14.9 million for the comparable periods in 2005. 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
decrease and increase for the three and six months ended June 30, 2006 in
comparison to the comparable periods in 2005, respectively, is primarily
attributable to:
>> a $617,000 specific reserve established in March 2006 and an
increase of $746,000 to the specific reserve in June 2006 for the
estimated loss associated with a $3.1 million unfunded letter of
credit acquired with the acquisition of CIB Bank;
>> a $470,000 loss recognized on a liquidation sale of residential
real estate and personal property of an SBA guaranteed loan; 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; partially offset by
>> a decrease of $939,000 of expenditures on other real estate.
Expenditures on other real estate were $131,000 and $171,000 for
the three and six months ended June 30, 2006, respectively.
Expenditures and losses on other real estate were $958,000 and
$1.1 million for the three and six months ended June 30, 2005,
and included an expenditure of $812,000 recorded in May 2005
related to a parcel of other real estate acquired in conjunction
with our CIB Bank acquisition.
Provision for Income Taxes
The provision for income taxes was $13.5 million and $25.2 million for
the three and six months ended June 30, 2006, respectively, in comparison to
$15.0 million and $28.3 million for the comparable periods in 2005. The
effective tax rate was 38.0% and 33.1% for the three and six months ended June
30, 2006, respectively, in comparison to 35.9% and 36.6% for the comparable
periods in 2005. The decrease in the effective tax rate for the six months ended
June 30, 2006 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 nonrecurring transactions, the adjusted effective tax rate was
38.0% and 37.7% for the three and six months ended June 30, 2006, respectively,
in comparison to 37.9% and 37.7% for the comparable periods in 2005.
Interest Rate Risk Management
We utilize derivative financial instruments to assist in our management
of interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The derivative financial
instruments we held as of June 30, 2006 and December 31, 2005 are summarized as
follows:
June 30, 2006 December 31, 2005
----------------------- ------------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................. $ 200,000 -- 300,000 114
Fair value hedges............................ -- -- 25,000 748
Interest rate floor agreement................ 100,000 1 100,000 70
Interest rate lock commitments............... 6,400 -- 5,900 --
Forward commitments to sell
mortgage-backed securities................. 49,000 -- 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 and six months ended June 30, 2006, we realized net
interest expense of $990,000 and $2.3 million, respectively, on our derivative
financial instruments, whereas during the three and six months ended June 30,
2005, we realized net interest income of $297,000 and $3.9 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 and $100.0 million notional amount of interest
rate swap agreements designated as cash flow hedges in March 2005 and April
2006, respectively, and the termination of $150.0 million, $101.2 million and
$25.0 million notional amount 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 six basis points and 15 basis points for the three and six months
ended June 30, 2006, respectively, in comparison to the comparable periods in
2005. In addition, the increasing interest rate environment has mitigated a
portion of the effect of the reduced earnings on our derivative financial
instruments. We recorded net losses on derivative instruments, which are
included in noninterest income in our consolidated statements of income, of
$3,000 and $69,000 for the three and six months ended June 30, 2006, in
comparison to net losses of $590,000 for the comparable periods in 2005. 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 more closely
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
in March 2005. The amount receivable by us under the swap
agreements was $1.1 million and $2.4 million at June 30, 2006 and
December 31, 2005, respectively, and the amount payable by us
under the swap agreements was $1.8 million and $2.5 million at
June 30, 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 June 30, 2006 and December 31, 2005 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
June 30, 2006:
July 31, 2007........................... $ 200,000 5.40% 3.08% $ (5,340)
========= ==== ==== ========
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 that was recorded in February 2006.
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 $1,000 and $70,000 at June 30,
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, further protecting our net interest margin against changes in
interest rates and providing funding for security purchases. The interest rate
floor agreements 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 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; on March 28,
2006, we terminated the $50.0 million term repurchase agreement with a maturity
date of August 1, 2007, and 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; and on April 28, 2006, we
terminated $50.0 million of the $150.0 million term repurchase agreement with a
maturity date of January 12, 2007, and recognized 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. Our termination transactions
entered into in 2006 resulted in a reduction of $200.0 million of our term
repurchase agreements, the recognition of a $2.7 million loss on the sale of
$200.0 million of investment securities held in our available-for-sale
investment portfolio, and prepayment penalties of $306,000 incurred in
conjunction with the early termination of the term repurchase agreements.
Pledged Collateral. At June 30, 2006 and December 31, 2005, we had pledged
investment securities available for sale with a fair value of $6.1 million and
$5.1 million, respectively, in connection with our interest rate swap
agreements. In addition, at December 31, 2005, we had a $2.0 million letter of
credit issued on our behalf to the counterparty and 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 $460,000 and ($49,000) at June 30, 2006 and December 31,
2005, respectively.
Loans and Allowance for Loan Losses
Interest and fees on loans, which represent the principal source of
income for First Banks, were 89.9% and 89.5% of total interest income for the
three and six months ended June 30, 2006, respectively, in comparison to 84.9%
and 84.4% for the comparable periods in 2005. Total loans, net of unearned
discount, increased to $7.60 billion, or 79.0% of total assets, at June 30,
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 acquisitions of FNBS, Community
Bank, FINB and UPAC, which provided loans, net of unearned discount, of $269.2
million, in aggregate, partially offset by the securitization of $138.9 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 in our loan portfolio is primarily attributable to:
>> an increase of $244.7 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;
>> an increase of $226.3 million in our commercial, financial and
agricultural portfolio, primarily attributable to internal loan
production, and $153.6 million of loans provided by our
acquisition of UPAC, and $12.7 million, in aggregate, of loans
provided by our acquisitions of FNBS, Community Bank and FINB;
>> an increase of $92.0 million in our real estate mortgage
portfolio. The net increase was attributable to: internal growth
within our loan portfolio of approximately $232.3 million,
largely attributable to the retention of certain mortgage loan
production in our residential real estate mortgage portfolio; our
acquisitions of FNBS, Community Bank and FINB, which provided
loans of $98.6 million; partially offset by the securitization of
$77.1 million and $61.8 million of certain residential mortgage
loans in March 2006 and April 2006, respectively, which resulted
in a change in our asset structure from residential mortgage
loans to available-for-sale investment securities; and the
transfer of $100.0 million of certain loans to our held for sale
portfolio following a commitment to sell these loans in August
2006; and
>> a $17.3 million increase in our loans held for sale portfolio
resulting from the transfer of $100.0 million of certain
residential mortgage loans to our loans held for sale portfolio
on June 30, 2006, partially offset by 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 June 30, 2006 and December 31, 2005:
June 30, December 31,
2006 2005
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual......................................................... $ 15,730 4,948
Real estate construction and development:
Nonaccrual......................................................... 14,399 11,137
Real estate mortgage:
One-to-four family residential:
Nonaccrual...................................................... 8,773 9,576
Restructured.................................................... 9 10
Multi-family residential loans:
Nonaccrual...................................................... 649 740
Commercial real estate loans:
Nonaccrual...................................................... 33,286 70,625
Consumer and installment:
Nonaccrual......................................................... 184 160
---------- ---------
Total nonperforming loans................................... 73,030 97,196
Other real estate.................................................... 5,460 2,025
---------- ---------
Total nonperforming assets.................................. $ 78,490 99,221
========== =========
Loans, net of unearned discount...................................... $7,600,591 7,020,771
========== =========
Loans past due 90 days or more and still accruing.................... $ 5,737 5,576
========== =========
Ratio of:
Allowance for loan losses to loans................................. 1.94% 1.93%
Nonperforming loans to loans....................................... 0.96 1.38
Allowance for loan losses to nonperforming loans................... 201.81 139.23
Nonperforming assets to loans and other real estate................ 1.03 1.41
========== =========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $73.0 million at June 30, 2006, compared to
$67.1 million at March 31, 2006 and $97.2 million at December 31, 2005. Other
real estate owned was $5.5 million, $3.3 million and $2.0 million at June 30,
2006, March 31, 2006 and December 31, 2005, respectively. Our nonperforming
assets, consisting of nonperforming loans and other real estate owned, were
$78.5 million at June 30, 2006, compared to $70.4 million at March 31, 2006 and
$99.2 million at December 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 $18.1 million, or 24.8% of our total
nonperforming loans, at June 30, 2006, from $18.2 million, or 27.1% of our total
nonperforming loans, at March 31, 2006, and from $55.0 million, or 56.6% of our
nonperforming loans, at December 31, 2005. Nonperforming loans were 0.96% of
loans, net of unearned discount, at June 30, 2006, compared to 0.94% of loans,
net of unearned discount, at March 31, 2006 and 1.38% at December 31, 2005.
Additionally, loans past due 90 days or more and still accruing interest were
$5.7 million at June 30, 2006, compared to $2.2 million at March 31, 2006 and
$5.6 million at December 31, 2005. Nonperforming loans at June 30, 2006 reflect
a $24.2 million, or 24.9%, decrease from nonperforming loans at December 31,
2005, and a $5.9 million, or 8.8%, increase from nonperforming loans at March
31, 2006. The 24.9% decrease in nonperforming loans during the six months ended
June 30, 2006 primarily resulted from our plans to reduce nonperforming assets
through 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. The overall decrease in our
nonperforming loans during 2006 was partially offset by two credits of $8.9
million and $10.0 million that were placed on nonaccrual status in March 2006
and June 2006, respectively, following deterioration of the financial position
of the borrowers.
We recorded net loan charge-offs of $1.2 million for the three months
ended June 30, 2006, compared to net loan recoveries of $2.1 million for the six
months ended June 30, 2006. We recorded net loan recoveries of $3.6 million for
the three months ended June 30, 2005 and net loan charge-offs of $3.0 million
for the six months ended June 30, 2005. Net loan recoveries for 2006 included a
loan recovery of $5.0 million on the payoff of a single loan in the first
quarter of 2006, as discussed above. Our allowance for loan losses was $147.4
million at June 30, 2006, compared to $140.2 million at March 31, 2006 and
$135.3 million at December 31, 2005. Our allowance for loan losses as a
percentage of loans, net of unearned discount, was 1.94% at June 30, 2006,
compared to 1.96% at March 31, 2006 and 1.93% at December 31, 2005. Our
allowance for loan losses as a percentage of nonperforming loans was 201.81% at
June 30, 2006, compared to 209.00% at March 31, 2006 and 139.23% at December 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 and six months
ended June 30, 2006 and 2005 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2006 2005 2006 2005
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period................ $140,235 144,154 135,330 150,707
Acquired allowance for loan losses.......... 3,368 419 3,944 419
-------- -------- -------- --------
143,603 144,573 139,274 151,126
-------- -------- -------- --------
Loans charged-off........................... (2,896) (2,385) (6,341) (15,021)
Recoveries of loans previously charged-off.. 1,676 5,976 8,450 12,059
-------- -------- -------- --------
Net loan recoveries (charge-offs)......... (1,220) 3,591 2,109 (2,962)
-------- -------- -------- --------
Provision for loan losses................... 5,000 (8,000) 6,000 (8,000)
-------- -------- -------- --------
Balance, end of period...................... $147,383 140,164 147,383 140,164
======== ======== ======== ========
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 $1.74 billion and $1.72 billion at June 30, 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 June 30, 2006:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less........................... $ 410,071 231,889 641,960
Over three months through six months........... 332,818 5,000 337,818
Over six months through twelve months.......... 394,062 110,000 504,062
Over twelve months............................. 191,436 66,107 257,543
----------- ------- ---------
Total..................................... $ 1,328,387 412,996 1,741,383
=========== ======= =========
In addition to these sources of funds, First Bank has established a
borrowing relationship with the Federal Reserve Bank of St. Louis. This
borrowing relationship, which is secured by commercial loans, provides an
additional liquidity facility that may be utilized for contingency purposes. At
June 30, 2006 and December 31, 2005, First Bank's borrowing capacity under the
agreement was approximately $661.1 million and $743.6 million, respectively. In
addition, First Bank's borrowing capacity through its relationship with the FHLB
was approximately $742.1 million and $679.3 million at June 30, 2006 and
December 31, 2005, respectively. First Bank had FHLB advances outstanding of
$26.1 million and $39.3 million at June 30, 2006 and December 31, 2005,
respectively, of which $1.1 million and $39.3 million, respectively, represented
advances assumed in conjunction with various acquisitions. On March 17, 2006 and
May 10, 2006, First Bank prepaid $20.5 million and $14.8 million of FHLB
advances, respectively, that were assumed in conjunction with previous
acquisitions, as further described 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 June 30,
2006 were as follows:
Less than 1-3 3-5 Over
1 Year Years Years 5 Years Total
------ ----- ----- ------- -----
(dollars expressed in thousands)
Operating leases....................... $ 12,575 21,027 13,530 21,948 69,080
Certificates of deposit (1)............ 2,930,308 568,783 140,615 15,061 3,654,767
Other borrowings (1)................... 326,889 235 872 -- 327,996
Notes payable (1)...................... 20,000 65,000 -- -- 85,000
Subordinated debentures (1)............ -- -- -- 304,270 304,270
Other contractual obligations.......... 1,138 292 14 17 1,461
----------- -------- -------- -------- ---------
Total............................. $ 3,290,910 655,337 155,031 341,296 4,442,574
=========== ======== ======== ======== =========
---------------
(1) Amounts exclude the related interest expense accrued on these obligations as of June 30, 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 Issue No. 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 Issue
No. 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 Issue No. 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 No. 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 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. 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), as further described in Note 7 to our
Consolidated Financial Statements.
In May 2005, the FASB issued SFAS No. 154 -- Accounting Changes and
Error Corrections. SFAS No. 154, a replacement of APB Opinion No. 20 --
Accounting Changes and FASB 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 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.
In June 2006, the FASB issued FASB Interpretation No. 48 -- Accounting
for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109 -- Accounting
for Income Taxes. FASB interpretation No. 48 clarifies the accounting for
uncertainty in income taxes in financial statements and prescribes a recognition
threshold and measurement attribute for financial statement recognition and
measurement of a tax position taken or expected to be taken. The Interpretation
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The FASB
Interpretation is effective for fiscal years beginning after December 15, 2006.
We are currently evaluating the requirements of FASB Interpretation No. 48 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 June 30, 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
and six months ended June 30, 2006 as compared to the comparable periods in 2005
and further discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations." During the three
and six months ended June 30, 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 and six months ended
June 30, 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 affected, or are reasonably likely to materially
affect, the Company's disclosure controls and procedures over financial
reporting.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the April 27, 2006 Annual Meeting of Shareholders of First Banks,
Messrs. James F. Dierberg, Allen H. Blake, Gordon A. Gundaker, Terrance M.
McCarthy, Steven F. Schepman, David L. Steward and Douglas H. Yaeger,
constituting all of the directors, were unanimously re-elected.
ITEM 6 - EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit Number Description
-------------- -----------
4.1 Indenture between First Banks, Inc., as Issuer, and
Wilmington Trust Company, as Trustee, dated as of April 28,
2006 - filed herewith.
4.2 Amended and Restated Declaration of Trust of First Bank
Statutory Trust V 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 April 28,
2006 - filed herewith.
4.3 Guarantee Agreement by and between First Banks, Inc. and
Wilmington Trust Company, dated as of April 28, 2006 - filed
herewith.
4.4 Placement Agreement by and among First Banks, Inc., First
Bank Statutory Trust V and FTN Financial Capital Markets and
Keefe, Bruyette & Woods, Inc., as Placement Agents, dated as
of April 27, 2006 - filed herewith.
4.5 Floating Rate Junior Subordinated Deferrable Interest
Debenture of First Banks, Inc., dated as of April 28, 2006 -
filed herewith.
4.6 Capital Securities Subscription Agreement by and among First
Bank Statutory Trust V, First Banks, Inc. and First
Tennessee Bank National Association, dated as of April 28,
2006 - filed herewith.
4.7 Capital Securities Certificate P-1 of First Bank Statutory
Trust V, dated as of April 28, 2006 - filed herewith.
4.8 Indenture between First Banks, Inc., as Issuer, and Wells
Fargo Bank, National Association, as Trustee, dated as of
June 16, 2006 - filed herewith.
4.9 Amended and Restated Declaration of Trust of First Bank
Statutory Trust VI by and among Wells Fargo Delaware Trust
Company, as Delaware Trustee, Wells Fargo Bank, National
Association, as Institutional Trustee, First Banks, Inc., as
Sponsor, and Allen H. Blake and Lisa K. Vansickle, as
Administrators, dated as of June 16, 2006 - filed herewith.
4.10 Guarantee Agreement by and between First Banks, Inc. and
Wells Fargo Bank, National Association, dated as of June 16,
2006 - filed herewith.
4.11 Purchase Agreement among First Bank Statutory Trust VI,
Issuer, First Banks, Inc., Sponsor, and Bear, Stearns & Co.
Inc., Initial Purchaser, dated as of June 14, 2006 - filed
herewith.
4.12 Junior Subordinated Debt Security due 2036 of First Banks,
Inc., dated as of June 16, 2006 - filed herewith.
4.13 Debenture Subscription Agreement by and between First Banks,
Inc. and First Bank Statutory Trust VI, dated as of June 16,
2006 - filed herewith.
4.14 Capital Securities Certificate P-001 of First Bank Statutory
Trust VI, dated as of June 16, 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: August 11, 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)