UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
-------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
8.15% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust IV and New York Stock Exchange
guaranteed by First Banks, Inc.)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. [X] Yes [ ] No
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. 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 Act). [ ] Yes [X] No
None of the voting stock of the Company is held by non-affiliates. All
of the voting stock of the Company is owned by various trusts, which were
established by and for the benefit of Mr. James F. Dierberg, the Company's
Chairman of the Board of Directors, and members of his immediate family.
At March 28, 2007, there were 23,661 shares of the registrant's common
stock outstanding.
FIRST BANKS, INC.
2006 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business............................................................................... 1
Item 1A. Risk Factors........................................................................... 14
Item 1B. Unresolved Staff Comments.............................................................. 16
Item 2. Properties............................................................................. 16
Item 3. Legal Proceedings...................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................................... 16
Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.......................................... 16
Item 6. Selected Financial Data................................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 51
Item 8. Financial Statements and Supplementary Data............................................ 52
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................... 52
Item 9A. Controls and Procedures................................................................ 52
Item 9B. Other Information...................................................................... 52
Part III
Item 10. Directors, Executive Officers and Corporate Governance................................. 52
Item 11. Executive Compensation................................................................. 56
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................................... 60
Item 13. Certain Relationships and Related Transactions, and Director Independence.............. 61
Item 14. Principal Accounting Fees and Services................................................. 62
Part IV
Item 15. Exhibits, Financial Statement Schedules................................................ 62
Signatures ....................................................................................... 109
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements with
respect to our financial condition, results of operations and business.
Generally, forward-looking statements may be identified through the use of words
such as: "believe," "expect," "anticipate," "intend," "plan," "estimate," or
words of similar meaning or future or conditional terms such as: "will,"
"would," "should," "could," "may," "likely," "probably," or "possibly." Examples
of forward-looking statements include, but are not limited to, estimates or
projections with respect to our future financial condition, and 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: our ability to consummate pending acquisitions; 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.
Refer to further discussion under "Business --Item 1A Risk Factors" for factors
that may impact these forward-looking statements. We do not have a duty to and
will not update these forward-looking statements. Readers of this Annual Report
on Form 10-K should therefore consider these risks and uncertainties in
evaluating forward-looking statements and should not place undue reliance on
these statements.
PART I
Item 1. Business
General. We are a registered bank holding company incorporated in Missouri in
1978 and headquartered in St. Louis, Missouri. We operate through our wholly
owned subsidiary bank holding company, The San Francisco Company, or SFC, and
SFC's wholly owned subsidiary bank, First Bank, both headquartered in St. Louis,
Missouri. First Bank operates through its subsidiaries, as listed below, and its
branch banking offices. First Bank's subsidiaries are wholly owned, except for
SBLS LLC, which was 51.0% owned by First Bank and 49.0% owned by First Capital
America, Inc. as of December 31, 2006.
>> First Bank Business Capital, Inc.;
>> Missouri Valley Partners, Inc., or MVP;
>> Adrian N. Baker & Company, or Adrian Baker;
>> Universal Premium Acceptance Corporation and its wholly owned
subsidiary, UPAC of California, Inc., or collectively, UPAC; and
>> Small Business Loan Source LLC, or SBLS LLC.
First Bank currently operates 195 branch offices in California, Illinois,
Missouri and Texas, with 217 automated teller machines, or ATMs, across the four
states. Over the last ten years, our organization has grown significantly,
primarily as a result of our acquisition strategy, as well as through internal
growth. At December 31, 2006, we had assets of $10.16 billion, loans, net of
unearned discount, of $7.67 billion, deposits of $8.44 billion and stockholders'
equity of $800.4 million.
Through First Bank, we offer a broad range of financial services, including
commercial and personal deposit products, commercial and consumer lending, and
many other financial products and services. Commercial and personal deposit
products include 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.
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. Consumer lending includes residential real estate, home equity and
installment lending. Other financial services include mortgage banking, debit
cards, brokerage services, employee benefit and commercial and personal
insurance services, internet banking, remote deposit, ATMs, telephone banking,
safe deposit boxes, and trust, private banking and institutional money
management services. The revenues generated by First Bank and its subsidiaries
consist primarily of interest income, generated from our loan and investment
security portfolios, service charges and fees generated from our deposit
products and services, and fees generated by our mortgage banking, insurance
services, and trust, private banking and institutional money management services
businesses. Our extensive line of products and services are offered to customers
primarily within our geographic areas, which include eastern Missouri, Illinois,
including the Chicago metropolitan area, southern and northern California, and
Houston and Dallas, Texas. Certain loan products, including small business loans
and insurance premium financing loans, are available nationwide through our
subsidiaries, SBLS LLC and UPAC.
Primary responsibility for managing our banking units rests with the officers
and directors of each unit, but we centralize many of our overall corporate
policies, procedures and administrative functions and provide centralized
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our banking units to focus
on customer service.
Various trusts, established by and administered by and for the benefit of Mr.
James F. Dierberg, our Chairman of the Board, and members of his immediate
family, own all of our voting stock. Mr. Dierberg and his family, therefore,
control our management and policies.
We have formed numerous affiliated Delaware or Connecticut business or statutory
trusts. These trusts operate as financing entities and were created for the sole
purpose of issuing trust preferred securities, and the sole assets of the trusts
are our subordinated debentures. In conjunction with the formation of our
financing entities and their issuance of the trust preferred securities, we
issued subordinated debentures to each of our financing entities in amounts
equivalent to the respective trust preferred securities plus the amount of the
common securities of the individual trusts, as outlined in the following table
and more fully described in Note 12 to our Consolidated Financial Statements. We
pay interest on our subordinated debentures to our respective financing
entities. In turn, our financing entities pay distributions to the holders of
the trust preferred securities. The interest payable on our subordinated
debentures is included in interest expense in our consolidated statements of
income.
The trust preferred securities issued by First Preferred Capital Trust IV are
publicly held and traded on the New York Stock Exchange, or NYSE. The remaining
trust preferred securities were issued in private placements. The trust
preferred securities have no voting rights except in certain limited
circumstances. A summary of the outstanding trust preferred securities issued by
our affiliated statutory and business trusts, and our related subordinated
debentures issued to our respective trusts in conjunction with the trust
preferred securities offerings, is as follows:
Date of Interest Preferred Subordinated
Name of Trust Trust Formation Type of Offering Rate Securities Debentures
------------- --------------- ---------------- ---- ---------- ----------
First Bank Capital Trust April 2002 Private Placement Variable $25,000,000 $25,774,000
First Preferred Capital Trust IV January 2003 Publicly Underwritten 8.15% 46,000,000 47,422,700
First Bank Statutory Trust March 2003 Private Placement 8.10% 25,000,000 25,774,000
First Bank Statutory Trust II September 2004 Private Placement Variable 20,000,000 20,619,000
First Bank Statutory Trust III November 2004 Private Placement Variable 40,000,000 41,238,000
First Bank Statutory Trust IV February 2006 Private Placement Variable 40,000,000 41,238,000
First Bank Statutory Trust V April 2006 Private Placement Variable 20,000,000 20,619,000
First Bank Statutory Trust VI June 2006 Private Placement Variable 25,000,000 25,774,000
First Bank Statutory Trust VII December 2006 Private Placement Variable 50,000,000 51,547,000
First Bank Statutory Trust VIII February 2007 Private Placement Variable 25,000,000 25,774,000
Recent Developments. At the regular meeting of the First Banks, Inc., or First
Banks, Board of Directors held on January 26, 2007, Mr. Allen H. Blake announced
his retirement and resigned his positions as Director, President and Chief
Executive Officer of First Banks, effective March 31, 2007. Upon acceptance of
Mr. Blake's resignation, the Board of Directors elected Mr. Terrance M. McCarthy
as President and Chief Executive Officer of First Banks, effective April 1,
2007.
Strategy. In the development of our banking franchise, we have focused on
building and reorganizing our infrastructure as necessary to accomplish our
objectives for organic growth, and to supplement this growth with de novo and
acquisition strategies to further expand our banking franchise. Our organization
is structured to leverage a strong sales force in each of our major market areas
in an effort to continue to provide quality financial products and the highest
level of customer service to our expanding customer base. Within the individual
markets, the sales organization is supported by a regional structure to position
it to serve the market opportunities within each area in the four states in
which we operate. We are committed to serving the small business and mid-sized
commercial segments along with the retail consumer market. We have devoted
significant resources to improving our infrastructure dedicated to rapid
approval, underwriting and documentation of consumer loans, strengthening our
small business services area, increasing our commercial business development
staff, reorganizing our marketing and product management areas, improving the
quality and depth of our regional commercial and consumer management groups, and
increasing resources for financial service product line and delivery systems,
branch development and training, and administrative and operational support.
In the past three years, we have added three business lines, including an
insurance premium financing company, an insurance brokerage agency and a small
business lending group, providing our customers with new and expanded products
and services to complement our existing line of financial services. In line with
our small business lending strategy, we segmented the loan origination and
servicing functions and added new business development officers throughout our
markets. With the significant expansion of our Chicago banking franchise in the
past three years, we have created a complete regional structure in the Chicago
area as well as three additional commercial banking groups to enable our credit
administration, commercial real estate and commercial and industrial banking
groups, branch administration, credit review, and human resources and training
functions to better serve our customers and employees. We continue to focus on
modifying and effectively repositioning our internal and external resources to
better serve the markets in which we operate. Although these efforts have led to
certain increased capital expenditures and noninterest expenses, we expect they
will lead to additional internal growth, more efficient operations and improved
profitability over the long term, in accordance with our long-term corporate
vision.
In the development of our banking franchise, we acquire other entities providing
financial services as one means of achieving our growth objectives and to
augment internal growth. Acquisitions may serve to enhance our presence in a
given market, to expand the extent of our market area, to enable us to enter new
or noncontiguous markets or to enable us to expand the array of financial
services that we provide. Due to the nature of our ownership, we have elected to
engage only in those acquisitions that can be accomplished for cash, rather than
by issuing securities, which given the characteristics of the acquisition arena
may, at times, place us at a competitive disadvantage relative to other
acquirers offering stock transactions. This results from the market
attractiveness of other financial institutions' stock and the advantages of
tax-free exchanges to the selling shareholders. Our acquisition activities are
generally somewhat sporadic because we may consummate multiple transactions in a
particular period, followed by a substantially less active acquisition period.
Furthermore, the intangible assets recorded in conjunction with these
acquisitions create an immediate reduction in our regulatory capital, providing
further financial disincentives to paying large premiums in cash acquisitions.
Recognizing these facts, we generally follow certain patterns in our
acquisitions. First, we generally acquire several smaller institutions,
sometimes over an extended period of time, rather than a single larger one. We
attribute this approach to the constraints imposed by the amount of funds
required for a larger transaction, as well as the opportunity to minimize the
aggregate premium required through smaller individual transactions. We may,
however, periodically acquire larger institutions that provide us with the
opportunity to rapidly expand our market presence in a highly desired market
area. Secondly, in some acquisitions, we may acquire institutions having
significant asset-quality, ownership, regulatory or other problems. We seek to
address the risks of these issues by adjusting the acquisition pricing,
accompanied by appropriate remedial attention after consummation of the
transaction. In these institutions, these issues may diminish their
attractiveness to other potential acquirers, and therefore may reduce the amount
of acquisition premium required. Finally, we may pursue our acquisition strategy
in other geographic areas, or pursue internal growth more aggressively because
cash transactions may not be economically viable in extremely competitive
acquisition markets.
Our acquisitions have allowed us to significantly expand our presence throughout
our geographic markets, improve operational efficiencies, convey a more
consistent image and quality of service and more cohesively market and deliver
our products and services. Following our acquisitions, various undertakings are
necessary to effectively integrate the acquired entities into our business
systems and culture. While the specific activities required are dependent upon
the individual circumstances surrounding each acquisition, the majority of our
efforts have been concentrated in various areas including, but not limited to:
(a) improving asset quality; (b) reducing unnecessary, duplicative and/or
excessive expenses including personnel, information technology and certain other
operational and administrative expenses; (c) maintaining, repairing and, in some
cases, refurbishing bank premises necessitated by the deferral of such projects
by some of the acquired entities; (d) renegotiating long-term leases that
provide space in excess of that necessary for banking activities and/or at rates
in excess of current market rates, or subleasing excess space to third parties;
(e) relocating branch offices that are not adequate, conducive or convenient for
banking operations; and (f) managing actual or potential litigation that existed
with respect to acquired entities to minimize the overall costs of negotiation,
settlement or litigation.
The post-acquisition process also includes the combining of separate and
distinct entities together to form a cohesive organization with common
objectives and focus. We have invested and continue to invest significant
resources to reorganize staff, recruit and train personnel where needed, and
establish the direction and focus necessary for the combined entity to take
advantage of the opportunities available to it. This investment generally
contributes to increases in noninterest expense, and results in the creation of
new banking units within the newly integrated combined entity, which convey a
more consistent image and quality of service. The new banking units provide a
broad array of banking products to their customers and generally compete
effectively in their marketplaces, even in the presence of other financial
institutions with much greater resources. While some of these modifications do
not contribute to reductions of noninterest expense, they contribute to the
commercial and retail business development efforts of the combined entity, and
ultimately to their prospects for improving future profitability.
Our business strategy also encompasses the opening of de novo branch offices as
another means of achieving our growth objectives, particularly when our
acquisition prospects are somewhat limited, primarily due to the market
environment requiring significantly higher premiums in order to transact
financial institution acquisitions. Our de novo branch strategy also provides
similar opportunities to our acquisition strategy by allowing us to enhance our
presence in our existing markets and enter new markets. Additionally, we
generally have more flexibility in selecting the most opportunistic sites for
our de novo branches, constructing the branch offices in accordance with our
standard business model and marketing and promoting our customized products and
services under our long-established trade name. We have plans underway to open
several de novo branch offices over the next few years. We expect to further
concentrate our efforts on this portion of our business strategy while
continuing to identify viable acquisition candidates at reasonable acquisition
premiums that are commensurate with our established acquisition strategy.
Acquisitions. In the continuing development of our banking franchise, we
emphasize acquiring other financial institutions and financial services
companies as one means of achieving our growth objectives. After we consummate
an acquisition, we expect to enhance the franchise of the acquired entity by
supplementing the marketing and business development efforts to broaden the
customer bases, strengthening particular segments of the business or filling
voids in the overall market coverage.
During the three years ended December 31, 2006, we completed ten bank
acquisitions, four branch office purchases, the acquisition of an insurance
premium financing company and an insurance brokerage agency, and purchased
substantially all of the assets and assumed certain liabilities of a company
that originates, sells and services SBA loans to small business concerns. As
demonstrated in the following table, our acquisitions during the past three
years have significantly increased our banking franchise presence in the dynamic
market areas of metropolitan Chicago, Dallas and Houston, and further augmented
our existing markets in southern California and the Midwest. We funded these
acquisitions from available cash reserves, borrowings under our secured credit
facility and proceeds from the issuance of subordinated debentures.
These transactions, which are further described in Note 2 to our Consolidated
Financial Statements, are summarized as follows:
Loans, Net
Net of Goodwill Banking
Entity / Total Unearned Investment Purchase and Other Locations
Closing Date Assets Discount Securities Deposits Price Intangibles Acquired
------------ ------ -------- ---------- -------- ----- ----------- --------
(dollars expressed in thousands)
2006
- ----
MidAmerica National Bank
Peoria and Bloomington,
Illinois
Branch Offices (1)
November 10, 2006 $ 158,300 154,100 -- 48,200 -- 2,400 1
First Bank of Beverly Hills
Beverly Hills, California
Branch Office (2)
November 3, 2006 157,500 -- -- 156,100 -- 8,700 1
TeamCo, Inc.
Oak Lawn, Illinois
August 31, 2006 67,900 43,100 16,100 60,100 13,900 9,600 2
San Diego Community Bank
Chula Vista, California
August 15, 2006 91,700 78,600 2,800 76,100 25,500 11,800 3
Universal Premium Acceptance
Corporation
Lenexa, Kansas
May 31, 2006 152,800 149,200 -- -- 52,700 (3) 44,700 --
First Independent National Bank
Plano, Texas
May 1, 2006 68,200 59,600 800 55,500 19,200 11,800 3
Pittsfield Community Bancorp, Inc.
Pittsfield, Illinois (4)
April 28, 2006 17,600 11,100 3,300 12,300 5,100 1,300 --
Adrian N. Baker & Company
Clayton, Missouri
March 31, 2006 3,000 -- -- -- 7,400 8,000 --
Dallas National Bank
Richardson, Texas
Branch Office (5)
January 20, 2006 1,100 100 -- 1,100 -- -- 1
First National Bank of Sachse
Sachse, Texas
January 3, 2006 76,200 49,300 14,300 66,200 20,800 12,400 1
--------- -------- -------- ---------- -------- -------- --
$ 794,300 545,100 37,300 475,600 144,600 110,700 12
========= ======== ======== ========== ======== ======== ==
2005
- ----
Northway State Bank
Grayslake, Illinois
October 31, 2005 $ 50,400 41,800 -- 45,200 10,300 5,400 1
International Bank of California
Los Angeles, California
September 30, 2005 151,600 113,500 14,700 132,100 33,700 15,800 5
Bank and Trust Company
Roodhouse, Illinois
Branch Office (6)
September 23, 2005 5,000 -- -- 5,100 -- 100 --
FBA Bancorp, Inc.
Chicago, Illinois
April 29, 2005 73,300 54,300 5,400 55,700 10,500 4,500 3
--------- -------- -------- ---------- -------- -------- --
$ 280,300 209,600 20,100 238,100 54,500 25,800 9
========= ======== ======== ========== ======== ======== ==
Loans, Net
Net of Goodwill Banking
Entity / Total Unearned Investment Purchase and Other Locations
Closing Date Assets Discount Securities Deposits Price Intangibles Acquired
------------ ------ -------- ---------- -------- ----- ----------- --------
(dollars expressed in thousands)
2004
- ----
Hillside Investors, Ltd.
Hillside, Illinois
November 30, 2004 $1,196,700 683,300 393,200 1,102,000 67,400 10,600 16
Small Business Loan
Source, Inc. (7)
Houston, Texas
August 31, 2004 47,100 24,000 -- -- 45,600 5,900 --
Continental Mortgage
Corporation - Delaware
Aurora, Illinois
July 30, 2004 140,700 73,600 44,800 104,600 4,200 (8) 2,100 2
---------- -------- -------- ---------- -------- -------- --
$1,384,500 780,900 438,000 1,206,600 117,200 18,600 18
========== ======== ======== ========== ======== ======== ==
- ---------------------------
(1) The Peoria and Bloomington, Illinois branch offices of MidAmerica National Bank, or MidAmerica, were acquired
by First Bank through a purchase of certain assets and assumption of certain liabilities of the branch
offices. Total assets consisted primarily of loans and fixed assets. Concurrent with this transaction, First
Bank closed and merged one of the former MidAmerica banking offices into an existing First Bank banking office
located in Peoria, Illinois, and, in addition, First Bank closed and merged one of its existing banking
offices into one of the former MidAmerica banking offices located in Peoria, Illinois.
(2) The Beverly Hills, California branch office of First Bank of Beverly Hills 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 certain assets.
(3) In conjunction with the acquisition of UPAC, First Bank repaid in full the outstanding senior and subordinated
notes of UPAC, including accumulated accrued and unpaid interest, totaling $125.9 million.
(4) 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.
(5) The Richardson, Texas branch office of Dallas National Bank 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 certain assets.
(6) The Roodhouse, Illinois branch of Bank and Trust Company was acquired by First Bank through a purchase of
certain assets and assumption of certain liabilities of the branch office. Total assets consisted primarily of
cash received upon assumption of the deposit liabilities.
(7) SBLS LLC, a Nevada-based limited liability company and subsidiary of First Bank, purchased substantially all
of the assets and assumed certain liabilities of Small Business Loan Source, Inc., or SBLS. In conjunction
with this transaction, on August 30, 2004, First Bank granted to First Capital America, Inc., or FCA, a
corporation owned by our Chairman and members of his immediate family, an option to purchase Membership
Interests of SBLS LLC. FCA exercised this option on June 30, 2005 and paid First Bank $7.4 million in cash. As
a result of this transaction, SBLS LLC became 51.0% owned by First Bank and 49.0% owned by FCA.
(8) In conjunction with the acquisition of Continental Mortgage Corporation - Delaware, or CMC, First Banks
redeemed in full all of the outstanding subordinated promissory notes of CMC, including accumulated accrued
and unpaid interest, totaling $4.5 million in aggregate.
Despite the significant expenses we incurred in the amalgamation of the acquired
entities into our corporate culture and systems, and in the expansion of our
organizational capabilities, the earnings of the acquired entities and the
increased net interest income resulting from the transition in the composition
of our loan and deposit portfolios have contributed to improving net income. For
the years ended December 31, 2006, 2005 and 2004, net income was $111.7 million,
$96.9 million and $82.9 million, respectively. Additional information pertaining
to our business and results of operations is included in the information set
forth in pages 18 through 51 of Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and in pages 101 through 102 of
"Note 20 to our Consolidated Financial Statements," and is incorporated herein
by reference. Although we may encounter certain short-term adverse effects on
our operating results associated with acquisitions, we believe the long-term
benefits of our acquisition program will exceed the short-term issues
encountered with certain acquisitions. Accordingly, in addition to concentrating
on internal growth through continued efforts to further develop our corporate
infrastructure and product and service offerings, we expect to continue to
identify and pursue opportunities for further growth through acquisitions and
expansionary de novo branch activities.
Pending Acquisitions. On November 7, 2006, we entered into an Agreement and Plan
of Reorganization providing for the acquisition of Royal Oaks Bancshares, Inc.
and its wholly owned banking subsidiary, Royal Oaks Bank, ssb (collectively,
Royal Oaks). Royal Oaks was headquartered in Houston, Texas and operated five
banking offices in the Houston area and was in the process of opening an
additional de novo branch banking office, which is now scheduled to open in the
second quarter of 2007. As further described in Note 25 to our Consolidated
Financial Statements, we completed our acquisition of Royal Oaks on February 28,
2007.
De Novo Branch Offices. During the three years ended December 31, 2006, we
opened the following five de novo branch offices:
Branch Office Location Date Opened
---------------------- -----------
Farmington, Missouri January 18, 2005
San Diego, California August 16, 2004
McKinney, Texas July 19, 2004
Wildwood, Missouri February 20, 2004
Houston, Texas February 9, 2004
Acquisition and Integration Costs. Certain costs associated with our
acquisitions are accrued as of the respective consummation dates, including
costs that we incur related 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, and costs relating
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. A
summary of the cumulative acquisition and integration costs attributable to our
acquisitions, which were accrued as of the consummation dates of the respective
acquisition, are summarized in Note 2 to our Consolidated Financial Statements.
These acquisition and integration costs are reflected in accrued and other
liabilities in our consolidated balance sheets. As the obligation to make
payments under these agreements is accrued at the consummation date, such
payments do not have any impact on our consolidated statements of income. We
also incur integration costs associated with our acquisitions that are expensed
in our consolidated statements of income that relate principally to additional
costs incurred in conjunction with the information technology conversions of the
respective entities, as further discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Comparison of
Results of Operations for 2006 and 2005, and --Comparison of Results of
Operations for 2005 and 2004."
Lending Activities. As further discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Loans and Allowance
for Loan Losses," our business development efforts are primarily focused on the
origination of the following general loan types: commercial, financial and
agricultural loans; real estate construction and land development loans;
commercial real estate mortgage loans; and to a lesser extent, residential real
estate mortgage loans. Our lending strategy emphasizes quality, growth and
diversification. Throughout our organization, we employ a common credit
underwriting policy. In addition to underwriting based on estimates and
projection of financial strength, collateral values and future cash flows, most
loans to borrowing entities other than individuals require the guarantee of the
parent company or entity sponsor, or in the case of smaller entities, the
personal guarantees of the principals. Our enhanced business development
resources continue to assist in the realignment of certain acquired loan
portfolios, which were skewed toward loan types that reflected the abilities and
experiences of the management members of the acquired entities. In order to
achieve a more diversified portfolio, to address asset-quality issues in the
portfolios and to achieve a higher interest yield on our loan portfolio, we
reduced a substantial portion of the loans that were acquired in certain
acquisitions through payments, refinancing with other financial institutions,
charge-offs and, in certain instances, sales of loans. As the acquired loan
portfolios decrease, we attempt to replenish them with higher yielding loans
that are internally generated by our business development function. With our
acquisitions, we have expanded our business development function into the newly
acquired market areas. We also continued to grow through internal growth.
Consequently, in spite of relatively large reductions in certain acquired
portfolios, our aggregate loan portfolio, net of unearned discount, increased
41.7% from $5.41 billion at December 31, 2001, to $7.67 billion at December 31,
2006.
In addition to restructuring our loan portfolio, we also have experienced a
change in the composition of our deposit base, through deposit development
programs and the mix of deposits acquired through our recent acquisitions. A
majority of our deposit development programs are directed toward increased
transaction accounts, such as demand and savings accounts. However, we have
recently experienced increased time deposits, coupled with higher deposit rates
paid on certain products, resulting from the highly competitive rate market. We
have also expanded our development of multiple account relationships with
individual customers by broadening our relationship with existing customers and
the products provided to our customers. This growth is accomplished by
cross-selling various products and services, packaging account types and
offering incentives to deposit customers on other deposit or non-deposit
services. The expansion of our small business market lending provides additional
opportunities to cross sell other financial services such as investment, trust,
insurance and traditional personal banking services to small business owners. In
addition, commercial borrowers are encouraged to maintain their operating
deposit accounts with us. Our time deposits have increased to $3.83 billion at
December 31, 2006, representing 45.3% of total deposits, as compared to $3.15
billion, or 41.8% of total deposits, at December 31, 2005. Our demand and
savings accounts have increased to $4.62 billion at December 31, 2006,
representing 54.7% of total deposits, as compared to $4.39 billion, or 58.2% of
total deposits, at December 31, 2005, reflecting our continued focus on
transactional accounts and full service deposit relationships with our
customers.
Commercial, Financial and Agricultural. Our commercial, financial and
agricultural loan portfolio, including lease financing, was $1.93 billion, or
25.2% of total loans, at December 31, 2006, compared to $1.62 billion, or 23.1%
of total loans, at December 31, 2005. The primary component of commercial,
financial and agricultural loans is commercial loans, which are made based on
the borrowers' general credit strength and ability to generate cash flows for
repayment from income sources. Most of these loans are made on a secured basis,
generally involving the use of company equipment, inventory and/or accounts
receivable, and, from time to time, real estate, as collateral. Regardless of
collateral, substantial emphasis is placed on the borrowers' ability to generate
cash flow sufficient to operate the business and provide coverage of debt
servicing requirements. Commercial loans are frequently renewable annually,
although some terms may be as long as five years. These loans typically require
the borrower to maintain certain operating covenants appropriate for the
specific business, such as profitability, debt service coverage and current
asset and leverage ratios, which are generally reported and monitored on a
quarterly basis and subject to more detailed annual reviews. Commercial loans
are made to customers primarily located in First Bank's geographic trade areas
of California, Illinois, Missouri and Texas who are engaged in manufacturing,
retailing, wholesaling and service businesses. This portfolio is not
concentrated in large specific industry segments that are characterized by
sufficient homogeneity that would result in significant concentrations of credit
exposure. Rather, it is a highly diversified portfolio that encompasses many
industry segments. Within both our real estate and commercial lending
portfolios, we strive for the highest degree of diversity that is practicable.
We also emphasize the development of other service relationships, particularly
deposit accounts, with our commercial borrowers.
Real Estate Construction and Development. Our real estate construction and land
development loan portfolio was $1.83 billion, or 23.9% of total loans, at
December 31, 2006, compared to $1.56 billion, or 22.3% of total loans, at
December 31, 2005. Real estate construction and land development loans include
commitments for construction of both residential and commercial properties.
Commercial real estate projects often require commitments for permanent
financing from other lenders upon completion of the project and, more typically,
may include a short-term amortizing component of the financing from the bank.
Commitments for construction of multi-tenant commercial and retail projects
generally require lease commitments from a substantial primary tenant or tenants
prior to commencement of construction. We typically engage in multi-phase,
multi-tenant projects, as opposed to large vertical projects, that allow us to
complete the projects in phases and limit the number of tenant building starts
based upon successful lease and/or sale of the tenant units. We finance some
projects for borrowers whose home office is located within our trade area but
the particular project may be outside our normal trade area. Although we
generally do not engage in developing commercial and residential construction
lending business outside of our trade area, certain loans acquired in recent
acquisitions have been related to projects outside our trade area. Residential
real estate construction and development loans are made based on the cost of
land acquisition and development, as well as the construction of the residential
units. Although we finance the cost of display units and units held for sale, a
substantial portion of the loans for individual residential units have purchase
commitments prior to funding. Residential condominium projects are funded as the
building construction progresses, but funding of unit finishing is generally
based on firm sales contracts.
Commercial Real Estate. Our commercial real estate loan portfolio was $2.20
billion, or 28.7% of total loans, at December 31, 2006, compared to $2.11
billion, or 30.1% of total loans, at December 31, 2005. Commercial real estate
loans include loans for which the intended source of repayment is rental and
other income from the real estate. This includes commercial real estate
developed for lease to third parties as well as the owner's occupancy. The
underwriting of owner occupied commercial real estate loans generally follows
the procedures for commercial lending described above, except that the
collateral is real estate, and the loan term may be longer. The primary emphasis
in underwriting loans for which the source of repayment is the performance of
the collateral is the projected cash flow from the real estate and its adequacy
to cover the operating costs of the project and the debt service requirements.
Secondary emphasis is placed on the appraised value of the real estate, with the
requirement that the appraised liquidation value of the collateral must be
adequate to repay the debt and related interest in the event the cash flow
becomes insufficient to service the debt. Generally, underwriting terms require
the loan principal not to exceed 80% of the appraised value of the collateral
and the loan maturity not to exceed ten years. Commercial real estate loans are
made for commercial office space, retail properties, hospitality, industrial and
warehouse facilities and recreational properties. We rarely finance commercial
real estate or rental properties that do not have lease commitments for a
majority of the rentable space.
Residential Real Estate Mortgage. Our residential real estate mortgage loan
portfolio was $1.27 billion, or 16.6% of total loans, at December 31, 2006,
compared to $1.21 billion, or 17.3% of total loans, at December 31, 2005.
Residential real estate mortgage loans are primarily loans secured by
single-family, owner-occupied properties. These loans include both adjustable
rate and fixed rate mortgage loans. Although we typically originate residential
real estate mortgage loans for sale in the secondary mortgage market in the form
of a mortgage-backed security or to various private third-party investors, from
time-to-time, we retain certain residential mortgage loans in our loan portfolio
as directed by management's business strategies. These strategies are reflected
in the expansion of our one-to-four family residential real estate mortgage
loans, excluding loans held for sale, since 2004, with a home equity product
line campaign in mid-2004 and our business strategy decision in mid-2003 to
retain a portion of our new loan production in our real estate mortgage
portfolio to provide more diversification within our loan portfolio and to
compensate for continued weak loan demand in other sectors of our loan portfolio
at that time. In addition, in the third quarter of 2005, we began retaining
additional mortgage loan production in our residential real estate mortgage
portfolio, including 15-year fixed rate, conforming conventional adjustable rate
mortgages and other similar products, which contributed to an increase in this
portion of our loan portfolio and represented a strategy we employed throughout
the first and second quarters of 2006 prior to reverting to our longer-term
business strategy of selling the majority of our mortgage loan production in the
secondary mortgage market.
Nonperforming Loans. Our nonperforming loans were $48.7 million, $97.2 million
and $85.8 million at December 31, 2006, 2005 and 2004, respectively,
representing 0.64%, 1.38% and 1.40%, respectively, of total loans, as further
discussed under "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Loans and Allowance for Loan Losses." These levels of
nonperforming loans, particularly in 2004 and 2005, are higher than our
historical averages which we attribute to our acquisitions, growth within our
loan portfolio and increased commercial lending activities. During 2004 and
2005, our commercial real estate portfolio experienced increasing amounts of
nonperforming loans, largely attributable to the problem loans acquired with our
acquisition of CIB Bank in November 2004, as further discussed below. During
2004, 2005 and 2006, we also experienced increasing amounts of nonperforming
loans within our real estate construction and development loan portfolio,
reflective of current market conditions surrounding land acquisition and
development loans, including slowdowns in unit sales.
Although the level of nonperforming loans associated with our acquisitions
completed in 2006 and 2005 was not significant, the level of nonperforming loans
associated with our acquisitions completed in 2004 was substantial. We had been
experiencing higher levels of nonperforming loans during 2002 and 2003,
primarily attributable to general economic conditions, additional problems
identified in certain acquired loan portfolios and the continued deterioration
of the portfolio of leases in our commercial leasing portfolio, particularly the
segment related to the airline industry following the events of September 11,
2001. Throughout 2004, we had begun to exhibit a substantial improvement in the
level of our nonperforming loans, primarily as a result of significant loan
payoffs, the sale of a portion of our commercial leasing portfolio in mid-2004,
the sale of certain acquired nonperforming loans, the strengthening of certain
loans and our continued efforts to improve asset quality. However, we
experienced a significant increase in the level of our nonperforming loans
associated with our acquisition of CIB Bank in November 2004. As of the date of
the acquisition, CIB Bank had $60.3 million of nonperforming loans, which
represented approximately 8.8% of CIB Bank's total loan portfolio, largely
attributable to a significant concentration in commercial real estate loans
outstanding to a relatively small number of borrowers. When we analyzed the CIB
Bank acquisition during our due diligence process prior to the acquisition, we
determined the level of problem loans that we expected to acquire with this
acquisition would, when combined with our existing portfolio of such loans,
result in a level of problem loans that was unacceptable to management.
Consequently, during the fourth quarter of 2004, we completed the sale of
approximately $50.2 million of problem loans, including $19.1 million of
nonperforming loans, which include loans on nonaccrual status and restructured
loans. We had anticipated these problems in negotiating the acquisition price of
CIB Bank. While CIB Bank had utilized a long-term workout strategy to address
certain nonperforming assets, our strategy was to address problem assets in a
more accelerated manner. Accordingly, we elected to hold for sale a portion of
the problem assets acquired from CIB Bank. In December 2004, we transferred
$18.3 million of CIB Bank's nonperforming loans to loans held for sale and
recorded a corresponding charge of $5.4 million to our allowance for loan losses
to reduce the loans held for sale to their estimated fair value, net of costs,
that was expected to be realized at the time of the sale, resulting in $12.9
million of loans classified as held for sale at December 31, 2004, that were
subsequently sold in early 2005, as further discussed below. Furthermore, we
increased the allowance for loan losses by $15.7 million to reflect the
additional reserves associated with the loans transferred to loans held for sale
and the application of our loss factors to CIB Bank's loan portfolio risk
ratings. This reflects our use of strategies for more rapid disposition and
recovery of certain acquired classified and nonperforming assets. The level of
nonperforming loans related to our CIB Bank acquisition declined to $50.5
million at December 31, 2004, representing 58.8% of our total nonperforming
loans. As further described in Note 2 to our Consolidated Financial Statements,
we completed the sale of the loans during the first and second quarters of 2005.
As a result of loan payoffs prior to the sales and sales prices significantly in
excess of the original third-party bid estimates for certain loans held for
sale, we recorded a $10.0 million reduction in goodwill to adjust loans held for
sale, net of the related tax effect.
During 2005, we experienced continued improvement in our portfolio of
nonperforming loans through the first nine months of the year, however, further
deterioration of certain acquired loans in the fourth quarter of 2005
contributed to an increase in nonperforming loans for 2005 and the decision to
sell certain loans and transfer them to our loans held for sale portfolio. This
increase was primarily associated with the deterioration of a few large credit
relationships during the fourth quarter of 2005, including two relationships
totaling $31.5 million. As a result, on December 31, 2005, we recognized $7.6
million of loan charge-offs in conjunction with the transfer of approximately
$59.7 million of nonperforming loans to our held for sale portfolio (of which
$6.0 million in charge-offs and $56.1 million of loans transferred were
associated with the CIB Bank acquired portfolio). These loans included the two
large credit relationships that had deteriorated during the fourth quarter of
2005 and one credit relationship of $12.4 million that was included in
nonperforming loans at December 31, 2004 with a value of $14.5 million, all of
which were acquired in the purchase of CIB Bank. The $59.7 million represented
the estimated fair value, net of costs, that was expected to be realized at the
time of sale. The overall increase in nonperforming loans in 2005 was partially
offset by significant improvement of 21.0% in the level of nonperforming loans
during the first three quarters of 2005 resulting from the sale of certain
acquired nonperforming loans, strengthening of certain loans, and loan payoffs
and/or external refinancing of various credits. A portion of the loan payoffs
and sales during the first quarter of 2005 pertaining to certain acquired
nonperforming loans that were classified as loans held for sale as of December
31, 2004 contributed to a reallocation of the purchase price on our acquisition
of CIB Bank, as previously discussed and further described in Note 2 to our
Consolidated Financial Statements. The level of nonperforming loans related to
our CIB Bank acquisition, which had declined to $32.8 million at the end of the
third quarter of 2005 from sales of loans and additional loan payoffs, increased
to $55.0 million, or 56.6% of nonperforming loans, at December 31, 2005 as a
result of the further deterioration of the few credit relationships in the
fourth quarter of 2005, as previously mentioned. Through loan payoffs, the sale
of certain remaining nonperforming loans and continued aggressive collection
efforts, we did not have any nonperforming loans associated with our acquisition
of CIB Bank at December 31, 2006, as further discussed below.
In January 2006, we received a payoff on one of the nonperforming loans in our
held for sale portfolio, reducing the held for sale portfolio by $12.4 million
and resulting in the recognition of a $5.0 million loan recovery. In addition,
in March 2006, we completed the sale of a majority of the remaining nonaccrual
loans in our held for sale portfolio, reducing the held for sale portfolio by
$32.5 million, and in September 2006, we recorded a $1.1 million write-down on a
remaining nonperforming loan in our held for sale portfolio and transferred the
loan at its estimated fair value of $13.5 million back to our loan portfolio. We
subsequently received a payoff on this nonperforming loan for the amount of the
adjusted carrying value in December 2006. Furthermore, in the fourth quarter of
2006, we elected to sell certain nonperforming loans and recognized loan
charge-offs of $2.3 million in conjunction with the transfer of $32.6 million of
certain loans to our held for sale portfolio prior to their sale, including
$14.8 million of nonperforming loans. We completed the sale of these loans held
for sale in December 2006 and recognized a pre-tax gain of $3.7 million. These
reductions in loans during 2006 were partially offset by deterioration within
our one-to-four family residential loan portfolio primarily due to current
market conditions, as well as several credit relationships, primarily within our
residential development and construction portfolio in late 2006, that were
placed on nonaccrual status during 2006.
We believe the levels of our nonperforming assets, while largely attributable to
our acquisitions and the overall risk in our loan portfolio, are also reflective
of cyclical trends experienced within the banking industry as a result of
economic conditions within our market areas. During 2006, we successfully
reduced our nonperforming loans by $48.5 million, or 49.9%, and we will continue
our efforts to further reduce the overall level of these assets through an
ongoing process of problem loan work-outs, loan payoffs and external
refinancings, and possibly additional sales of certain nonperforming loans.
Loans past due 90 days or more and still accruing interest remained relatively
flat, totaling $5.7 million at December 31, 2006, compared to $5.6 million at
December 31, 2005, but showed significant improvement during 2005, decreasing
$23.1 million from $28.7 million at December 31, 2004. Loan charge-offs, net of
recoveries, decreased to $6.8 million for 2006, from $13.4 million for 2005, and
$24.8 million for 2004, as further discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Loans and Allowance
for Loan Losses."
SBLS LLC's purchase of substantially all of the assets of SBLS in August 2004
resulted in an increase to nonperforming loans of $8.8 million, which
represented approximately 36.7% of SBLS's loan portfolio at the time of
acquisition. SBLS LLC held a significant concentration of assets associated with
the shrimping vessel industry, reflected in both loans and other repossessed
assets. The shrimping vessel industry concentration and its depressed status
were reflected in our net asset purchase price. SBLS LLC's asset concentration
associated with the distressed shrimping vessels industry further deteriorated
in 2005 due to higher interest rates, increased fuel costs, and the physical
damage to several of the vessels by Hurricane Katrina. As a result, the SBA
agreed to repurchase SBLS LLC's entire shrimping vessels portfolio, and these
loans were placed in liquidation status resulting in the recognition of
substantial loan losses in 2005. Throughout 2006, the majority of these loans
have been fully liquidated via completion of the sale of the underlying
collateral and/or the collection of insurance proceeds associated with vessels
that were deemed to be irreparable. SBLS LLC's nonperforming loans have declined
substantially since the date of acquisition to $1.6 million at December 31,
2006, from $1.8 million and $6.2 million at December 31, 2005 and 2004,
respectively. SBLS LLC's net loan charge-offs were $256,000 for 2006, compared
to $3.8 million in 2005 and $690,000 in 2004.
Market Areas. As of December 31, 2006, First Bank's 187 banking facilities were
located in California, Illinois, Missouri and Texas. First Bank operates in the
St. Louis metropolitan area, in eastern Missouri and throughout Illinois,
including Chicago. First Bank also operates in southern California, including
San Diego and the greater Los Angeles metropolitan area, including Ventura
County, Riverside County and Orange County; in Santa Barbara County; in northern
California, including the greater San Francisco, San Jose and Sacramento
metropolitan areas; and in Texas in the Houston and Dallas metropolitan areas.
Our larger networks of branch offices are located in high growth markets,
specifically the Los Angeles, Chicago and St. Louis metropolitan areas.
The following table lists the geographic market areas in which First Bank
operates, total deposits, deposits as a percentage of total deposits and the
number of locations as of December 31, 2006:
Total Deposits Number
Deposits as a Percentage of
Geographic Area (in millions) of Total Deposits Locations
--------------- ------------- ----------------- ---------
Southern California.................................................. $ 2,128.9 25.2% 40
Northern Illinois.................................................... 1,603.7 19.0 36
St. Louis, Missouri metropolitan area................................ 1,530.3 18.1 31
Northern California.................................................. 1,163.2 13.8 17
Central and southern Illinois........................................ 1,080.8 12.8 34
Texas................................................................ 514.1 6.1 15
Missouri (excluding the St. Louis metropolitan area)................. 422.1 5.0 14
--------- ----- ---
Total deposits....................................................... $ 8,443.1 100.0% 187
========= ===== ===
Competition and Branch Banking. The activities in which First Bank engages are
highly competitive. Those activities and the geographic markets served primarily
involve competition with other banks, some of which are affiliated with large
regional or national holding companies, and other financial services companies.
Financial institutions compete based upon interest rates offered on deposit
accounts and other credit and service charges, the types of products and quality
of services rendered, the convenience of branch facilities, interest rates
charged on loans and, in the case of loans to large commercial borrowers,
relative lending limits.
Our principal competitors include other commercial banks, savings banks, savings
and loan associations, mutual funds, finance companies, including insurance
premium financing companies, trust companies, insurance brokerage companies,
credit unions, mortgage companies, leasing companies, private issuers of debt
obligations and suppliers of other investment alternatives, such as securities
firms and financial holding companies. Many of our non-bank competitors are not
subject to the same degree of regulation as that imposed on bank holding
companies, federally insured banks and national or state chartered banks. As a
result, such non-bank competitors have advantages over us in providing certain
services. We also compete with major multi-bank holding companies, which are
significantly larger than us and have greater access to capital and other
resources.
We believe we will also continue to face competition in the acquisition of
independent banks, savings banks, branch offices and other financial companies.
We often compete with larger financial institutions that have substantially
greater resources available for making acquisitions.
Subject to regulatory approval, commercial banks operating in California,
Illinois, Missouri and Texas are permitted to establish branches throughout
their respective states, thereby creating the potential for additional
competition in our service areas.
Supervision and Regulation
General. Along with First Bank, we are extensively regulated by Federal and
state laws and regulations which are designed to protect depositors of First
Bank and the safety and soundness of the U.S. banking system, not our
stockholders. To the extent this discussion refers to statutory or regulatory
provisions, it is not intended to summarize all such provisions and is qualified
in its entirety by reference to the relevant statutory and regulatory
provisions. Changes in applicable laws, regulations or regulatory policies may
have a material effect on our business and prospects. We are unable to predict
the nature or extent of the effects on our business and earnings that new
federal and state legislation or regulation may have. The enactment of the
legislation described below has significantly affected the banking industry
generally and is likely to have ongoing effects on First Bank and us in the
future.
As a registered bank holding company under the Bank Holding Company Act of 1956,
as amended, we are subject to regulation and supervision of the Board of
Governors of the Federal Reserve System, or Federal Reserve. We file annual
reports with the Federal Reserve and provide to the Federal Reserve additional
information as it may require.
Since First Bank is an institution chartered by the State of Missouri and a
member of the Federal Reserve, both the State of Missouri Division of Finance
and the Federal Reserve supervise, regulate and examine First Bank. First Bank
is also regulated by the Federal Deposit Insurance Corporation, or FDIC, which
provides deposit insurance of up to $100,000 for each insured depositor.
Bank Holding Company Regulation. The activities of bank holding companies are
generally limited to the business of banking, managing or controlling banks, and
other activities that the Federal Reserve has determined to be so closely
related to banking or managing or controlling banks as to the proper incident
thereto. In addition, under the Gramm-Leach-Bliley Act, or GLB Act, which was
enacted in November 1999 and is further discussed below, a bank holding company,
whose control depository institutions are "well-capitalized" and "well-managed"
(as defined in Federal Banking Regulations), and which obtains "satisfactory"
Community Reinvestment Act (discussed briefly below) ratings, may declare itself
to be a "financial holding company" and engage in a broader range of activities.
As of this date, we are not a "financial holding company."
We are also subject to capital requirements applied on a consolidated basis,
which are substantially similar to those required of First Bank (briefly
summarized below). The Bank Holding Company Act also requires a bank holding
company to obtain approval from the Federal Reserve before:
>> acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls a majority of such
shares);
>> acquiring all or substantially all of the assets of another bank
or bank holding company; or
>> merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or consolidation
that would have a substantially anti-competitive result, unless the
anti-competitive effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to
be served. The Federal Reserve also considers capital adequacy and other
financial and managerial factors in reviewing acquisitions and mergers.
Safety and Soundness and Similar Regulations. We are subject to various
regulations and regulatory policies directed at the financial soundness of First
Bank. These include, but are not limited to, the Federal Reserve's source of
strength policy, which obligates a bank holding company such as us to provide
financial and managerial strength to its subsidiary banks; restrictions on the
nature and size of certain affiliate transactions between a bank holding company
and its subsidiary depository institutions and restrictions on extensions of
credit by its subsidiary banks to executive officers, directors, principal
stockholders and the related interests of such persons.
Regulatory Capital Standards. The federal bank regulatory agencies have adopted
substantially similar risk-based and leverage capital guidelines for banking
organizations. Risk-based capital ratios are determined by classifying assets
and specified off-balance sheet obligations and financial instruments into
weighted categories, with higher levels of capital being required for categories
deemed to represent greater risk. Federal Reserve policy also provides that
banking organizations generally, and particularly those that are experiencing
internal growth or actively making acquisitions, are expected to maintain
capital positions that are substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Under the risk-based capital standard, the minimum consolidated ratio of total
capital to risk-adjusted assets required for bank holding companies is 8%. At
least one-half of the total capital must be composed of common equity, retained
earnings, qualifying noncumulative perpetual preferred stock, a limited amount
of qualifying cumulative perpetual preferred stock and minority interests in the
equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets, which amount is referred to as
"Tier I capital." The remainder may consist of qualifying hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier I
capital and a limited amount of loan and lease loss reserves, which amount,
together with Tier I capital, is referred to as "Total Risk-Based Capital."
In addition to the risk-based standard, we are subject to minimum requirements
with respect to the ratio of our Tier I capital to our average assets less
goodwill and certain other intangible assets, or the Leverage Ratio. Applicable
requirements provide for a minimum Leverage Ratio of 3% for bank holding
companies that have the highest supervisory rating, while all other bank holding
companies must maintain a minimum Leverage Ratio of at least 4% to 5%. The
Office of the Comptroller of the Currency and the FDIC have established capital
requirements for banks under their respective jurisdictions that are consistent
with those imposed by the Federal Reserve on bank holding companies.
Information regarding our capital levels and First Bank's capital levels under
the federal capital requirements is contained in Note 21 to our Consolidated
Financial Statements appearing elsewhere in this report. As further described in
Note 21 to our Consolidated Financial Statements, on March 1, 2005, the Federal
Reserve adopted a final rule, Risk-Based Capital Standards: Trust Preferred
Securities and the Definition of Capital, which allows for the continued
inclusion, on a limited basis, of trust preferred securities in Tier I capital.
Under the final rule, trust preferred securities and other restricted core
capital elements will be subject to stricter quantitative limits. The Federal
Reserve's final rule limits restricted core capital elements to 25% of the sum
of all core capital elements, including restricted core capital elements, net of
goodwill less any associated deferred tax liability.
Prompt Corrective Action. The FDIC Improvement Act requires the federal bank
regulatory agencies to take prompt corrective action in respect to depository
institutions that do not meet minimum capital requirements. A depository
institution's status under the prompt corrective action provisions depends upon
how its capital levels compare to various relevant capital measures and other
factors as established by regulation.
The federal regulatory agencies have adopted regulations establishing relevant
capital measures and relevant capital levels. Under the regulations, a bank will
be:
>> "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier I capital ratio of 6% or greater and a
Leverage Ratio of 5% or greater and is not subject to any order
or written directive by any such regulatory authority to meet and
maintain a specific capital level for any capital measure;
>> "adequately capitalized" if it has a total risk-based capital
ratio of 8% or greater, a Tier I capital ratio of 4% or greater
and a Leverage Ratio of 4% or greater (3% in certain
circumstances);
>> "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I capital ratio of less than 4% or a
Leverage Ratio of less than 4% (3% in certain circumstances);
>> "significantly undercapitalized" if it has a total risk-based
capital ratio of less than 6%, a Tier I capital ratio of less
than 3% or a Leverage Ratio of less than 3%; and
>> "critically undercapitalized" if its tangible equity is equal to
or less than 2% of its average quarterly tangible assets.
Under certain circumstances, a depository institution's primary federal
regulatory agency may use its authority to lower the institution's capital
category. The banking agencies are permitted to establish individual minimum
capital requirements exceeding the general requirements described above.
Generally, failing to maintain the status of "well capitalized" or "adequately
capitalized" subjects a bank to restrictions and limitations on its business
that become progressively more severe as the capital levels decrease.
A bank is prohibited from making any capital distribution (including payment of
a dividend) or paying any management fee to its holding company if the bank
would thereafter be "undercapitalized." Limitations exist for "undercapitalized"
depository institutions regarding, among other things, asset growth,
acquisitions, branching, new lines of business, acceptance of brokered deposits
and borrowings from the Federal Reserve System. These institutions are also
required to submit a capital restoration plan that includes a guarantee from the
institution's holding company. "Significantly undercapitalized" depository
institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become "adequately
capitalized," requirements to reduce total assets and cessation of receipt of
deposits from correspondent banks. The appointment of a receiver or conservator
may be required for "critically undercapitalized" institutions.
Dividends. Our primary source of funds in the future is the dividends, if any,
paid by First Bank. The ability of First Bank to pay dividends is limited by
federal laws, by regulations promulgated by the bank regulatory agencies and by
principles of prudent bank management. Under the most restrictive of these
requirements, the future payment of dividends from First Bank is limited to
approximately $135.0 million at December 31, 2006, unless prior permission of
the regulatory authorities is obtained.
Customer Protection. First Bank is also subject to consumer laws and regulations
intended to protect consumers in transactions with depository institutions, as
well as other laws or regulations affecting customers of financial institutions
generally. These laws and regulations mandate various disclosure requirements
and substantively regulate the manner in which financial institutions must deal
with their customers. First Bank must comply with numerous regulations in this
regard and is subject to periodic examinations with respect to its compliance
with the requirements.
Community Reinvestment Act. The Community Reinvestment Act of 1977 requires
that, in connection with examinations of financial institutions within their
jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those financial institutions. These factors are also
considered in evaluating mergers, acquisitions and other applications to expand.
The Gramm-Leach-Bliley Act. The GLB Act, enacted in 1999, amended and repealed
portions of the Glass-Steagall Act and other federal laws restricting the
ability of bank holding companies, securities firms and insurance companies to
affiliate with each other and to enter new lines of business. The GLB Act
established a comprehensive framework to permit financial companies to expand
their activities, including through such affiliations, and to modify the federal
regulatory structure governing some financial services activities. This
authority of financial firms to broaden the types of financial services offered
to customers and to affiliates with other types of financial services companies
may lead to further consolidation in the financial services industry. However,
it may lead to additional competition in the markets in which we operate by
allowing new entrants into various segments of those markets that are not the
traditional competitors in those segments. Furthermore, the authority granted by
the GLB Act may encourage the growth of larger competitors.
The GLB Act also adopted consumer privacy safeguards requiring financial
services providers to disclose their policies regarding the privacy of customer
information to their customers and, subject to some exceptions, allowing
customers to "opt out" of policies permitting such companies to disclose
confidential financial information to non-affiliated third parties.
The Sarbanes-Oxley Act. In July 2002, the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley, was enacted. Sarbanes-Oxley imposes a myriad of corporate
governance and accounting measures designed to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of disclosures under securities laws. All
public companies that file periodic reports with the Securities and Exchange
Commission, or SEC, are affected by Sarbanes-Oxley.
Sarbanes-Oxley addresses, among other matters: (i) the creation of an
independent accounting oversight board to oversee the audit of public companies
and auditors who perform such audits; (ii) auditor independence provisions which
restrict non-audit services that independent accountants may provide to their
audit clients; (iii) additional corporate governance and responsibility measures
which require the chief executive officer and chief financial officer to certify
financial statements, to forfeit salary and bonuses in certain situations, and
protect whistleblowers and informants; (iv) expansion of the audit committee's
authority and responsibility by requiring that the audit committee have direct
control of the outside auditor, be able to hire and fire the auditor, and
approve all non-audit services; (v) requirements that audit committee members be
independent; (vi) disclosure of a code of ethics; and (vii) enhanced penalties
for fraud and other violations. The provisions of Sarbanes-Oxley also require
that management assess the effectiveness of internal control over financial
reporting and that the independent auditor issue a report on management's
attestation on internal control over financial reporting. However, because we
are a non-accelerated filer, this provision of Sarbanes-Oxley will not become
effective for us until the fiscal year ended December 31, 2007.
Sarbanes-Oxley has and is expected to continue to increase the administrative
costs of doing business for public companies; however, we cannot predict the
significance of such increase.
The USA Patriot Act. The Patriot Act was enacted in October 2001 in response to
the terrorist attacks in New York, Pennsylvania and Washington, D.C. that
occurred on September 11, 2001. The Patriot Act is intended to strengthen the
ability of U.S. law enforcement agencies and the intelligence communities to
work cohesively to combat terrorism on a variety of fronts. The potential impact
of the Patriot Act on financial institutions of all kinds is significant and
wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and imposes various regulations, including standards
for verifying client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering. The Patriot Act is expected to increase the administrative costs and
burden of doing business for financial institutions; however, while we cannot
predict the full impact of such an increase, we do not expect it to differ from
that of other financial institutions.
Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System.
The Federal Reserve requires all depository institutions to maintain reserves
against their transaction accounts and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements. Institutions are authorized to borrow
from the Federal Reserve Bank discount window, but Federal Reserve regulations
require institutions to exhaust other reasonable alternative sources of funds,
including advances from Federal Home Loan Banks, before borrowing from the
Federal Reserve Bank.
First Bank is a member of the Federal Reserve System and the Federal Home Loan
Bank System. As a member, First Bank is required to hold investments in regional
banks within those systems. First Bank was in compliance with these requirements
at December 31, 2006, with investments of $10.3 million in stock of the Federal
Home Loan Bank of Des Moines and $24.9 million in stock of the Federal Reserve
Bank of St. Louis. First Bank also holds an investment of $784,000 in stock of
the Federal Home Loan Bank of San Francisco and $54,000 in stock of the Federal
Home Loan Bank of Dallas, as a nonmember, to collateralize certain Federal Home
Loan Bank advances assumed in conjunction with certain acquisition transactions.
Monetary Policy and Economic Control. The commercial banking business is
affected by legislation, regulatory policies and general economic conditions as
well as the monetary policies of the Federal Reserve. The instruments of
monetary policy available to the Federal Reserve include the following: (i)
changes in the discount rate on member bank borrowings and the targeted federal
funds rate; (ii) the availability of credit at the discount window; (iii) open
market operations; (iv) the imposition of changes in reserve requirements
against deposits of domestic banks; (v) the imposition of changes in reserve
requirements against deposits and assets of foreign branches; and (vi) the
imposition of and changes in reserve requirements against certain borrowings by
banks and their affiliates.
These monetary policies are used in varying combinations to influence overall
growth and distributions of bank loans, investments and deposits, and this use
may affect interest rates charged on loans or paid on liabilities. The monetary
policies of the Federal Reserve have had a significant effect on the operating
results of commercial banks and are expected to do so in the future. Such
policies are influenced by various factors, including inflation, unemployment,
and short-term and long-term changes in the international trade balance and in
the fiscal policies of the U.S. Government. We cannot predict the effect that
changes in monetary policy or in the discount rate on member bank borrowings
will have on our future business and earnings or those of First Bank.
Employees
As of March 28, 2007, we employed approximately 2,930 employees. None of the
employees are subject to a collective bargaining agreement. We consider our
relationships with our employees to be good.
Item 1A. Risk Factors
Readers of our Annual Report on Form 10-K should consider the risk factors
described below in conjunction with the other information included in this
Annual Report on Form 10-K, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, our Selected Financial Data, our
Consolidated Financial Statements and the related notes thereto, and the
financial and other data contained elsewhere in this report. See also "Special
Note Regarding Forward-Looking Statements" appearing at the beginning of this
report.
We pursue acquisitions to supplement our internal growth. Acquisitions involve
varying degrees of inherent risk that could affect our profitability.
Acquisitions of other banks or businesses may expose us to asset quality
problems, higher than anticipated expenses, operational problems or unknown or
contingent liabilities of the entities we acquire. If the quantity of these
problems exceeds our estimates, our earnings and financial condition may be
adversely affected. Furthermore, acquisitions generally require integration of
the acquired entity's systems and procedures with ours in order to make the
transaction economically feasible. This integration process is complicated and
time consuming and can also be disruptive to the customers of the acquired
business. If the integration process is not conducted successfully and with
minimal effect on the business and its customers, we may not realize the
anticipated economic benefits of particular acquisitions within the expected
time frame, and we may lose higher than expected numbers of customers or
employees of the acquired business.
Competition for acquisitions in the financial services industry and our status
as a privately held company make our efforts to grow through acquisitions
difficult. We face intense competition from other financial institutions in
pursuing acquisitions, particularly related to price. Prices at which
acquisitions can be made fluctuate with market conditions. We have experienced
times during which acquisitions could not be made in specific markets at prices
our management considered acceptable, and we expect that this situation will
happen again. Because of our intention to remain a closely held company, we do
not use our common stock to make acquisitions. Our use of cash as acquisition
consideration can be a disadvantage in acquisitions relative to other
prospective acquirers in those instances in which selling stockholders desire a
tax-free exchange.
Geographic distance between our operations increases operating costs and makes
efforts to standardize operations more difficult. We operate banking offices in
California, Illinois, Missouri and Texas. The noncontiguous nature of many of
our geographic markets increases operating costs and makes it more difficult for
us to standardize our business practices and procedures. As a result of our
geographic dispersion, we face the following challenges, among others: (a)
operation of information technology and item processing functions at remote
locations including the transportation of documents and increased communications
line charges from various service providers; (b) control of correspondent
accounts, reserve balances and wire transfers in different time zones; (c)
familiarizing personnel with our business environment, banking practices and
customer requirements at geographically dispersed locations; (d) providing
administrative support, including accounting, human resources, credit
administration, loan servicing, internal audit and credit review at significant
distances; and (e) establishing and monitoring compliance with our corporate
policies and procedures in different areas.
Our emphasis on commercial real estate lending and real estate construction and
development lending has increased our credit risk. Our expanded level of
commercial real estate and construction and development lending may carry with
it greater credit risk than the credit risk associated with residential real
estate lending. A substantial portion of our loans are secured by commercial
real estate. Commercial real estate and real estate construction and development
loans were $2.20 billion and $1.83 billion, respectively, at December 31, 2006,
representing 29.6% and 24.6%, respectively, of our loan portfolio, excluding
loans held for sale. As previously discussed under "Business --Lending
Activities," during 2004 and 2005, we experienced increasing amounts of
nonperforming loans within our commercial real estate portfolio, largely
attributable to the problem loans acquired with our acquisition of CIB Bank in
November 2004, and we have taken steps to significantly reduce the level of
nonperforming loans during 2005 and 2006. During 2006, we experienced increasing
amounts of nonperforming loans within our real estate construction and
development loan portfolios, reflective of current market conditions surrounding
land acquisition and development loans, including slowdowns in unit sales.
Adverse developments affecting real estate in one or more of our markets could
further increase the credit risk associated with our loan portfolio, as further
discussed under "Business --Lending Activities" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Loans and Allowance
for Loan Losses." The Department of the Treasury, Federal Reserve and FDIC
collectively issued guidance entitled, "Concentrations in Commercial Real Estate
Lending, Sound Risk Management Practices," that focuses on financial
institutions that have high and increasing concentrations of commercial real
estate loans on their balance sheets that make them more vulnerable to cyclical
commercial real estate markets, and is intended to reinforce the institution's
risk management practices and appropriate capital levels associated with these
concentrations.
Decreases in interest rates could have a negative impact on our profitability.
Our earnings are principally dependent on our ability to generate net interest
income. Net interest income is affected by many factors that are partly or
completely beyond our control, including competition, general economic
conditions and the policies of regulatory authorities, including the monetary
policies of the Federal Reserve. Under our current interest rate risk position,
our net interest income could be negatively affected by a decline in interest
rates, as further discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Interest Rate Risk Management."
Our interest rate risk hedging activities may not effectively reduce volatility
in earnings. To offset the risks associated with the effects of changes in
market interest rates, we periodically enter into transactions designed to hedge
our interest rate risk. The accounting for such hedging activities under U.S.
generally accepted accounting principles requires our hedging instruments to be
recorded at fair value. The effect of certain of our hedging strategies may
result in volatility in our quarterly and annual earnings as interest rates
change or as the volatility in the underlying derivatives markets increases or
decreases. The volatility in earnings is primarily a result of marking to market
certain of our hedging instruments and/or modifying our overall hedge position,
as further discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Interest Rate Risk Management."
The financial services business is highly competitive, and we face competitive
disadvantages because of our size and the nature of banking regulation. We
encounter strong direct competition for deposits, loans and other financial
services in all of our market areas. Our larger competitors, which have
significantly greater resources, may have advantages over us in providing
certain services. Our principal competitors include other commercial banks,
savings banks, savings and loan associations, mutual funds, finance companies,
trust companies, insurance companies, leasing companies, credit unions, mortgage
companies, private issuers of debt obligations and suppliers of other investment
alternatives, such as securities firms and financial holding companies. Many of
our non-bank competitors are not subject to the same degree of regulation as
that imposed on bank holding companies, federally insured banks and national or
state chartered banks. As a result, such non-bank competitors may have
advantages over us in providing certain services.
We may not be able to implement technological change as effectively as our
competitors. The financial services industry has in the past and continues to
undergo rapid technological change related to delivery and availability of
products and services and operating efficiencies. In many instances
technological improvements require significant capital expenditures, and many of
our larger competitors have significantly greater resources to absorb such
capital expenditures than we may have available.
We operate in a highly regulated environment. Recently enacted, proposed and
future legislation and regulations may increase our cost of doing business. We
and our subsidiaries are subject to extensive federal and state legislation,
regulation and supervision. Recently enacted, proposed and future legislation
and regulations have had and are expected to continue to have a significant
impact on the financial services industry. Some of the legislative and
regulatory changes, including the Sarbanes-Oxley Act and the USA Patriot Act,
have and are expected to continue to increase our costs of doing business,
particularly personnel and technology expenses necessary to maintain compliance
with the expanded regulatory requirements. Additionally, the legislative and
regulatory changes could reduce our ability to compete in certain markets, as
further discussed under "Business -- Supervision and Regulation."
Item 1B. Unresolved Staff Comments
We are not an accelerated filer or a large accelerated filer, as defined in Rule
12b-2 of the Securities Exchange Act of 1934, or the Exchange Act, nor are we a
well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Consequently, Item 1B is not applicable to us.
Item 2. Properties
We own our office building, which houses our principal place of business,
located at 135 North Meramec, Clayton, Missouri 63105. The property is in good
condition and consists of approximately 60,353 square feet, of which
approximately 1,791 square feet is currently leased to others. Of our other 186
offices and four operations and administrative facilities at December 31, 2006,
105 are located in buildings that we own and 85 are located in buildings that we
lease.
We consider the properties at which we do business to be in good condition
generally and suitable for our business conducted at each location. To the
extent our properties or those acquired in connection with our acquisition of
other entities provide space in excess of that effectively utilized in the
operations of First Bank, we seek to lease or sub-lease any excess space to
third parties. Additional information regarding the premises and equipment
utilized by First Bank appears in Note 7 to our Consolidated Financial
Statements appearing elsewhere in this report.
Item 3. Legal Proceedings
In the ordinary course of business, we and our subsidiaries become involved in
legal proceedings. Our management, in consultation with legal counsel, believes
the ultimate resolution of existing proceedings will not have a material adverse
effect on our business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Information. There is no established public trading market for our common
stock. Various trusts, which were established by and are administered by and for
the benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of
his immediate family, own all of our voting stock.
Dividends. In recent years, we have paid minimal dividends on our Class A
Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible
Adjustable Rate Preferred Stock, and have paid no dividends on our Common Stock.
Our ability to pay dividends is limited by regulatory requirements and our
credit agreement, and by the receipt of dividend payments from First Bank, which
is also subject to regulatory requirements. The dividend limitations are further
described in Note 11 and Note 22 to our Consolidated Financial Statements
appearing elsewhere in this report.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below are derived from our
consolidated financial statements. This information is qualified by reference to
our Consolidated Financial Statements appearing elsewhere in this report. This
information should be read in conjunction with such Consolidated Financial
Statements, the related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
As of or For the Year Ended December 31, (1)
------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(dollars expressed in thousands, except share and per share data)
Income Statement Data:
Interest income................................... $ 646,304 493,940 394,782 391,153 425,721
Interest expense.................................. 261,862 168,259 94,767 104,026 157,551
----------- --------- --------- --------- ---------
Net interest income............................. 384,442 325,681 300,015 287,127 268,170
Provision for loan losses......................... 12,000 (4,000) 25,750 49,000 55,500
----------- --------- --------- --------- ---------
Net interest income after provision for
loan losses................................... 372,442 329,681 274,265 238,127 212,670
Noninterest income................................ 112,943 96,085 87,199 87,519 67,649
Noninterest expense............................... 319,216 277,638 233,218 226,880 210,950
----------- --------- --------- --------- ---------
Income before provision for income taxes and
minority interest in (loss) income of
subsidiary.................................... 166,169 148,128 128,246 98,766 69,369
Provision for income taxes........................ 55,062 52,509 45,338 35,955 22,771
----------- --------- --------- --------- ---------
Income before minority interest in (loss)
income of subsidiary.......................... 111,107 95,619 82,908 62,811 46,598
Minority interest in (loss) income of subsidiary.. (587) (1,287) -- -- 1,431
----------- --------- --------- --------- ---------
Net income...................................... $ 111,694 96,906 82,908 62,811 45,167
=========== ========= ========= ========= =========
Dividends:
Preferred stock................................... $ 786 786 786 786 786
Common stock...................................... -- -- -- -- --
Ratio of total dividends declared to net income... 0.70% 0.81% 0.95% 1.25% 1.74%
Per Share Data:
Earnings per common share:
Basic.......................................... $ 4,687.38 4,062.36 3,470.80 2,621.39 1,875.69
Diluted........................................ 4,630.72 4,007.46 3,421.58 2,588.31 1,853.64
Weighted average shares of common stock
outstanding.................................... 23,661 23,661 23,661 23,661 23,661
Balance Sheet Data:
Investment securities............................. $ 1,464,946 1,340,783 1,813,349 1,049,714 1,145,670
Loans, net of unearned discount................... 7,666,481 7,020,771 6,137,968 5,328,075 5,432,588
Total assets...................................... 10,158,714 9,170,333 8,732,841 7,106,940 7,351,177
Total deposits.................................... 8,443,086 7,541,831 7,151,970 5,961,615 6,172,820
Notes payable..................................... 65,000 100,000 15,000 17,000 7,000
Subordinated debentures........................... 297,966 215,461 273,300 209,320 278,389
Common stockholders' equity....................... 787,372 665,875 587,830 536,752 505,978
Total stockholders' equity........................ 800,435 678,938 600,893 549,815 519,041
Earnings Ratios:
Return on average assets.......................... 1.16% 1.10% 1.10% 0.87% 0.64%
Return on average stockholders' equity............ 15.26 15.11 14.44 11.68 9.44
Efficiency ratio (2).............................. 64.18 65.83 60.23 60.56 62.82
Net interest margin (3)........................... 4.36 4.01 4.36 4.45 4.23
Asset Quality Ratios:
Allowance for loan losses to loans................ 1.90 1.93 2.46 2.19 1.83
Nonperforming loans to loans (4).................. 0.64 1.38 1.40 1.41 1.38
Allowance for loan losses to nonperforming
loans (4)....................................... 299.05 139.23 175.65 154.52 132.29
Nonperforming assets to loans and
other real estate (5)........................... 0.72 1.41 1.46 1.62 1.52
Net loan charge-offs to average loans............. 0.09 0.21 0.45 0.61 1.01
Capital Ratios:
Average total stockholders' equity to
average total assets............................ 7.61 7.28 7.61 7.48 6.78
Total risk-based capital ratio.................... 10.25 10.14 10.61 10.27 10.68
Leverage ratio.................................... 8.13 8.13 7.89 7.62 6.45
- ---------------------------------
(1) The comparability of the selected data presented is affected by the acquisitions of 12 banks, an insurance
brokerage agency, an insurance premium financing company, a loan origination business and seven branch offices
during the five-year period ended December 31, 2006. The selected data includes the financial position and
results of operations of each acquired entity only for the periods subsequent to its respective date of
acquisition.
(2) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income.
(3) Net interest rate margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average
interest-earning assets.
(4) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms.
(5) Nonperforming assets consist of nonperforming loans and other real estate.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following presents management's discussion and analysis of our financial
condition and results of operations as of the dates and for the periods
indicated. This discussion should be read in conjunction with our "Selected
Financial Data," our Consolidated Financial Statements and the related notes
thereto, and the other financial data appearing elsewhere in this report. This
discussion set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements with
respect to our financial condition, results of operations and business. These
forward-looking statements are subject to certain risks and uncertainties, not
all of which can be predicted or anticipated. Various factors may cause our
actual results to differ materially from those contemplated by the
forward-looking statements herein. We do not have a duty to and will not update
these forward-looking statements. Readers of our Annual Report on Form 10-K
should therefore consider these risks and uncertainties in evaluating
forward-looking statements and should not place undue reliance on
forward-looking statements. See "Special Note Regarding Forward-Looking
Statements" appearing at the beginning of this report and "Item 1A - Risk
Factors," appearing elsewhere in this report.
RESULTS OF OPERATIONS
Overview
Net income was $111.7 million, $96.9 million and $82.9 million for the years
ended December 31, 2006, 2005 and 2004, respectively. Our return on average
assets and our return on average stockholders' equity were 1.16% and 15.26%,
respectively, for the year ended December 31, 2006, compared to 1.10% and
15.11%, respectively, for 2005, and 1.10% and 14.44%, respectively, for 2004.
Our financial results for 2006 represented record earnings for us, both for the
year and for the fourth quarter of 2006, and resulted in our achievement of
surpassing the $100.0 million earnings milestone.
Our record earnings in 2006 were driven by an 18.0% increase in net interest
income and a 17.5% increase in noninterest income. Our average interest-earning
assets increased 8.7% and, coupled with higher prevailing interest rates,
contributed to a $58.8 million increase in net interest income and improvement
in our net interest margin, which increased 35 basis points to 4.36% for 2006,
from 4.01% for 2005. Noninterest income increased to $112.9 million in 2006,
from $96.1 million in 2005. The increases in net interest income and noninterest
income were partially offset by an increase in our provision for loan losses and
higher levels of noninterest expense. Noninterest expense increased 15.0% to
$319.2 million in 2006, from $277.6 million in 2005. The increased expenses are
commensurate with significant expansion of our branch office network and
employee base in several key markets resulting from our acquisitions of other
financial institutions in 2005 and 2006, and the acquisition of an insurance
premium financing company and an insurance brokerage agency in 2006. Our
aggressive and diligent efforts to improve asset quality resulted in a 44.4%
reduction in nonperforming assets during 2006. The increase in net income for
2005 was primarily attributable to a significant reduction in our provision for
loan losses, as further discussed below, and increased net interest income
resulting from net interest-earning assets provided by our acquisitions, higher
yields earned on those assets and internal loan growth. However, our net
interest income was adversely affected by a decline in earnings on interest rate
swap agreements associated with our interest rate risk management program,
primarily resulting from increasing prevailing interest rates and the maturity
and termination of certain interest rate swap agreements, as further discussed
under "--Interest Rate Risk Management."
We recorded a provision for loan losses of $12.0 million for the year ended
December 31, 2006, compared to a negative provision for loan losses of $4.0
million for the year ended December 31, 2005, and a provision for loan losses of
$25.8 million for the year ended December 31, 2004. We attribute the increase in
our provision for loan losses in 2006 primarily to loan portfolio growth, both
external and organic, coupled with the deterioration of certain large credit
relationships primarily associated with the real estate sector of our loan
portfolio, including our one-to-four family residential loan portfolio. The
decrease in our provision for loan losses in 2005 was commensurate with the
decreasing credit risk that existed in our loan portfolio at that time. While we
had recorded a negative provision for loan losses of $8.0 million for the first
nine months of 2005, reflecting a 21.0% improvement in nonperforming loans
during this period from the sale of certain acquired nonperforming loans, the
strengthening of certain loans, loan payoffs and/or external refinancing of
various credits, and a significant reduction in net loan charge-offs, the level
of nonperforming loans increased during the fourth quarter of 2005 as a result
of further deterioration of a small number of large credit relationships, which
resulted in a fourth quarter provision for loan losses of $4.0 million. We
continue to closely monitor the level of our nonperforming assets in accordance
with our credit risk guidelines and focus on methods to improve our management
of these assets based on changing economic conditions throughout our market
areas.
Financial Condition and Average Balances
Our average total assets were $9.61 billion for the year ended December 31,
2006, compared to $8.81 billion and $7.54 billion for the years ended December
31, 2005 and 2004, respectively, reflecting increases of $797.7 million and
$1.27 billion, respectively. Our total assets reached a record high of $10.16
billion at December 31, 2006, compared to $9.17 billion and $8.73 billion at
December 31, 2005 and 2004, respectively, representing increases of $988.4
million and $437.5 million, respectively. We attribute the increase in our total
assets in 2006 and 2005 to a combination of organic growth and growth through
acquisitions in our target markets completed during the past three years,
including our acquisition of CIB Bank in late 2004, which provided assets of
$1.20 billion. Our acquisitions completed in 2004, 2005 and 2006 provided total
assets at the time of the transactions of $1.38 billion, $280.3 million and
$794.3 million, in aggregate, respectively, as well as the related intangible
assets associated with these transactions. As previously mentioned, our
acquisitions completed in 2006 included the acquisition of two financial service
companies, an insurance premium financing company and an insurance brokerage
company, thereby providing our business with new opportunities, and expanding
the broad array of products and services available to our customers.
Our interest-earning assets averaged $8.86 billion for the year ended December
31, 2006, compared to $8.15 billion and $6.91 billion for the years ended
December 31, 2005 and 2004, respectively, while our interest-bearing liabilities
averaged $7.50 billion for the year ended December 31, 2006, compared to $6.82
billion and $5.78 billion for the years ended December 31, 2005 and 2004,
respectively. We used funds from the growth of average deposits of $809.9
million and maturities of investment securities to fund internal loan growth and
to reinvest in higher-yielding investment securities in 2006. We issued
additional subordinated debentures, as further described below, which we
primarily used to fund our bank acquisitions in 2006 and to refinance existing,
higher-cost subordinated debentures on their optional call date at the end of
the year. Our average other borrowings declined $191.2 million as a result of a
reduction of certain term repurchase agreements utilized in conjunction with our
interest rate risk management program. The increase in our average assets for
2005 was primarily funded by an increase in average deposits of $1.04 billion;
an increase in average other borrowings of $85.7 million, an increase in notes
payable of $33.2 million; and an increase in average subordinated debentures of
$38.8 million. Funds available from maturities and sales of investment
securities during 2005 were primarily used to fund loan growth, and a portion of
the remaining funds available from maturities of investment securities were
reinvested in higher-yielding available-for-sale investment securities.
Average loans, net of unearned discount, were $7.47 billion, $6.44 billion and
$5.51 billion for the years ended December 31, 2006, 2005 and 2004,
respectively. Our acquisitions completed during 2005 and 2006 provided total
loans, net of unearned discount, of $209.6 million and $545.1 million,
respectively. Internal loan growth of $584.2 million for 2006 reflects: a $234.1
million increase in our real estate construction and development portfolio; and
a $289.8 million increase in our real estate mortgage portfolio resulting from
management's business decision to retain certain residential mortgage loan
production in our residential real estate mortgage portfolio during the first
half of 2006, partially offset by the securitization of $138.9 million of
certain residential mortgage loans in early 2006 which shifted these assets to
available-for-sale investment securities; and the transfer of approximately
$130.0 million of certain loans to our held for sale portfolio, which were
subsequently sold in 2006 in conjunction with sales of existing loans originated
and held for sale. Internal loan growth for 2006 also resulted from a $120.4
million increase in our loans held for sale portfolio, reflecting: (a) the
timing of loan originations and subsequent sales of residential mortgage loans
in the secondary mortgage market; partially offset by (b) the sale of certain
nonperforming loans that were transferred to our held for sale portfolio on
December 31, 2005, (c) the transfer and subsequent sale of certain performing
and nonperforming loans in the fourth quarter of 2006; and (d) the payoff of two
significant nonperforming loans, totaling $27.3 million in aggregate, that were
included in our held for sale portfolio at December 31, 2005, as further
discussed under "--Loans and Allowance for Loan Losses." Internal loan growth of
$687.5 million for 2005 was primarily generated from a $286.8 million increase
in our real estate mortgage portfolio resulting from management's business
decision to retain additional mortgage loan product production in our
residential real estate mortgage portfolio, and a home equity product line
campaign that we held in mid-2004; a $241.9 million increase in our real estate
construction and development portfolio; and a $194.8 million increase in our
loans held for sale portfolio, including approximately $59.7 million of
nonperforming loans that were transferred to the loans held for sale portfolio
at December 31, 2005, as further discussed under "--Loans and Allowance for Loan
Losses." This increase was partially offset by reductions in a portion of our
nonperforming loan portfolio due to the sale of certain nonperforming loans in
early 2005, loan payoffs and/or external refinancing of various credits.
Investment securities averaged $1.27 billion, $1.64 billion and $1.28 billion
for the years ended December 31, 2006, 2005 and 2004, respectively. Funds
available from maturities of investment securities, deposit growth and excess
short-term investments were utilized to fund internal loan growth during the
majority of 2006, and the remaining funds were reinvested in higher-yielding
investment securities. These securities purchases primarily occurred late in
2006 and resulted from funds available from deposit growth in excess of loan
demand. The sale of available-for-sale investment securities associated with the
termination of $200.0 million of term repurchase agreements in the first half of
2006 was partially offset by an increase in the securities portfolio due to the
securitization of $138.9 million of certain of our residential mortgage loans
held in our loan portfolio, an increase in our trading securities portfolio of
$77.8 million, and the addition of $37.3 million of securities obtained with our
bank acquisitions completed in 2006. We attribute the increase in 2005 primarily
to our 2004 and 2005 acquisitions, which provided investment securities, in
aggregate, of $438.0 million and $20.1 million, respectively. Funds available
from maturities of investment securities, deposit growth and an increase in our
other borrowings were used to fund loan growth and for the reinvestment in
additional higher-yielding available-for-sale investment securities. Throughout
2005, short-tem investments were utilized to fund an anticipated level of
attrition associated with our acquisitions, primarily time deposits acquired
with CIB Bank. Average short-term investments declined $49.1 million to $70.3
million for the year ended December 31, 2005, from $119.4 million in 2004.
Nonearning assets averaged $754.7 million, $662.4 million and $633.2 million for
the years ended December 31, 2006, 2005 and 2004, respectively. The increases in
2006 and 2005 are largely attributable to our acquisitions completed in 2005 and
2006, which increased our capital expenditures, thus contributing to an overall
increase in bank premises and equipment, partially offset by continued related
depreciation and amortization, and an increase in intangible assets recognized
in conjunction with the acquisitions. Aggregate intangible assets recorded in
conjunction with our acquisitions completed in 2005 and 2006, including
goodwill, core deposit intangibles associated with our bank and branch
acquisitions, and the customer list intangibles associated with our purchases of
Adrian Baker and UPAC, were $25.8 million and $110.7 million, respectively. Our
derivative financial instruments averaged ($4.0) million, ($3.1) million and
$25.9 million for the years ended December 31, 2006, 2005 and 2004,
respectively. This reflects a decline in the fair value of certain derivative
financial instruments and the maturity and/or termination of certain of our
interest rate swap agreements during 2005 and 2006, as further discussed under
"--Interest Rate Risk Management" and in Note 5 to our Consolidated Financial
Statements. In addition, purchases of land, bank premises and equipment for
future de novo branch offices further contributed to the overall increases in
nonearning assets during these periods.
We use deposits as our primary funding source and acquire them from a broad base
of local markets, including both individual and corporate customers. Deposits
averaged $8.01 billion, $7.20 billion and $6.17 billion for the years ended
December 31, 2006, 2005 and 2004, respectively. Our year-end deposits were $8.44
billion, $7.54 billion and $7.15 billion at December 31, 2006, 2005 and 2004,
respectively, reflecting increases of $901.3 million for 2006 and $389.9 million
for 2005. The increases in 2006 and 2005 were primarily attributable to organic
growth stemming from our deposit development programs throughout the periods,
including enhanced product and service offerings coupled with marketing
campaigns, in addition to our acquisitions of banks and/or branches in our
target markets that were completed in 2005 and 2006, which provided aggregate
deposits of $238.1 million and $475.6 million, respectively, at the time of
their acquisition. The change in the composition of our deposit mix reflects
continued efforts to expand our existing customer relationships by increasing
the number and types of products provided, efforts to increase transactional
accounts, such as savings and demand accounts through our deposit development
campaigns, coupled with trends toward increased time deposits and higher deposit
rates paid on certain products resulting from the highly competitive rate market
environment. Average time deposits were $3.63 billion, $2.91 billion and $2.04
billion for the years ended December 31, 2006, 2005 and 2004, respectively.
Average demand and savings deposits were $4.38 billion, $4.30 billion and $4.13
billion for the years ended December 31, 2006, 2005 and 2004, respectively. The
overall growth in deposits was partially offset by an anticipated level of
attrition associated with our recent acquisitions, particularly savings and time
deposits acquired from CIB Bank, including brokered and internet deposits, and
continued aggressive competition within our market areas.
Other borrowings averaged $380.5 million, $571.7 million and $486.0 million for
the years ended December 31, 2006, 2005 and 2004, respectively. The decrease in
the average balances for 2006 reflects the termination of $150.0 million and
$50.0 million of term repurchase agreements in the first and second quarters of
2006, respectively, partially offset by a $100.0 million term repurchase
agreement entered into in the third quarter of 2006, as further described in
Note 5 and Note 10 to our Consolidated Financial Statements. We also attribute
the decrease to the prepayment of $35.3 million of Federal Home Loan Bank, or
FHLB, advances that were assumed with certain bank acquisitions, and a decrease
in daily repurchase agreements, principally in connection with the cash
management activities of our commercial deposit customers. The increase in the
average balances for 2005 reflects $250.0 million of term repurchase agreements
that we entered into in conjunction with our interest rate risk management
program during 2004, partially offset by the termination of $50.0 million of
term repurchase agreements in the fourth quarter of 2005. The increase in
average balances for 2005 also reflects an increase in daily repurchase
agreements, as well as an increase in average FHLB advances, primarily
associated with our bank acquisitions, to $44.2 million for 2005, compared to
$21.0 million for 2004.
Our notes payable averaged $88.8 million, $36.8 million and $3.7 million for the
years ended December 31, 2006, 2005 and 2004, respectively. The increases in
2006 and 2005 were attributable to the addition of a term loan in conjunction
with the restructuring of our overall financing arrangement in 2005. In
conjunction with our Amended and Restated Secured Credit Agreement that we
entered into in August 2005 to restructure our overall financing arrangement, we
borrowed $80.0 million on the term loan in August 2005 and borrowed the
remaining $20.0 million on the term loan in November 2005. The proceeds of the
term loan were used to fund our acquisition of International Bank of California,
or IBOC, and to partially fund the repayment of our 10.24% subordinated
debentures issued to First Preferred Capital Trust II, or FPCT II, in September
2005, as further discussed below. As further described in Note 11 to our
Consolidated Financial Statements, on August 10, 2006, we 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. We subsequently repaid $35.0 million of the term loan during 2006,
reducing the balance to $65.0 million at December 31, 2006, from $100.0 million
at December 31, 2005. Furthermore, during 2005, we repaid in full the $15.0
million outstanding advance drawn under our revolving credit line in 2004 to
partially fund our acquisition of CIB Bank.
Subordinated debentures issued to our affiliated statutory and business trusts
averaged $281.5 million, $259.2 million and $220.4 million for the years ended
December 31, 2006, 2005 and 2004, respectively. During 2006, we issued a total
of $139.2 million of variable rate subordinated debentures in private placements
through four newly-formed statutory trusts: specifically, $41.2 million issued
to First Bank Statutory Trust IV on March 1, 2006; $20.6 million issued to First
Bank Statutory Trust V on April 28, 2006; $25.8 million issued to First Bank
Statutory Trust VI on June 16, 2006; and $51.5 million issued to First Bank
Statutory Trust VII on December 14, 2006. On December 31, 2006, we repaid in
full $56.9 million of 9.0% fixed rate subordinated debentures, as further
described in Note 12 to our Consolidated Financial Statements. The increase in
2005 reflects our issuance of $61.9 million of variable rate subordinated
debentures late in 2004, specifically, $20.6 million issued to First Bank
Statutory Trust II in September 2004 and $41.2 million issued to First Bank
Statutory Trust III in November 2004, partially offset by the repayment in full
of $59.3 million of 10.24% subordinated debentures on September 30, 2005 that
were issued to FPCT II, as further described in Note 12 to our Consolidated
Financial Statements. The repayment of these subordinated debentures was funded
by the term loan.
Stockholders' equity averaged $731.9 million, $641.5 million and $574.3 million
for the years ended December 31, 2006, 2005 and 2004, respectively. The increase
for 2006 reflects net income of $111.7 million, a $6.8 million increase in
accumulated other comprehensive income, which was comprised of $4.9 million
associated with the change in our unrealized gains and losses on
available-for-sale investment securities and $1.9 million associated with the
change in the fair value of our derivative financial instruments, partially
offset by dividends paid on our Class A and Class B preferred stock. We
primarily attribute the increase for 2005 to net income of $96.9 million,
partially offset by dividends paid on our Class A and Class B preferred stock,
and an $18.1 million decrease in accumulated other comprehensive income, which
was comprised of $13.8 million associated with the change in our unrealized
gains and losses on available-for-sale investment securities and $4.3 million
associated with the change in the fair value of our derivative financial
instruments. These decreases were reflective of changes in prevailing interest
rates, a decline in the fair value of our derivative financial instruments, and
the maturity of certain interest rate swap agreements designated as cash flow
hedges during 2005, as further discussed under "--Interest Rate Risk Management"
and in Note 5 to our Consolidated Financial Statements.
The following table sets forth, on a tax-equivalent basis, certain information
relating to our average balance sheets, and reflects the average yield earned on
our interest-earning assets, the average cost of our interest-bearing
liabilities and the resulting net interest income for the periods presented.
Years Ended December 31,
------------------------------------------------------------------------------------------
2006 2005 2004
--------------------------- ------------------------------ ---------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans: (1)(2)(3)
Taxable....................... $7,451,016 580,448 7.79% $6,422,341 423,361 6.59% $5,493,867 340,660 6.20%
Tax-exempt (4)................ 21,073 1,623 7.70 14,629 1,129 7.72 15,187 1,260 8.30
Investment securities:
Taxable....................... 1,220,785 57,017 4.67 1,599,161 65,895 4.12 1,245,226 50,170 4.03
Tax-exempt (4)................ 47,946 2,885 6.02 45,626 2,675 5.86 37,775 2,292 6.07
Short-term investments.......... 116,630 5,909 5.07 70,251 2,211 3.15 119,370 1,643 1.38
---------- ------- ---------- ------- ---------- -------
Total interest-earning
assets................... 8,857,450 647,882 7.31 8,152,008 495,271 6.08 6,911,425 396,025 5.73
------- ------- -------
Nonearning assets................. 754,678 662,396 633,154
---------- ---------- ----------
Total assets................ $9,612,128 $8,814,404 $7,544,579
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits.................... $ 962,956 8,147 0.85% $ 905,613 4,398 0.49% $ 856,765 3,472 0.41%
Savings deposits.............. 2,152,419 53,297 2.48 2,135,156 29,592 1.39 2,175,425 20,128 0.93
Time deposits (3)............. 3,631,516 155,252 4.28 2,906,601 93,167 3.21 2,036,323 49,467 2.43
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
deposits................. 6,746,891 216,696 3.21 5,947,370 127,157 2.14 5,068,513 73,067 1.44
Other borrowings................ 380,546 16,803 4.42 571,717 18,240 3.19 485,994 6,102 1.26
Notes payable (5)............... 88,843 5,530 6.22 36,849 2,305 6.26 3,657 506 13.84
Subordinated debentures (3)..... 281,500 22,833 8.11 259,214 20,557 7.93 220,428 15,092 6.85
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities.............. 7,497,780 261,862 3.49 6,815,150 168,259 2.47 5,778,592 94,767 1.64
------- ------- -------
Noninterest-bearing liabilities:
Demand deposits................. 1,267,681 1,257,277 1,100,072
Other liabilities............... 114,735 100,462 91,660
---------- ---------- ----------
Total liabilities........... 8,880,196 8,172,889 6,970,324
Stockholders' equity.............. 731,932 641,515 574,255
---------- ---------- ----------
Total liabilities and
stockholders' equity..... $9,612,128 $8,814,404 $7,544,579
========== ========== ==========
Net interest income............... 386,020 327,012 301,258
======= ======= =======
Interest rate spread.............. 3.82 3.61 4.09
Net interest margin (6)........... 4.36% 4.01% 4.36%
==== ==== ====
- ------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $1.6 million, $1.3 million and $1.2 million for the years ended December 31, 2006, 2005 and 2004, respectively.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees. Exclusive of these fees, the interest
rates paid were 6.11%, 4.93% and 2.87% for the years ended December 31, 2006, 2005 and 2004, respectively.
(6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning
assets.
The following table indicates, on a tax-equivalent basis, the changes in
interest income and interest expense that are attributable to changes in average
volume and changes in average rates, in comparison with the preceding year. The
change in interest due to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the dollar amounts of the change in
each.
Increase (Decrease) Attributable to Change in:
---------------------------------------------------------------------
December 31, 2006 Compared December 31, 2005 Compared
to December 31, 2005 to December 31, 2004
-------------------------------- --------------------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Interest earned on:
Loans: (1)(2)(3)
Taxable............................. $ 73,513 83,574 157,087 60,269 22,432 82,701
Tax-exempt (4)...................... 497 (3) 494 (45) (86) (131)
Investment securities:
Taxable............................. (16,922) 8,044 (8,878) 14,579 1,146 15,725
Tax-exempt (4)...................... 137 73 210 464 (81) 383
Short-term investments................. 1,923 1,775 3,698 (888) 1,456 568
-------- ------- ------- ------- ------- -------
Total interest income........... 59,148 93,463 152,611 74,379 24,867 99,246
-------- ------- ------- ------- ------- -------
Interest paid on:
Interest-bearing demand deposits....... 297 3,452 3,749 209 717 926
Savings deposits....................... 242 23,463 23,705 (381) 9,845 9,464
Time deposits (3)...................... 26,572 35,513 62,085 24,956 18,744 43,700
Other borrowings....................... (7,199) 5,762 (1,437) 1,253 10,885 12,138
Notes payable (5)...................... 3,240 (15) 3,225 2,219 (420) 1,799
Subordinated debentures (3)............ 1,801 475 2,276 2,882 2,583 5,465
-------- ------- ------- ------- ------- -------
Total interest expense.......... 24,953 68,650 93,603 31,138 42,354 73,492
-------- ------- ------- ------- ------- -------
Net interest income............. $ 34,195 24,813 59,008 43,241 (17,487) 25,754
======== ======= ======= ======= ======= =======
- -------------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effect of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees.
Net Interest Income
The primary source of our income is net interest income. Net interest income
(expressed on a tax-equivalent basis) increased to $386.0 million for the year
ended December 31, 2006, from $327.0 million and $301.3 million for the years
ended December 31, 2005 and 2004, respectively. Our net interest margin was
4.36% for the year ended December 31, 2006, compared to 4.01% and 4.36% for the
years ended December 31, 2005 and 2004, respectively. Net interest income is the
difference between the interest earned on our interest-earning assets, such as
loans and investment securities, and the interest paid on our interest-bearing
liabilities, such as deposits and borrowings. Net interest income is affected by
the level and composition of assets, liabilities and stockholders' equity, as
well as the general level of interest rates and changes in interest rates.
Interest income on a tax-equivalent basis includes the additional amount of
interest income that would have been earned if our investment in certain
tax-exempt interest-earning assets had been made in assets subject to federal,
state and local income taxes yielding the same after-tax income. Net interest
margin is determined by dividing net interest income on a tax-equivalent basis
by average interest-earning assets. The interest rate spread is the difference
between the average equivalent yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities.
We attribute the increase in net interest income in 2006 to an 8.7% increase in
our average interest-earning assets stemming from internal growth and growth
through acquisitions of banks and other financial service companies, combined
with higher yields on those assets commensurate with the prevailing interest
rates in our markets. The increase in average interest-earning assets reflects
increases in average loans and average short-term investments, and the transfer
of funding from lower-yielding investment securities to higher-yielding loans.
The increase in our interest income was partially offset by increased interest
expense related to increasing deposit balances along with a continued
redistribution of deposit balances toward higher-yielding products and higher
interest rates paid on those deposits, as well as increased interest expense
paid on the overall levels of our other borrowings and subordinated debentures.
Our overall borrowing levels reflect the reduction in the use of higher cost
funding sources, such as term repurchase agreements and FHLB advances. Our
average notes payable increased $52.0 million as a result of the term loan
advances we borrowed in August 2005 and November 2005. Our average subordinated
debentures, which support acquisitions and are also utilized for other corporate
purposes, increased $22.3 million as a result of our issuance of $139.2 million
of variable rate subordinated debentures through four newly-formed statutory
trusts, partially offset by the repayment of $56.9 million of 9.0% fixed rate
subordinated debentures on December 31, 2006. 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, as further discussed below.
We primarily credit the increase in net interest income in 2005 to
interest-earning assets provided by our acquisitions completed in 2004 and 2005,
internal loan growth coupled with higher interest rates on loans,
higher-yielding investment securities and the repayment of our 10.24%
subordinated debentures in September 2005. The overall increase in our net
interest income was partially offset by: (a) increased interest expense
associated with deposit growth, higher interest rates paid on deposits, and a
redistribution of deposit balances toward higher-yielding products; (b) the mix
of the CIB Bank deposit base acquired; (c) increased levels of other borrowings,
including our term loan, coupled with increased interest rates on such
borrowings; and (d) the issuance of $61.9 million of additional subordinated
debentures in late 2004 through two newly formed statutory trusts; partially
offset by our repayment of $59.3 million of 10.24% subordinated debentures in
September 2005. These transactions, coupled with our use of derivative financial
instruments, have allowed us to reduce our overall interest expense associated
with our subordinated debentures as the additional subordinated debentures have
been issued at significantly lower interest rates.
Derivative financial instruments that were entered into in conjunction with our
interest rate risk management program to mitigate the effects of decreasing
interest rates reduced our net interest income by $5.0 million for the year
ended December 31, 2006, whereas these derivative financial instruments
contributed to increases in our net interest income of $2.2 million and $50.1
million, respectively, for the years ended December 31, 2005 and 2004. The
decreased earnings on our interest rate swap agreements for 2006 and 2005
contributed to reductions in our net interest margin of approximately eight
basis points and 59 basis points, respectively, and reflects higher interest
rates and maturities of $750.0 million of interest rate swap agreements
designated as cash flow hedges and $50.0 million of interest rate swap
agreements designated as fair value hedges during 2004; the maturity of $200.0
million and $100.0 million 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 of interest rate swap
agreements designated as fair value hedges in February 2005, May 2005 and
February 2006, respectively. However, the earnings on our interest rate swap
agreements significantly contributed to our ability to maintain our net interest
margin in 2004. During the third quarter of 2006, we significantly expanded our
utilization of derivative financial instruments, as further described in Note 5
to our Consolidated Financial Statements, to reduce our exposure to falling
interest rates. The Company has implemented various methods to reduce the effect
of decreasing interest rates on our net interest income, including the funding
of investment security purchases through the issuance of term repurchase
agreements. However, the reduction of our interest rate swap agreements has
resulted in a substantial reduction of our net interest income and further
compression of our net interest margin, which has been partially offset by the
impact of the rising rate environment experienced in 2005 and 2006, as further
discussed below.
The yield on our loan portfolio was 7.79% for the year ended December 31, 2006,
compared to 6.59% and 6.21% for 2005 and 2004, respectively. Average loans, net
of unearned discount, were $7.47 billion for the year ended December 31, 2006,
in comparison to $6.44 billion and $5.51 billion for the years ended December
31, 2005 and 2004, respectively. Increases in prevailing interest rates that
began in mid-2004 and continued throughout 2005 and 2006 contributed to the
increased yields on our loan portfolio during 2005 and 2006. During 2006, the
Federal Reserve increased the targeted federal funds rate, resulting in four
increases in the prime rate of interest from 7.25% at December 31, 2005 to 8.25%
at December 31, 2006. During 2005, the Federal Reserve increased the targeted
federal funds rate, resulting in eight increases in the prime rate of interest
from 5.25% at December 31, 2004 to 7.25% at December 31, 2005. The prime rate of
interest increased from 4.00% at January 1, 2004 to 5.25% at December 31, 2004.
These interest rates are reflected not only in the rate of interest earned on
loans that are indexed to the prime rate, but also in other assets and
liabilities which either have variable or adjustable rates, or which have
matured or repriced during these periods. Although the rising interest rate
environment contributed to the increase in our loan yields 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.
These interest rate swap agreements reduced our interest income on loans by $4.2
million for the year ended December 31, 2006, in contrast to increasing our
interest income on loans by $2.6 million and $38.3 million in 2005 and 2004,
respectively. The yields on our loan portfolio were impacted by higher interest
rates and the maturities and/or termination of interest rate swap agreements
designated as cash flow hedges of $750.0 million in 2004, $200.0 million in 2005
and $100.0 million in 2006, which resulted in decreased earnings on our swap
agreements, thereby contributing to a reduction in interest on our loan
portfolio. Specifically, the impact of the swap agreements resulted in a
compression of our net interest income of approximately $6.9 million for 2006
compared to 2005, and $35.7 million for 2005 compared to 2004, as further
discussed under "--Interest Rate Risk Management." Interest income on our loan
portfolio for 2006 includes 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." The lower yield on our loan portfolio during 2004
reflected increased competition, continued weak loan demand and generally lower
prevailing interest rates during the period, despite the increases in the prime
lending rate during the second half of 2004.
For the years ended December 31, 2006, 2005 and 2004, the aggregate weighted
average rate paid on our interest-bearing deposit portfolio was 3.21%, 2.14% and
1.44%, respectively. We attribute the increase in 2006 to the continued rising
interest rate environment and a change in the mix of our average deposits which
reflects a trend towards increased time deposits over transactional accounts,
coupled with higher interest rates paid on deposits commensurate with the highly
competitive rate market that continues to exert pressure on our net interest
margin. We attribute the increase in 2005 to the rising interest rate
environment and the mix of the CIB Bank deposit base acquired in November 2004,
which included higher cost time deposits, including brokered and internet
deposits. In addition, decreased earnings associated with certain of our
interest rate swap agreements designated as fair value hedges, as well as the
termination of $150.0 million notional amount of fair value hedges in February
2005, resulted in a decrease in our net interest income of approximately $8.5
million for 2005, compared to 2004, as further described in Note 5 to our
Consolidated Financial Statements. While deposit growth continues to provide an
adequate funding source for our loan portfolio, competitive pressures on
deposits within our markets continue to impact our deposit pricing.
The aggregate weighted average rate paid on our other borrowings was 4.42% for
the year ended December 31, 2006, compared to 3.19% and 1.26% for the years
ended December 31, 2005 and 2004, respectively, reflecting changes in the
short-term interest rate environment that began in mid-2004. The increase in the
aggregate weighted average rates paid on our other borrowings in 2006 and 2005
also reflects the termination of $200.0 million of term repurchase agreements in
2006, partially offset by a $100.0 million term repurchase agreement entered
into during 2006, and the termination of a $50.0 million term repurchase
agreement in November 2005, and the impact of the related spreads to the London
Interbank Offering Rate, or LIBOR, as further described in Note 5 and Note 10 to
our Consolidated Financial Statements.
The aggregate weighted average rate on our notes payable was 6.22%, 6.26% and
13.84% for the years ended December 31, 2006, 2005 and 2004, respectively. The
aggregate weighted average rates paid reflect changing market interest rates
during these periods, and unused credit commitment and letter of credit facility
fees on our secured credit agreement with a group of unaffiliated financial
institutions, as well as other fees paid in conjunction with the annual renewal
of this financing arrangement. The overall cost of this funding source during
2004 was significantly higher due to fees associated with the credit facility
coupled with minimal borrowings under the revolving credit line during 2004.
Exclusive of these fees, the aggregate weighted average rate paid on our notes
payable was 6.11%, 4.93% and 2.87% for the years ended December 31, 2006, 2005
and 2004, respectively. Amounts outstanding under our term loan bear interest at
a floating rate equal to LIBOR, plus a margin determined by the outstanding loan
balances and our profitability for the preceding four calendar quarters. Amounts
outstanding under our revolving line of credit bear interest at a floating rate
equal to the lead bank's prime rate or, at our option, at LIBOR plus a margin
determined by the outstanding loan balances and our profitability for the
preceding four calendar quarters. Thus, our secured credit agreement represents
a relatively high-cost funding source as increased advances have the effect of
increasing the weighted average rate of our non-deposit liabilities. As further
described in Note 11 to our Consolidated Financial Statements, we borrowed $80.0
million on our term loan in August 2005 and $20.0 million on our term loan in
November 2005, and on August 10, 2006, we 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. During 2006,
we repaid $35.0 million of the term loan, reducing the balance to $65.0 million
at December 31, 2006, from $100.0 million at December 31, 2005. Also, during
2005, we repaid the remaining outstanding balance of $15.0 million drawn under
our revolving credit line that we had drawn in November 2004 to partially fund
our acquisition of CIB Bank.
The aggregate weighted average rate paid on our subordinated debentures was
8.11%, 7.93% and 6.85% for the years ended December 31, 2006, 2005 and 2004,
respectively. The aggregate weighted average rates reflect the issuance of
$139.2 million of variable rate subordinated debentures in private placements
through four newly formed statutory trusts, partially offset by the repayment of
$56.9 million of 9.0% fixed rate subordinated debentures on December 31, 2006,
as well as the repayment of $59.3 million of 10.24% subordinated debentures in
September 2005 and the issuance of $61.9 million of subordinated debentures in
late 2004. The refinancing of the outstanding subordinated debentures that
carried a higher fixed interest rate improved our net interest income and net
interest margin. However, the earnings impact of our interest rate swap
agreements had a declining impact on the reduction of interest expense
associated with our subordinated debentures. These interest rate swap
agreements, which reduced interest expense by $5.7 million and $2.0 million
during 2004 and 2005, respectively, increased interest expense by $814,000
during 2006. These swap agreements, which were designated as fair value hedges,
were terminated in May 2005 and February 2006, as further discussed under
"--Interest Rate Risk Management" and in Note 5 to our Consolidated Financial
Statements.
Comparison of Results of Operations for 2006 and 2005
Net Income. Net income was $111.7 million for the year ended December 31, 2006,
compared to $96.9 million for 2005. Our return on average assets and our return
on average stockholders' equity were 1.16% and 15.26%, respectively, for the
year ended December 31, 2006, compared to 1.10% and 15.11%, respectively, for
2005. Net income for 2006 reflects increased net interest income and noninterest
income, partially offset by an increase in our provision for loan losses, higher
levels of noninterest expense and an increase in our provision for income taxes.
The increase in earnings in 2006 reflects our continuing efforts to strengthen
earnings while focusing on reducing the overall level of our nonperforming
assets. The increase in net interest income and net interest margin resulted
from (a) an increase in average interest-earning assets stemming from internal
loan growth and growth through acquisitions, and (b) higher yields earned on
those assets as a result of an increased interest rate environment; partially
offset by increased interest expense associated with an increasing deposit base
coupled with higher interest rates paid on deposits and on our short-term and
long-term borrowings, and the adverse impact of a decline in earnings on our
interest rate swap agreements associated with our interest rate risk management
program, as further discussed under "--Net Interest Income." The increase in net
income in 2006 was partially offset by a significant increase in our provision
for loan losses, which resulted from loan portfolio growth and the deterioration
of certain credit relationships despite an overall improvement in our
nonperforming loans throughout 2006, as further discussed under "--Provision for
Loan Losses." The increase in our noninterest income in 2006 was attributable to
increased gains on loans sold and held for sale associated with mortgage banking
activities and the sale of certain loans, commission fee income associated with
our insurance brokerage agency acquired in March 2006, increased service charges
on deposit accounts and customer service fees related to higher deposit balances
stemming from product development efforts and deposits associated with our 2005
and 2006 acquisitions, and gains on the sale of other assets, as further
discussed under "--Noninterest Income." The overall increase in the level of
noninterest expense for 2006 reflects increased salaries and employee benefits
expense, occupancy expenses and amortization of intangible assets, commensurate
with the significant expansion of our branch office network and employee base
resulting from our acquisitions of an insurance premium financing company and an
insurance brokerage agency in 2006, the addition of 20 branch offices associated
with acquisitions in 2005 and 2006, and an increase in the full-time equivalent
employee base during 2006, as further discussed under "--Noninterest Expense."
Provision for Loan Losses. We recorded a provision for loan losses of $12.0
million for the year ended December 31, 2006. The provision recorded during 2006
was primarily driven by significant growth within our loan portfolio, coupled
with deterioration within our one-to-four family residential portfolio in
addition to the deterioration of certain other credits, including four large
credit relationships within our residential development and construction
portfolio during the later part of 2006 that were primarily driven by current
market conditions, including slowdowns in unit sales, as further discussed under
"Business -- Lending Activities" and "--Loans and Allowance for Loan Losses." We
recorded a $4.0 million negative provision for loan losses for the year ended
December 31, 2005 to reduce our allowance for loan losses to a level
commensurate with the decreasing credit risk that existed in the loan portfolio
at that time. Our nonperforming loans decreased $48.5 million, or 49.9%, to
$48.7 million at December 31, 2006, from $97.2 million at December 31, 2005. The
decrease in the overall level of nonperforming loans during 2006 reflects our
efforts to improve asset quality through the sale of nonperforming loans and
loan payoffs, as well as the strengthening of certain credit relationships, as
further discussed under "--Loans and Allowance for Loan Losses." The overall
decrease was partially offset by several significant credit relationships that
were downgraded and placed on nonaccrual status during 2006, as previously
mentioned.
Our allowance for loan losses was $145.7 million at December 31, 2006, compared
to $135.3 million at December 31, 2005, representing 1.90% and 1.93% of loans,
net of unearned discount, respectively, and 299.05% and 139.23% of nonperforming
loans, respectively. The allowance for loan losses at December 31, 2006 includes
$5.2 million of balances acquired in conjunction with our 2006 acquisitions. Our
net loan charge-offs declined to $6.8 million from $13.4 million for the years
ended December 31, 2006 and 2005, respectively. Our net loan charge-offs for
2006 were 0.09% of average loans, representing a significant improvement over
0.21% in 2005. Loan charge-offs were $22.2 million for 2006, compared to $33.1
million in 2005, and loan recoveries were $15.4 million for 2006, compared to
$19.8 million in 2005. Loan charge-offs for 2006 included approximately $3.3
million of loan charge-offs associated with two significant residential
development project relationships that were placed on nonaccrual status during
2006, in addition to $2.3 million of charge-offs recorded in conjunction with
the transfer of certain portfolio loans to our loans held for sale portfolio
prior to their sale in December 2006. Loan recoveries for 2006 included $5.0
million recorded on the payoff of a single loan that was transferred to our held
for sale portfolio on December 31, 2005.
Under our loan policy, loans are placed on nonaccrual status once principal or
interest payments become 90 days past due. However, individual loan officers may
submit written requests for approval to continue the accrual of interest on
loans that become 90 days past due. These requests must be submitted for
approval consistent with the authority levels provided in our credit approval
policies, and they are only granted if an expected near term future event, such
as a pending renewal or expected payoff, exists at the time the loan becomes 90
days past due. If the expected near term future event does not occur as
anticipated, the loan is then placed on nonaccrual status. Management considers
the nonperforming assets trends in its overall assessment of the adequacy of the
allowance for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off and
recovery experience are presented under "--Loans and Allowance for Loan Losses."
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 2006 and 2005:
December 31, Increase (Decrease)
-------------------- -------------------
2006 2005 Amount %
---- ---- ------ ---
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees.... $ 43,310 39,776 3,534 8.88%
Gain on loans sold and held for sale............................. 26,020 20,804 5,216 25.07
Net loss on investment securities................................ (1,813) (2,873) 1,060 36.90
Bank-owned life insurance investment income...................... 3,103 4,860 (1,757) (36.15)
Investment management income..................................... 8,412 8,573 (161) (1.88)
Insurance product income......................................... 4,848 -- 4,848 100.00
Other............................................................ 29,063 24,945 4,118 16.51
--------- ------- ------
Total noninterest income...................................... $ 112,943 96,085 16,858 17.54
========= ======= ====== ======
Noninterest expense:
Salaries and employee benefits................................... $ 166,864 139,764 27,100 19.39%
Occupancy, net of rental income.................................. 26,953 22,081 4,872 22.06
Furniture and equipment.......................................... 16,960 16,015 945 5.90
Postage, printing and supplies................................... 6,721 5,743 978 17.03
Information technology fees...................................... 37,099 35,472 1,627 4.59
Legal, examination and professional fees......................... 8,783 9,319 (536) (5.75)
Amortization of intangible assets................................ 8,195 4,850 3,345 68.97
Communications................................................... 2,425 2,012 413 20.53
Advertising and business development............................. 7,128 7,043 85 1.21
Charitable contributions......................................... 6,462 5,922 540 9.12
Other............................................................ 31,626 29,417 2,209 7.51
--------- ------- ------
Total noninterest expense..................................... $ 319,216 277,638 41,578 14.98
========= ======= ====== ======
Noninterest Income. Noninterest income was $112.9 million for the year ended
December 31, 2006, in comparison to $96.1 million for 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 increased to $43.3
million from $39.8 million for the years ended December 31, 2006 and 2005,
respectively. The increase in service charges and customer service fees is
primarily attributable to: (a) increased deposit account balances associated
with internal growth and our acquisitions of banks completed in 2005 and 2006,
as further discussed under "--Financial Condition and Average Balances" and in
Note 2 to our Consolidated Financial Statements; (b) additional products and
services available and utilized by our retail and commercial customer base; (c)
increased fee income from customer service charges for non-sufficient funds and
returned check fees coupled with enhanced control of fee waivers; and (d)
pricing increases on certain service charges and customer service fees
instituted to reflect current market conditions.
The gain on loans sold and held for sale increased to $26.0 million from $20.8
million for the years ended December 31, 2006 and 2005, respectively. We
primarily attribute the increase in 2006 to: (a) a $1.7 million gain, before
applicable income taxes, recorded on the sale of certain nonperforming loans in
March 2006 that were transferred to our loans held for sale portfolio on
December 31, 2005; (b) 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 and transfer to our
investment portfolio of $77.1 million and $61.8 million, respectively, of
residential mortgage loans held in our loan portfolio, as further described in
Note 6 to our Consolidated Financial Statements; (c) net gains of $2.4 million
recorded on the sale of $278.7 million of certain residential mortgage loans, as
further discussed under "--Mortgage Banking Activities" and "--Loans and
Allowance for Loan Losses;" and (d) a $3.7 million gain, before applicable
income taxes, recorded on the sale, in December 2006, of 44 loans in our loans
held for sale portfolio, of which 26 were nonperforming loans, as further
discussed under "--Loans and Allowance for Loan Losses." The increase in our
gain on loans sold and held for sale was partially offset by a $1.1 million
write-down of the carrying value of a nonperforming loan that was transferred to
our loans held for sale portfolio on December 31, 2005, and subsequently
transferred back into our loan portfolio at fair value in September 2006, as
further discussed under "--Loans and Allowance for Loan Losses."
Noninterest income includes a net loss on investment securities of $1.8 million
and $2.9 million for the years ended December 31, 2006 and 2005, respectively.
The net loss for 2006 resulted primarily from sales of certain
available-for-sale investment securities associated with the full termination of
three $50.0 million term repurchase agreements and the partial termination of
$50.0 million of a $150.0 million term repurchase agreement, as further
described in Note 3, Note 5 and Note 10 to our Consolidated Financial
Statements, partially offset by a gain of $389,000 on the redemption of common
stock held as an available-for-sale investment security. The net loss for 2005
resulted from the sale of certain available-for-sale investment securities
associated with the termination of a $50.0 million term repurchase agreement.
Bank-owned life insurance investment income was $3.1 million for the year ended
December 31, 2006, in comparison to $4.9 million in 2005. The decrease 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 generated by MVP, our institutional money
management subsidiary, was $8.4 million for the year ended December 31, 2006, in
comparison to $8.6 million in 2005, reflecting decreased portfolio management
fee income as a result of current market conditions.
Insurance product income generated by Adrian Baker, our insurance brokerage
agency acquired on March 31, 2006, as further described in Note 2 to our
Consolidated Financial Statements, was $4.8 million for the year ended December
31, 2006.
Other income was $29.1 million and $24.9 million for the years ended December
31, 2006 and 2005, respectively. We attribute the primary components of the
increase in other income to:
>> an increase of $3.1 million in gains on sales of other assets,
including a $2.8 million gain recognized on the sale of an asset that
was acquired as settlement in full of a loan charged-off in prior
years and a gain of $885,000 recognized on the sale of assets that
were acquired with our acquisition of CIB Bank;
>> an increase of $1.7 million attributable to interest due on tax
refunds associated with the filing of amended federal income tax
returns for the years from 2000 through 2004;
>> a release fee of $938,000 received on funds collected 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 net increase of $839,000 in loan servicing fees, which was primarily
attributable to a decrease of $966,000 in impairment charges on SBA
servicing rights and a decrease of $1.5 million in the amortization of
servicing rights, as further described in Note 6 to our Consolidated
Financial Statements; partially offset by a decrease of $1.6 million
in fees from loans serviced for others;
>> a decrease of $680,000 in net losses on our derivative instruments;
>> an increase of $652,000 in gains on sales of other real estate. Gains
on sales of other real estate were $2.0 million for the year ended
December 31, 2006, 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 year ended December 31, 2005 were $1.3 million; and
>> income associated with continued growth and expansion of our banking
franchise, including our de novo branch offices and our acquisitions
completed during 2005 and 2006; partially offset by
>> a decrease of $2.5 million in recoveries of certain loan principal
balances that had been previously charged-off by the financial
institutions prior to their acquisitions by First Banks.
Noninterest Expense. Noninterest expense was $319.2 million for the year ended
December 31, 2006, in comparison to $277.6 million for 2005. Our efficiency
ratio was 64.18% for the year ended December 31, 2006, compared to 65.83% for
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 the sum of net interest income and noninterest
income. The increase in noninterest expense was primarily attributable to our
2005 and 2006 acquisitions, including salaries and employee benefits expense,
occupancy expense and information technology fees, as well as increases in
amortization of intangible assets and other expense.
We record the majority of integration costs attributable to our acquisitions as
of the consummation date of our purchase business combinations. These costs
include, but are not limited to, items such as:
>> write-downs and impairment of assets of the acquired entities that
will no longer be usable subsequent to the consummation date,
primarily data processing equipment, incompatible hardware and
software, bank signage, etc. These adjustments are generally recorded
as of the consummation date as an allocation of the purchase price
with the offsetting adjustment recorded as an increase to goodwill.
For all periods presented, these adjustments are not material to our
operations;
>> costs associated with a planned exit of an activity of the acquired
entity that is not associated with or is not expected to generate
revenues after the consummation date, such as credit card lending.
These costs are generally recorded as of the consummation date through
the establishment of an accrued liability with the offsetting
adjustment recorded as an increase to goodwill. These costs are
infrequently encountered and, for all periods presented, are not
material to our operations;
>> planned involuntary employee termination benefits, as further
discussed under "Business --Acquisitions - Acquisition and Integration
Costs" and Note 2 to our Consolidated Financial Statements; and
>> contractual obligations of the acquired entities that existed prior to
the consummation date that either have no economic benefit to the
combined entity or have a penalty that we will incur to cancel the
contractual obligation. These contractual obligations generally relate
to existing information technology and item processing contracts of
the acquired entities that include penalties for early termination.
The acquisition of specialized entities does not typically result in
costs associated with integration of information technology systems as
the existing systems remain in use. In conjunction with the merger and
integration of our acquisitions, the acquired banks are converted to
our existing information technology and item processing systems.
Consequently, the costs associated with terminating the existing
contracts of the acquired entities are generally recorded as of the
consummation date through the establishment of an accrued liability
with the offsetting adjustment recorded as an increase to goodwill as
further discussed under "Business -- Acquisitions - Acquisition and
Integration Costs" and Note 2 to our Consolidated Financial
Statements.
We make adjustments to the fair value of the acquired entities' assets and
liabilities for these items as of the consummation date and include them in the
allocation of the overall acquisition cost. We also incur costs associated with
our acquisitions that are expensed in our consolidated statements of income.
These costs relate specifically to additional costs incurred in conjunction with
the information technology and item processing conversions of the acquired
entities, as well as training of personnel on First Bank's systems, as further
described and quantified below.
Salaries and employee benefits increased by $27.1 million to $166.9 million for
the year ended December 31, 2006, from $139.8 million in 2005. We attribute the
overall increase to increased salaries and employee benefits expenses associated
with an aggregate of 20 additional branches acquired in 2005 and 2006, one de
novo branch opened in 2005, the acquisitions of UPAC and Adrian Baker, 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 benefit plans. Our total full-time
equivalent employees increased to approximately 2,630 at December 31, 2006 from
approximately 2,290 at December 31, 2005.
Occupancy, net of rental income, and furniture and equipment expense was $43.9
million and $38.1 million for the years ended December 31, 2006 and 2005,
respectively. The increase reflects higher levels of expense resulting from our
de novo activities and acquisitions in 2005 and 2006, as discussed above, as
well as 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 and item processing fees were $37.1 million and $35.5
million for the years ended December 31, 2006 and 2005, respectively. As more
fully described in Note 19 to our Consolidated Financial Statements, First
Services, L.P., a limited partnership indirectly owned by our Chairman and
members of his immediate family, provides information technology and various
operational support services to our subsidiaries and us. Information technology
fees also include fees paid to outside servicers associated with our mortgage
lending and trust divisions, our small business lending and institutional money
management subsidiaries, and UPAC and Adrian Baker. The increased level of
information technology fees was primarily attributable to the additional branch
offices provided by our acquisitions and de novo branch office openings; certain
de-conversion costs from other providers associated with our acquisitions;
growth and technological advancements consistent with our product and service
offerings; and continued expansion and upgrades to technological equipment,
networks and communication channels, including costs to maintain security and
provide compliance with the Sarbanes-Oxley Act of 2002; partially offset by
expense reductions resulting from information technology conversions of our
acquisitions completed in 2005 and 2006, as well as the achievement of certain
efficiencies associated with the implementation of various technology projects.
Legal, examination and professional fees was $8.8 million and $9.3 million for
the years ended December 31, 2006 and 2005, respectively. The continued
expansion of overall corporate activities, the ongoing professional services
utilized by certain of our acquired entities, and the levels of legal fees
associated with certain litigation matters have all contributed to the overall
expense levels in 2005 and 2006.
Amortization of intangible assets was $8.2 million and $4.9 million for the
years ended December 31, 2006 and 2005, respectively. The increase is
attributable to core deposit intangibles associated with our acquisitions
completed in 2005 and 2006, in addition to the customer list intangibles
associated with our acquisitions of Adrian Baker and UPAC in March 2006 and May
2006, respectively, as further described in Note 2 and Note 8 to our
Consolidated Financial Statements.
Charitable contributions expense was $6.5 million and $5.9 million for the years
ended December 31, 2006 and 2005, respectively. The increase is primarily
attributable to an increase in charitable contributions made to the Dierberg
Operating Foundation, Inc. and The Dierberg Foundation, charitable foundations
established by our Chairman and members of his immediate family, as further
described in Note 19 to our Consolidated Financial Statements.
Other expense was $31.6 million and $29.4 million for the years ended December
31, 2006 and 2005, respectively. Other expense encompasses numerous general and
administrative expenses including insurance, freight and courier services,
correspondent bank charges, miscellaneous losses and recoveries, expenses on
other real estate owned, memberships and subscriptions, transfer agent fees,
sales taxes and travel, meals and entertainment. The increase in other expense
was 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 our 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 offices and our acquisitions
completed during 2005 and 2006; partially offset by
>> a decrease of $1.5 million of expenditures on other real estate.
Expenses on other real estate were $520,000 for the year ended
December 31, 2006. Expenses on other real estate were $2.0 million for
the year ended December 31, 2005, and included expenditures of $1.1
million 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 $55.1 million for
the year ended December 31, 2006, representing an effective income tax rate of
33.1%, in comparison to $52.5 million, representing an effective income tax rate
of 35.5%, for the year ended December 31, 2005. The increase in our provision
for income taxes primarily reflects our increased earnings. In 2006, we reversed
a $2.9 million federal tax reserve and a $1.9 million state tax reserve as they
were no longer deemed necessary as a result of the resolution of a potential tax
liability. In 2005, we reversed a $3.3 million state tax reserve as it was no
longer deemed necessary as a result of the resolution of a potential tax
liability. In addition, we recorded net tax benefits of $5.6 million and $2.1
million relating to the utilization of certain federal and state tax credits for
the years ended December 31, 2006 and 2005, respectively. Excluding these
transactions, our effective income tax rate was 38.5% and 38.4% for the years
ended December 31, 2006 and 2005, respectively.
Comparison of Results of Operations for 2005 and 2004
Net Income. Net income was $96.9 million for the year ended December 31, 2005,
compared to $82.9 million for 2004. Our return on average assets and our return
on average stockholders' equity were 1.10% and 15.11%, respectively, for the
year ended December 31, 2005, compared to 1.10% and 14.44%, respectively, for
2004. Results for 2005 reflect increased net interest income and noninterest
income, and a negative provision for loan losses, partially offset by increased
noninterest expense and an increased provision for income taxes. The increase in
2005 reflects our continuing efforts to strengthen earnings and simultaneously
improve asset quality. Net interest-earning assets provided by our 2004 and 2005
acquisitions, higher-yielding investment securities, and internal loan growth
coupled with higher interest rates on loans contributed to increased interest
income in 2005. However, net interest income was adversely affected by a decline
in earnings on our interest rate swap agreements associated with our interest
rate risk management program, primarily resulting from increasing prevailing
interest rates and the maturity and termination of certain interest rate swap
agreements; increased interest expense as a result of higher interest rates on
deposits and a redistribution of deposit balances toward higher-yielding
products in conjunction with the CIB Bank deposit base acquired in November
2004; increased levels of borrowings coupled with increased rates on such
borrowings; and the issuance of additional subordinated debentures late in 2004
to partially fund our acquisition of CIB Bank, as further discussed under "--Net
Interest Income." Despite the increasing interest rate environment, overall
conditions within our markets and the impact of the decline in earnings on our
interest rate swap agreements continue to exert pressure on our net interest
income and our net interest margin. The increase in net income in 2005 also
resulted from a significant reduction in our provision for loan losses as a
result of overall improvement in our nonperforming loans during 2005, exclusive
of a deterioration of certain credits in the fourth quarter of 2005 that we
transferred to our loans held for sale portfolio, as further discussed under
"--Provision for Loan Losses." We primarily attribute the increased noninterest
income to additional noninterest income associated with our 2004 and 2005
acquisitions, increased gains on mortgage loans sold and held for sale,
increased investment management fee income, and increased service charges on
deposit accounts and customer service fees related to higher deposit balances;
partially offset by net losses on sales of available-for-sale investment
securities and the recognition of impairment on our SBA servicing assets, as
further discussed under "--Noninterest Income." The overall increase in our
operating expenses for 2005, as further discussed under "--Noninterest Expense,"
primarily reflects increased expense levels resulting from our 2004 and 2005
acquisitions and the addition of five de novo branch offices in 2004 and 2005,
significant charitable contributions expense and increases in salaries and
employee benefits expenses.
Provision for Loan Losses. We recorded a $4.0 million negative provision for
loan losses for the year ended December 31, 2005, in comparison to a provision
for loan losses of $25.8 million for the year ended December 31, 2004. Our net
loan charge-offs declined to $13.4 million from $24.8 million for the years
ended December 31, 2005 and 2004, respectively. As further discussed under
"--Lending Activities" and "--Loans and Allowance for Loan Losses," while we had
recorded a negative provision for loan losses of $8.0 million for the first nine
months of 2005, reflecting a 21.0% improvement in our nonperforming loans during
this period as a result of the sale of certain acquired nonperforming loans, the
strengthening of certain loans, loan payoffs and external refinancing of various
credits, and a significant reduction in net loan charge-offs, the level of
nonperforming loans increased during the fourth quarter of 2005 following
further deterioration of a few large credit relationships, resulting in a fourth
quarter provision for loan losses of $4.0 million. Our nonperforming loans,
which had decreased to $67.8 million at September 30, 2005 from $85.8 million at
December 31, 2004, increased $29.4 million during the fourth quarter of 2005,
resulting in a balance of $97.2 million at December 31, 2005. The increase in
nonperforming loans in the fourth quarter of 2005 is primarily attributable to
further deterioration of a small number of credit relationships, including two
large credit relationships associated with our CIB Bank purchase of $14.9
million and $16.6 million, or $31.5 million in aggregate. On December 31, 2005,
we recognized $7.6 million of loan charge-offs to reduce the loans to their
estimated fair value, net of costs, that is expected to be realized at the time
of the sale, and transferred approximately $59.7 million of nonperforming loans
to our held for sale portfolio, which included several of the relationships that
deteriorated during the fourth quarter of 2005. Included in the loan charge-offs
and loans transferred to our held for sale portfolio were $6.0 million of loan
charge-offs and approximately $49.6 million of nonperforming loans that were
associated with our CIB Bank purchase. In January 2006, we received a payoff of
one of the nonperforming loans in our held for sale portfolio that had a
carrying value of $12.4 million at December 31, 2005, and recorded a $5.0
million loan recovery. Furthermore, in March 2006, we completed the sale of a
majority of the remaining nonaccrual loans in our held for sale portfolio that
had a carrying value of approximately $32.5 million in aggregate, at December
31, 2005.
Tables summarizing nonperforming assets, past due loans and charge-off and
recovery experience are presented under "--Loans and Allowance for Loan Losses."
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 2005 and 2004:
December 31, Increase (Decrease)
-------------------- -------------------
2005 2004 Amount %
---- ---- ------ ---
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees.... $ 39,776 38,230 1,546 4.04%
Gain on loans sold and held for sale............................. 20,804 18,497 2,307 12.47
Net (loss) gain on investment securities......................... (2,873) 257 (3,130) (1,217.90)
Bank-owned life insurance investment income...................... 4,860 5,201 (341) (6.56)
Investment management income..................................... 8,573 6,870 1,703 24.79
Other............................................................ 24,945 18,144 6,801 37.48
--------- ------- ------
Total noninterest income...................................... $ 96,085 87,199 8,886 10.19
========= ======= ====== =========
Noninterest expense:
Salaries and employee benefits................................... $ 139,764 117,492 22,272 18.96%
Occupancy, net of rental income.................................. 22,081 19,882 2,199 11.06
Furniture and equipment.......................................... 16,015 17,017 (1,002) (5.89)
Postage, printing and supplies................................... 5,743 5,010 733 14.63
Information technology fees...................................... 35,472 32,019 3,453 10.78
Legal, examination and professional fees......................... 9,319 7,412 1,907 25.73
Amortization of intangible assets................................ 4,850 2,912 1,938 66.55
Communications................................................... 2,012 1,866 146 7.82
Advertising and business development............................. 7,043 5,493 1,550 28.22
Charitable contributions......................................... 5,922 577 5,345 926.34
Other............................................................ 29,417 23,538 5,879 24.98
--------- ------- ------
Total noninterest expense..................................... $ 277,638 233,218 44,420 19.05
========= ======= ====== =========
Noninterest Income. Noninterest income was $96.1 million for the year ended
December 31, 2005, in comparison to $87.2 million for 2004. 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 increased to $39.8
million from $38.2 million for the years ended December 31, 2005 and 2004,
respectively. The increase in service charges and customer service fees is
primarily attributable to:
>> increased demand deposit account balances associated with internal
growth and our acquisitions of Continental Community Bank and Trust
Company, or CCB, and CIB Bank completed in 2004, and our acquisitions
completed in 2005;
>> additional products and services available and utilized by our retail
and commercial customer base;
>> increased fee income from customer service charges for non-sufficient
funds and returned check fees coupled with enhanced control of fee
waivers;
>> higher earnings allowances on commercial deposit accounts;
>> increased fee income associated with automated teller machine services
and debit cards; and
>> pricing increases on certain service charges and customer service fees
instituted to reflect current market conditions.
The gain on loans sold and held for sale increased to $20.8 million from $18.5
million for the years ended December 31, 2005 and 2004, respectively. The
increase in 2005 is partially attributable to an increase of $2.0 million of
gains on SBA loans sold by SBLS LLC. The increase is also attributable to an
increase in gains on mortgage loans sold resulting from an increase in the
volume of mortgage loan sales in the secondary market as a result of increased
loan origination volumes. In general, new residential mortgage loan production
of 15-year fixed rate, conforming conventional adjustable rate mortgages and
other similar products is being retained in our portfolio, while other loans,
primarily 20 and 30-year fixed rate loans, are typically being sold in the
secondary loan markets.
Noninterest income includes a net loss on investment securities of $2.9 million
for the year ended December 31, 2005, in comparison to a net gain on investment
securities of $257,000 in 2004. The net loss for 2005 resulted from the sale of
certain available-for-sale investment securities associated with the termination
of a $50.0 million term repurchase agreement in the fourth quarter of 2005. The
net gain for 2004 resulted primarily from the sales of certain
available-for-sale investment securities held by acquired institutions that did
not meet our overall investment objectives.
Bank-owned life insurance investment income was $4.9 million for the year ended
December 31, 2005, in comparison to $5.2 million in 2004. The decrease in
investment income reflects a reduced return on the performance of the underlying
securities surrounding the insurance contracts which is primarily attributable
to the portfolio mix of investments and overall market conditions.
Investment management income generated by MVP was $8.6 million for the year
ended December 31, 2005, in comparison to $6.9 million in 2004, reflecting
increased portfolio management fee income attributable to new business
development and overall growth in assets under management.
Other income was $24.9 million and $18.1 million for the years ended December
31, 2005 and 2004, respectively. We attribute the primary components of the
increase in other income to:
>> an increase of $3.6 million attributable to recoveries of certain loan
principal balances that had been charged-off by the various respective
financial institutions prior to their acquisition by First Banks;
>> an increase of $3.1 million attributable to the reversal of a specific
reserve on a letter of credit assumed with the CIB Bank acquisition
and collection of the related fees resulting from the cancellation of
the letter of credit;
>> a net decrease in losses on the valuation or sale of certain
repossessed assets, primarily related to our commercial leasing
portfolio. Net gains for 2005 were $696,000 and included $464,000 of
gains on two sales of repossessed leasing equipment. Net losses for
2004 were $1.6 million and included a $750,000 write-down on
repossessed aircraft leasing equipment and a $1.3 million write-down
on repossessed equipment unrelated to the airline industry, partially
offset by gains of $350,000 on the sale of other repossessed aircraft
leasing equipment;
>> an increase of $713,000 reflecting reductions of a contingent
liability established in conjunction with the sale of a portion of our
commercial leasing portfolio in June 2004. The reductions of the
contingent liability in 2005 and 2004 of $1.1 million and $375,000,
respectively, were the result of further reductions in related lease
balances for the specific pools of leases sold;
>> a recovery of agent loan collection expenses of $739,000 as permitted
under a loan participation agreement prior to recovery of principal
and interest, from funds collected from the liquidation of a portion
of the collateral that secured the loan by the receiver;
>> a $602,000 net increase in loan servicing fees. The net increase is
primarily attributable to: increased fees from loans serviced for
others, primarily attributable to a $2.3 million increase in SBLS LLC
loan servicing fees, offset by an $887,000 increase in amortization of
SBA servicing rights and the recognition of a $2.4 million impairment
charge on our SBA servicing rights following substantial damage to
several shrimping vessels within the servicing portfolio caused by the
effects of Hurricane Katrina; a $199,000 decrease in mortgage loan
servicing fees, including a lower level of interest shortfall on
mortgage loans, offset by a $1.6 million decrease in amortization of
mortgage servicing rights; and increased unused commitment fees of
$281,000;
>> an increase of $584,000 in fees from fiduciary activities;
>> a $448,000 decrease in net losses on our derivative instruments; and
>> our acquisitions completed in 2004 and 2005; partially offset by
>> a decrease of $2.4 million in gains on sales of other real estate.
Gains on sales of other real estate were $1.3 million for the year
ended December 31, 2005, and included approximately $972,000 of gains
recorded on the sale of six holdings of other real estate. Gains on
sales of other real estate were $3.7 million for the year ended
December 31, 2004, and included a $2.7 million gain recorded in the
first quarter of 2004 on the sale of residential and recreational
development property that was transferred to other real estate in
January 2003 and approximately $390,000 of gains recorded on the sale
of two additional holdings of other real estate;
>> a decline of $1.2 million in rental income associated with reduced
commercial leasing activities;
>> a decrease of $1.0 million in gains on sales of branches, net of
expenses. Gains, net of expenses, on the sale of two Midwest banking
offices totaled $1.0 million and reflected a $390,000 gain, net of
expenses, on the sale of one of our Missouri branch banking offices in
February 2004, and a $630,000 gain, net of expenses, on the sale of
one of our Illinois banking offices in April 2004. There were no sales
of branch banking offices in 2005; and
>> a net increase in losses, net of gains, on the disposition of certain
assets, primarily attributable to a $459,000 net loss resulting from
the demolition of a branch drive-thru facility and a $277,000 net loss
resulting from the sale of a former CIB Bank branch facility during
2005.
Noninterest Expense. Noninterest expense was $277.6 million for the year ended
December 31, 2005, in comparison to $233.2 million for 2004. Our efficiency
ratio was 65.83% for the year ended December 31, 2005, compared to 60.23% for
2004. The increases in noninterest expense and our efficiency ratio for 2005
were primarily attributable to increases in expenses resulting from our 2004 and
2005 acquisitions and the addition of five de novo branch offices in 2004 and
2005, and increases in salaries and employee benefits expense, information
technology expense, charitable contributions expense, expenses on other real
estate, and other expense.
Salaries and employee benefits increased by $22.3 million to $139.8 million for
the year ended December 31, 2005, from $117.5 million in 2004. We attribute the
overall increase to increased salaries and employee benefits expenses associated
with an aggregate of 27 additional branches acquired in 2004 and 2005 and five
de novo branches opened in 2004 and 2005; and the addition of a regional
structure in Chicago following our significant expansion in the Chicago market
area, including credit administration, commercial real estate and commercial and
industrial banking groups, branch administration, credit review and human
resource and training functions. The increase is also attributable to generally
higher salary and employee benefit costs associated with employing and retaining
qualified personnel, including enhanced incentive compensation and employee
benefits plans. Our number of employees on a full-time equivalent basis
increased to approximately 2,290 at December 31, 2005, from approximately 2,170
at December 31, 2004.
Occupancy, net of rental income, and furniture and equipment expense totaled
$38.1 million and $36.9 million for the years ended December 31, 2005 and 2004,
respectively. The increase is primarily attributable to higher levels of expense
resulting from our acquisitions in 2004 and 2005, which added 27 branch offices,
and the opening of five de novo branch offices in 2004 and 2005, as well as the
formation of separate small business banking loan origination offices in most of
our market areas. The increase is also attributable to increased technology
equipment expenditures, continued expansion and renovation of certain corporate
and branch offices, including additional production and administrative offices,
and increased depreciation expense associated with acquisitions and capital
expenditures.
Information technology and item processing fees were $35.5 million and $32.0
million for the years ended December 31, 2005 and 2004, respectively. The
increased level of fees is primarily attributable to the additional branch
offices provided by our acquisitions and de novo branch office openings; certain
de-conversion costs from other providers associated with our acquisitions,
growth and technological advancements consistent with our product and service
offerings; and continued expansion and upgrades to technological equipment,
networks and communication channels; partially offset by expense reductions
resulting from information technology conversions of our acquisitions completed
in 2004, as well as the achievement of certain efficiencies associated with the
implementation of various technology projects. Legal, examination and
professional fees were $9.3 million and $7.4 million for the years ended
December 31, 2005 and 2004, respectively. The continued expansion of overall
corporate activities, the ongoing professional services utilized by certain of
our acquired entities, and increased legal fees associated with commercial loan
documentation, collection efforts and certain litigation costs primarily related
to our various acquired entities have all contributed to the overall expense
levels in 2004 and 2005. The increase in 2005 is also attributable to $471,000
of fees paid for accounting and other services, including operational and
systems support, provided by the seller of CIB Bank pursuant to a service
agreement to provide services from the November 2004 sale date through the
system conversion date in February 2005.
Amortization of intangible assets was $4.9 million and $2.9 million for the
years ended December 31, 2005 and 2004, respectively. The increase is
attributable to core deposit intangibles associated with our acquisitions
completed in 2004 and 2005.
Communications and advertising and business development expenses were $9.1
million and $7.4 million for the years ended December 31, 2005 and 2004,
respectively. The expansion of our sales, marketing and product group in 2004
and broadened advertising campaigns have contributed to higher expenditures and
are consistent with our continued focus on expanding our banking franchise and
the products and services available to our customers. Our spring and fall
advertising campaigns have contributed to the increase in 2005. We continue our
efforts to manage these expenses through renegotiation of contracts, enhanced
focus on advertising and promotional activities in markets that offer greater
benefits, as well as ongoing cost containment efforts.
Charitable contribution expense was $5.9 million and $577,000 for the years
ended December 31, 2005 and 2004, respectively. The increase in 2005 was
primarily attributable to charitable contributions of $2.5 million and $1.5
million, respectively, in December 2005 to The Dierberg Foundation and the
Dierberg Operating Foundation, Inc. The increase is also attributable to a $1.5
million contribution in May 2005 to an urban revitalization development project
located in the city of St. Louis. In exchange for this contribution, we received
Missouri state tax credits that will be utilized to reduce certain state income
taxes.
Other expense was $29.4 million and $23.5 million for the years ended December
31, 2005 and 2004, respectively. Other expense encompasses numerous general and
administrative expenses including insurance, freight and courier services,
correspondent bank charges, miscellaneous losses and recoveries, expenses on
other real estate owned, memberships and subscriptions, transfer agent fees,
sales taxes and travel, meals and entertainment. The increase is primarily
attributable to:
>> an increase of $1.6 million of expenditures on other real estate.
Expenditures on other real estate were $2.0 million for the year ended
December 31, 2005, and included expenses of $1.1 million in
preparation for the sale of a parcel of other real estate acquired
with the acquisition of CIB Bank. Expenditures on other real estate
were $364,000 for the year ended December 31, 2004;
>> increased losses and adjustments to the carrying value of certain
affordable housing credit partnership investments; and
>> expenses associated with continued growth and expansion of our banking
franchise, including our de novo branch offices and acquisitions
completed during 2004 and 2005, particularly CIB Bank.
Provision for Income Taxes. The provision for income taxes was $52.5 million for
the year ended December 31, 2005, representing an effective income tax rate of
35.5%, in comparison to $45.3 million, representing an effective income tax rate
of 35.4%, for the year ended December 31, 2004. The increase in our provision
for income taxes primarily reflects our increased earnings. During 2005 and
2004, we reversed $3.3 million and $2.8 million of state tax reserves,
respectively, that were no longer deemed necessary as a result of the resolution
of a potential tax liability. Additionally, in 2005, we recorded a net tax
benefit of $2.1 million relating to our utilization of certain federal and state
tax credits. Excluding these transactions, our effective income tax rate was
38.4% and 37.5% for the years ended December 31, 2005 and 2004.
Interest Rate Risk Management
For financial institutions, the maintenance of a satisfactory level of net
interest income is a primary factor in achieving acceptable income levels.
However, the maturity and repricing characteristics of the institution's loan
and investment portfolios may differ significantly from those within its deposit
structure. The nature of the loan and deposit markets within which a financial
institution operates and its objectives for business development within those
markets at any point in time influence these characteristics. In addition, the
ability of borrowers to repay loans and depositors to withdraw funds prior to
stated maturity dates introduces divergent option characteristics that operate
primarily as interest rates change. These factors cause various elements of the
institution's balance sheet to react in different manners and at different times
relative to changes in interest rates, potentially leading to increases or
decreases in net interest income over time. Depending upon the direction and
magnitude of interest rate movements and their effect on the specific components
of the institution's balance sheet, the effects on net interest income can be
substantial. Consequently, managing a financial institution requires
establishing effective control over the exposure of the institution to changes
in interest rates.
We strive to manage our interest rate risk by:
>> maintaining an Asset Liability Committee, or ALCO, responsible to our
Board of Directors and Executive Management, to review the overall
interest rate risk management activity and approve actions taken to
reduce risk;
>> employing a financial simulation model to determine our exposure to
changes in interest rates;
>> coordinating the lending, investing and deposit-generating functions
to control the assumption of interest rate risk; and
>> utilizing various financial instruments, including derivatives, to
offset inherent interest rate risk should it become excessive.
The objective of these procedures is to limit the adverse impact that changes in
interest rates may have on our net interest income.
The ALCO has overall responsibility for the effective management of interest
rate risk and the approval of policy guidelines. The ALCO includes our President
and Chief Executive Officer, Chief Operating Officer, Chief Financial Officer,
Chief Investment Officer and the senior officers of finance and risk management,
and certain other officers. The Asset Liability Management Group, which monitors
interest rate risk, supports the ALCO, prepares analyses for review by the ALCO
and implements actions that are either specifically directed by the ALCO or
established by policy guidelines.
In managing sensitivity, we strive to reduce the adverse impact on earnings by
managing interest rate risk within internal policy constraints. Our policy is to
manage exposure to potential risks associated with changing interest rates by
maintaining a balance sheet posture in which annual net interest income is not
significantly impacted by reasonably possible near-term changes in interest
rates. To measure the effect of interest rate changes, we project our net income
over a two-year horizon on a pro forma basis. The analysis assumes various
scenarios for increases and decreases in interest rates including both
instantaneous and gradual, and parallel and non-parallel shifts in the yield
curve, in varying amounts. For purposes of arriving at reasonably possible
near-term changes in interest rates, we include scenarios based on actual
changes in interest rates, which have occurred over a two-year period,
simulating both a declining and rising interest rate scenario.
We are "asset-sensitive," indicating that our assets would generally reprice
with changes in interest rates more rapidly than our liabilities, and our
simulation model indicates a loss of projected net interest income should
interest rates decline. While a decline in interest rates of less than 100 basis
points has a relatively minimal impact on our net interest income, an
instantaneous parallel decline in the interest yield curve of 100 basis points
indicates a pre-tax projected loss of approximately 3.7% of net interest income,
based on assets and liabilities at December 31, 2006. Although we do not
anticipate that instantaneous shifts in the yield curve as projected in our
simulation model are likely, these are indications of the effects that changes
in interest rates would have over time.
We also prepare and review a more traditional interest rate sensitivity position
in conjunction with the results of our simulation model. The following table
presents the projected maturities and periods to repricing of our rate sensitive
assets and liabilities as of December 31, 2006, adjusted to account for
anticipated prepayments:
Over Over
Three Six Over
Three through through One Over
Months Six Twelve through Five
or Less Months Months Five Years Years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
Loans (1).................................... $4,550,231 416,290 580,060 1,890,766 229,134 7,666,481
Investment securities........................ 350,854 167,462 161,407 557,480 227,743 1,464,946
Short-term investments....................... 153,583 -- -- -- -- 153,583
---------- --------- --------- --------- --------- ---------
Total interest-earning assets............ 5,054,668 583,752 741,467 2,448,246 456,877 9,285,010
Effect of interest rate swap agreements...... (600,000) -- 200,000 400,000 -- --
---------- --------- --------- --------- --------- ---------
Total interest-earning assets after
the effect of interest
rate swap agreements................... $4,454,668 583,752 941,467 2,848,246 456,877 9,285,010
========== ========= ========= ========= ========= =========
Interest-bearing liabilities:
Interest-bearing demand deposits............. $ 363,317 225,846 147,291 108,013 137,472 981,939
Money market deposits........................ 1,733,483 -- -- -- -- 1,733,483
Savings deposits............................. 105,246 86,673 74,291 105,245 247,637 619,092
Time deposits................................ 1,205,768 785,312 1,196,107 628,577 11,700 3,827,464
Other borrowings............................. 369,950 77 3,157 715 -- 373,899
Notes payable................................ 65,000 -- -- -- -- 65,000
Subordinated debentures...................... 201,035 25,736 -- -- 71,195 297,966
---------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities....... $4,043,799 1,123,644 1,420,846 842,550 468,004 7,898,843
========== ========= ========= ========= ========= =========
Interest-sensitivity gap:
Periodic..................................... $ 410,869 (539,892) (479,379) 2,005,696 (11,127) 1,386,167
=========
Cumulative................................... 410,869 (129,023) (608,402) 1,397,294 1,386,167
========== ========= ========= ========= =========
Ratio of interest-sensitive assets to
interest-sensitive liabilities:
Periodic................................. 1.10 0.52 0.66 3.38 0.98 1.18
=========
Cumulative............................... 1.10 0.98 0.91 1.19 1.18
========== ========= ========= ========= =========
- -------------------------
(1) Loans are presented net of unearned discount.
Management made certain assumptions in preparing the foregoing table. These
assumptions included:
>> loans will repay at projected repayment rates;
>> mortgage-backed securities, included in investment securities, will
repay at projected repayment rates;
>> interest-bearing demand accounts and savings deposits will behave in a
projected manner with regard to their interest rate sensitivity; and
>> fixed maturity deposits will not be withdrawn prior to maturity.
A significant variance in actual results from one or more of these assumptions
could materially affect the results reflected in the foregoing table.
Our overall asset-sensitive position at December 31, 2006 remained relatively
consistent at $1.39 billion, or 13.65% of our total assets, in comparison to our
overall asset-sensitive position of $1.34 billion, or 14.60% of our total
assets, at December 31, 2005. However, we were in a liability-sensitive position
on a cumulative basis through the twelve-month time horizon of $608.4 million,
or 5.99% of our total assets, at December 31, 2006, whereas we were in an
asset-sensitive position on a cumulative basis through the twelve-month time
horizon of $117.1 million, or 1.28% of our total assets, at December 31, 2005.
We primarily attribute the liability-sensitive position on a cumulative basis
through the twelve-month time horizon in 2006 to an increase in money market
deposits and an increase in the repricing of time deposits within the
twelve-month time horizon as a result of the current interest rate environment
and economic conditions.
The interest-sensitivity position is one of several measurements of the impact
of interest rate changes on net interest income. Its usefulness in assessing the
effect of potential changes in net interest income varies with the constant
change in the composition of our assets and liabilities and changes in interest
rates. For this reason, we place greater emphasis on our simulation model for
monitoring our interest rate risk exposure.
As previously discussed, we utilize derivative financial instruments to assist
in our management of interest rate sensitivity by modifying the repricing,
maturity and option characteristics of certain assets and liabilities. The
derivative financial instruments we held as of December 31, 2006 and 2005 are
summarized as follows:
December 31,
----------------------------------------------------
2006 2005
------------------------ -------------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................ $600,000 4,369 300,000 114
Fair value hedges........................... -- -- 25,000 748
Interest rate floor agreements.............. 300,000 376 100,000 70
Interest rate cap agreements................ 400,000 139 -- --
Interest rate lock commitments.............. 5,900 -- 5,900 --
Forward commitments to sell
mortgage-backed securities................ 54,000 -- 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.
For the year ended December 31, 2006, we realized net interest expense of $5.0
million on our derivative financial instruments, whereas for the years ended
December 31, 2005 and 2004, we realized net interest income of $2.2 million and
$50.1 million, respectively, on our derivative financial instruments. The
decreased earnings for 2006 and 2005 are primarily attributable to 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. Although we have implemented other methods to
mitigate the reduction in net interest income associated with our derivatives,
the maturity and termination of the swap agreements has resulted in a
compression of our net interest margin of approximately eight basis points for
the year ended December 31, 2006, in comparison to 2005. In addition, the
increasing interest rate environment has mitigated a portion of the effect of
the reduced earnings on our derivative financial instruments. During the third
quarter of 2006, we significantly expanded our utilization of derivative
financial instruments, as further described in Note 5 to our Consolidated
Financial Statements, in an effort to reduce the adverse impact that falling
interest rates could have on our net interest income.
We recorded net losses on derivative instruments, which are included in
noninterest income in our consolidated statements of income, of $390,000, $1.1
million and $1.5 million for the years ended December 31, 2006, 2005 and 2004,
respectively. The net losses recorded in 2006 reflect changes in the value of
our interest rate floor agreements entered into in September 2005 and 2006, and
changes in the value of our interest rate cap agreements entered into in
September 2006. The net losses recorded in 2005 reflect changes in the value of
our fair value hedges and the underlying hedged liabilities, and changes in the
value of our interest rate floor agreement entered into in September 2005.
Information regarding our derivative financial instruments outlined in the table
above is further discussed in Note 5 to our Consolidated Financial Statements
appearing elsewhere in this report.
Mortgage Banking Activities
Our mortgage banking activities consist of the origination, purchase and
servicing of residential mortgage loans. The purchase of loans to be held for
sale is primarily limited to loans that we acquire in conjunction with our
acquisition of other financial institutions. Generally, we sell our production
of residential mortgage loans in the secondary loan markets. However, in
mid-2003, as a result of continued weak loan demand in other sectors of our loan
portfolio, we made a business strategy decision to retain a portion of new
residential mortgage loan production in our real estate mortgage portfolio,
generally represented by production originated in our St. Louis production
offices with the exception of 20 and 30-year fixed rate loans which are
typically sold in the secondary loan markets. Furthermore, in the third quarter
of 2005, we revised our strategy and began retaining additional mortgage loan
production in our residential real estate mortgage portfolio, including 15-year
fixed rate, conforming conventional adjustable rate mortgages and other similar
products, and continued this strategy through the first six months of 2006, as
further discussed in "--Loans and Allowance for Loan Losses." Servicing rights
may either be retained or released with respect to conventional, FHA and VA
conforming fixed-rate and conventional adjustable rate residential mortgage
loans.
For the three years ended December 31, 2006, 2005 and 2004, we originated
residential mortgage loans held for sale and held for portfolio totaling $1.28
billion, $1.60 billion and $1.14 billion, respectively, and sold residential
mortgage loans totaling $1.11 billion, $1.14 billion and $1.03 billion,
respectively. The origination and purchase of residential mortgage loans and the
related sale of the loans provides us with additional sources of income
including the gain or loss realized upon sale, the interest income earned while
the loan is held awaiting sale and the ongoing loan servicing fees from the
loans sold with servicing rights retained. Mortgage loans serviced for investors
aggregated $1.04 billion, $1.01 billion and $1.06 billion at December 31, 2006,
2005 and 2004, respectively.
The gain on mortgage loans originated for resale, including loans sold and held
for sale, was $18.6 million, $18.1 million and $17.8 million for the years ended
December 31, 2006, 2005 and 2004, respectively. We determine these gains, net of
losses, on a lower of cost or market basis. These gains are realized at the time
of sale. The cost basis reflects both the adjustments of the carrying values of
loans held for sale to the lower of cost, adjusted to include the cost of
hedging the loans held for sale, or current market values, as well as the
adjustments for any gains or losses on loan commitments for which the interest
rate has been established, net of anticipated underwriting "fallout," adjusted
for the cost of hedging these loan commitments. Fallout represents loans not
funded due to issues discovered during the underwriting process or withdrawal of
the loan request by the customer. The increase in gains in 2006 is primarily
attributable to the recognition of $2.1 million of servicing income generated
from the capitalization of mortgage servicing rights pertaining to the
securitization and transfer to our investment portfolio of $138.9 million of
residential mortgage loans held in our loan portfolio, as further described in
Note 6 to our Consolidated Financial Statements; and net gains of $386,000, $1.1
million and $909,000 recorded on the sale of $100.0 million, $101.6 million and
$77.1 million of certain residential mortgage loans in August 2006, October 2006
and December 2006, respectively, of which $127.8 million represented loans held
in our portfolio and $150.9 million represented loans held for sale; partially
offset by management's decision to retain additional loan volume in our
residential real estate mortgage portfolio during the first six months of 2006,
as discussed above. The increase for 2005 is primarily attributable to the
continued growth of our mortgage banking activities and the relatively high
volume of loans originated and sold commensurate with the prevailing interest
rate environment, partially offset by management's decision to retain additional
loan volume in our residential real estate mortgage portfolio, as discussed
above.
Interest income on loans held for sale was $18.2 million for the year ended
December 31, 2006, in comparison to $11.7 million and $8.8 million for the years
ended December 31, 2005 and 2004, respectively. The amount of interest income
realized on loans held for sale is a function of the average balance of loans
held for sale, the period for which the loans are held and the prevailing
interest rates when the loans are made. The average balance of loans held for
sale was $247.0 million, $184.1 million and $133.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively. On an annualized basis, our
yield on the portfolio of loans held for sale was 7.39%, 6.36% and 6.61% for the
years ended December 31, 2006, 2005 and 2004, respectively. This compares with
our cost of funds, as a percentage of average interest-bearing liabilities, of
3.49%, 2.47% and 1.64% for the years ended December 31, 2006, 2005 and 2004,
respectively.
We report mortgage loan servicing fees in other noninterest income in our
consolidated statements of income, net of amortization of mortgage servicing
rights, interest shortfall and mortgage-backed security guarantee fee expense.
Interest shortfall equals the difference between the interest collected from a
loan-servicing customer upon prepayment of the loan and a full month's interest
that is required to be remitted to the security owner. Our net mortgage loan
servicing fees contributed to an overall reduction in our other noninterest
income of $1.4 million, $1.2 million and $2.6 million for the years ended
December 31, 2006, 2005 and 2004, respectively, which included the amortization
of mortgage servicing rights of $4.1 million, $5.0 million and $6.5 million for
the years ended December 31, 2006, 2005 and 2004, respectively. We attribute the
slight decrease in net loan servicing fees in 2006 to a reduction in fees
associated with the retention of a portion of loan production in our residential
mortgage loan portfolio, as previously discussed, partially offset by reduced
amortization of mortgage servicing rights. We attribute the increase in net loan
servicing fees in 2005 to reduced amortization of mortgage servicing rights,
partially offset by a reduction in fees associated with a lower volume of loans
serviced for others and the retention of a portion of loan production in our
residential mortgage loan portfolio.
Our interest rate risk management policy provides certain hedging parameters to
reduce the interest rate risk exposure arising from changes in loan prices from
the time of commitment until the sale of the security or loan. To reduce this
exposure, we use forward commitments to sell fixed-rate mortgage-backed
securities at a specified date in the future. At December 31, 2006, 2005 and
2004, we had $56.0 million, $47.7 million and $35.3 million, respectively, of
loans held for sale and related commitments, net of committed loan sales and
estimated underwriting fallout, of which $54.0 million, $47.0 million and $34.0
million, respectively, were hedged through the use of such forward commitments.
Investment Securities
We classify the securities within our investment portfolio as trading, available
for sale or held to maturity. Our investment security portfolio consists
primarily of securities designated as available for sale. During the fourth
quarter of 2005, we began to engage in the trading of investment securities. The
investment security portfolio was $1.46 billion at December 31, 2006, compared
to $1.34 billion and $1.81 billion at December 31, 2005 and 2004, respectively.
We attribute the increase in the investment securities portfolio in 2006 to: an
increase in the available-for-sale securities portfolio due to the
securitization of $138.9 million of certain of our residential mortgage loans
held in our loan portfolio; an increase in our trading securities portfolio of
$77.8 million; reinvestment of funds available from maturities in
higher-yielding securities; and an increase of $37.3 million relating to
securities acquired through our acquisitions completed in 2006; partially offset
by the sale of the underlying available-for-sale investment securities
associated with the termination of $200.0 million of term repurchase agreements,
as further described in Note 3, Note 5 and Note 10 to our Consolidated Financial
Statements. Funds available from maturities of investment securities during 2005
were primarily used to fund loan growth, resulting in the decrease in our
investment securities portfolio in 2005. A portion of the remaining funds
available from maturities of investment securities were reinvested in
higher-yielding available-for-sale investment securities. The decrease also
reflects the sale of the underlying available-for-sale investment securities
associated with the termination of a $50.0 million term repurchase agreement.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source of income
for First Bank. Interest and fees on loans were 90.0%, 85.9% and 86.5% of total
interest income for the years ended December 31, 2006, 2005 and 2004,
respectively. We recognize interest and fees on loans as income using the
interest method of accounting. Loan origination fees are deferred and accreted
to interest income over the estimated life of the loans using the interest
method of accounting. The accrual of interest on loans is discontinued when it
appears that interest or principal may not be paid in a timely manner in the
normal course of business. We generally record payments received on nonaccrual
and impaired loans as principal reductions, and defer the recognition of
interest income on loans until all principal has been repaid or an improvement
in the condition of the loan has occurred that would warrant the resumption of
interest accruals.
Loans, net of unearned discount, represented 75.5% of our assets as of December
31, 2006, compared to 76.6% of our assets at December 31, 2005. Loans, net of
unearned discount, increased $645.7 million to $7.67 billion at December 31,
2006 from $7.02 billion at December 31, 2005. The overall increase in loans, net
of unearned discount, in 2006 is primarily attributable to internal loan growth
of $584.2 million and our acquisitions completed in 2006, which provided loans,
net of unearned discount, of $545.1 million, in aggregate. This increase was
partially offset by the securitization of certain residential mortgage loans
that we transferred to our investment portfolio, and the sale and/or payoff of
certain nonperforming loans, as further discussed below. Loans, net of unearned
discount, increased $882.8 million to $7.02 billion at December 31, 2005 from
$6.14 billion at December 31, 2004. Our acquisitions completed in 2005 provided
loans, net of unearned discount, of $209.6 million, in aggregate. Exclusive of
these acquisitions, our loans, net of unearned discount, increased $687.5
million in 2005, as a result of internal loan growth. In addition, we reduced
our loans and leases by $14.3 million in the first and second quarters of 2005
from the sale of certain nonperforming loans, resulting from management's
business decision in late 2004 to reduce the level of our nonperforming assets
through the sale of certain nonperforming loans. We attribute the net increase
in our loan portfolio in 2006 primarily to:
>> an increase of $315.1 million in our commercial, financial and
agricultural portfolio, primarily attributable to an increase of
$214.9 million associated with our acquisitions completed during 2006,
including $149.2 million of loans provided by our acquisition of UPAC
in May 2006, in addition to continued internal loan production growth
within this portfolio;
>> an increase of $268.2 million in our real estate construction and
development portfolio resulting from internal growth due to new loan
originations and seasonal fluctuations on existing and available
credit lines, as well as a $34.2 million increase associated with our
acquisitions completed in 2006; and
>> an increase of $145.4 million in our real estate mortgage portfolio
resulting from: (a) internal loan growth of $289.8 million, largely
attributable to the retention of certain mortgage loan production in
our residential real estate mortgage portfolio during the first six
months of 2006 following management's business strategy decision in
the third quarter of 2005 to retain certain additional mortgage loan
product production in our residential real estate mortgage portfolio;
(b) our acquisitions completed during 2006, which provided real estate
mortgage loans of $293.0 million; partially offset by (c) 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 (d)
the sale of approximately $127.8 million of residential mortgage loans
in the third and fourth quarters of 2006; partially offset by
>> a decrease of $98.8 million in loans held for sale resulting from (a)
the timing of loan originations and subsequent sales in the secondary
mortgage market; (b) the payoff and/or sale of approximately $44.9
million of certain acquired loans that we transferred to our held for
sale portfolio on December 31, 2005; and (c) the transfer of a $13.5
million nonperforming loan from our loans held for sale portfolio to
our commercial real estate loan portfolio after recording a $1.1
million write-down of the credit to its estimated fair value at the
time of transfer. We subsequently received a payoff on this credit for
the amount of its revised carrying value in December 2006.
In our evaluation of acquisitions, it is anticipated that as we apply our
standards for credit structuring, underwriting, documentation and approval, a
portion of the existing borrowers will elect to refinance their loans with
another financial institution, because of one or more of the following factors:
(a) there may be an aggressive effort by other financial institutions to attract
them; (b) they do not accept the changes involved, or (c) they are unable to
meet our credit requirements. In addition, another portion of the portfolio may
either enter our remedial collection process to reduce undue credit exposure or
improve problem loans, or may be charged-off. The amount of this attrition will
vary substantially among acquisitions depending on the strength and discipline
within the credit function of the acquired institution; the magnitude of
problems contained in the acquired portfolio; the aggressiveness of competing
institutions to attract business; and the significance of the acquired
institution to the overall banking market. Typically, in acquisitions of
institutions that have strong credit cultures prior to their acquisitions and
operate in moderately large markets, there is relatively little attrition that
occurs after the acquisition. However, in those acquisitions in which the credit
discipline has been weak, and particularly those in small metropolitan or rural
areas, we can experience substantially greater attrition. Generally, this
process occurs within approximately six to 12 months after completion of the
acquisition.
During the five years ended December 31, 2006, loans, net of unearned discount,
increased from $5.41 billion at December 31, 2001 to $7.67 billion at December
31, 2006, an increase of $2.26 billion, or 41.7%. Throughout this period, we
have achieved significant growth through implementation of our acquisition
strategy and we have also enhanced our capabilities for achieving and managing
internal growth. A key element of this process has been the expansion of our
corporate business development staff, which is responsible for the internal
development and management of both loan and deposit relationships with
commercial customers. While this process was occurring, in an attempt to achieve
more diversification, a higher level of interest yield and a reduction in
interest rate risk within our loan portfolio, we also focused on repositioning
our portfolio. As the corporate business development effort continued to
originate a substantial volume of new loans, nearly all of our conforming
residential mortgage loan production was historically sold in the secondary
mortgage market until management's decision in 2003 to retain a portion of the
new loan production in our real estate mortgage portfolio to offset continued
weak loan demand in other sectors of our loan portfolio and management's
decision in the third quarter of 2005 to retain additional mortgage loan product
production in our residential real estate mortgage portfolio, including 15-year
fixed rate, conforming conventional adjustable rate mortgages and other similar
products. Furthermore, our lease financing portfolio, which now represents an
insignificant portion of our loan portfolio, was reduced as a result of (a) the
discontinuation of our New Mexico based leasing operation in 2002, the transfer
of all responsibilities for the existing portfolio to a new leasing staff in St.
Louis, Missouri, a change in our overall business strategy resulting in reduced
commercial leasing activities and repayment of leases by borrowers, and (b) the
sale of a significant portion of our remaining commercial leasing portfolio,
which reduced the portfolio by approximately $33.1 million to $9.6 million at
June 30, 2004. We have also reduced our consumer lending by discontinuing the
origination of indirect auto loans and selling our student loan and credit card
loan portfolios. This allowed us to fund part of the growth in corporate lending
through reductions in indirect automobile and other consumer-related loans.
As previously mentioned, our acquisitions have contributed to an increase in the
portfolios of new loans during the five years ended December 31, 2006. In
certain cases, these acquired portfolios contained significant loan problems,
which we had anticipated and attempted to consider in our acquisition pricing.
As we resolved the asset quality issues, the portfolios of the acquired entities
tended to decline due to the elimination of problem loans and because many of
the resources that would otherwise be directed toward generating new loans were
concentrated on improving or eliminating existing problem relationships. We
continued to experience this trend, most significantly as a result of our
acquisition of CIB Bank in November 2004, although we have been successful in
satisfactorily addressing the problem credits acquired with that acquisition, as
further discussed below.
The following table summarizes the components of changes in our loan portfolio,
net of unearned discount, for the five years ended December 31, 2006:
Increase (Decrease) For the Year Ended December 31,
------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(dollars expressed in thousands)
Internal loan volume increase (decrease):
Commercial lending.............................. $ 160,642 204,494 91,760 (22,211) (119,295)
Residential real estate lending (1)............. 410,181 481,642 32,348 (103,573) 36,074
Consumer lending, net of unearned discount...... 13,412 1,383 (11,900) (22,429) (44,060)
Loans and leases sold................................ (344,687) (14,337) (83,216) -- --
Loans provided by acquisitions....................... 545,106 209,621 780,901 43,700 151,000
Securitization of loans.............................. (138,944) -- -- -- --
---------- ------- ------- -------- --------
Total increase (decrease)....................... $ 645,710 882,803 809,893 (104,513) 23,719
========== ======= ======= ======== ========
- --------------------------------
(1) Includes loans held for sale.
We seek to maintain a lending strategy that emphasizes quality, growth and
diversification. Throughout our organization, we employ a common credit
underwriting policy. Our commercial lenders focus principally on small to
middle-market companies. Consumer lenders focus principally on residential
loans, including home equity loans and other consumer financing opportunities
arising out of our branch banking network.
Commercial, financial and agricultural loans include loans that are made
primarily based on the borrowers' general credit strength and ability to
generate cash flows for repayment from income sources even though such loans may
also be secured by real estate or other assets. Real estate construction and
development loans, primarily relating to residential properties and commercial
properties, represent financing secured by real estate under construction. Real
estate mortgage loans consist primarily of loans secured by single-family,
owner-occupied properties and various types of commercial properties on which
the income from the property is the intended source of repayment. Consumer and
installment loans are loans to individuals and consist of a mix of secured and
unsecured loans, including preferred credit and loans secured by automobiles.
Loans held for sale are primarily fixed and adjustable rate residential mortgage
loans pending sale in the secondary mortgage market in the form of a
mortgage-backed security, or to various private third-party investors.
The following table summarizes the composition of our loan portfolio by major
category and the percent of each category to the total portfolio as of the dates
presented:
December 31,
--------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------------ ------------------ ------------------ ----------------- ------------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
(dollars expressed in thousands)
Commercial, financial
and agricultural.......... $1,934,908 26.0% $1,616,841 24.1% $1,569,321 26.1% $1,407,626 27.1% $1,443,016 28.4%
Real estate construction
and development........... 1,832,504 24.6 1,564,255 23.3 1,318,413 22.0 1,063,889 20.5 989,650 19.5
Real estate mortgage:
One-to-four-family
residential loans....... 1,270,158 17.0 1,214,121 18.1 870,889 14.5 811,650 15.7 694,604 13.7
Multi-family residential
loans................... 141,341 1.9 143,663 2.2 102,447 1.7 108,163 2.1 112,517 2.2
Commercial real estate
loans................... 2,203,649 29.6 2,112,004 31.5 2,088,245 34.8 1,662,451 32.1 1,637,001 32.2
Lease financing............... 4 -- 2,981 -- 5,911 0.1 67,282 1.3 126,738 2.5
Consumer and installment,
net of unearned
discount.................. 67,590 0.9 51,772 0.8 49,677 0.8 61,268 1.2 79,097 1.5
---------- ----- ---------- ----- ---------- ----- ---------- ----- --------- -----
Total loans,
excluding loans
held for sale...... 7,450,154 100.0% 6,705,637 100.0% 6,004,903 100.0% 5,182,329 100.0% 5,082,623 100.0%
===== ===== ===== ===== =====
Loans held for sale........... 216,327 315,134 133,065 145,746 349,965
---------- ---------- ---------- ---------- ----------
Total loans........... $7,666,481 $7,020,771 $6,137,968 $5,328,075 $5,432,588
========== ========== ========== ========== ==========
Loans at December 31, 2006 mature as follows:
Over One Year
Through Five
Years Over Five Years
--------------------- -------------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
Commercial, financial and agricultural.................... $1,208,583 63,055 133,517 243,697 286,056 1,934,908
Real estate construction and development... .............. 1,098,508 114,593 555,247 33,526 30,630 1,832,504
Real estate mortgage:
One-to-four family residential loans.................. 91,421 163,450 48,235 162,845 804,207 1,270,158
Multi-family residential loans........................ 9,964 60,688 41,148 18,332 11,209 141,341
Commercial real estate loans.......................... 409,604 800,092 301,190 362,776 329,987 2,203,649
Lease financing........................................... -- 4 -- -- -- 4
Consumer and installment, net of unearned discount........ 22,567 38,278 2,628 2,126 1,991 67,590
Loans held for sale....................................... 216,327 -- -- -- -- 216,327
---------- --------- --------- -------- --------- ---------
Total loans......................................... $3,056,974 1,240,160 1,081,965 823,302 1,464,080 7,666,481
========== ========= ========= ======== ========= =========
Nonperforming assets include nonaccrual loans, restructured loans and other real
estate. The following table presents the categories of nonperforming assets and
certain ratios as of the dates presented:
December 31,
---------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual..................................... $ 9,879 4,937 10,147 26,876 15,787
Restructured terms............................. -- -- 4 -- --
Real estate construction and development:
Nonaccrual..................................... 13,344 11,137 13,435 6,402 23,378
Real estate mortgage:
One-to-four family residential loans:
Nonaccrual................................... 18,885 9,576 9,881 21,611 14,833
Restructured terms........................... 9 10 11 13 15
Multi-family residential loans:
Nonaccrual................................... 272 740 434 804 772
Commercial real estate loans:
Nonaccrual................................... 6,260 70,625 50,671 13,994 8,890
Restructured terms........................... -- -- -- -- 1,907
Lease financing:
Nonaccrual .................................... -- 11 907 5,328 8,723
Consumer and installment:
Nonaccrual .................................... 81 160 310 336 860
---------- --------- --------- --------- ---------
Total nonperforming loans............... 48,730 97,196 85,800 75,364 75,165
Other real estate................................. 6,433 2,025 4,030 11,130 7,609
---------- --------- --------- --------- ---------
Total nonperforming assets.............. $ 55,163 99,221 89,830 86,494 82,774
========== ========= ========= ========= =========
Loans, net of unearned discount................... $7,666,481 7,020,771 6,137,968 5,328,075 5,432,588
========== ========= ========= ========= =========
Loans past due 90 days or more
and still accruing.............................. $ 5,653 5,576 28,689 2,776 4,635
========== ========= ========= ========= =========
Ratio of:
Allowance for loan losses to loans............. 1.90% 1.93% 2.46% 2.19% 1.83%
Nonperforming loans to loans................... 0.64 1.38 1.40 1.41 1.38
Allowance for loan losses to
nonperforming loans.......................... 299.05 139.23 175.65 154.52 132.29
Nonperforming assets to loans and
other real estate............................ 0.72 1.41 1.46 1.62 1.52
========== ========= ========= ========= =========
Nonperforming loans, consisting of loans on nonaccrual status and certain
restructured loans, were $48.7 million at December 31, 2006, in comparison to
$97.2 million and $85.8 million at December 31, 2005 and 2004, respectively.
Other real estate owned was $6.4 million, $2.0 million and $4.0 million at
December 31, 2006, 2005 and 2004, respectively. Our nonperforming assets,
consisting of nonperforming loans and other real estate owned, were $55.2
million, $99.2 million and $89.8 million at December 31, 2006, 2005 and 2004,
respectively. A significant portion of our nonperforming loans in 2004 and 2005
included loans associated with our acquisition of CIB Bank in November 2004,
which totaled $55.0 million, or 56.6% of our nonperforming loans, at December
31, 2005, and $50.5 million, or 58.8% of our nonperforming loans, at December
31, 2004. At December 31, 2006, we did not have any nonperforming loans
associated with our CIB Bank acquisition. The decrease in nonperforming loans
primarily resulted from our plans to reduce nonperforming assets through the
sale of certain nonperforming loans, loan payoffs and/or external refinancing of
certain credit relationships. We attribute the 44.4% net decrease in our
nonperforming assets during the year ended December 31, 2006 to the following:
>> the payoff of two significant nonperforming loans totaling $27.3
million, in aggregate;
>> following the transfer of 11 nonperforming loans totaling
approximately $59.7 million to our held for sale portfolio on December
31, 2005, as further discussed below, 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 payoff,
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. Additionally,
in September 2006, we recorded a $1.1 million write-down on the single
remaining nonperforming loan held for sale and transferred the loan at
its estimated fair value of $13.5 million back into our loan
portfolio. We subsequently received a payoff on this nonperforming
loan in December 2006 in the amount of the loan's adjusted carrying
value;
>> in December 2006, we completed the sale of $32.6 million of loans,
which included approximately $14.8 million of acquired nonperforming
loans, and recorded a pre-tax gain of approximately $3.7 million on
the sale of these loans. In addition, we recognized loan charge-offs
of $2.3 million in conjunction with the transfer of these commercial
loans to our loans held for sale portfolio prior to their sale; and
>> overall improvement in the level of nonperforming assets resulting
from our continued focus on improving asset quality through an ongoing
process of problem loan work-outs, exclusive of the deterioration of
certain credit relationships discussed below; the sale of certain
acquired nonperforming loans; the strengthening of certain loans; and
loan payoffs and/or external refinancing of various credits, as
further discussed below.
The overall reduction in our nonperforming assets was partially offset by
deterioration within our one-to-four family residential loan portfolio as a
result of current market conditions, and the deterioration of several credit
relationships, primarily within our residential development and construction
portfolio, during the later part of 2006 that were driven by current market
conditions, including slowdowns in unit sales.
As further discussed under "Business --Lending Activities," the increase in
nonperforming loans in 2005 was primarily attributable to the deterioration of a
few large credit relationships in our Midwest region during the fourth quarter
of 2005, partially offset by significant improvement in the overall level of our
nonperforming loans during the first nine months of 2005. The increase in
nonperforming loans in the fourth quarter of 2005 was primarily attributable to
further deterioration of a small number of credit relationships in our Midwest
region, including two large relationships of $14.9 million and $16.6 million, or
$31.5 million in aggregate, that were acquired in the purchase of CIB Bank. On
December 31, 2005, we recognized $7.6 million of loan charge-offs to reduce the
loans to their estimated fair value, net of costs, that was expected to be
realized at the time of the sale, and transferred approximately $59.7 million of
nonperforming loans to our held for sale portfolio, which included several of
the relationships that deteriorated during the fourth quarter of 2005 and one
credit relationship of $12.4 million, which was included in nonperforming loans
at December 31, 2004 with a value of $14.5 million. Included in these loan
charge-offs and loans transferred to our held for sale portfolio were $6.0
million of loan charge-offs and approximately $49.6 million of nonperforming
loans that were associated with our CIB Bank purchase. As previously discussed,
during 2006, we sold the majority of these loans held in our loans held for sale
portfolio, received payoffs on certain credits, and transferred one loan back
into our loan portfolio and subsequently received payment in full of the
remaining balance.
The improvement of our nonperforming loans during the first nine months of 2005
primarily resulted from: our continued emphasis on improving asset quality; the
sale of approximately $14.3 million of certain acquired nonperforming loans;
strengthening of certain loans; and loan payoffs and/or external refinancing of
various credits, including $97.3 million of loan payoffs on 14 credit
relationships during the first and second quarters of 2005. A portion of the
loan payoffs and sales during the first quarter of 2005 pertaining to certain
acquired nonperforming loans that were classified as loans held for sale as of
December 31, 2004 contributed to a reallocation of the purchase price on our
acquisition of CIB Bank, as further described in Note 2 to our Consolidated
Financial Statements. We also recorded a $1.6 million write-down on an acquired
parcel of other real estate owned to its estimated fair value based upon
additional data received. This write-down was recorded as an acquisition-related
adjustment in the first quarter of 2005 and is further discussed in Note 2 to
our Consolidated Financial Statements. In addition, our nonperforming assets
associated with our acquisition of SBLS in August 2004 decreased by $4.0 million
during 2005, primarily resulting from $3.8 million of loan charge-offs, which
reduced SBLS LLC's nonperforming assets to $2.3 million at December 31, 2005.
SBLS LLC previously had a significant concentration of assets associated with
the shrimping vessels industry, which were reflected in both nonperforming loans
and other repossessed assets. The SBA agreed to repurchase SBLS LLC's entire
shrimping vessels portfolio, and these loans were placed in liquidation status
in 2005. Throughout 2006, the majority of these loans have been fully liquidated
via completion of the sale of the underlying collateral and/or the collection of
insurance proceeds associated with vessels that were heavily damaged by
Hurricane Katrina and deemed to be irreparable.
The increase in nonperforming loans in 2004 was primarily associated with our
2004 acquisitions, partially offset by substantial improvement in our existing
portfolio of nonperforming assets as a result of significant loan payoffs, the
liquidation of foreclosed property, the sale of certain nonperforming loans and
the sale of a portion of our commercial leasing portfolio. The increase in
nonperforming loans in 2003 and 2002 was primarily attributable to the current
economic conditions that existed during those periods, additional problems
identified in two acquired loan portfolios and continuing deterioration in our
commercial leasing portfolio, particularly the segment of the portfolio related
to the airline industry.
Loans past due 90 days or more and still accruing interest were $5.7 million and
$5.6 million at December 31, 2006 and 2005, respectively, reflecting a decrease
of approximately $23.1 million from $28.7 million at December 31, 2004. The
overall levels of such delinquencies at December 31, 2006 and 2005 are primarily
reflective of the continued growth in our loan portfolio. The substantial
increase in 2004 resulted from our acquisitions of CIB Bank and CCB, which
comprised $27.2 million of our loans past due 90 days or more and still accruing
interest at December 31, 2004. A significant portion of these loans were past
due as to contractual maturity and pending renewal at December 31, 2004;
however, the majority of the loan payments were current and in accordance with
the contractual terms of the underlying credit agreements.
Our allowance for loan losses as a percentage of loans, net of unearned
discount, was 1.90%, 1.93% and 2.46% at December 31, 2006, 2005 and 2004,
respectively. Our allowance for loan losses as a percentage of nonperforming
loans increased to 299.05% at December 31, 2006, from 139.23% and 175.65% at
December 31, 2005 and 2004, respectively, and primarily resulted from the
reduction in nonperforming loans in 2006. Our allowance for loan losses was
$145.7 million at December 31, 2006, compared to $135.3 million and $150.7
million at December 31, 2005 and 2004, respectively. As further described in the
table below and under "--Business - Lending Activities," the allowance for loan
losses also reflects an increase of $5.2 million and $2.0 million in 2006 and
2005, respectively, and an increase of $33.8 million in 2004, of balances
acquired in conjunction with our acquisitions, including a $15.7 million
increase to reflect the application of our loss factors to CIB Bank's loan
portfolio risk ratings, reflecting our strategies for more rapid resolution of
certain acquired classified and nonperforming assets. This adjustment was
partially offset by our reclassification, at the time of acquisition, of CIB
Bank's specific reserves of $21.7 million as a reduction of the basis of the
individual loan relationships (which had no impact on our net loan balances),
and the transfer of $18.3 million of nonperforming loans to loans held for sale,
resulting in a corresponding charge of $5.4 million to the allowance for loan
losses to reduce the loans held for sale to their estimated fair value, net of
broker costs, that was expected to be realized at the time of sale.
Loan charge-offs decreased to $22.2 million for the year ended December 31,
2006, compared to $33.1 million and $50.6 million for the comparable periods in
2005 and 2004, respectively. Loan recoveries were $15.4 million for the year
ended December 31, 2006, compared to $19.8 million and $25.9 million for the
comparable periods in 2005 and 2004, respectively. Loan charge-offs, net of
recoveries, decreased to $6.8 million for the year ended December 31, 2006,
compared to $13.4 million and $24.8 million for the comparable periods in 2005
and 2004, respectively. Net loan charge-offs for 2006 include $2.3 million of
loans charged-off in conjunction with the transfer of certain commercial loans
to the loans held for sale portfolio prior to their sale in the fourth quarter
of 2006, and a $5.0 recovery recorded in the first quarter of 2006 on the payoff
of a single nonperforming loan. Net loan charge-offs for 2005 included $7.6
million of charge-offs associated with the $59.7 million of loans transferred to
our held for sale portfolio at December 31, 2005, as previously discussed. We
continue to closely monitor our loan portfolio and address the ongoing
challenges posed by the economic environment, including reduced loan demand and
highly competitive markets within certain sectors of our loan portfolio. We
consider this in our overall assessment of the adequacy of the allowance for
loan losses.
The level of nonperforming assets from our 2004 acquisitions significantly
contributed to increased levels of problem loans and past due loans, and we
anticipated the level of nonperforming and delinquent loans would continue
during 2005 and, to a lesser degree, during 2006 as we worked to resolve the
underlying issues associated with the nonperforming assets of the acquired
portfolios, including our efforts to actively market and sell a significant
portion of the nonperforming loans, as discussed above. In addition, although we
have experienced improvement in our nonperforming asset levels in 2006, we
continue our efforts to reduce the overall level of these assets in accordance
with our credit risk guidelines.
As of December 31, 2006, 2005, 2004, 2003 and 2002, $67.1 million, $124.3
million, $161.8 million, $109.4 million and $98.2 million, respectively, of
loans not included in the table above were identified by management as having
potential credit problems, or problem loans. The decline in the level of problem
loans during 2005 and 2006 primarily reflects improvement in the management of
these loans and success in resolving certain of the problem loans associated
with our 2004 and 2005 acquisitions. The significant increase in the level of
problem loans for the year ended December 31, 2004 was primarily attributable to
our acquisition of CIB Bank, in addition to internal portfolio growth and
economic conditions within certain sectors of the markets in which we operate.
The significant level of problem loans for the year ended December 31, 2003 was
primarily due to continuing deterioration of our commercial leasing portfolio,
internal and external portfolio growth, the gradual slow down and uncertainties
that occurred in the economy in the markets in which we operate, as well as
residual problem loans stemming from one of our 2001 acquisitions. Certain
acquired loan portfolios exhibited varying degrees of distress prior to their
acquisition. While these problems had been identified and considered in our
acquisition pricing, the acquisitions led to an increase in nonperforming assets
and problem loans. Management continues its efforts to reduce nonperforming and
problem loans and re-define overall strategy and business plans with respect to
our loan portfolio as deemed necessary.
Our credit management policies and procedures focus on identifying, measuring
and controlling credit exposure. These procedures employ a lender-initiated
system of rating credits, which is ratified in the loan approval process and
subsequently tested in internal credit reviews, external audits and regulatory
bank examinations. The system requires the rating of all loans at the time they
are originated or acquired, except for homogeneous categories of loans, such as
residential real estate mortgage loans and consumer loans. These homogeneous
loans are assigned an initial rating based on our experience with each type of
loan. We adjust the ratings of the homogeneous loans based on payment experience
subsequent to their origination.
We include adversely rated credits, including loans requiring close monitoring
that would not normally be considered classified credits by regulators, on our
monthly loan watch list. Loans may be added to our watch list for reasons that
are temporary and correctable, such as the absence of current financial
statements of the borrower or a deficiency in loan documentation. Other loans
are added to our watch list whenever any adverse circumstance is detected which
might affect the borrower's ability to comply with the contractual terms of the
loan. The delinquency of a scheduled loan payment, deterioration in the
borrower's financial condition identified in a review of periodic financial
statements, a decrease in the value of the collateral securing the loan, or a
change in the economic environment within which the borrower operates could
initiate the addition of a loan to our watch list. Loans on our watch list
require periodic detailed loan status reports prepared by the responsible
officer which are discussed in formal meetings with credit review and credit
administration staff members. Upgrades and downgrades of loan risk ratings may
be initiated by the responsible loan officer. However, upgrades of risk ratings
associated with significant credit relationships and/or problem credit
relationships may only be made with the concurrence of appropriate regional or
senior regional credit officers.
Each month, the credit administration department provides management with
detailed lists of loans on the watch list and summaries of the entire loan
portfolio by risk rating. These are coupled with analyses of changes in the risk
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
our loan 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 an appropriate level. In addition,
management exercises a certain degree of judgment in its analysis of the overall
adequacy of the allowance for losses. In its analysis, management considers the
changes in the portfolio, including growth, composition, the ratio of net loans
to total assets, and the economic conditions of the regions in which we operate.
Based on this quantitative and qualitative analysis, adjustments are made to the
allowance for loan losses. Such adjustments are reflected in our consolidated
statements of income.
The allocation of the allowance for loan losses by loan category is a result of
the application of our risk rating system augmented by qualitative analysis. The
same procedures we employ to determine the overall risk in our loan portfolio
and our requirements for the allowance for loan losses determine the
distribution of the allowance by loan category. Consequently, the distribution
of the allowance will change from period to period due to (a) changes in the
aggregate loan balances by loan category; (b) changes in the identified risk in
each loan in the portfolio over time, excluding those homogeneous categories of
loans such as consumer and installment loans and residential real estate
mortgage loans for which risk ratings are changed based on payment performance;
and (c) changes in loan concentrations by borrower.
Since the methods of calculating the allowance requirements have not
significantly changed over time, the reallocations among different categories of
loans that appear between periods are the result of changes in the balances of
the individual loans that comprise the aggregate portfolio due to the factors
listed above. However, the perception of risk with respect to particular loans
within the portfolio will change over time as a result of the characteristics
and performance of those loans, as well as the overall economic trends and
market trends, including our actual and expected trends in nonperforming loans.
Consequently, while there are no specific allocations of the allowance resulting
from economic or market conditions or actual or expected trends in nonperforming
loans, these factors are considered in the initial assignment of risk ratings to
loans and in subsequent changes to those risk ratings.
The following table is a summary of our loan loss experience for the five years
ended December 31, 2006:
As of or For the Years Ended December 31,
-------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of year......... $ 135,330 150,707 116,451 99,439 97,164
Acquired allowances for loan losses.................. 5,208 1,989 33,752 757 1,366
Other adjustments (1)................................ -- -- (479) -- --
---------- --------- --------- --------- ---------
140,538 152,696 149,724 100,196 98,530
---------- --------- --------- --------- ---------
Loans charged-off:
Commercial, financial and agricultural........... (6,905) (10,500) (26,550) (23,476) (45,697)
Real estate construction and development......... (6,202) (7,838) (3,481) (5,825) (7,778)
Real estate mortgage:
One-to-four family residential loans.......... (3,779) (3,399) (4,891) (4,167) (2,697)
Multi-family residential loans................ (241) -- (139) (87) (109)
Commercial real estate loans.................. (3,635) (9,699) (9,995) (1,708) (2,747)
Lease financing.................................. (607) (491) (4,536) (19,160) (8,426)
Consumer and installment......................... (834) (1,196) (1,051) (1,350) (3,070)
---------- --------- --------- --------- ---------
Total...................................... (22,203) (33,123) (50,643) (55,773) (70,524)
---------- --------- --------- --------- ---------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural........... 5,237 10,802 14,983 10,147 8,331
Real estate construction and development......... 1,661 1,963 748 1,659 631
Real estate mortgage:
One-to-four family residential loans.......... 1,066 1,953 1,597 781 628
Multi-family residential loans................ -- -- 27 99 792
Commercial real estate loans.................. 6,048 2,901 2,659 4,174 3,491
Lease financing.................................. 731 1,501 4,878 4,805 494
Consumer and installment......................... 651 637 984 1,363 1,566
---------- --------- --------- --------- ---------
Total...................................... 15,394 19,757 25,876 23,028 15,933
---------- --------- --------- --------- ---------
Net loans charged-off...................... (6,809) (13,366) (24,767) (32,745) (54,591)
---------- --------- --------- --------- ---------
Provision for loan losses............................ 12,000 (4,000) 25,750 49,000 55,500
---------- --------- --------- --------- ---------
Allowance for loan losses, end of year............... $ 145,729 135,330 150,707 116,451 99,439
========== ========= ========= ========= =========
Loans outstanding, net of unearned discount:
Average.......................................... $7,472,089 6,436,970 5,509,054 5,385,363 5,424,508
End of year...................................... 7,666,481 7,020,771 6,137,968 5,328,075 5,432,588
End of year, excluding loans held for sale....... 7,450,154 6,705,637 6,004,903 5,182,329 5,082,623
========== ========= ========= ========= =========
Ratio of allowance for loan losses
to loans outstanding:
Average.......................................... 1.95% 2.10% 2.74% 2.16% 1.83%
End of year...................................... 1.90 1.93 2.46 2.19 1.83
End of year, excluding loans held for sale....... 1.96 2.02 2.51 2.25 1.96
Ratio of net charge-offs to average
loans outstanding.................................. 0.09 0.21 0.45 0.61 1.01
Ratio of current year recoveries to
preceding year's charge-offs....................... 46.48 39.01 46.40 32.65 50.66
========== ========= ========= ========= =========
- ---------------
(1) In December 2003, we established a $1.0 million specific reserve for estimated losses on a $5.3 million letter
of credit that was recorded in accrued and other liabilities in our consolidated balance sheets. In January 2004,
the letter of credit was fully funded as a loan and the related $1.0 million specific reserve was reclassified from
accrued and other liabilities to the allowance for loan losses. In June 2004, we reclassified $1.5 million from the
allowance for loan losses to accrued and other liabilities to establish a specific reserve associated with our
commercial leasing portfolio sale and related recourse obligations for certain leases sold.
The following table is a summary of the allocation of the allowance for loan
losses for the five years ended December 31, 2006:
2006 2005 2004 2003 2002
---------------- ----------------- ---------------- ----------------- ----------------
Percent Percent Percent Percent Percent
of of of of of
Category Category Category Category Category
of of of of of
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars expressed in thousands)
Commercial, financial
and agricultural................ $ 47,973 25.24% $ 39,245 23.03% $ 46,195 25.57% $ 37,142 26.42% $34,915 26.56%
Real estate construction
and development................. 40,410 23.90 32,638 22.28 38,525 21.48 26,782 19.97 22,667 18.22
Real estate mortgage:
One-to-four family
residential loans........... 13,308 16.57 10,526 17.29 8,466 14.19 9,684 15.23 7,913 12.79
Multi-family residential
loans....................... 95 1.84 67 2.05 20 1.67 186 2.03 32 2.07
Commercial real estate loans.. 41,833 28.75 51,199 30.08 55,922 34.01 36,632 31.20 28,477 30.13
Lease financing................... 87 -- 315 0.04 628 0.10 4,830 1.26 3,649 2.33
Consumer and installment.......... 1,035 0.88 757 0.74 617 0.81 668 1.15 703 1.46
Loans held for sale............... 988 2.82 583 4.49 334 2.17 527 2.74 1,083 6.44
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Total....................... $145,729 100.00% $135,330 100.00% $150,707 100.00% $116,451 100.00% $99,439 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======= ======
Deposits
Deposits are the primary source of funds for First Bank. Our deposits consist
principally of core deposits from our local market areas, including individual
and corporate customers.
The following table sets forth the distribution of our average deposit accounts
for the years indicated and the weighted average interest rates on each category
of deposits:
Year Ended December 31,
----------------------------------------------------------------------------------------
2006 2005 2004
-------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of of of
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(dollars expressed in thousands)
Noninterest-bearing demand
deposits.................... $1,267,681 15.82% --% $1,257,277 17.45% --% $1,100,072 17.83% --%
Interest-bearing demand
deposits.................... 962,956 12.01 0.85 905,613 12.57 0.49 856,765 13.89 0.41
Savings deposits.............. 2,152,419 26.86 2.48 2,135,156 29.64 1.39 2,175,425 35.27 0.93
Time deposits................. 3,631,516 45.31 4.28 2,906,601 40.34 3.21 2,036,323 33.01 2.43
---------- ------ ==== ---------- ------ ==== ---------- ------ ====
Total average deposits.... $8,014,572 100.00% $7,204,647 100.00% $6,168,585 100.00%
========== ====== ========== ====== ========== ======
Capital and Dividends
Historically, we have accumulated capital to support our acquisitions by
retaining most of our earnings. We pay relatively small dividends on our Class A
convertible, adjustable rate preferred stock and our Class B adjustable rate
preferred stock, totaling $786,000 for the years ended December 31, 2006, 2005
and 2004.
Management believes as of December 31, 2006 and 2005, First Bank and we were
"well capitalized," as defined in regulations adopted pursuant to the FDIC
Improvement Act of 1991. First Bank's and our actual and required capital ratios
are further described in Note 21 to our Consolidated Financial Statements.
As of December 31, 2006, we had nine affiliated Delaware or Connecticut
statutory and business trusts that were created for the sole purpose of issuing
trust preferred securities. As further described in Note 12 to our Consolidated
Financial Statements, the sole assets of the statutory and business trusts are
our subordinated debentures.
A summary of the outstanding trust preferred securities issued by our affiliated
statutory and business trusts, and our related subordinated debentures issued to
the respective trusts in conjunction with the trust preferred securities
offerings as of December 31, 2006, is as follows:
Date of Trust Interest Preferred Subordinated
Name of Trust Formation Type of Offering Rate Securities Debentures
------------- --------- ---------------- ---- ---------- ----------
First Bank Capital Trust April 2002 Private Placement Variable $25,000,000 $25,774,000
First Preferred Capital Trust IV January 2003 Publicly Underwritten 8.15% 46,000,000 47,422,700
First Bank Statutory Trust March 2003 Private Placement 8.10% 25,000,000 25,774,000
First Bank Statutory Trust II September 2004 Private Placement Variable 20,000,000 20,619,000
First Bank Statutory Trust III November 2004 Private Placement Variable 40,000,000 41,238,000
First Bank Statutory Trust IV February 2006 Private Placement Variable 40,000,000 41,238,000
First Bank Statutory Trust V April 2006 Private Placement Variable 20,000,000 20,619,000
First Bank Statutory Trust VI June 2006 Private Placement Variable 25,000,000 25,774,000
First Bank Statutory Trust VII December 2006 Private Placement Variable 50,000,000 51,547,000
For regulatory reporting purposes, the trust preferred securities are eligible
for inclusion, subject to certain limitations, in our Tier 1 capital. Because of
these limitations, as of December 31, 2006, $19.8 million of the trust preferred
securities was not eligible for inclusion in our Tier 1 capital; however, this
amount was eligible for inclusion in our total risk-based capital. In addition,
as further described in Note 25 to our Consolidated Financial Statements, in
February 2007, we issued $25.8 million of subordinated debentures to First Bank
Statutory Trust VIII, a newly-formed Delaware statutory trust.
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
$1.86 billion and $1.72 billion at December 31, 2006 and 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 December 31, 2006:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less.................................... $ 506,143 174,874 681,017
Over three months through six months.................... 323,862 5,000 328,862
Over six months through twelve months................... 410,917 13,000 423,917
Over twelve months...................................... 178,657 246,025 424,682
---------- --------- ---------
Total............................................... $1,419,579 438,899 1,858,478
========== ========= =========
In addition to these sources of funds, First Bank has established a borrowing
relationship with the Federal Reserve Bank of St. Louis. This borrowing
relationship, which is secured by commercial loans, provides an additional
liquidity facility that may be utilized for contingency purposes. At December
31, 2006 and 2005, First Bank's borrowing capacity under the agreement was
approximately $639.1 million and $743.6 million, respectively. In addition,
First Bank's borrowing capacity through its relationship with the FHLB was
approximately $666.0 million and $679.3 million at December 31, 2006 and 2005,
respectively. We had FHLB advances outstanding of $4.0 million and $39.3 million
at December 31, 2006 and 2005, respectively, all of which represent advances
assumed in conjunction with various acquisitions. On March 17, 2006 and May 10,
2006, we 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 10 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 obligations at December 31, 2006 were as
follows:
Less Than 1-3 3-5 Over
1 Year Years Years 5 Years Total
------ ----- ----- ------- -----
(dollars expressed in thousands)
Operating leases....................... $ 14,175 25,728 16,106 36,984 92,993
Certificates of deposit (1)............ 3,185,226 513,793 116,744 11,701 3,827,464
Other borrowings....................... 172,874 201,025 -- -- 373,899
Notes payable.......................... 30,000 35,000 -- -- 65,000
Subordinated debentures................ -- -- -- 297,966 297,966
Other contractual obligations (2)...... 57,861 135 8 15 58,019
---------- -------- -------- -------- ---------
Total.............................. $3,460,136 775,681 132,858 346,666 4,715,341
========== ======== ======== ======== =========
----------------------------
(1) Amounts exclude the related interest expense accrued on these obligations as of December 31, 2006.
(2) Amounts include the obligation related to our repayment in full of the $56.9 million of subordinated
debentures issued to First Preferred Capital Trust III, which is included in accrued and other
liabilities in our consolidated balance sheets, as further described in Note 12 to our Consolidated
Financial Statements. Amounts exclude the related interest expense accrued on this obligation as of
December 31, 2006.
Management believes the available liquidity and operating results of First Bank
will be sufficient to provide funds for growth and to permit the distribution of
dividends to us sufficient to meet our operating and debt service requirements,
both on a short-term and long-term basis, and to pay the interest on the
subordinated debentures that we issued to our affiliated statutory and business
financing trusts.
Critical Accounting Policies
Our financial condition and results of operations presented in our Consolidated
Financial Statements, accompanying notes to our Consolidated Financial
Statements, selected consolidated and other financial data appearing elsewhere
in this report, and management's discussion and analysis of financial condition
and results of operations are, to a large degree, dependent upon our accounting
policies. The selection and application of our accounting policies involve
judgments, estimates and uncertainties that are susceptible to change.
We have identified the following accounting policies that we believe are the
most critical to the understanding of our financial condition and results of
operations. These critical accounting policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of a
materially different financial condition and/or results of operations could be a
reasonable likelihood. The impact and any associated risks related to our
critical accounting policies on our business operations is discussed throughout
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations," where such policies affect our reported and expected financial
results. A detailed discussion on the application of these and other accounting
policies is summarized in Note 1 to our Consolidated Financial Statements
appearing elsewhere in this report.
Loans and Allowance for Loan Losses. We maintain an allowance for loan losses at
a level we consider adequate to provide for probable losses in our loan
portfolio. The determination of our allowance for loan losses requires
management to make significant judgments and estimates based upon a periodic
analysis of our loans held for portfolio and held for sale considering, among
other factors, current economic conditions, loan portfolio composition, past
loan loss experience, independent appraisals, the fair value of underlying loan
collateral, our customers' ability to repay their loans and selected key
financial ratios. If actual events prove the estimates and assumptions we used
in determining our allowance for loan losses were incorrect, we may need to make
additional provisions for loan losses. For further discussion, refer to "--Loans
and Allowance for Loan Losses" and Note 4 to our Consolidated Financial
Statements appearing elsewhere in this report.
Derivative Financial Instruments. We utilize derivative financial instruments to
assist in our management of interest rate sensitivity by modifying the
repricing, maturity and option characteristics of certain assets and
liabilities. The judgments and assumptions that are most critical to the
application of this critical accounting policy are those affecting the
estimation of fair value and hedge effectiveness. Fair value is based on quoted
market prices where available. If quoted market prices are unavailable, fair
value is based on quoted market prices of comparable derivative instruments.
Factors that affect hedge effectiveness include the initial selection of the
derivative that will be used as a hedge and how well changes in its cash flow or
fair value have correlated and are expected to correlate with changes in the
cash flow or fair value of the underlying hedged asset or liability. Past
correlation is easy to demonstrate, but expected correlation depends upon
projections and trends that may not always hold true within acceptable limits.
Changes in assumptions and conditions could result in greater than expected
inefficiencies that, if large enough, could reduce or eliminate the economic
benefits anticipated when the hedges were established and/or invalidate
continuation of hedge accounting. Greater inefficiency and/or discontinuation of
hedge accounting are likely to result in increased volatility in our reported
earnings. For cash flow hedges, this would result as more or all of the change
in the fair value of the affected derivative being reported in noninterest
income. For fair value hedges, there may be some impact on our reported earnings
as the change in the fair value of the affected derivative may not be offset by
changes in the fair value of the underlying hedged asset or liability. For
further discussion, refer to "--Effects of New Accounting Standards,"
"--Interest Rate Risk Management" and Note 5 to our Consolidated Financial
Statements appearing elsewhere in this report.
Deferred Tax Assets. We recognize deferred tax assets for the estimated future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. We recognize deferred tax assets subject to management's judgment based
upon available evidence that realization is more likely than not. Our deferred
tax assets are reduced, if necessary, by a deferred tax asset valuation
allowance. In the event that we determine we would not be able to realize all or
part of our deferred tax assets in the future, we would need to adjust the
recorded value of our deferred tax assets, which would result in a direct charge
to our provision for income taxes in the period in which such determination is
made. For further discussion, refer to "--Comparison of Results of Operations
for 2006 and 2005 - Provision for Income Taxes," "--Comparison of Results of
Operations for 2005 and 2004 - Provision for Income Taxes," and Note 13 to our
Consolidated Financial Statements appearing elsewhere in this report.
Business Combinations. We emphasize acquiring other financial institutions as
one means of achieving our growth objectives. The determination of the fair
value of the assets and liabilities acquired in these transactions, as well as
the returns on investment that may be achieved, requires management to make
significant judgments and estimates based upon detailed analyses of the existing
and future economic value of such assets and liabilities and/or the related
income streams, including the resulting intangible assets. If actual events
prove the estimates and assumptions we used in determining the fair values of
the acquired assets and liabilities or the projected income streams were
incorrect, we may need to make additional adjustments to the recorded values of
such assets and liabilities, which could result in increased volatility in our
reported earnings. In addition, we may need to make additional adjustments to
the recorded value of our intangible assets, which may impact our reported
earnings and directly impacts our regulatory capital levels. For further
discussion, refer to "--Acquisitions" and Note 2, Note 8 and Note 21 to our
Consolidated Financial Statements appearing elsewhere in this report.
Effects of New Accounting Standards
In November 2005, the Financial Accounting Standards Board, or 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
impairment. The FSP was 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 May 2005, the FASB issued SFAS No. 154 -- Accounting Changes and Error
Corrections. SFAS No. 154, a replacement of Accounting Principles Bulletin
Opinion No. 20 -- Accounting Changes and 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 was effective for accounting changes and corrections of errors in
fiscal years beginning after December 15, 2005. Early application was 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 February 2006, the FASB issued SFAS No. 155 -- Accounting For Certain Hybrid
Financial Instruments, an amendment of SFAS No. 133 -- Accounting For Derivative
Instruments and Hedging Activities and SFAS No. 140. SFAS No. 155 allows
entities to remeasure at fair value a hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation from the host
instrument, if the holder irrevocably elects to account for the whole instrument
on a fair value basis. Subsequent changes in the fair value of the instrument
would be recognized in earnings. In January 2007, the FASB posted to its website
revisions to certain SFAS No. 133 implementation issues that were affected by
the issuance of SFAS No. 155 and SFAS No. 156 (discussed below). These revisions
provide a narrow scope exception for securitized interests in prepayable
financial assets that only contain an embedded derivative that results from the
embedded call options in the underlying prepayable financial assets if certain
criteria are met. SFAS No. 155 is effective for financial instruments acquired,
issued, or subject to a remeasurement event occurring after the beginning of the
first fiscal year that begins after September 15, 2006. Early adoption is
permitted as of the beginning of the fiscal year unless the entity has already
issued interim financial statements during that fiscal year. We are currently
evaluating the requirements of SFAS No. 155 to determine its impact on our
financial condition and results of operations.
In March 2006, the FASB issued SFAS No. 156 - Accounting for Servicing of
Financial Assets. SFAS No. 156, an amendment of FASB SFAS No. 140 - Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, addresses the recognition and measurement of separately recognized
servicing assets and liabilities and 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 an entity's fiscal year unless the entity has
already issued interim financial statements during that fiscal year. We
implemented SFAS No. 156 on January 1, 2007, which did not have a material
impact on our financial condition or 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 FASB
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 implemented FASB Interpretation No. 48 on January 1, 2007, which did
not have a material impact on our financial condition, results of operations, or
our beginning retained earnings.
In September 2006, the SEC issued SEC Staff Accounting Bulletin, or SAB, No. 108
- - Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB No. 108 addresses the
methods in which uncorrected errors in previous years should be considered when
quantifying errors in current-year financial statements, and requires an entity
to consider the effect of all carry over and reversing effects of prior-year
misstatements when quantifying errors in current-year financial statements. The
SAB does not change the SEC staff's previous guidance on evaluating the
materiality of errors in financial statements. SAB No. 108 allows an entity to
record the effects of adopting the guidance as a cumulative-effect adjustment to
retained earnings. This adjustment must be reported as of the beginning of the
first fiscal year ending after November 15, 2006. In December 2006, we
implemented the requirements of SAB No. 108, which had no impact on our
financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157 - Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
U.S. generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, and does not
require any new fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. Early adoption is permitted as of the beginning of an entity's fiscal
year unless the entity has already issued interim financial statements during
that fiscal year. We are currently evaluating the requirements of SFAS No. 157
to determine its impact on our financial condition and results of operations.
In February 2007, the FASB issued SFAS No. 159 - The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of SFAS No.
115. SFAS No. 159 provides entities with an option to report selected financial
assets and liabilities at fair value in an effort to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. Retrospective application is
not allowed. Early adoption is permitted as of the beginning of an entity's
fiscal year that begins on or before November 15, 2007, provided the entity also
elects to adopt all of the provisions of SFAS No. 157 at the early adoption
date. We are currently evaluating the requirements of SFAS No. 159 to determine
their impact on our financial condition and results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The quantitative and qualitative disclosures about market risk are included
under "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Interest Rate Risk Management" appearing on pages 35
through 37 of this report.
Effects of Inflation
Inflation affects financial institutions less than other types of companies.
Financial institutions make relatively few significant asset acquisitions that
are directly affected by changing prices. Instead, the assets and liabilities
are primarily monetary in nature. Consequently, interest rates are more
significant to the performance of financial institutions than the effect of
general inflation levels. While a relationship exists between the inflation rate
and interest rates, we believe this is generally manageable through our
asset-liability management program.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data appear on pages 63 through 106
of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our "disclosure controls and procedures" (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period
covered by this report. Based on such evaluation, our Chief Executive Officer
and our Chief Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act. There have not been any changes in the Company's
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of
2006 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Board of Directors and Committees of the Board
Our Board of Directors consists of seven members. The Board determined that
Messrs. Gundaker, Steward and Yaeger are independent. Each of our directors
identified in the following table was elected or appointed to serve a one-year
term and until his successor has been duly qualified for office.
Director Principal Occupation(s) During Last Five Years
Name Age Since and Directorships of Public Companies
---- --- ----- -------------------------------------
James F. Dierberg (1) 69 1979 Chairman of the Board of Directors of First Banks, Inc. since 1988;
Chief Executive Officer of First Banks, Inc. from 1988 to April
2003; President of First Banks, Inc. from 1979 to 1992 and from
1994 to October 1999; Chairman of the Board of Directors, President
and Chief Executive Officer of First Banks America, Inc.from 1994
until its merger with First Banks, Inc. in December 2002.
Allen H. Blake (2) 64 1988 President of First Banks, Inc. since October 1999; Chief Executive
Officer of First Banks, Inc. since April 2003; Chief Financial
Officer of First Banks, Inc. from 1984 to September 1999 and from
May 2001 to August 31, 2005; Chief Operating Officer of First
Banks, Inc. from 1998 to July 2002; Director of First Banks, Inc.
since 1988; Director, Executive Vice President, Chief Operating
Officer and Secretary of First Banks America, Inc. from 1998 until
its merger with First Banks, Inc. in December 2002; Chief
Financial Officer of First Banks America, Inc. from 1994 to
September 1999 and from May 2001 until December 2002.
Terrance M. McCarthy (2) 52 2003 Senior Executive Vice President and Chief Operating Officer of
First Banks, Inc. since August 2002; Director of First Banks, Inc.
since April 2003; Director of First Banks America, Inc. from July
2001 until its merger with First Banks, Inc. in December 2002;
Executive Vice President of First Banks America, Inc. from 1999 to
December 2002; Chairman of the Board of Directors of First Bank
since January 2003; President and Chief Executive Officer of First
Bank since August 2002; Chairman of the Board of Directors,
President and Chief Executive Officer of First Bank and Trust from
April 2000 until its merger with and into First Bank in March 2003.
Steven F. Schepman (1) 34 2004 Director of First Banks, Inc. since July 2004; Senior Vice
President and Chief Financial Officer of First Banks, Inc. since
August 31, 2005; Director of First Bank from April 2001 to October
2004; Senior Vice President - Private Banking, Wealth Management
and Trust Services of First Bank from November 2000 to August 31,
2005; From May 1999 to November 2000, Mr. Schepman was employed in
various other senior management capacities with First Banks, Inc.
Gordon A. Gundaker (3) 73 2001 President and Chief Executive Officer of Coldwell Banker Gundaker,
a full-service real estate brokerage company, in St. Louis,
Missouri.
David L. Steward (3) 55 2000 Chairman of the Board of Directors of World Wide Technology
Holding Co., Inc., an electronic procurement and logistics company
in the information technology industry, in St. Louis, Missouri;
Director of Centene Corporation, Civic Progress of St.
Louis, the St. Louis Regional Commerce and Growth Association,
the Regional Business Council, Webster University, Barnes Jewish
Hospital, the United Way of Greater St. Louis and Greater St.
Louis Area Council - Boy Scouts of America.
Douglas H. Yaeger (3)(4) 58 2000 Chairman of the Board of Directors, President and Chief Executive
Officer of The Laclede Group, Inc., an exempt public utility
holding company in St. Louis, Missouri since 2001; Chairman of the
Board of Directors, President and Chief Executive Officer of
Laclede Gas Company since 1999; President of Laclede Gas Company
since 1997; Director and Chief Operating Officer of Laclede Gas
Company from 1997 to 1999; Executive Vice President - Operations
and Marketing of Laclede Gas Company from 1995 to 1997; Director
and past Chairman of the Board of Directors of the St. Louis
Regional Commerce and Growth Association; Director and past
Chairman of Southern Gas Association; Director of American Gas
Association; Director and incoming Chairman of the Missouri Energy
Development Association; Commissioner of the St. Louis Science
Center; Director of Barnes-Jewish Hospital, Greater St. Louis
Area Council - Boy Scouts of America, The Municipal Theatre
Association of St. Louis, the United Way of Greater St. Louis
and Webster University; President of Civic Progress.
- --------------------------------------
(1) Mr. Steven F. Schepman is the son-in-law of Mr. James F. Dierberg.
(2) At the regular meeting of the First Banks, Inc. Board of Directors held on January 26, 2007, Mr. Allen H. Blake
announced his retirement and resigned his positions as a Director, President and Chief Executive Officer of First
Banks, effective March 31, 2007. Upon acceptance of Mr. Blake's resignation, the Board of Directors elected
Mr. Terrance M. McCarthy as President and Chief Executive Officer of First Banks, effective April 1, 2007.
(3) Member of the Audit Committee.
(4) Mr. Douglas H. Yaeger serves as Chairman of the Audit Committee and the audit committee financial expert.
Committees and Meetings of the Board of Directors
Three members of our Board of Directors currently serve on the Audit Committee,
all of whom the Board of Directors determined to be independent; there are no
other committees of the Board of Directors. The Audit Committee assists the
Board of Directors in fulfilling the Board's oversight responsibilities with
respect to the quality and integrity of the consolidated financial statements,
financial reporting process and systems of internal controls. The Audit
Committee also assists the Board of Directors in monitoring the independence and
performance of the independent auditors, the internal audit department and the
operation of ethics programs. The Audit Committee operates under a written
charter adopted by the Board of Directors.
The members of the Audit Committee as of March 28, 2007 were Mr. Gordon A.
Gundaker, Mr. David L. Steward and Mr. Douglas H. Yaeger, who serves as the
Chairman of the Audit Committee and the audit committee financial expert.
Audit Committee Report
The Audit Committee is responsible for oversight of our financial reporting
process on behalf of the Board of Directors. Management has primary
responsibility for our financial statements and financial reporting, including
internal controls, subject to the oversight of the Audit Committee and the Board
of Directors. In fulfilling its responsibilities, the Audit Committee reviewed
the audited consolidated financial statements with management and discussed the
acceptability of the accounting principles used, the reasonableness of
significant judgments made and the clarity of the disclosures.
The Audit Committee reviewed with the Independent Registered Public Accounting
Firm, who is responsible for planning and carrying out a proper audit and
expressing an opinion on the conformity of our audited consolidated financial
statements with U.S. generally accepted accounting principles, their judgments
as to the acceptability of the accounting principles we use, and such other
matters as are required to be discussed with the Audit Committee by Statement on
Auditing Standards No. 61, Communications with Audit Committees, as amended. In
addition, the Audit Committee discussed with the Independent Registered Public
Accounting Firm its independence from management and the Company, including the
matters required by Standard No. 1 of the Independence Standards Board, and the
Audit Committee considered the compatibility of non-audit services provided by
the Independent Registered Public Accounting Firm with the firm's independence.
KPMG LLP has provided the Audit Committee with the written disclosures and
letter required by Standard No. 1 of the Independence Standards Board.
The Audit Committee discussed with our Internal Audit Department and Independent
Registered Public Accounting Firm the overall scope and plans for their
respective audits. The Audit Committee met with the Internal Audit Department
and Independent Registered Public Accounting Firm with and without management
present to discuss the results of their examinations, their evaluations of our
internal controls and the overall quality of our financial reporting.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited consolidated
financial statements be included in the Annual Report on Form 10-K as of and for
the year ended December 31, 2006 for filing with the SEC.
Audit Committee
---------------
Douglas H. Yaeger, Chairman of the Audit Committee
Gordon A. Gundaker
David L. Steward
Code of Ethics for Principal Executive Officer and Financial Professionals
The Board of Directors has approved a Code of Ethics for Principal Executive
Officer and Financial Professionals that covers the Principal Executive Officer,
the Chief Financial Officer, the Chief Operating Officer, the Chief Credit
Officer, the Chief Investment Officer, the Senior Vice President and Controller,
the Senior Vice President - Director of Taxes, the Senior Vice President -
Director of Management Accounting, and all professionals serving in a Corporate
Finance, Accounting, Treasury, Tax or Investor Relations role. These individuals
are also subject to the policies and procedures adopted by First Banks that
govern the conduct of all of its employees. The Code of Ethics for Principal
Executive Officer and Financial Professionals is included as an exhibit to this
Annual Report on Form 10-K.
Code of Conduct for Employees, Officers and Directors
The Board of Directors has approved a Code of Conduct applicable to all
employees, officers and directors of First Banks that addresses conflicts of
interest, honesty and fair dealing, accounting and auditing matters, political
activities and application and enforcement of the Code of Conduct. The Code of
Conduct is available on First Banks' website, www.firstbanks.com, under "About
us." ------------------
Executive Officers
Our executive officers, each of whom was elected to the office(s) indicated by
the Board of Directors, as of March 28, 2007, were as follows:
Current First Banks Principal Occupation(s)
Name Age Office(s) Held During Last Five Years
---- --- -------------- ----------------------
James F. Dierberg 69 Chairman of the Board of Directors. See "Item 10 - Directors, Executive
Officers and Corporate Governance -
Board of Directors."
Allen H. Blake 64 President, Chief Executive Officer See "Item 10 - Directors, Executive
and Director. Officers and Corporate Governance -
Board of Directors."
Terrance M. McCarthy 52 Senior Executive Vice President, See "Item 10 - Directors, Executive
Chief Operating Officer and Officers and Corporate Governance -
Director; Chairman of the Board of Board of Directors."
Directors, President and Chief
Executive Officer of First Bank.
Steven F. Schepman 34 Senior Vice President, Chief See "Item 10 - Directors, Executive
Financial Officer and Director. Officers and Corporate Governance -
Board of Directors."
Russell L. Goldammer 50 Executive Vice President and Chief Executive Vice President and Chief
Information Officer. Information Officer since November
2004; Chief Information Officer of
Outsourcing Solutions, Inc., St. Louis,
Missouri, from April 2001 to October
2004; Senior Vice President of U.S.
Bank in Milwaukee, Wisconsin, from
October 1999 to April 2001.
Daniel W. Jasper 61 Executive Vice President and Chief Executive Vice President and Chief
Credit Officer; Director and Credit Officer of First Banks, Inc.
Executive Vice President of First since October 2003; Senior Vice
Bank. President and Acting Chief Credit
Officer of First Banks, Inc. from May
2003 to October 2003; Senior Vice
President - Credit Administration of
First Banks, Inc. from 1995 to May 2003.
F. Christopher McLaughlin 53 Executive Vice President and Executive Vice President and Director of
Director of Sales, Marketing and Sales, Marketing and of Products First
Products; Director of First Bank. Banks, Inc. since September 2003;
Director of First Bank since Otober
2004; Executive Vice President-Personal
Banking Division, HSBC Bank USA in
Buffalo, New York from 1998 to June
2002; Independent Consultant from July
2002 to August 2003.
Mary P. Sherrill 52 Executive Vice President and Executive Vice President and Director
Director of Operations; Director of of Operations of First Banks, Inc.
First Bank. since April 2003; Director of First
Bank since April 2003; Director, Vice
Chairman and Chief of Bank Operations
Southwest Bank in St. Louis, Missouri
from April 1999 to March 2003.
Item 11. Executive Compensation
Compensation Discussion and Analysis. As outlined in the stock ownership table
included in "Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters," all of our voting stock is owned by
various trusts, established by and administered by and for the benefit of Mr.
James F. Dierberg, our Chairman of the Board, and members of his immediate
family. Therefore, we do not use equity awards in our compensation program.
The objective of our executive compensation policies and practices is to attract
and retain talented key executives that will contribute to the achievement of
strategic goals and the growth and success of the Company in order to enhance
the long-term value of our Company. Compensation is based upon the achievement
of corporate goals and objectives, as established by key corporate executives
and reported to the Board of Directors. Rewards for performance are designed to
motivate the continued strong performance of key executives on a long-term
basis.
Our executive compensation programs are designed to reward the achievement of
financial results in accordance with our corporate goals and objectives. The
elements of our executive compensation programs include base salary, annual
bonus compensation and the ability to participate in a nonqualified deferred
compensation plan. Our executive compensation programs are cash-based and do not
include any other forms of non-cash compensation. We do not provide the named
executive officers with employment contracts or severance agreements, and
consequently, we are under no obligation to make additional payments to any of
the named executive officers in the event of severance, change in control,
retirement or resignation. The individual components of compensation to
executive officers are periodically evaluated using various factors, as further
discussed below.
Salary. Base salaries of executive officers are dependent upon the evaluation of
certain factors and are based, in part, on non-quantifiable considerations, at
the discretion of the Chairman and/or certain executive officers. The level of
base salaries of executive officers is designed to reward the officer's
performance based upon an evaluation of the following factors: (i) the
performance of the Company and the achievement of corporate goals and
objectives, considering general business and industry conditions, among other
factors, and the contributions of specific executives towards the overall
performance; (ii) each executive officer's areas of responsibility and the
Company's performance in those areas; and (iii) the level of compensation paid
to comparable executives by other financial institutions of comparable size in
the market areas in which we operate to ensure we maintain a competitive
compensation package. Our corporate goals and objectives provide particular
measurements to which the Board of Directors and executive management assign
significance, such as net income, organic and external growth in target market
areas, expense control, net interest margin, credit quality, and regulatory
examination results. These factors are taken into consideration by the Chairman
of the Board, who evaluates the appropriate base salary and related annual
salary increases of the President and Chief Executive Officer, and by the
Chairman of the Board and certain senior executive officers, who evaluate the
appropriate base salary and related annual salary increases of executive
officers and other employees. Base salaries of executive officers are reviewed
on an ongoing basis and are generally adjusted on an annual basis, and may be
further adjusted periodically as a result of significant changes in
responsibility, employment market conditions, and other factors.
Bonus. We offer our key executive officers additional compensation through an
Executive Incentive Compensation Plan, or the Plan. The objectives of the Plan
are to promote superior short-term and long-term financial performance of the
Company through its key executives; to reward those key executive officers who
deliver solid results with market-competitive incentives; and to attract,
motivate and retain skilled and experienced individuals who can increase the
size and profitability of the Company. Our Chairman of the Board has full
discretion to determine on an annual basis those executives who are eligible to
participate in the Plan. Each of the named executive officers is a participant
in the Plan, along with certain other executive officers, with the exception of
Mr. Schepman, son-in-law to Mr. James F. Dierberg, as lineal descendants of Mr.
Dierberg and their spouses are not eligible to participate in Plan. Mr. Schepman
received a discretionary bonus in 2006.
The bonus award amounts under the Plan are determined by a mathematical formula
that is based primarily on our weighted average return on equity multiplied by a
weighting component and the named executive officer's annual salary. Payments
under the Plan are made annually based upon the results of the above-referenced
formulas, unless determined otherwise by the Board of Directors for the Chief
Executive Officer or by the Chief Executive Officer for the other participants.
In considering any adjustment to payments to other executive officers, the Chief
Executive Officer will evaluate each executive officer's contribution to
improving our return on equity during the plan year.
Deferred Compensation. We offer a deferred compensation plan to the executive
officers and other key employees to promote retention by providing a long-term
savings opportunity on a tax-effective basis.
The Board of Directors and President and Chief Executive Officer periodically
review the various components of our executive compensation programs. The
salaries paid, annual bonuses awarded and deferred compensation balances for the
named executives in 2006 are further described in the "Summary Compensation
Table" and "Nonqualified Deferred Compensation Table" below.
Executive Compensation. The following table sets forth certain information
regarding compensation earned by the named executive officers for the year ended
December 31, 2006:
SUMMARY COMPENSATION TABLE
--------------------------
All Other
Name and Principal Position(s) Salary (1) Bonus (1) Compensation (2) Total (1)
- ------------------------------ ------ ----- ------------ -----
James F. Dierberg $ 610,000 -- 8,800 618,800
Chairman of the Board of Directors
Allen H. Blake 470,000 413,800 8,800 892,600
President and Chief Executive Officer
Steven F. Schepman 175,400 20,000 8,300 203,700
Senior Vice President
and Chief Financial Officer
Terrance M. McCarthy 409,000 345,000 8,800 762,800
Senior Executive Vice President
and Chief Operating Officer
Daniel W. Jasper 245,600 215,000 8,800 469,400
Executive Vice President
and Chief Credit Officer
- --------------------------
(1) Salary and bonus reported for Messrs. Allen H. Blake, Steven F. Schepman, Terrance M. McCarthy
and Daniel W. Jasper include payments deferred in our NQDC Plan, as further described below,
of $300,900, $5,000, $213,400 and $67,600, respectively, or an aggregate of $586,900. Salary
reported for Mr. Dierberg did not include any payments deferred in our NQDC Plan. Earnings
by the named executives on their NQDC Plan balances did not include any above-market or
preferential earnings.
(2) All other compensation reported reflects matching contributions to our 401(k) Plan.
Nonqualified Deferred Compensation. Officers that meet certain position and base
salary criteria and non-employee directors are eligible to participate in our
Nonqualified Deferred Compensation Plan, or NQDC Plan. Participants are allowed
to defer, on an annual basis, up to 25% of their salary and up to 100% of their
bonus payments, and hypothetically invest in various investment options
available in the NQDC Plan that are selected by the participant and may be
changed by the participant at any time. These investment options mirror the
investment options that we offer through our 401(k) plan and include various
investment funds such as equity funds, international stock funds, capital
appreciation funds, money market funds, bond funds, mid-cap value funds and
growth funds.
The NQDC Plan allows for us to credit the deferred compensation accounts of any
participant with discretionary contributions, however, we have not made any such
discretionary contributions under the NQDC Plan since its inception. Any such
contributions, if made, would vest over a five-year period. Earnings or losses
on participant account balances resulting from the participant's investment
choices are credited or charged to the participant accounts on a monthly basis.
We recognized these earnings or losses in our consolidated statements of income
on a monthly basis. In the event of retirement, payment of the vested portion of
the participant's deferred compensation account balance is either made through a
single lump sum payment or annual payments over five or ten years, subject to
the election by the participant. Payment of the vested portion of the
participant's deferred compensation account balance is made through a single
lump sum payment in the event the participant terminates his or her employment
for reasons other than retirement. We did not make any withdrawals or
distributions to the named executive officers or the non-employee directors from
our NQDC Plan for the year ended December 31, 2006.
The following table sets forth certain information regarding nonqualified
deferred compensation earned by the named executive officers for the year ended
December 31, 2006:
NONQUALIFIED DEFERRED COMPENSATION TABLE
----------------------------------------
Executive Aggregate Aggregate
Contributions in Earnings in Balance at
Name and Principal Position(s) Last Fiscal Year (1) Last Fiscal Year December 31, 2006
- ------------------------------ ---------------- ---------------- -----------------
James F. Dierberg $ -- 22,200 392,800 (2)
Chairman of the Board of Directors
Allen H. Blake (3) 300,900 65,700 1,111,100 (4)
President and Chief Executive Officer
Steven F. Schepman 5,000 200 5,200
Senior Vice President
and Chief Financial Officer
Terrance M. McCarthy 213,400 52,700 502,300 (5)
Senior Executive Vice President
and Chief Operating Officer
Daniel W. Jasper 67,600 18,600 187,200 (6)
Executive Vice President
and Chief Credit Officer
- ----------------------------
(1) All executive contributions represent the deferral of base salary and/or bonus payments
reflected in the "Summary Compensation Table." We did not make any discretionary
contributions under the NQDC Plan as of and for the year ended December 31, 2006.
(2) Of this amount, $305,500 represents deferrals of cash consideration from prior years that
were reflected in the "Summary Compensation Table" in our Annual Report on Form 10-K for
the relevant years. The remaining balance represents the cumulative earnings on the
original deferred amounts and the participant's 2006 activity.
(3) Following his retirement, which will be effective on March 31, 2007, Mr. Allen H. Blake
will receive his NQDC Plan participant account balance, which is fully vested, in annual
distributions over a period of ten years.
(4) Of this amount, $605,800 represents deferrals of cash consideration from prior years that
were reflected in the "Summary Compensation Table" in our Annual Report on Form 10-K for
the relevant years. The remaining balance represents the cumulative earnings on the
original deferred amounts and the participant's 2006 activity.
(5) Of this amount, $189,900 represents deferrals of cash consideration from prior years that
were reflected in the "Summary Compensation Table" in our Annual Report on Form 10-K for
the relevant years. The remaining balance represents the cumulative earnings on the
original deferred amounts and the participant's 2006 activity.
(6) Of this amount, $92,500 represents deferrals of cash consideration from prior years that
were reflected in the "Summary Compensation Table" in our Annual Report on Form 10-K for
the relevant years. The remaining balance represents the cumulative earnings on the
original deferred amounts and the participant's 2006 activity.
Potential Payments Upon Termination. Upon termination of employment, the
executive officers will receive payments of their vested portion of the
executive's deferred compensation account balance under our NQDC Plan as
described above.
Compensation of Directors. The following table sets forth compensation earned by
the named non-employee directors for the year ended December 31, 2006:
DIRECTOR COMPENSATION TABLE
---------------------------
Fees
Earned
or Paid
Name in Cash Total
- ---- ------- -----
Gordon A. Gundaker $ 29,000 29,000
David L. Steward (1) 29,000 29,000
Hal J. Upbin (2) 8,000 8,000
Douglas H. Yaeger (1)(3) 33,000 33,000
- -----------------------------
(1) Fees paid for Messrs. David L. Steward and Douglas H. Yaeger include
payments deferred in our NQDC Plan of $29,000 and $33,000, respectively, or
an aggregate of $62,000. Earnings by the directors on their NQDC Plan
balances did not include any above-market or preferential earnings.
(2) Mr. Hal J. Upbin resigned his positions as a Director and as an independent
member of the Audit Committee at the regular meeting of the First Banks
Board of Directors held on January 27, 2006.
(3) Mr. Douglas H. Yaeger serves as Chairman of the Audit Committee and the
audit committee financial expert.
Our executive officers that are also directors do not receive remuneration other
than salaries and bonuses for serving on our Board of Directors. Only those
directors who are neither our employees nor employees of any of our subsidiaries
receive cash remuneration for their services as directors. Such non-employee
directors, as shown in the table above, received a fee of $3,000 for each Board
meeting attended and $1,000 for each Audit Committee meeting attended in 2006.
Messr. Douglas H. Yaeger also received a fee of $4,000 per calendar quarter for
his service as Chairman of the Audit Committee, and Messrs. Gordon A. Gundaker,
David L. Steward and Hal J. Upbin also received a fee of $3,000 per calendar
quarter for their service as members of the Audit Committee. Our non-employee
directors are also eligible to participate in our NQDC Plan. Our directors do
not receive any retainers or other compensation, and there are no arrangements
for amounts to be paid to directors upon resignation or any other termination of
such director or a change in control of the Company. The Audit Committee is
currently the only committee of our Board of Directors.
Compensation Committee Interlocks and Insider Participation. We do not have a
compensation committee, therefore, our Board of Directors performs the functions
of such a committee. Messrs. Dierberg, Blake, McCarthy and Schepman serve or
have served as executive officers and/or members of our Board of Directors.
Except for the foregoing, none of our executive officers served during 2006 as a
member of our compensation committee, or any other committee performing similar
functions, or as a director of another entity, any of whose executive officers
or directors served on our Board of Directors.
See further information regarding transactions with related parties in Note 19
to our Consolidated Financial Statements appearing on pages 100 through 101 of
this report.
Compensation Committee Report.
Our Board of Directors, which performs the functions of our compensation
committee, has reviewed the Compensation Discussion and Analysis and discussed
such with management. Based on such review and discussions, the Board of
Directors recommended the Compensation Discussion and Analysis be included in
the Company's Annual Report on Form 10-K as of and for the year ended December
31, 2006.
Board of Directors
------------------
James F. Dierberg, Chairman of the Board of Directors
Allen H. Blake
Gordon A. Gundaker
Terrance M. McCarthy
Steven F. Schepman
David L. Steward
Douglas H. Yaeger
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth, as of March 28, 2007, certain information with
respect to the beneficial ownership of all classes of our voting capital stock
by each person known to us to be the beneficial owner of more than five percent
of the outstanding shares of the respective classes of our stock:
Percent of
Number of Total
Title of Class Shares Percent Voting
and Name of Owner Owned of Class Power
----------------- ----- -------- -----
Common Stock ($250.00 par value)
- --------------------------------
James F. Dierberg II Family Trust (1)........................ 7,714.677 (2) 32.605% *
Ellen C. Dierberg Family Trust (1)........................... 7,714.676 (2) 32.605 *
Michael J. Dierberg Family Trust (1)......................... 4,255.319 (2) 17.985 *
Michael J. Dierberg Irrevocable Trust (1).................... 3,459.358 (2) 14.621 *
First Trust (Mary W. Dierberg and First Bank, Trustees) (1).. 516.830 (3) 2.184 *
Class A Convertible Adjustable Rate Preferred Stock
- ---------------------------------------------------
($20.00 par value)
- ------------------
James F. Dierberg, Trustee of the James F. Dierberg
Living Trust (1)......................................... 641,082 (4)(5) 100% 77.7%
Class B Non-Convertible Adjustable Rate Preferred Stock
- -------------------------------------------------------
($1.50 par value)
- -----------------
James F. Dierberg, Trustee of the James F. Dierberg
Living Trust (1)......................................... 160,505 (5) 100% 19.4%
All executive officers and directors
other than Mr. James F. Dierberg
and members of his immediate family.......................... 0 0% 0.0%
- --------------------
* Represents less than 1.0%.
(1) Each of the above-named trustees and beneficial owners are United States citizens, and the business
address for each such individual is 135 North Meramec, Clayton, Missouri 63105. Mr. James F. Dierberg,
our Chairman of the Board, and Mrs. Mary W. Dierberg, are husband and wife, and Messrs. James F.
Dierberg II and Michael J. Dierberg and Mrs. Ellen D. Schepman, formerly Ms. Ellen C. Dierberg, are
their adult children.
(2) Due to the relationship between Mr. James F. Dierberg, his wife and their children, Mr. Dierberg is
deemed to share voting and investment power over these shares.
(3) Due to the relationship between Mr. James F. Dierberg, his wife and First Bank, Mr. Dierberg is
deemed to share voting and investment power over these shares.
(4) Convertible into common stock, based on the appraised value of the common stock at the date of
conversion. Assuming an appraised value of the common stock equal to the book value, the number of
shares of common stock into which the Class A Preferred Stock is convertible at December 31, 2006 is
385, which shares are not included in the above table.
(5) Sole voting and investment power.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
Review and Approval of Related Person Transactions. We review all relationships
and transactions in which we and our directors and executive officers and their
immediate family members and entities in which such persons have a significant
interest are participants to determine whether such persons have a direct or
indirect material interest. Our management collects information from the
executive officers and the directors regarding the related person transactions
and determines whether we or a related person has a direct or indirect material
interest in the transaction. If we determine that a transaction is directly or
indirectly material to us or a related person, then the transaction is disclosed
in accordance with applicable requirements. In addition, the Audit Committee of
our Board of Directors reviews and approves or ratifies any related person
transaction that is required to be so disclosed. In the event that a member of
the Audit Committee is a related person to such a transaction, such member may
not participate in the discussion or vote regarding approval or ratification of
the transaction.
Related Person Transactions. Outside of normal customer relationships, no
directors, executive officers or shareholders holding over 5% of our voting
securities, and no corporations or firms with which such persons or entities are
associated, currently maintain or have maintained since the beginning of the
last full fiscal year, any significant business or personal relationship with
our subsidiaries or us, other than that which arises by virtue of such position
or ownership interest in our subsidiaries or us, except as set forth in "Item 11
- - Executive Compensation - Compensation of Directors," or as described in the
following paragraphs.
First Bank has had in the past, and may have in the future, loan transactions
and related banking services in the ordinary course of business with our
directors and/or their affiliates. These loan transactions have been made on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unaffiliated persons and did not involve
more than the normal risk of collectibility or present other unfavorable
features. First Bank does not extend credit to our officers or to officers of
First Bank, except extensions of credit secured by mortgages on personal
residences, loans to purchase automobiles and personal credit card accounts.
Certain of our shareholders, directors and officers and their respective
affiliates have deposit accounts and related banking services with First Bank.
It is First Bank's policy not to permit any of its officers or directors or
their affiliates to overdraw their respective deposit accounts. Deposit account
overdraft protection may be approved for persons or entities under a plan
whereby a credit limit has been established in accordance with First Bank's
standard credit criteria.
Transactions with related parties, including transactions with affiliated
persons and entities, are described in Note 19 to our Consolidated Financial
Statements on pages 100 through 101 of this report.
Director Independence. Our Board of Directors has determined that Messrs. Gordon
A. Gundaker, David L. Steward and Douglas H. Yaeger have no material
relationship with us and each is independent. Our Audit Committee of the Board
of Directors is composed only of independent directors. In order to be
considered independent, our Board of Directors must determine that a director
does not have any direct or indirect material relationship with us as provided
under the rules of the New York Stock Exchange, or NYSE. In making such a
determination, the Board of Directors considers all relationships between us, or
any of our subsidiaries, and the director, or any of his immediate family
members, or any entity with which the director or any of his immediate family
members is affiliated by reason of being a partner, officer or significant
shareholder thereof. In assessing the independence of our directors, the Board
of Directors considered all relationships between us and our directors based
primarily upon responses of the directors to questions posed through a
directors' and officers' questionnaire. The Board of Directors considered each
of the related person transaction discussed above in making its independence
determination.
First Banks has only preferred securities listed on the NYSE and, pursuant to
the General Application section of NYSE Rule 303A, is not subject to NYSE Rule
303A.01 requiring a majority of independent directors. Messrs. Dierberg, Blake,
McCarthy and Schepman are not independent because they are each current or
former executive officers of the company.
Item 14. Principal Accounting Fees and Services
Fees of Independent Registered Public Accounting Firm
During 2006 and 2005, KPMG LLP served as our Independent Registered Public
Accounting Firm and provided services to our affiliates and us. The following
table sets forth fees for professional audit services rendered by KPMG LLP for
the audit of our consolidated financial statements and other audit services in
2006 and 2005:
2006 2005
---- ----
Audit fees, excluding audit related fees (1)......................... $ 601,500 820,500
Audit related fees................................................... -- --
Tax fees (2)......................................................... 82,637 111,676
All other fees....................................................... -- --
--------- --------
Total......................................................... $ 684,137 932,176
========= ========
------------------------
(1) For 2006 and 2005, audit fees include the audits of the consolidated financial statements of
First Banks and SBLS LLC, as well as services provided for reporting requirements under
FDICIA and mortgage banking activities, which are included in the audit fees of First Banks,
as these services are closely related to the audit of First Banks' consolidated financial
statements. Audit fees also include other accounting and reporting consultations. Audit fees
for 2005 also include audits of the consolidated financial statements of Hillside and
subsidiaries.
(2) For 2006, tax services include tax compliance and general tax planning and advice. For 2005,
tax services include preparation of amended income tax returns, tax compliance and general
tax planning and advice.
Policy Regarding the Approval of Independent Auditor Provision of Audit and
Non-Audit Services
Consistent with the Securities and Exchange Commission requirements regarding
auditor independence, the Audit Committee recognizes the importance of
maintaining the independence, in fact and appearance, of our independent
auditors. As such, the Audit Committee has adopted a policy for pre-approval of
all audit and permissible non-audit services provided by our independent
auditors. Under the policy, the Audit Committee, or its designated member, must
pre-approve services prior to commencement of the specified service. The
requests for pre-approval are submitted to the Audit Committee or its designated
member by the Director of Audit with a statement as to whether in his/her view
the request is consistent with the Securities and Exchange Commission's rules on
auditor independence. The Audit Committee reviews the pre-approval requests and
the fees paid for such services at their regularly scheduled quarterly meetings
or at special meetings.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements and Supplementary Data - The financial
statements and supplementary data filed as part of this Report
are included in Item 8.
2. Financial Statement Schedules - These schedules are omitted
for the reason they are not required or are not applicable.
3. Exhibits - The exhibits are listed in the index of exhibits
required by Item 601 of Regulation S-K at Item (b) below and
are incorporated herein by reference.
(b) The index of required exhibits is included beginning on page 110
of this Report.
(c) Not Applicable.
FIRST BANKS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders
First Banks, Inc.:
We have audited the accompanying consolidated balance sheets of First Banks,
Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Banks, Inc.
and subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
------------
St. Louis, Missouri
March 28, 2007
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands, except share and per share data)
December 31,
----------------------------
2006 2005
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................ $ 215,974 212,667
Short-term investments......................................................... 153,583 73,985
----------- ---------
Total cash and cash equivalents........................................... 369,557 286,652
----------- ---------
Investment securities:
Trading........................................................................ 81,168 3,389
Available for sale............................................................. 1,359,729 1,311,289
Held to maturity (fair value of $23,971 and $25,791, respectively)............. 24,049 26,105
----------- ---------
Total investment securities............................................... 1,464,946 1,340,783
----------- ---------
Loans:
Commercial, financial and agricultural......................................... 1,934,912 1,619,822
Real estate construction and development....................................... 1,832,504 1,564,255
Real estate mortgage........................................................... 3,615,148 3,469,788
Consumer and installment....................................................... 83,008 64,724
Loans held for sale............................................................ 216,327 315,134
----------- ---------
Total loans............................................................... 7,681,899 7,033,723
Unearned discount.............................................................. (15,418) (12,952)
Allowance for loan losses...................................................... (145,729) (135,330)
----------- ---------
Net loans................................................................. 7,520,752 6,885,441
----------- ---------
Bank premises and equipment, net.................................................... 178,417 144,941
Goodwill and other intangible assets................................................ 295,382 191,901
Bank-owned life insurance........................................................... 113,778 111,442
Deferred income taxes............................................................... 100,175 128,938
Other assets........................................................................ 115,707 80,235
----------- ---------
Total assets.............................................................. $10,158,714 9,170,333
=========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand..................................................... $ 1,281,108 1,299,350
Interest-bearing demand........................................................ 981,939 981,837
Savings........................................................................ 2,352,575 2,106,470
Time deposits of $100 or more.................................................. 1,419,579 1,076,908
Other time deposits............................................................ 2,407,885 2,077,266
----------- ---------
Total deposits............................................................ 8,443,086 7,541,831
Other borrowings.................................................................... 373,899 539,174
Notes payable....................................................................... 65,000 100,000
Subordinated debentures............................................................. 297,966 215,461
Deferred income taxes............................................................... 42,826 27,104
Accrued expenses and other liabilities.............................................. 130,033 61,762
Minority interest in subsidiary..................................................... 5,469 6,063
----------- ---------
Total liabilities......................................................... 9,358,279 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.......................................................... 9,685 5,910
Retained earnings................................................................... 784,864 673,956
Accumulated other comprehensive loss................................................ (13,092) (19,906)
----------- ---------
Total stockholders' equity................................................ 800,435 678,938
----------- ---------
Total liabilities and stockholders' equity................................ $10,158,714 9,170,333
=========== =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands, except share and per share data)
Years Ended December 31,
----------------------------------
2006 2005 2004
---- ---- ----
Interest income:
Interest and fees on loans............................................... $ 581,503 424,095 341,479
Investment securities:
Taxable................................................................ 57,017 65,895 50,170
Nontaxable............................................................. 1,875 1,739 1,490
Short-term investments................................................... 5,909 2,211 1,643
--------- -------- --------
Total interest income................................................ 646,304 493,940 394,782
--------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand................................................ 8,147 4,398 3,472
Savings................................................................ 53,297 29,592 20,128
Time deposits of $100 or more.......................................... 59,114 28,010 13,762
Other time deposits.................................................... 96,138 65,157 35,705
Other borrowings......................................................... 16,803 18,240 6,102
Notes payable............................................................ 5,530 2,305 506
Subordinated debentures.................................................. 22,833 20,557 15,092
--------- -------- --------
Total interest expense............................................... 261,862 168,259 94,767
--------- -------- --------
Net interest income.................................................. 384,442 325,681 300,015
Provision for loan losses................................................... 12,000 (4,000) 25,750
--------- -------- --------
Net interest income after provision for loan losses.................. 372,442 329,681 274,265
--------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees............ 43,310 39,776 38,230
Gain on loans sold and held for sale..................................... 26,020 20,804 18,497
Net (loss) gain on investment securities................................. (1,813) (2,873) 257
Bank-owned life insurance investment income.............................. 3,103 4,860 5,201
Investment management income............................................. 8,412 8,573 6,870
Insurance product income................................................. 4,848 -- --
Other.................................................................... 29,063 24,945 18,144
--------- -------- --------
Total noninterest income............................................. 112,943 96,085 87,199
--------- -------- --------
Noninterest expense:
Salaries and employee benefits........................................... 166,864 139,764 117,492
Occupancy, net of rental income.......................................... 26,953 22,081 19,882
Furniture and equipment.................................................. 16,960 16,015 17,017
Postage, printing and supplies........................................... 6,721 5,743 5,010
Information technology fees.............................................. 37,099 35,472 32,019
Legal, examination and professional fees................................. 8,783 9,319 7,412
Amortization of intangible assets........................................ 8,195 4,850 2,912
Communications........................................................... 2,425 2,012 1,866
Advertising and business development..................................... 7,128 7,043 5,493
Charitable contributions................................................. 6,462 5,922 577
Other.................................................................... 31,626 29,417 23,538
--------- -------- --------
Total noninterest expense............................................ 319,216 277,638 233,218
--------- -------- --------
Income before provision for income taxes and minority interest in
loss of subsidiary................................................ 166,169 148,128 128,246
Provision for income taxes.................................................. 55,062 52,509 45,338
--------- -------- --------
Income before minority interest in loss of subsidiary................ 111,107 95,619 82,908
Minority interest in loss of subsidiary..................................... (587) (1,287) --
--------- -------- --------
Net income........................................................... 111,694 96,906 82,908
Preferred stock dividends................................................... 786 786 786
--------- -------- --------
Net income available to common stockholders.......................... $ 110,908 96,120 82,122
========= ======== ========
Basic earnings per common share............................................. $4,687.38 4,062.36 3,470.80
========= ======== ========
Diluted earnings per common share........................................... $4,630.72 4,007.46 3,421.58
========= ======== ========
Weighted average shares of common stock outstanding......................... 23,661 23,661 23,661
========= ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Three Years Ended December 31, 2006
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands, except per share data)
Accu-
Adjustable Rate mulated
Preferred Stock Other
------------------- Compre- Total
Class A Additional hensive Stock-
Conver- Common Paid-in Retained Income holders'
tible Class B Stock Capital Earnings (Loss) Equity
----- ------- ----- ------- -------- ------ ------
Consolidated balances, January 1, 2004............... $12,822 241 5,915 5,910 495,714 29,213 549,815
-------
Year ended December 31, 2004:
Comprehensive income:
Net income..................................... -- -- -- -- 82,908 -- 82,908
Other comprehensive loss, net of tax:
Unrealized losses on investment securities... -- -- -- -- -- (5,711) (5,711)
Reclassification adjustment for investment
securities gains included in net income.... -- -- -- -- -- (167) (167)
Derivative instruments:
Current period transactions................ -- -- -- -- -- (25,166) (25,166)
-------
Total comprehensive income....................... 51,864
Class A preferred stock dividends,
$1.20 per share................................ -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share................................ -- -- -- -- (17) -- (17)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2004............. 12,822 241 5,915 5,910 577,836 (1,831) 600,893
-------
Year ended December 31, 2005:
Comprehensive income:
Net income..................................... -- -- -- -- 96,906 -- 96,906
Other comprehensive loss, net of tax:
Unrealized losses on investment securities... -- -- -- -- -- (15,659) (15,659)
Reclassification adjustment for investment
securities losses included in net income... -- -- -- -- -- 1,867 1,867
Derivative instruments:
Current period transactions................ -- -- -- -- -- (4,283) (4,283)
-------
Total comprehensive income....................... 78,831
Class A preferred stock dividends,
$1.20 per share................................ -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share................................ -- -- -- -- (17) -- (17)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2005............. 12,822 241 5,915 5,910 673,956 (19,906) 678,938
-------
Year ended December 31, 2006:
Comprehensive income:
Net income..................................... -- -- -- -- 111,694 -- 111,694
Other comprehensive income, net of tax:
Unrealized gains on investment securities.... -- -- -- -- -- 3,666 3,666
Reclassification adjustment for investment
securities losses included in net income... -- -- -- -- -- 1,242 1,242
Derivative instruments
Current period transactions................ -- -- -- -- -- 1,906 1,906
-------
Total comprehensive income....................... 118,508
Adjustment for the utilization of net
operating losses associated with prior
acquisitions................................. -- -- -- 3,775 -- -- 3,775
Class A preferred stock dividends,
$1.20 per share................................ -- -- -- -- (769) -- (769)
Class B preferred stock dividends,
$0.11 per share................................ -- -- -- -- (17) -- (17)
------- --- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2006............. $12,822 241 5,915 9,685 784,864 (13,092) 800,435
======= === ===== ===== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands)
Years ended December 31,
------------------------------------
2006 2005 2004
---- ---- ----
Cash flows from operating activities:
Net income.............................................................. $ 111,694 96,906 82,908
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of bank premises and equipment....... 18,912 17,381 18,579
Amortization, net of accretion..................................... 13,863 16,111 17,102
Originations and purchases of loans held for sale.................. (1,000,765) (1,327,890) (1,036,548)
Proceeds from sales of loans held for sale......................... 1,229,574 1,201,695 1,104,254
Provision for loan losses.......................................... 12,000 (4,000) 25,750
Provision for deferred income taxes................................ 10,208 (1,216) (747)
Increase in accrued interest receivable............................ (9,781) (2,280) (696)
Increase in accrued interest payable............................... 6,230 6,115 1,361
Proceeds from sales of trading securities.......................... 9,947 -- --
Purchases of trading securities.................................... (88,494) (3,389) --
Gain on loans sold and held for sale............................... (26,020) (20,804) (18,497)
Net loss (gain) on sales of investment securities.................. 1,813 2,873 (257)
Gain on sales of branches, net of expenses......................... -- -- (1,000)
Other operating activities, net.................................... 42,973 20,323 13,513
Minority interest in loss of subsidiary............................ (587) (1,287) --
---------- ---------- ----------
Net cash provided by operating activities..................... 331,567 538 205,722
---------- ---------- ----------
Cash flows from investing activities:
Cash (paid) received for acquired entities, net of cash and
cash equivalents received (paid)...................................... (204,690) (11,579) 21,098
Proceeds from sales of investment securities available for sale......... 198,061 147,120 26,340
Maturities of investment securities available for sale.................. 1,003,970 658,803 680,631
Maturities of investment securities held to maturity.................... 2,887 5,635 4,632
Purchases of investment securities available for sale................... (1,065,738) (325,642) (1,029,993)
Purchases of investment securities held to maturity..................... (865) (6,509) (19,031)
Proceeds from sale of leases............................................ -- -- 35,544
Net increase in loans................................................... (510,054) (569,255) (211,104)
Recoveries of loans previously charged-off.............................. 15,394 19,757 25,876
Purchases of bank premises and equipment................................ (37,904) (17,128) (10,960)
Sale of minority interest in subsidiary................................. -- 7,350 --
Other investing activities, net......................................... 12 1,834 15,358
---------- ---------- ----------
Net cash used in investing activities......................... (598,927) (89,614) (461,609)
---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits...................... 10,185 (50,119) 23,355
Increase (decrease) in time deposits.................................... 415,562 199,255 (11,521)
Decrease in Federal Home Loan Bank advances............................. (43,410) (6,144) (29,020)
Decrease in federal funds purchased..................................... -- (78) --
(Decrease) increase in securities sold under agreements to repurchase... (135,464) (59,232) 286,928
Advances drawn on notes payable......................................... -- 100,000 15,000
Repayments of notes payable............................................. (35,000) (15,000) (17,000)
Proceeds from issuance of subordinated debentures....................... 139,178 -- 61,857
Repayments of subordinated debentures................................... -- (59,278) --
Cash paid for sales of branches, net of cash and cash equivalents sold.. -- -- (19,353)
Payment of preferred stock dividends.................................... (786) (786) (786)
---------- ---------- ----------
Net cash provided by financing activities..................... 350,265 108,618 309,460
---------- ---------- ----------
Net increase in cash and cash equivalents..................... 82,905 19,542 53,573
Cash and cash equivalents, beginning of year................................. 286,652 267,110 213,537
---------- ---------- ----------
Cash and cash equivalents, end of year....................................... $ 369,557 286,652 267,110
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on liabilities............................................... $ 255,632 162,144 93,406
Income taxes.......................................................... 45,497 56,591 42,701
========== ========== ==========
Noncash investing and financing activities:
Securitization and transfer of loans to investment securities......... $ 138,944 -- --
Loans transferred to other real estate................................ 7,542 3,737 5,142
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies
followed by First Banks, Inc. and subsidiaries (First Banks or the Company):
Basis of Presentation. The accompanying consolidated financial
statements of First Banks have been prepared in accordance with U.S. generally
accepted accounting principles and conform to predominant practices within the
banking industry. Management of First Banks has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the consolidated
financial statements in conformity with U.S. generally accepted accounting
principles. Actual results could differ from those estimates.
Principles of Consolidation. The consolidated financial statements
include the accounts of the parent company and its subsidiaries, giving effect
to the minority interest in one subsidiary, as more fully described below, and
in Note 2 and Note 19 to the Consolidated Financial Statements. All significant
intercompany accounts and transactions have been eliminated. Certain
reclassifications of 2005 and 2004 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), and SFC's wholly owned subsidiary
bank, First Bank, both headquartered in St. Louis, Missouri. First Bank operates
through its branch banking offices and subsidiaries: First Bank Business
Capital, Inc.; Missouri Valley Partners, Inc. (MVP); 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 of December 31, 2006.
Cash and Cash Equivalents. Cash, due from banks and short-term
investments, which include federal funds sold and interest-bearing deposits, are
considered to be cash and cash equivalents for purposes of the consolidated
statements of cash flows. Federal funds sold were $152.2 million and $65.0
million at December 31, 2006 and 2005, respectively, and interest-bearing
deposits were $1.4 million and $9.0 million at December 31, 2006 and 2005,
respectively.
First Bank is required to maintain certain daily reserve balances on
hand in accordance with regulatory requirements. These reserve balances
maintained in accordance with such requirements were $24.7 million and $24.3
million at December 31, 2006 and 2005, respectively.
Investment Securities. The classification of investment securities as
trading, available for sale or held to maturity is determined at the date of
purchase.
Investment securities designated as trading, which represent any
security held for near term sale, are stated at fair value. Realized and
unrealized gains and losses are included in noninterest income.
Investment securities designated as available for sale, which represent
any security that First Banks has no immediate plan to sell but which may be
sold in the future under different circumstances, are stated at fair value.
Realized gains and losses are included in noninterest income, based on the
amortized cost of the individual security sold. Unrealized gains and losses, net
of related income tax effects, are recorded in accumulated other comprehensive
income. All previous fair value adjustments included in the separate component
of accumulated other comprehensive income (loss) are reversed upon sale.
Premiums and discounts incurred relative to the par value of securities
purchased are amortized or accreted, respectively, on the level-yield method
taking into consideration the level of current and anticipated prepayments.
Investment securities designated as held to maturity, which represent
any security that First Banks has the positive intent and ability to hold to
maturity, are stated at cost, net of amortization of premiums and accretion of
discounts computed on the level-yield method taking into consideration the level
of current and anticipated prepayments.
A decline in the market value of any available-for-sale or
held-to-maturity investment security below its carrying value that is deemed to
be other than temporary results in a reduction in the cost basis of the carrying
value to fair value. The other-than-temporary impairment is charged to
noninterest income and a new cost basis is established. When determining
other-than-temporary impairment, consideration is given as to whether First
Banks has the ability and intent to hold the investment security until a market
price recovery and whether evidence indicating the carrying value of the
investment security is recoverable outweighs evidence to the contrary.
Loans Held for Portfolio. Loans held for portfolio are carried at cost,
adjusted for amortization of premiums and accretion of discounts using the
interest method. Interest and fees on loans are recognized as income using the
interest method. Loan origination fees are deferred and accreted to interest
income over the estimated life of the loans using the interest method. Loans
held for portfolio are stated at cost as First Banks has the ability and it is
management's intention to hold them to maturity.
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal course of
business or once principal or interest payments become 90 days past due under
the contractual terms of the loan agreement. Generally, payments received on
nonaccrual and impaired loans are recorded as principal reductions. Interest
income is recognized after all delinquent principal has been repaid or an
improvement in the condition of the loan has occurred that warrants resumption
of interest accruals.
A loan is considered impaired when it is probable that First Banks will
be unable to collect all amounts due, both principal and interest, according to
the contractual terms of the loan agreement. Loans on nonaccrual status are
considered to be impaired loans. When measuring impairment, the expected future
cash flows of an impaired loan are discounted at the loan's effective interest
rate. Alternatively, impairment is measured by reference to an observable market
price, if one exists, or the fair value of the collateral for a
collateral-dependent loan. Regardless of the historical measurement method used,
First Banks measures impairment based on the fair value of the collateral when
foreclosure is probable. Additionally, impairment of a restructured loan is
measured by discounting the total expected future cash flows at the loan's
effective rate of interest as stated in the original loan agreement.
Loans Held for Sale. Loans held for sale are comprised of residential
mortgage loans held for sale in the secondary mortgage market, frequently in the
form of a mortgage-backed security, U.S. Small Business Administration (SBA)
loans awaiting sale of the guaranteed portion to the SBA, and commercial real
estate loans which may be identified for sale to specific buyers to achieve
credit or loan concentration objectives. Loans held for sale are carried at the
lower of cost or market value, which is determined on an individual loan basis.
Additionally, the carrying value of the residential mortgage loans held for sale
also includes the cost of hedging the loans held for sale. The amount by which
cost exceeds market value is recorded in a valuation allowance as a reduction of
loans held for sale. Changes in the valuation allowance are reflected as part of
the gain on loans sold and held for sale in the consolidated statements of
income in the periods in which the changes occur. Gains or losses on the sale of
loans held for sale are determined on a specific identification basis and
reflect the difference between the value received upon sale and the carrying
value of the loans held for sale, including the cost of hedging the residential
mortgage loans held for sale. Loans held for sale transferred to loans held for
portfolio or available-for-sale investment securities are transferred at fair
value.
Loan Servicing Income. Loan servicing income is included in noninterest
income and represents fees earned for servicing real estate mortgage loans owned
by investors and originated by First Bank's mortgage banking operation, as well
as SBA loans to small business concerns that are originated by SBLS LLC, First
Bank's majority-owned subsidiary that originates, sells and services SBA loans.
These fees are net of federal agency guarantee fees, interest shortfall,
amortization of loan servicing rights and impairment valuation allowances. Such
fees are generally calculated on the outstanding principal balance of the loans
serviced and are recorded as income when earned.
Allowance for Loan Losses. The allowance for loan losses is maintained
at a level considered adequate to provide for probable losses. The provision for
loan losses is based on a monthly analysis of the loans held for portfolio,
considering, among other factors, current economic conditions, loan portfolio
composition, past loan loss experience, independent appraisals, loan collateral,
payment experience and selected key financial ratios. Adjustments are reflected
in the consolidated statements of income in the periods in which they become
known. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. Such
agencies may require First Banks to modify its allowance for loan losses based
on their judgment about information available to them at the time of their
examination.
Derivative Instruments and Hedging Activities. First Banks utilizes
derivative instruments and hedging strategies to assist in the management of
interest rate sensitivity and to modify the repricing, maturity and option
characteristics of certain assets and liabilities. First Banks uses such
derivative instruments solely to reduce its interest rate risk exposure.
Derivative instruments are recorded in the consolidated balance sheets and
measured at fair value. At inception of a derivative transaction, First Banks
designates the derivative instrument as either a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment (fair value
hedges) or a hedge of a forecasted transaction or the variability of cash flows
to be received or paid related to a recognized asset or liability (cash flow
hedges). For all hedging relationships, First Banks documents the hedging
relationship and its risk-management objectives and strategy for entering into
the hedging relationship including the hedging instrument, the hedged item(s),
the nature of the risk being hedged, how the hedging instrument's effectiveness
in offsetting the hedged risk will be assessed and a description of the method
the Company will utilize to measure hedge ineffectiveness. This process also
includes linking all derivative instruments that are designated as fair value
hedges or cash flow hedges to the underlying assets and liabilities or to
specific firm commitments or forecasted transactions. First Banks also assesses,
both at the hedge's inception and on an ongoing basis, whether the derivative
instruments that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of the hedged item(s). First
Banks discontinues hedge accounting prospectively when it is determined that the
derivative instrument is no longer effective in offsetting changes in the fair
value or cash flows of the hedged item(s), the derivative instrument expires or
is sold, terminated, or exercised, the derivative instrument is de-designated as
a hedging instrument because it is unlikely that a forecasted transaction will
occur, a hedged firm commitment no longer meets the definition of a firm
commitment, or management determines that designation of the derivative
instrument as a hedging transaction is no longer appropriate.
A summary of First Banks' accounting policies for its derivative
instruments and hedging activities is as follows:
>> Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate
swap agreements designated as cash flow hedges are accounted for
at fair value. The effective portion of the change in the cash
flow hedge's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into
noninterest income when the underlying transaction affects
earnings. The ineffective portion of the change in the cash flow
hedge's gain or loss is recorded in noninterest income on each
monthly measurement date. The net interest differential is
recognized as an adjustment to interest income or interest
expense of the related asset or liability being hedged. In the
event of early termination, the net proceeds received or paid on
the interest rate swap agreements are recognized immediately in
noninterest income.
>> Interest Rate Swap Agreements - Fair Value Hedges. Interest rate
swap agreements designated as fair value hedges are accounted for
at fair value. Changes in the fair value of the swap agreements
are recognized currently in noninterest income. The change in the
fair value of the underlying hedged item is recognized as an
adjustment to the carrying amount of the underlying hedged item
and is also reflected currently in noninterest income. All
changes in fair value are measured on a monthly basis. The net
interest differential is recognized as an adjustment to interest
income or interest expense of the related asset or liability
being hedged. In the event of early termination or
ineffectiveness, the net proceeds received or paid on the
interest rate swap agreements are recognized immediately in
noninterest income and the future net interest differential, if
any, is recognized prospectively in noninterest income. The
cumulative change in the fair value of the underlying hedged item
is deferred and amortized or accreted to interest income or
interest expense over the weighted average life of the related
asset or liability. If, however, the underlying hedged item is
repaid, the cumulative change in the fair value of the underlying
hedged item is recognized immediately in noninterest income.
>> Interest Rate Cap and Floor Agreements. Interest rate cap and
floor agreements are accounted for at fair value. Changes in the
fair value of interest rate cap and floor agreements are
recognized in noninterest income on each monthly measurement
date.
>> Interest Rate Lock Commitments. Commitments to originate loans
for subsequent sale in the secondary market (interest rate lock
commitments), which primarily consist of commitments to originate
fixed rate residential mortgage loans, are recorded at fair
value. Changes in the fair value are recognized in noninterest
income on a monthly basis.
>> Forward Commitments to Sell Mortgage-Backed Securities. Forward
commitments to sell mortgage-backed securities are recorded at
fair value. Changes in the fair value of forward commitments to
sell mortgage-backed securities are recognized in noninterest
income on a monthly basis.
Bank Premises and Equipment, Net. Bank premises and equipment are
carried at cost less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful lives of the
related assets. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the useful life of the related asset or
the term of the lease. Bank premises and improvements are depreciated over five
to 40 years and equipment is depreciated over three to seven years.
Goodwill and Other Intangible Assets. Goodwill and other intangible
assets consist of goodwill, core deposit intangibles and customer list
intangibles. Goodwill and intangible assets with indefinite useful lives are not
amortized, but instead tested for impairment at least annually. Intangible
assets with definite useful lives are amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144. First Banks amortizes, on a straight-line basis,
its core deposit intangibles, customer list intangibles and goodwill associated
with transactions structured as purchases of certain assets and assumption of
selected liabilities (P&A Transactions). Core deposit intangibles are amortized
over the estimated periods to be benefited, which has been estimated at five to
seven years, and customer list intangibles are amortized over the estimated
periods to be benefited, which has been estimated at seven to 16 years. Goodwill
associated with P&A Transactions is amortized over the estimated periods to be
benefited, which has been estimated to be 15 years. Goodwill associated with
stock purchases is not amortized, but instead, is tested annually for impairment
in accordance with First Banks' existing methods of measuring and recording
impairment losses, as described below.
First Banks reviews intangible assets for impairment whenever events or
changes in circumstances indicate the carrying value of an underlying asset may
not be recoverable. First Banks measures recoverability based upon the future
cash flows expected to result from the use of the underlying asset and its
eventual disposition. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying value of the underlying
asset, First Banks recognizes an impairment loss. The impairment loss recognized
represents the amount by which the carrying value of the underlying asset
exceeds the fair value of the underlying asset. If an asset being tested for
recoverability was acquired in a business combination accounted for using the
purchase method, goodwill that arose in the transaction is included as part of
the asset grouping in determining recoverability. If some but not all of the
assets acquired in that transaction are being tested, goodwill is allocated to
the assets being tested for recoverability on a pro rata basis using the
relative fair values of the long-lived assets and identifiable intangibles
acquired at the acquisition dates. In instances where goodwill is identified
with assets that are subject to an impairment loss, the carrying amount of the
identified goodwill is eliminated before reducing the carrying amounts of
impaired long-lived assets and identifiable intangibles. As such adjustments
become necessary, they are reflected in the consolidated statements of income in
the periods in which they become known.
Mortgage Servicing Rights. Mortgage servicing rights are capitalized by
allocating the total cost of the mortgage loans to mortgage servicing rights and
the loans (without mortgage servicing rights) based on the relative fair values
of the two components. Upon capitalizing the mortgage servicing rights, they are
amortized, in proportion to the related estimated net servicing income on a
basis that approximates the disaggregated, discounted basis, over the expected
lives of the related loans, which is approximately five to seven years. The
weighted average amortization period of mortgage servicing rights is
approximately five years.
The value of mortgage servicing rights is adversely affected when
mortgage interest rates decline which normally causes mortgage loan prepayments
to increase. When loans are prepaid or refinanced, the related unamortized
balance of the mortgage servicing rights is charged to amortization expense. The
determination of the fair value of the mortgage servicing rights is performed
quarterly based upon an independent third party valuation. Based on these
analyses, a comparison of the fair value of the mortgage servicing rights with
the carrying value of the mortgage servicing rights is made, with impairment, if
any, recognized at that time. The impairment analyses are prepared using
stratifications of the mortgage servicing rights based on the predominant risk
characteristics of the underlying mortgage loans, including size, interest rate,
weighted average original term, weighted average remaining term and estimated
prepayment speeds. As part of these analyses, the fair value of the mortgage
servicing rights for each stratum is compared to the carrying value of the
mortgage servicing rights for each stratum. To the extent the carrying value of
the mortgage servicing rights exceeds the fair value of the mortgage servicing
rights for a stratum, First Banks recognizes impairment equal to the amount by
which the carrying value of the mortgage servicing rights for a stratum exceeds
the fair value. Impairment is recognized through a valuation allowance that is
recorded as a reduction of mortgage servicing rights. The valuation allowance
may be reversed based upon subsequent improvement in the fair value of a
stratum; however, First Banks does not recognize fair value of the mortgage
servicing rights in excess of the carrying value of mortgage servicing rights
for any stratum. Changes in the valuation allowance are reflected in the
consolidated statements of income in the periods in which the change occurs.
SBA Servicing Rights. SBA servicing rights are capitalized by
allocating the total cost of the SBA loans to servicing rights and the loans
(without servicing rights) based on the relative fair values of the two
components. The fair value of servicing rights is computed using the present
value of the estimated future servicing income in excess of such income
estimated at a normal servicing fee rate. The servicing rights, net of the
valuation allowance, are amortized in proportion to, and over the period of, the
estimated net servicing revenue of the underlying SBA loans, which range from
seven to 25 years. The weighted average amortization period of the SBA servicing
rights is approximately 18 years. The determination of the fair value of the SBA
servicing rights is performed monthly based upon quarterly independent third
party valuation analyses. Based on these analyses, a comparison of the fair
value of the SBA servicing rights with the carrying value of the SBA servicing
rights is made, with impairment, if any, recognized at that time. The
predominant risk characteristics of the underlying SBA loans used to stratify
SBA servicing rights for purposes of measuring impairment include size, interest
rate, weighted average original term, weighted average remaining term and
estimated prepayment speeds. To the extent the carrying value of the SBA
servicing rights exceeds the fair value of the SBA servicing rights, First Banks
recognizes impairment equal to the amount by which the carrying value of the SBA
servicing rights exceeds the fair value. Impairment is recognized through a
valuation allowance that is recorded as a reduction of SBA servicing rights.
Changes in the valuation allowance are reflected in the consolidated statements
of income in the periods in which the change occurs. First Banks does not
recognize fair value of the SBA servicing rights in excess of the carrying value
of SBA servicing rights for any stratum.
Other Real Estate. Other real estate, consisting of real estate
acquired through foreclosure or deed in lieu of foreclosure, is stated at the
lower of cost or fair value less applicable selling costs. The excess of cost
over fair value of the property at the date of acquisition is charged to the
allowance for loan losses. Subsequent reductions in carrying value, to reflect
current fair value or costs incurred in maintaining the properties, are charged
to expense as incurred. Other real estate was $6.4 million and $2.0 million at
December 31, 2006 and 2005, respectively.
Income Taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in the tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. First Banks,
Inc. and its eligible subsidiaries file a consolidated federal income tax return
and unitary or consolidated state income tax returns in all applicable states.
Financial Instruments With Off-Balance Sheet Risk. A financial
instrument is defined as cash, evidence of an ownership interest in an entity,
or a contract that conveys or imposes on an entity the contractual right or
obligation to either receive or deliver cash or another financial instrument.
First Banks utilizes financial instruments to reduce the interest rate risk
arising from its financial assets and liabilities. These instruments involve, in
varying degrees, elements of interest rate risk and credit risk in excess of the
amount recognized in the consolidated balance sheets. "Interest rate risk" is
defined as the possibility that interest rates may move unfavorably from the
perspective of First Banks due to maturity and/or interest rate adjustment
timing differences between interest-earning assets and interest-bearing
liabilities. The risk that a counterparty to an agreement entered into by First
Banks may default is defined as "credit risk."
First Banks is a party to commitments to extend credit and commercial
and standby letters of credit in the normal course of business to meet the
financing needs of its customers. These commitments involve, in varying degrees,
elements of interest rate risk and credit risk in excess of the amount reflected
in the consolidated balance sheets.
Earnings Per Common Share. Basic earnings per common share (EPS) are
computed by dividing the income available to common stockholders (the numerator)
by the weighted average number of shares of common stock outstanding (the
denominator) during the year. The computation of dilutive EPS is similar except
the denominator is increased to include the number of additional shares of
common stock that would have been outstanding if the dilutive potential shares
had been issued. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back any convertible preferred
dividends.
(2) ACQUISITIONS AND INTEGRATION COSTS
Completed Acquisitions. During the three years ended December 31, 2006,
First Banks completed the following acquisitions:
Goodwill
Total Purchase and Other
Entity Date Assets Price Intangibles
------ ---- ------ ----- -----------
(dollars expressed in thousands)
2006
----
MidAmerica National Bank
Peoria and Bloomington, Illinois
Branch Offices (1) November 10, 2006 $ 158,300 -- 2,400
First Bank of Beverly Hills
Beverly Hills, California
Branch Office (1) November 3, 2006 157,500 -- 8,700
TeamCo, Inc.
Oak Lawn, Illinois August 31, 2006 67,900 13,900 9,600
San Diego Community Bank
Chula Vista, California August 15, 2006 91,700 25,500 11,800
Universal Premium Acceptance
Corporation (2)
Lenexa, Kansas May 31, 2006 152,800 52,700 44,700
First Independent National Bank
Plano, Texas May 1, 2006 68,200 19,200 11,800
Pittsfield Community Bancorp, Inc.
Pittsfield, Illinois April 28, 2006 17,600 5,100 1,300
Adrian N. Baker & Company
Clayton, Missouri March 31, 2006 3,000 7,400 8,000
Dallas National Bank
Richardson, Texas
Branch Office (1) January 20, 2006 1,100 -- --
First National Bank of Sachse
Sachse, Texas January 3, 2006 76,200 20,800 12,400
---------- -------- --------
$ 794,300 144,600 110,700
========== ======== ========
2005
----
Northway State Bank
Grayslake, Illinois October 31, 2005 $ 50,400 10,300 5,400
International Bank of California
Los Angeles, California September 30, 2005 151,600 33,700 15,800
Bank and Trust Company
Roodhouse, Illinois
Branch Office (1) September 23, 2005 5,000 -- 100
FBA Bancorp, Inc.
Chicago, Illinois April 29, 2005 73,300 10,500 4,500
---------- -------- --------
$ 280,300 54,500 25,800
========== ======== ========
2004
----
Hillside Investors, Ltd.
Hillside, Illinois November 30, 2004 $1,196,700 67,400 10,600
Small Business Loan Source, Inc.
Houston, Texas August 31, 2004 47,100 45,600 5,900
Continental Mortgage Corporation -
Delaware (3)
Aurora, Illinois July 30, 2004 140,700 4,200 2,100
---------- -------- --------
$1,384,500 117,200 18,600
========== ======== ========
---------------
(1) First Bank acquired the branch offices through a purchase of certain assets and assumption of certain
liabilities of the branch offices. Total assets consisted of cash received upon assumption of the
deposit liabilities and loans.
(2) In conjunction with the acquisition of UPAC, First Bank repaid in full the outstanding senior and
subordinated notes of UPAC, including accumulated accrued and unpaid interest, totaling $125.9
million.
(3) In conjunction with the acquisition of Continental Mortgage Corporation- Delaware (CMC), First Banks
redeemed in full all of the outstanding subordinated promissory notes of CMC, including accumulated
accrued and unpaid interest, totaling $4.5 million in aggregate.
Goodwill and other intangible assets associated with the acquisitions
included in the table above are not deductible for tax purposes, with the
exception of P&A Transactions and the goodwill associated with the purchase of
assets and assumption of liabilities of Small Business Loan Source, Inc. (SBLS).
For 2006, 2005 and 2004 acquisitions, goodwill and other intangible assets in
the amounts of $110.7 million, $25.8 million and $18.6 million, respectively,
were assigned to First Bank.
The consolidated financial statements include the financial position
and results of operations of the aforementioned transactions for the periods
subsequent to the respective acquisition dates, and the assets acquired and
liabilities assumed were recorded at their estimated fair value on the
acquisition dates. These fair value adjustments for the acquisitions completed
in 2006 represent current estimates and are subject to further adjustments as
the valuation data is finalized. The aforementioned acquisitions were funded
from available cash reserves, borrowings under First Banks' term loan and
revolving credit agreements, and/or proceeds from the issuance of subordinated
debentures.
On July 30, 2004, First Banks completed its acquisition of CMC and its
wholly owned banking subsidiary, Continental Community Bank and Trust Company
(CCB) for $4.2 million in cash, and redeemed in full all of the outstanding
subordinated promissory notes of CMC, including accumulated accrued and unpaid
interest, totaling $4.5 million in aggregate. The acquisition served to expand
First Banks' banking franchise in Chicago, Illinois. The transaction was funded
through internally generated funds. CMC, through CCB, operated two banking
offices in the Chicago suburban communities of Aurora and Villa Park. At the
time of the transaction, CMC had assets of $140.7 million, loans, net of
unearned discount, of $73.6 million and deposits of $104.6 million. Preliminary
goodwill of $1.5 million was subsequently adjusted to $100,000 during the third
quarter of 2005, and the core deposit intangibles, which are being amortized
over seven years utilizing the straight-line method, were $2.0 million. CMC was
merged with and into SFC and CCB was merged with and into First Bank at the time
of the acquisition.
On August 31, 2004, SBLS LLC, a Nevada-based limited liability company
and subsidiary of First Bank, purchased substantially all of the assets and
assumed certain liabilities of SBLS, headquartered in Houston, Texas, in
exchange for cash and certain payments contingent on future valuations of
specifically identified assets, including servicing assets and retained
interests in securitizations, as further described in Note 24 to the
Consolidated Financial Statements. The transaction was funded through internally
generated funds. At the time of the transaction, SBLS LLC purchased from SBLS
assets of $47.1 million, including $24.0 million of SBA loans, net of unearned
discount, and $15.1 million of SBA servicing rights, and assumed $1.5 million of
liabilities, resulting in a net cash payment of $45.6 million. Goodwill was $5.9
million. In conjunction with this transaction, on August 30, 2004, First Bank
granted to FCA, a corporation owned by First Banks' Chairman and members of his
immediate family, an option to purchase Membership Interests of SBLS LLC. FCA
exercised this option on June 30, 2005 and paid First Bank $7.4 million in cash.
As a result of this transaction, SBLS LLC became 51.0% owned by First Bank and
49.0% owned by FCA, and accordingly, effective June 30, 2005, FCA's ownership
interest is recognized as minority interest in subsidiary in the consolidated
balance sheets and, beginning July 1, 2005, the related minority interest in
income or loss of subsidiary is recognized in the consolidated statements of
income.
On November 30, 2004, First Banks completed its acquisition of Hillside
Investors, Ltd. (Hillside) and its wholly owned banking subsidiary, CIB Bank
(collectively, CIB Bank), headquartered in Hillside, Illinois, for approximately
$67.4 million in cash. The acquisition served to significantly expand First
Banks' banking franchise in Chicago, Illinois. The transaction was funded
through the issuance of subordinated debentures associated with two private
placements of $60.0 million in aggregate of trust preferred securities through
newly formed affiliated statutory trusts, as further described in Note 12 to the
Consolidated Financial Statements. The acquisition was also funded through
borrowings under the Company's revolving line of credit with a group of
unaffiliated financial institutions. CIB Bank operated 16 banking offices in the
Chicago, Illinois metropolitan area, including ten offices in Cook County, three
offices in Lake County, two offices in Will County and one office in DuPage
County. At the time of the transaction, CIB Bank had assets of $1.20 billion,
loans, net of unearned discount, of $683.3 million, investment securities of
$393.2 million and deposits of $1.10 billion. Preliminary goodwill was $4.3
million and the core deposit intangibles, which are being amortized over seven
years utilizing the straight-line method, were $13.4 million. As further
described below, goodwill and core deposit intangibles were subsequently
adjusted during the first quarter of 2005. Hillside was merged with and into SFC
and CIB Bank was merged with and into First Bank on December 1, 2004.
During the first quarter of 2005, First Banks recorded certain
acquisition-related adjustments pertaining to its acquisition of CIB Bank.
Acquisition-related adjustments included additional purchase accounting
adjustments necessary to appropriately adjust the preliminary goodwill of $4.3
million recorded at the time of the acquisition, which was based upon current
estimates available at that time, to reflect the receipt of additional valuation
data. The aggregate adjustments resulted in a purchase price reallocation among
goodwill, core deposit intangibles and bank premises and equipment. The purchase
price reallocation resulted in the reallocation of $3.1 million of negative
goodwill to core deposit intangibles and bank premises and equipment, thereby
reducing such assets by $2.8 million and $2.4 million, net of the related tax
effect of $1.1 million and $941,000, respectively. Following the recognition of
the acquisition-related adjustments, goodwill recorded was reduced from $4.3
million to zero and the core deposit intangibles, which are being amortized over
seven years utilizing the straight-line method, were reduced from $13.4 million
to $10.6 million, net of the related tax effect. The individual components of
the $4.3 million acquisition-related adjustments to goodwill and the $3.1
million purchase price reallocation recorded in the first quarter of 2005 are
summarized as follows:
>> a $1.6 million increase in goodwill to adjust time deposits, net
of the related tax effect, to their estimated fair value;
>> a $967,000 increase in goodwill to adjust other real estate
owned, net of the related tax effect, to its estimated fair
value;
>> a $10.0 million reduction in goodwill to adjust loans held for
sale, net of the related tax effect, to their estimated fair
value. These adjustments were based upon the receipt of loan
payoffs and significantly higher sales prices received over the
original third-party bid estimates, for certain loans held for
sale. All of the acquired nonperforming loans that had been held
for sale as of December 31, 2004 had either been sold or repaid
as of March 31, 2005, with the exception of one credit
relationship, which was subsequently sold in April 2005;
>> a $1.7 million increase in goodwill, net of the related tax
effect, and a related decrease in core deposit intangibles of
$2.8 million, resulting from the purchase price reallocation; and
>> a $1.4 million increase in goodwill, net of the related tax
effect, and a related decrease in bank premises and equipment of
$2.4 million, resulting from the purchase price reallocation.
On April 29, 2005, First Banks completed its acquisition of FBA
Bancorp, Inc. (FBA) and its wholly owned subsidiary, First Bank of the Americas,
S.S.B. (FBOTA), for $10.5 million in cash. The acquisition served to expand
First Banks' banking franchise in Chicago, Illinois. The transaction was funded
through internally generated funds. FBA was headquartered in Chicago, Illinois,
and through FBOTA, operated three banking offices in the southwestern Chicago
metropolitan communities of Back of the Yards, Little Village and Cicero. At the
time of the acquisition, FBA had assets of $73.3 million, loans, net of unearned
discount, of $54.3 million and deposits of $55.7 million. Goodwill was $2.8
million, and the core deposit intangibles, which are being amortized over seven
years utilizing the straight-line method, were $1.7 million. FBA was merged with
and into SFC, and FBOTA was merged with and into First Bank at the time of the
acquisition.
On September 23, 2005, First Bank completed its acquisition of certain
assets and assumption of the deposit liabilities of the Roodhouse, Illinois
branch office of Bank and Trust Company, an Illinois commercial bank (Roodhouse
Branch). At the time of the transaction, the Roodhouse Branch had deposit
liabilities of $5.1 million. Total assets consisted primarily of cash received
upon assumption of the deposit liabilities. The core deposit intangibles, which
are being amortized over seven years utilizing the straight-line method, were
$100,000.
On September 30, 2005, First Banks completed its acquisition of
International Bank of California (IBOC) for $33.7 million in cash. The
acquisition served to further expand First Banks' banking franchise in Southern
California, providing five additional banking offices in Los Angeles,
California, including one branch in downtown Los Angeles and four branches in
eastern Los Angeles County, in Alhambra, Arcadia, Artesia and Rowland Heights.
The transaction was funded with a portion of the proceeds of First Banks' $100.0
million term loan, as further described in Note 11 to the Consolidated Financial
Statements. At the time of the acquisition, IBOC had assets of $151.6 million,
loans, net of unearned discount, of $113.5 million and deposits of $132.1
million. Goodwill was $12.0 million, and the core deposit intangibles, which are
being amortized over seven years utilizing the straight-line method, were $3.8
million. IBOC was merged with and into First Bank at the time of the
acquisition.
On October 31, 2005, First Banks completed its acquisition of Northway
State Bank (NSB) for $10.3 million in cash. The acquisition served to expand
First Banks' banking franchise in Chicago, Illinois. The transaction was funded
through internally generated funds. NSB was headquartered in Grayslake,
Illinois, and operated one banking office in Lake County in the northern Chicago
metropolitan area. At the time of the acquisition, NSB had assets of $50.4
million, loans, net of unearned discount, of $41.8 million and deposits of $45.2
million. Preliminary goodwill of $3.8 million was subsequently adjusted to $4.5
million during the third quarter of 2006, and the core deposit intangibles,
which are being amortized over seven years utilizing the straight-line method,
were $909,000. NSB was merged with and into First Bank at the time of the
acquisition.
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. Goodwill was $8.8 million, and the core
deposit intangibles, which are being amortized over five years utilizing the
straight-line method, were $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. Total assets consisted primarily of loans, fixed assets and cash
received upon assumption of deposit liabilities and certain assets.
On March 31, 2006, First Bank completed its acquisition of Adrian Baker
for $7.4 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 agency
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 this
specialized 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. Goodwill was $4.3 million, and the
customer list intangibles, which are being amortized over 15 years utilizing the
straight-line method, were $3.7 million. 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. Goodwill was $807,000, and the core deposit intangibles,
which are being amortized over five years utilizing the straight-line method,
were $517,000. Community Bank was merged with and into First Bank at the time of
the acquisition.
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, at the
time of the acquisition, FINB was in the process of opening a de novo branch
banking office located in the Preston Forest Shopping Center in Dallas County,
which subsequently opened on June 26, 2006. 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
described in Note 12 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. Goodwill was $9.3 million, and the core deposit intangibles,
which are being amortized over five years utilizing the straight-line method,
were $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., an
Iowa corporation, and its wholly owned subsidiaries, UPAC, a Missouri
corporation, and UPAC of California, Inc., a California corporation
(collectively, UPAC), for $52.7 million in cash. In conjunction with the
acquisition of UPAC, First Banks repaid in full the outstanding senior and
subordinated notes of UPAC, which totaled $125.9 million at the time of the
acquisition. UPAC is an insurance premium financing 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 this
highly-specialized industry. The transaction was funded through internally
generated funds and a $52.0 million short-term Federal Home Loan Bank (FHLB)
advance. At the time of the acquisition, UPAC had assets of $152.8 million,
loans, net of unearned discount, of $149.2 million and stockholders' equity of
$18.3 million. Goodwill was $25.4 million, and the customer list intangibles,
which are being amortized over 16 years utilizing the straight-line method, were
$19.3 million. KIF, Inc. 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.
On August 15, 2006, First Banks completed its acquisition of San Diego
Community Bank (SDCB) for $25.5 million in cash. SDCB was headquartered in Chula
Vista, California, which is located approximately ten miles south of downtown
San Diego, and operated two other banking offices in Kearney Mesa and Otay Mesa.
The acquisition served to expand First Banks' banking franchise in southern
California. The transaction was funded through internally generated funds and
the issuance of subordinated debentures associated with the private placement of
$20.0 million of trust preferred securities through a newly formed affiliated
statutory trust, as further described in Note 12 to the Consolidated Financial
Statements. At the time of the acquisition, SDCB had assets of $91.7 million,
loans, net of unearned discount, of $78.6 million, deposits of $76.1 million and
stockholders' equity of $12.3 million. Goodwill was $7.5 million, and the core
deposit intangibles, which are being amortized over five years utilizing the
straight-line method, were $4.3 million. SDCB was merged with and into First
Bank at the time of the acquisition.
On August 31, 2006, First Banks completed its acquisition of TeamCo,
Inc. and its wholly owned banking subsidiary, Oak Lawn Bank (collectively, Oak
Lawn) for $13.9 million in cash. Oak Lawn was headquartered in Oak Lawn,
Illinois, which is located approximately 15 miles southwest of the Chicago Loop
in Chicago Southland, and operated a second banking office in Orland Park,
Illinois, which is located approximately 39 miles southwest of downtown Chicago.
The acquisition served to expand First Banks' banking franchise in Chicago,
Illinois. The transaction was funded through internally generated funds and the
issuance of subordinated debentures associated with the private placement of
$25.0 million of trust preferred securities through a newly formed affiliated
statutory trust, as further described in Note 12 to the Consolidated Financial
Statements. At the time of the acquisition, Oak Lawn had assets of $67.9
million, loans, net of unearned discount, of $43.1 million, deposits of $60.1
million and stockholders' equity of $5.5 million. Goodwill was $7.3 million, and
the core deposit intangibles, which are being amortized over five years
utilizing the straight-line method, were $2.3 million. Oak Lawn was merged with
and into First Bank at the time of the acquisition.
On November 3, 2006, First Bank completed its acquisition of the First
Bank of Beverly Hills' banking office located in Beverly Hills, California
(Beverly Drive Office). At the time of the acquisition, the Beverly Drive Office
had assets of $157.5 million and deposits of $156.1 million. Total assets
consisted primarily of cash received upon assumption of deposit liabilities and
certain assets. The core deposit intangibles, which are being amortized over
five years utilizing the straight-line method, were $8.7 million.
On November 10, 2006, First Bank completed its acquisition of
MidAmerica National Bank's three banking offices located in Peoria and
Bloomington, Illinois (collectively, MidAmerica Offices). At the time of the
acquisition, the MidAmerica Offices had, on a combined basis, assets of $158.3
million including loans, net of unearned discount, of $154.1 million, and
deposits of $48.2 million. The core deposit intangibles, which are being
amortized over five years utilizing the straight-line method, were $2.4 million.
Pending Acquisitions. On November 7, 2006, First Banks entered into an
Agreement and Plan of Reorganization providing for the acquisition of Royal Oaks
Bancshares, Inc. and its wholly owned banking subsidiary, Royal Oaks Bank, ssb
(collectively, Royal Oaks). Royal Oaks was headquartered in Houston, Texas and
operated five banking offices in the Houston area. In addition, at the time of
the acquisition, Royal Oaks was in the process of opening a de novo branch
banking office located in the Heights, near downtown Houston, which is expected
to be completed in the second quarter of 2007. As further described in Note 25
to the Consolidated Financial Statements, First Banks completed its acquisition
of Royal Oaks on February 28, 2007.
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 $386,000 as of December 31, 2006, as summarized in the following
table, is comprised of contractual obligations under salary continuation
agreements to seven individuals with remaining terms ranging from approximately
two months to nine 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. The following table summarizes the cumulative acquisition
and integration costs attributable to the Company's acquisitions, which were
accrued as of the consummation dates of the respective acquisition and 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, 2003......................... $ 1,412 -- 1,412
Year Ended December 31, 2004:
Amounts accrued at acquisition date................ 180 496 676
Payments........................................... (831) (496) (1,327)
------- ------- -------
Balance at December 31, 2004......................... 761 -- 761
------- ------- -------
Year Ended December 31, 2005:
Amounts accrued at acquisition date................ 785 1,265 2,050
Payments........................................... (1,004) (1,131) (2,135)
------- ------- -------
Balance at December 31, 2005......................... 542 134 676
------- ------- -------
Year Ended December 31, 2006:
Amounts accrued at acquisition date................ 1,702 1,949 3,651
Payments........................................... (1,858) (2,083) (3,941)
------- ------- -------
Balance at December 31, 2006......................... $ 386 -- 386
======= ======= =======
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities Available for Sale. The amortized cost, contractual
maturity, gross unrealized gains and losses and fair value of investment
securities available for sale at December 31, 2006 and 2005 were as follows:
Maturity
---------------------------------- Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized ------------------ Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2006:
Carrying value:
U.S. Government sponsored
agencies..................... $344,636 29,737 4,032 966 379,371 81 (742) 378,710 4.99%
Mortgage-backed securities..... 438 11,477 50,670 839,172 901,757 610 (19,514) 882,853 4.76
State and political
subdivisions................. 4,102 16,294 11,493 2,122 34,011 260 (56) 34,215 3.90
Equity investments ............ -- -- -- 26,608 26,608 1,527 (234) 27,901 4.06
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)......... 36,050 -- -- -- 36,050 -- -- 36,050 5.49
-------- ------- ------ ------- --------- ------ ------- ---------
Total..................... $385,226 57,508 66,195 868,868 1,377,797 2,478 (20,546) 1,359,729 4.81
======== ======= ====== ======= ========= ====== ======= ========= ====
Fair value:
Debt securities................ $348,448 57,480 65,580 824,270
Equity securities.............. 36,050 -- -- 27,901
-------- ------- ------ -------
Total..................... $384,498 57,480 65,580 852,171
======== ======= ====== =======
Weighted average yield........... 5.01% 4.69% 4.57% 4.75%
======== ======= ====== =======
December 31, 2005:
Carrying value:
U.S. Government sponsored
agencies..................... $212,869 181,800 4,400 -- 399,069 -- (4,725) 394,344 3.32%
Mortgage-backed securities..... 281 9,899 52,121 783,831 846,132 149 (22,156) 824,125 4.60
State and political
subdivisions................. 5,574 17,242 8,864 710 32,390 293 (109) 32,574 3.79
Corporate debt securities...... 7,721 -- -- -- 7,721 -- (15) 7,706 4.58
Equity investments............. 156 -- -- 16,995 17,151 961 -- 18,112 4.64
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)......... 34,428 -- -- -- 34,428 -- -- 34,428 4.87
-------- ------- ------ ------- --------- ------ ------- ---------
Total..................... $261,029 208,941 65,385 801,536 1,336,891 1,403 (27,005) 1,311,289 4.21
======== ======= ====== ======= ========= ====== ======= ========= ====
Fair value:
Debt securities................ $224,429 206,076 64,207 764,037
Equity securities.............. 34,584 -- -- 17,956
-------- ------- ------ -------
Total........................ $259,013 206,076 64,207 781,993
======== ======= ====== =======
Weighted average yield........... 3.27% 3.72% 4.33% 4.62%
======== ======= ====== =======
Securities Held to Maturity. The amortized cost, contractual maturity,
gross unrealized gains and losses and fair value of investment securities held
to maturity at December 31, 2006 and 2005 were as follows:
Maturity
------------------------------------ Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized -------------------- Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2006:
Carrying value:
Mortgage-backed securities..... $ -- -- 6,875 7,213 14,088 7 (132) 13,963 5.13%
State and political
subdivisions................. 1,482 6,861 1,355 263 9,961 97 (50) 10,008 4.18
-------- ------ ------ ------ ------ ---- ---- ------
Total..................... $ 1,482 6,861 8,230 7,476 24,049 104 (182) 23,971 4.74
======== ====== ====== ====== ====== ==== ==== ====== ====
Fair value:
Debt securities................ $ 1,479 6,848 8,278 7,366
======== ====== ====== ======
Weighted average yield........... 3.84% 4.21% 5.02% 5.07%
======== ====== ====== ======
December 31, 2005:
Carrying value:
Mortgage-backed securities..... $ -- -- 6,970 8,495 15,465 9 (321) 15,153 5.09%
State and political
subdivisions................. 1,350 8,331 695 264 10,640 67 (69) 10,638 4.20
-------- ------ ------ ------ ------ ---- ---- ------
Total..................... $ 1,350 8,331 7,665 8,759 26,105 76 (390) 25,791 4.73
======== ====== ====== ====== ====== ==== ==== ====== ====
Fair value:
Debt securities................ $ 1,355 8,328 7,509 8,599
======== ====== ====== ======
Weighted average yield........... 4.40% 4.20% 5.03% 5.02%
======== ====== ====== ======
Proceeds from sales of available-for-sale investment securities were
$198.0 million, $147.1 million and $26.3 million for the years ended December
31, 2006, 2005 and 2004, respectively. Gross gains of $389,300 and $257,100 were
realized on sales of available-for-sale investment securities for the years
ended December 31, 2006 and 2004, respectively. There were no gross gains on the
sale of these securities during the year ended December 31, 2005. Gross losses
of $2.7 million and $2.9 million were realized on sales of available-for-sale
investment securities during the years ended December 31, 2006 and 2005,
respectively. The gross losses for the year ended December 31, 2006 include a
loss of $2.7 million that resulted from the sale of $197.0 million of
available-for-sale investment securities for liquidity purposes, including the
related termination of $200.0 million in aggregate of term repurchase
agreements, as further described in Note 5 and Note 10 to the Consolidated
Financial Statements. The gross loss of $2.9 million for the year ended December
31, 2005 resulted from the sale of $150.0 million of available-for-sale
investment securities for liquidity purposes, including the related termination
of a $50.0 million term repurchase agreement, as further described in Note 5 to
the Consolidated Financial Statements. There were no gross losses realized on
sales of available-for-sale investment securities in 2004.
Proceeds from calls of investment securities were $27.5 million, $16.6
million and $63.1 million for the years ended December 31, 2006, 2005 and 2004,
respectively. There were no gross gains realized on called securities in 2006,
2005 and 2004. Gross losses of $2,100 and $3,800 were realized on these called
securities during the years ended December 31, 2006 and 2005, respectively.
There were no gross losses realized on called securities in 2004. Net gains on
trading securities for the year ended December 31, 2006 were $97,000.
First Bank is a member of the Federal Home Loan Bank (FHLB) system and
the Federal Reserve Bank (FRB) system and maintains investments in FHLB and FRB
stock. These investments are recorded at cost, which represents redemption
value. The investment in FRB stock is maintained at a minimum of 6% of First
Bank's capital stock and capital surplus. The investment in FHLB of Des Moines
stock is maintained at an amount equal to 0.12% of First Bank's total assets as
of December 31, 2004, up to a maximum of $10.0 million, plus 4.45% of advances
and 0.15% of outstanding standby letters of credit. First Bank also holds an
investment in stock of the FHLB of Dallas and the FHLB of San Francisco, as a
nonmember, to collateralize certain FHLB advances assumed in conjunction with
certain acquisition transactions. The investment in FHLB of Dallas stock is
maintained at a minimum of 4.10% of advances. The investment in FHLB of San
Francisco stock is maintained at a minimum of 4.70% of advances.
Investment securities with a carrying value of approximately $586.4
million and $619.4 million at December 31, 2006 and 2005, respectively, were
pledged in connection with deposits of public and trust funds, securities sold
under agreements to repurchase and for other purposes as required by law.
Gross unrealized losses on investment securities and the fair value of
the related securities, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position,
at December 31, 2006 and 2005, were as follows:
December 31, 2006
---------------------------------------------------------------------------
Less than 12 months 12 months or more Total
----------------------- ----------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ---------- --------- ---------- --------- ----------
(dollars expressed in thousands)
Available for sale:
U.S. Government sponsored
agencies....................... $ 202,459 (304) 64,799 (438) 267,258 (742)
Mortgage-backed securities....... 197,214 (3,912) 597,394 (15,602) 794,608 (19,514)
State and political subdivisions. 3,088 (7) 5,656 (49) 8,744 (56)
Equity investments............... 5,602 (234) -- -- 5,602 (234)
--------- ------- -------- -------- --------- --------
Total....................... $ 408,363 (4,457) 667,849 (16,089) 1,076,212 (20,546)
========= ======= ======== ======== ========= ========
Held to maturity:
Mortgage-backed securities....... $ -- -- 13,682 (132) 13,682 (132)
State and political subdivisions. 199 (1) 4,630 (49) 4,829 (50)
--------- ------- -------- -------- --------- --------
Total....................... $ 199 (1) 18,312 (181) 18,511 (182)
========= ======= ======== ======== ========= ========
December 31, 2005
---------------------------------------------------------------------------
Less than 12 months 12 months or more Total
----------------------- ----------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ---------- --------- ---------- --------- ----------
(dollars expressed in thousands)
Available for sale:
U.S. Government sponsored
agencies....................... $ 206,641 (2,374) 187,702 (2,351) 394,343 (4,725)
Mortgage-backed securities....... 375,462 (8,368) 411,640 (13,788) 787,102 (22,156)
State and political subdivisions. 11,653 (97) 833 (12) 12,486 (109)
Corporate debt securities........ 7,706 (15) -- -- 7,706 (15)
--------- ------- -------- -------- --------- --------
Total....................... $ 601,462 (10,854) 600,175 (16,151) 1,201,637 (27,005)
========= ======= ======== ======== ========= ========
Held to maturity:
Mortgage-backed securities....... $ 14,828 (321) -- -- 14,828 (321)
State and political subdivisions. 4,462 (58) 365 (11) 4,827 (69)
--------- ------- -------- -------- --------- --------
Total....................... $ 19,290 (379) 365 (11) 19,655 (390)
========= ======= ======== ======== ========= ========
U.S. Government sponsored agencies and mortgage-backed securities - The
unrealized losses on investments in mortgage-backed securities and other agency
securities were caused by fluctuations in interest rates. The contractual terms
of these securities are guaranteed by government-sponsored enterprises. It is
expected that the securities would not be settled at a price less than the
amortized cost. Because First Banks has the ability and intent to hold these
investments until a market price recovery or maturity, these investments are not
considered other-than-temporarily impaired. At December 31, 2006, the unrealized
losses for U.S. government sponsored agencies for 12 months or more included 19
securities, and the unrealized losses for mortgage-backed securities for 12
months or more included 138 securities. At December 31, 2005, the unrealized
losses for U.S. government sponsored agencies for 12 months or more included 14
securities, and the unrealized losses for mortgage-backed securities for 12
months or more included 62 securities.
State and political subdivisions and corporate debt securities - The
unrealized losses on investments in state and political subdivisions and
corporate debt securities were caused by fluctuations in interest rates. It is
expected that the securities would not be settled at a price less than the
amortized cost. Because the decline in fair value is attributable to changes in
interest rates and not credit quality, and because First Banks has the ability
and intent to hold these investments until a market price recovery or maturity,
these investments are not considered other-than-temporarily impaired. At
December 31, 2006, the unrealized losses for state and political subdivisions
for 12 months or more included 53 securities. At December 31, 2005, the
unrealized losses for state and political subdivisions for 12 months or more
included seven securities.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December
31, 2006, 2005 and 2004 were as follows:
2006 2005 2004
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year...................................... $ 135,330 150,707 116,451
Acquired allowances for loan losses............................. 5,208 1,989 33,752
Other adjustments (1)........................................... -- -- (479)
--------- -------- --------
140,538 152,696 149,724
--------- -------- --------
Loans charged-off............................................... (22,203) (33,123) (50,643)
Recoveries of loans previously charged-off...................... 15,394 19,757 25,876
--------- -------- --------
Net loans charged-off...................................... (6,809) (13,366) (24,767)
--------- -------- --------
Provision for loan losses....................................... 12,000 (4,000) 25,750
--------- -------- --------
Balance, end of year............................................ $ 145,729 135,330 150,707
========= ======== ========
---------------
(1) In December 2003, First Bank established a $1.0 million specific reserve for estimated losses
on a $5.3 million letter of credit that was recorded in accrued and other liabilities in the
consolidated balance sheets. In January 2004, the letter of credit was fully funded as a loan
and the related $1.0 million specific reserve was reclassified from accrued and other
liabilities to the allowance for loan losses. Additionally, in June 2004, First Bank
reclassified $1.5 million from the allowance for loan losses to accrued and other liabilities
to establish a specific reserve associated with the commercial leasing portfolio sale and
related recourse obligations for certain leases sold. This liability has been reduced to
$410,000 at December 31, 2006.
At December 31, 2006 and 2005, First Banks had $48.7 million and $97.2
million of impaired loans, consisting of loans on nonaccrual status. Interest on
nonaccrual loans that would have been recorded under the original terms of the
loans was $3.7 million, $9.9 million and $4.4 million for the years ended
December 31, 2006, 2005 and 2004, respectively. Of these amounts, $1.3 million,
$3.4 million and $716,000 was recorded as interest income on such loans in 2006,
2005 and 2004, respectively. The allowance for loan losses includes an
allocation for each impaired loan. The aggregate allocation of the allowance for
loan losses related to impaired loans was approximately $9.7 million and $20.1
million at December 31, 2006 and 2005, respectively. The average recorded
investment in impaired loans was $73.6 million, $79.9 million and $77.3 million
for the years ended December 31, 2006, 2005 and 2004, respectively. The amount
of interest income recognized using a cash basis method of accounting during the
time these loans were impaired was $3.7 million, $3.6 million and $717,000 in
2006, 2005 and 2004, respectively. At December 31, 2006 and 2005, First Banks
had $5.7 million and $5.6 million, respectively, of loans past due 90 days or
more and still accruing interest.
First Banks' primary market areas are the states of Missouri, Illinois,
Texas and California. At December 31, 2006 and 2005, approximately 90% and 91%
of the total loan portfolio, respectively, and 77% and 83% of the commercial,
financial and agricultural loan portfolio, respectively, were made to borrowers
within these states.
Real estate lending constituted the only significant concentration of
credit risk. Real estate loans comprised approximately 74% and 76% of the loan
portfolio at December 31, 2006 and 2005, respectively, of which 26% and 27%,
respectively, were made to consumers in the form of residential real estate
mortgages and home equity lines of credit. First Bank also offers residential
real estate mortgage loans with terms that require interest only payments. At
December 31, 2006, the balance of such loans was $332.6 million, of which $276.5
million were held for portfolio and $56.1 million were held for sale. At
December 31, 2005, the balance of such loans was $332.3 million, of which $194.6
million were held for portfolio and $137.7 million were held for sale.
In general, First Banks is a secured lender. At December 31, 2006 and
2005, 99% of the loan portfolio was collateralized. Collateral is required in
accordance with the normal credit evaluation process based upon the
creditworthiness of the customer and the credit risk associated with the
particular transaction.
Loans to directors, their affiliates and executive officers of First
Banks, Inc. were approximately $55.9 million and $37.9 million at December 31,
2006 and 2005, respectively, as further described in Note 19 to the Consolidated
Financial Statements.
(5) DERIVATIVE INSTRUMENTS
First Banks utilizes derivative financial instruments to assist in the
management of interest rate sensitivity by modifying the repricing, maturity and
option characteristics of certain assets and liabilities. Derivative financial
instruments held by First Banks at December 31, 2006 and 2005 are summarized as
follows:
December 31,
--------------------------------------------------
2006 2005
------------------------ ----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................. $600,000 4,369 300,000 114
Fair value hedges............................ -- -- 25,000 748
Interest rate floor agreements............... 300,000 376 100,000 70
Interest rate cap agreements................. 400,000 139 -- --
Interest rate lock commitments............... 5,900 -- 5,900 --
Forward commitments to sell
mortgage-backed securities............... 54,000 -- 47,000 --
======== ===== ======== ====
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, therefore, are not a measure of
First Banks' credit exposure through its use of these instruments. The credit
exposure represents the loss First Banks would incur in the event the
counterparties failed completely to perform according to the terms of the
derivative financial instruments and the collateral held to support the credit
exposure was of no value.
For the year ended December 31, 2006, First Banks realized net interest
expense of $5.0 million on its derivative financial instruments, whereas for the
years ended December 31, 2005 and 2004, First Banks realized net interest income
of $2.2 million and $50.1 million, respectively, on its derivative financial
instruments. First Banks recorded net losses on derivative instruments, which
are included in noninterest income in the consolidated statements of income, of
$390,000, $1.1 million and $1.5 million for the years ended December 31, 2006,
2005 and 2004, respectively.
Cash Flow Hedges. First Banks entered into the following interest rate
swap agreements, which have been designated as cash flow hedges, to effectively
lengthen the repricing characteristics of certain interest-earning assets to
correspond more closely with their funding source with the objective of
stabilizing cash flow, and accordingly, net interest income over time:
>> During September 2000, March 2001, April 2001, March 2002 and
July 2003, First Banks entered into interest rate swap agreements
of $600.0 million, $200.0 million, $175.0 million, $150.0 million
and $200.0 million notional amount, respectively. The underlying
hedged assets are certain loans within First Banks' commercial
loan portfolio. The swap agreements provide for First Banks to
receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the weighted average prime lending rate
minus 2.70%, 2.82%, 2.82%, 2.80% and 2.85%, respectively. The
terms of the swap agreements provide for First Banks to pay and
receive interest on a quarterly basis. In November 2001, First
Banks terminated $75.0 million notional amount of the swap
agreements originally entered into in April 2001 in order to
appropriately modify its overall hedge position in accordance
with its 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 $150.0 million notional swap
agreement that was entered into in March 2002 matured in March
2004, the $600.0 million notional swap agreements that were
entered into in September 2000 matured in September 2004, and the
$200.0 million notional swap agreement that was entered into in
March 2001 matured in March 2005.
>> On September 14, 2006, First Banks entered into a $200.0 million
notional amount three-year interest rate swap agreement and a
$200.0 million notional amount four-year interest rate swap
agreement. The underlying hedged assets are certain loans within
First Banks' commercial loan portfolio. The swap agreements
provide for First Banks to receive a fixed rate of interest and
pay an adjustable rate of interest equivalent to the weighted
average prime lending rate minus 2.86%. The terms of the swap
agreements provide for First Banks to pay and receive interest on
a quarterly basis.
The amount receivable by First Banks under the swap agreements was $7.0
million and $2.4 million at December 31, 2006 and 2005, respectively, and the
amount payable by First Banks under the swap agreements was $2.7 million and
$2.5 million at December 31, 2006 and 2005, respectively.
The maturity dates, notional amounts, interest rates paid and received
and fair value of First Banks' interest rate swap agreements designated as cash
flow hedges as of December 31, 2006 and 2005 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2006:
July 31, 2007........................... $ 200,000 5.40% 3.08% $ (2,705)
September 18, 2009...................... 200,000 5.39 5.20 98
September 20, 2010...................... 200,000 5.39 5.20 449
--------- --------
$ 600,000 5.39 4.49 $ (2,158)
========= ===== ===== ========
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. First Banks entered into the following interest rate
swap agreements, which have been designated as fair value hedges, to effectively
shorten the repricing characteristics of certain interest-bearing liabilities to
correspond more closely with their funding source with the objective of
stabilizing net interest income over time:
>> During January 2001, First Banks entered into $150.0 million
notional amount of five-year interest rate swap agreements that
provided for First Banks to receive a fixed rate of interest and
pay an adjustable rate of interest equivalent to the three-month
London Interbank Offering Rate (LIBOR). The underlying hedged
liabilities were a portion of First Banks' other time deposits.
The terms of the swap agreements provided for First Banks to pay
interest on a quarterly basis and receive interest on a
semiannual basis. In February 2005, First Banks 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
adjustment of the underlying hedged liabilities was recorded as
interest expense over the remaining weighted average maturity of
the underlying hedged liabilities of approximately ten months. At
December 31, 2005, the basis adjustments associated with these
swap agreements were fully amortized.
>> During May 2002, March 2003 and April 2003, First Banks entered
into $55.2 million, $25.0 million and $46.0 million notional
amount, respectively, of interest rate swap agreements that
provided for First Banks to receive a fixed rate of interest and
pay an adjustable rate of interest equivalent to the three-month
LIBOR plus 2.30%, 2.55% and 2.58%, respectively. The underlying
hedged liabilities were a portion of First Banks' subordinated
debentures. The terms of the swap agreements provided for First
Banks to pay and receive interest on a quarterly basis. The
amounts receivable and payable by First Banks under the swap
agreements at December 31, 2005 were $506,000 and $420,000,
respectively. In May 2005, First Banks terminated the $55.2
million and $46.0 million notional swap agreements in order to
appropriately modify future hedge positions in accordance with
First Banks' interest rate risk management program. The resulting
$854,000 basis adjustment of the underlying hedged liabilities,
in aggregate, 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, First Banks terminated
the remaining $25.0 million notional swap agreement. In
conjunction with this transaction, First Banks recorded the
resulting $1.7 million basis adjustment of the underlying hedged
liabilities and the remaining balance of the basis adjustments
associated with the swap agreements that were terminated in May
2005, totaling $834,000, in the 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.
The maturity date, notional amount, interest rate paid and received and
fair value of First Banks' interest rate swap agreement designated as a fair
value hedge as of December 31, 2005 was as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2005:
March 20, 2033......................... $ 25,000 6.57% 8.10% $ (1,460)
======== ===== ===== ========
Interest Rate Floor Agreements. In September 2005, First Bank entered
into a $100.0 million notional amount three-year interest rate floor agreement
in conjunction with its interest rate risk management program. The interest rate
floor agreement provides for First Bank to receive a quarterly fixed rate of
interest of 5.00% should the three-month LIBOR equal or fall below the strike
price of 2.00%. On August 24, 2006, First Bank entered into a $200.0 million
notional amount three-year interest rate floor agreement in conjunction with the
restructuring of a term repurchase agreement, as further described in Note 10 to
the Consolidated Financial Statements, to further stabilize net interest income
in the event of a declining rate scenario. The interest rate floor agreement
provides for First Bank to receive a quarterly adjustable rate of interest
equivalent to the differential between the strike price of 4.00% and the
three-month LIBOR should the three-month LIBOR equal or fall below the strike
price. The carrying value of the interest rate floor agreements, which is
included in other assets in the consolidated balance sheets, was $376,000 and
$70,000 at December 31, 2006 and 2005, respectively.
Interest Rate Floor Agreements Embedded in Term Repurchase Agreements.
First Bank has term repurchase agreements under master repurchase agreements
with unaffiliated third parties, as further described in Note 10 to the
Consolidated Financial Statements. The underlying securities associated with the
term repurchase agreements are mortgage-backed securities and callable U.S.
Government agency securities and are held by other financial institutions under
safekeeping agreements. The term repurchase agreements were entered into with
the objective of stabilizing net interest income over time, further protecting
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 (and the interest rate cap agreements previously included
within the term repurchase agreements) represent embedded derivative instruments
which, in accordance with existing accounting literature governing derivative
instruments, are not required to be separated from the term repurchase
agreements and accounted for separately as a derivative financial instrument. As
such, the term repurchase agreements are reflected in other borrowings in the
consolidated balance sheets and the related interest expense is reflected as
interest expense on other borrowings in the consolidated statements of income.
As further described in Note 10 to the Consolidated Financial Statements, in
March 2005, in accordance with the Company's interest rate risk management
program, First Bank modified its term repurchase agreements under master
repurchase agreements with unaffiliated third parties to terminate the interest
rate cap agreements previously embedded within the agreements and simultaneously
enter into interest rate floor agreements, also embedded within the agreements.
These modifications resulted in adjustments to the existing interest rate spread
to LIBOR for the underlying agreements. The modified terms of the term
repurchase agreements became effective during the second quarter of 2005. First
Bank did not incur any costs associated with the modifications of the agreements
nor did the modifications result in a change to the accounting treatment of the
embedded derivative instruments.
As further described in Note 3 and Note 10 to the Consolidated
Financial Statements, in November 2005, First Bank terminated its $50.0 million
term repurchase agreement with a maturity date of August 15, 2006, and
simultaneously recognized a loss of $2.9 million on the sale of
available-for-sale investment securities associated with the termination of the
term repurchase agreement. In addition, on February 14, 2006, First Bank
terminated its two $50.0 million term repurchase agreements with maturity dates
of June 14, 2007, and recognized a $1.6 million loss on the sale of $100.0
million of available-for-sale investment securities associated with the
termination of the term repurchase agreements; on March 28, 2006, First Bank
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, First Bank 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. The Company's termination transactions entered into
in 2006 resulted in a reduction of $200.0 million of its term repurchase
agreements, the recognition of a $2.7 million loss on the sale of $200.0 million
of investment securities held in its available-for-sale investment portfolio,
and prepayment penalties of $306,000 incurred in conjunction with the early
termination of the term repurchase agreements. Additionally, on August 24, 2006,
First Bank restructured the remaining $100.0 million term repurchase agreement
to extend the maturity date to October 12, 2010 and to modify the pricing
structure, including the interest rate floor strike price, as further described
in Note 10 to the Consolidated Financial Statements. First Bank did not incur
any costs associated with the restructuring of the agreement.
On July 14, 2006, First Bank entered into a $100.0 million four-year
term repurchase agreement under a master repurchase agreement with an
unaffiliated third party, as further described in Note 10 to the Consolidated
Financial Statements. 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 a
safekeeping agreement.
Interest Rate Cap Agreements. On September 14, 2006, First Bank entered
into a $200.0 million notional amount three-year interest rate cap agreement and
a $200.0 million notional amount four-year interest rate cap agreement in
conjunction with the interest rate swap agreements designated as cash flow
hedges that First Banks entered into on September 14, 2006, as previously
described, to limit the net interest expense associated with First Banks'
interest rate swap agreements in the event of a rising rate scenario. The $200.0
million notional amount three-year interest rate cap agreement provides for
First Bank to receive a quarterly adjustable rate of interest equivalent to the
differential between the three-month LIBOR and the strike price of 7.00% should
the three-month LIBOR exceed the strike price. The $200.0 million notional
amount four-year interest rate cap agreement provides for First Bank to receive
a quarterly adjustable rate of interest equivalent to the differential between
the three-month LIBOR and the strike price of 7.50% should the three-month LIBOR
exceed the strike price. The carrying value of the interest rate cap agreements,
which is included in other assets in the consolidated balance sheets, was
$139,000 at December 31, 2006.
Pledged Collateral. At December 31, 2006, First Banks had accepted cash
of $4.2 million as collateral in connection with its interest rate swap
agreements. At December 31, 2005, First Banks had a $2.0 million letter of
credit issued on its behalf to the counterparty and had pledged investment
securities available for sale with a fair value of $5.1 million and cash of $1.8
million as collateral in connection with its interest rate swap agreements.
Interest Rate Lock Commitments / Forward Commitments to Sell
Mortgage-Backed Securities. Derivative financial instruments issued by First
Banks consist of interest rate lock commitments to originate fixed-rate loans to
be sold. Commitments to originate fixed-rate loans consist primarily of
residential real estate loans. These net loan commitments and loans held for
sale are hedged with forward contracts to sell mortgage-backed securities. The
carrying value of these interest rate lock commitments included in other assets
in the consolidated balance sheets was ($17,000) and ($49,000) at December 31,
2006 and 2005, respectively.
(6) SERVICING RIGHTS
Mortgage Banking Activities. At December 31, 2006 and 2005, First Banks
serviced mortgage loans for others totaling $1.04 billion and $1.01 billion,
respectively. Borrowers' escrow balances held by First Banks on such loans were
$5.7 million and $5.0 million at December 31, 2006 and 2005, respectively.
Changes in mortgage servicing rights, net of amortization, for the years ended
December 31, 2006 and 2005 were as follows:
2006 2005
---- ----
(dollars expressed in thousands)
Balance, beginning of year............................................. $ 6,623 10,242
Mortgage servicing rights acquired..................................... -- 435
Originated mortgage servicing rights (1)............................... 3,298 904
Amortization........................................................... (4,054) (4,958)
-------- -------
Balance, end of year................................................... $ 5,867 6,623
======== =======
------------------------
(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. Additionally, 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 years ended December 31, 2006, 2005 and 2004.
Amortization of mortgage servicing rights at December 31, 2006 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2007.................................................................... $ 2,250
2008.................................................................... 1,226
2009.................................................................... 761
2010.................................................................... 567
2011.................................................................... 446
Thereafter.............................................................. 617
-------
Total............................................................... $ 5,867
=======
Other Servicing Activities. At December 31, 2006 and 2005, First Banks
serviced SBA loans for others totaling $143.4 million and $163.4 million,
respectively. Changes in SBA servicing rights, net of amortization and
impairment, for the years ended December 31, 2006 and 2005 were as follows:
2006 2005
---- ----
(dollars expressed in thousands)
Balance, beginning of year............................................. $ 9,489 13,013
Originated SBA servicing rights........................................ 1,630 1,065
Amortization........................................................... (1,662) (2,230)
Impairment............................................................. (1,393) (2,359)
-------- -------
Balance, end of year................................................... $ 8,064 9,489
======== =======
First Banks recognized impairment of $1.4 million, $2.4 million and
$459,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The
impairment of $1.4 million recorded for the year ended December 31, 2006
primarily resulted from a decline in the fair value of the SBA servicing assets
below the carrying value attributable to the placement of certain loans on
nonaccrual status and payoffs received on certain existing loans. The impairment
of $2.4 million recorded for the year ended December 31, 2005 resulted from a
decline in the fair value of the SBA servicing assets below the carrying value
following substantial damage to several shrimping vessels within the servicing
portfolio caused by the effects of Hurricane Katrina, as well as continued
distress affecting the U.S. shrimping industry and the ability of these
borrowers to repay their loans.
Amortization of SBA servicing rights at December 31, 2006 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2007.................................................................... $ 1,498
2008.................................................................... 1,243
2009.................................................................... 1,030
2010.................................................................... 850
2011.................................................................... 701
Thereafter.............................................................. 2,742
-------
Total............................................................... $ 8,064
=======
(7) BANK PREMISES AND EQUIPMENT, NET
Bank premises and equipment, net of accumulated depreciation and
amortization, were comprised of the following at December 31, 2006 and 2005:
2006 2005
---- ----
(dollars expressed in thousands)
Land................................................................. $ 42,386 33,191
Buildings and improvements........................................... 126,903 118,426
Furniture, fixtures and equipment.................................... 124,980 111,238
Leasehold improvements............................................... 25,250 25,494
Construction in progress............................................. 18,066 2,269
--------- --------
Total........................................................... 337,585 290,618
Less accumulated depreciation and amortization....................... 159,168 145,677
--------- --------
Bank premises and equipment, net................................ $ 178,417 144,941
========= ========
Depreciation and amortization expense for the years ended December 31,
2006, 2005 and 2004 was $18.9 million, $17.4 million and $18.6 million,
respectively.
First Banks leases land, office properties and equipment under
operating leases. Certain of the leases contain renewal options and escalation
clauses. Total rent expense was $18.0 million, $15.5 million and $13.2 million
for the years ended December 31, 2006, 2005 and 2004, respectively. Future
minimum lease payments under noncancellable operating leases extend through 2084
as follows:
(dollars expressed in thousands)
Year ending December 31:
2007................................................................... $ 14,175
2008................................................................... 13,716
2009................................................................... 12,012
2010................................................................... 9,914
2011................................................................... 6,192
Thereafter............................................................. 36,984
--------
Total future minimum lease payments................................ $ 92,993
========
First Banks also leases to unrelated parties a portion of its banking
facilities. Rental income associated with these leases was $5.9 million, $6.4
million and $5.8 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of amortization, were
comprised of the following at December 31, 2006 and 2005:
2006 2005
------------------------- --------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles............ $ 60,867 (18,850) 36,555 (11,710)
Customer list intangibles........... 23,320 (913) -- --
Goodwill associated with
P&A Transactions.................. 2,210 (1,288) 2,210 (1,146)
--------- -------- -------- --------
Total........................... $ 86,397 (21,051) 38,765 (12,856)
========= ======== ======== ========
Unamortized intangible assets:
Goodwill associated with
stock purchases................... $ 230,036 165,992
========= ========
Amortization of intangible assets was $8.2 million, $4.9 million and
$2.9 million for the years ended December 31, 2006, 2005 and 2004, respectively.
As of December 31, 2006, the remaining estimated life of the amortization period
for core deposit intangibles, customer list intangibles and goodwill associated
with P&A Transactions was six years, 16 years and eight years, respectively.
Amortization of intangible assets, including amortization of core deposit
intangibles, customer list intangibles and goodwill associated with P&A
Transactions, has been estimated in the following table, and does not take into
consideration any potential future acquisitions or branch office purchases.
(dollars expressed in thousands)
Year ending December 31:
2007..................................................................... $11,706
2008..................................................................... 11,706
2009..................................................................... 9,803
2010..................................................................... 9,342
2011..................................................................... 7,041
Thereafter............................................................... 15,748
-------
Total................................................................ $65,346
=======
Changes in the carrying amount of goodwill for the years ended December
31, 2006 and 2005 were as follows:
2006 2005
---- ----
(dollars expressed in thousands)
Balance, beginning of year............................................. $ 167,056 156,849
Goodwill acquired during the year...................................... 63,378 18,579
Acquisition-related adjustments (1).................................... 666 (8,229)
Amortization - P&A Transactions........................................ (142) (143)
--------- --------
Balance, end of year................................................... $ 230,958 167,056
========= ========
--------------------
(1) Acquisition-related adjustments recorded in 2006, as further described in Note 2 to the
Consolidated Financial Statements, included $646,000 recorded in the third quarter of 2006
pertaining to the acquisition of Northway State Bank in October 2005. Acquisition-related
adjustments recorded in 2005 included $4.3 million recorded in the first quarter of 2005
pertaining to the acquisition of CIB Bank in November 2004, $1.4 million recorded in the third
quarter of 2005 pertaining to the acquisition of CMC in July 2004, and $2.5 million recorded in
the fourth quarter of 2005 pertaining to the acquisition of Bank of Ste. Genevieve in March
2003. 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.
(9) MATURITIES OF TIME DEPOSITS
A summary of maturities of time deposits of $100,000 or more and other
time deposits as of December 31, 2006 is as follows:
Time deposits of Other time
$100,000 or more deposits Total
---------------- -------- -----
(dollars expressed in thousands)
Year ending December 31:
2007............................................ $ 1,240,922 1,944,304 3,185,226
2008............................................ 112,728 322,275 435,003
2009............................................ 18,611 60,179 78,790
2010............................................ 19,299 56,515 75,814
2011............................................ 17,734 23,196 40,930
Thereafter...................................... 10,285 1,416 11,701
----------- ---------- ----------
Total....................................... $ 1,419,579 2,407,885 3,827,464
=========== ========== ==========
(10) OTHER BORROWINGS
Other borrowings were comprised of the following at December 31, 2006
and 2005:
2006 2005
---- ----
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily............................................................... $ 169,874 199,874
Term................................................................ 200,000 300,000
FHLB advances (1)........................................................ 4,025 39,300
--------- --------
Total........................................................... $ 373,899 539,174
========= ========
----------------------
(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.
The average balance of other borrowings was $380.5 million and $571.7
million, respectively, and the maximum month-end balance of other borrowings was
$535.7 million and $604.3 million, respectively, for the years ended December
31, 2006 and 2005. The average rates paid on other borrowings during the years
ended December 31, 2006, 2005 and 2004 were 4.42%, 3.19% and 1.26%,
respectively. Interest expense on securities sold under agreements to repurchase
was $16.1 million, $16.5 million and $5.4 million for the years ended December
31, 2006, 2005 and 2004, respectively. Interest expense on FHLB advances was
$689,000, $1.6 million and $716,000 for the years ended December 31, 2006, 2005
and 2004, respectively. The assets underlying the daily securities sold under
agreements to repurchase and the FHLB advances are held by First Banks. The
underlying securities associated with the term repurchase agreements are
mortgage-backed securities and callable U.S. Government agency securities and
are held by other financial institutions under safekeeping agreements. As
further described in Note 5 to the Consolidated Financial Statements, the
interest rate floor agreements included within the term repurchase agreements
(and the interest rate cap agreements previously included within the term
repurchase agreements) represent embedded derivative instruments. In accordance
with the Company's interest rate risk management program, First Bank modified
its term repurchase agreements under master repurchase agreements with
unaffiliated third parties in March 2005 to terminate the interest rate cap
agreements previously embedded within the agreements and simultaneously enter
into interest rate floor agreements, also embedded within the agreements. These
modifications resulted in adjustments to the existing interest rate spread to
LIBOR for the underlying agreements, as set forth in the following table. The
modified terms of the agreements became effective during the second quarter of
2005. First Bank did not incur any costs associated with the modifications of
the agreements nor did the modifications result in a change to the accounting
treatment of the embedded derivative instruments.
The maturity dates, par amounts, interest rate spreads and interest
rate floor strike prices on First Bank's term repurchase agreements as of
December 31, 2006 and 2005 were as follows:
Par Interest Rate Interest Rate Floor
Maturity Date Amount Spread Strike Price
------------- ------ ------ ------------
(dollars expressed
in thousands)
December 31, 2006:
July 19, 2010 (1)................. $ 100,000 LIBOR + 0.5475% (3) 5.00% (3)
October 12, 2010 (2).............. 100,000 LIBOR + 0.5100% (3) 4.50% (3)
---------
$ 200,000
=========
December 31, 2005:
January 12, 2007 (2).............. $ 150,000 LIBOR + 0.0050% (4) 3.00% (4)
June 14, 2007 (5)................. 50,000 LIBOR - 0.3300% (4) 3.00% (4)
June 14, 2007 (5)................. 50,000 LIBOR - 0.3400% (4) 3.00% (4)
August 1, 2007 (6)................ 50,000 LIBOR + 0.0800% (4) 3.00% (4)
---------
$ 300,000
=========
-----------------------
(1) First Bank entered into this $100.0 million four-year term repurchase agreement under a master
repurchase agreement on July 14, 2006. Interest is paid quarterly, beginning on October 18, 2006.
(2) First Bank terminated $50.0 million of this term repurchase agreement on April 28, 2006, resulting
in an $83,000 prepayment penalty and the recognition of a $310,000 loss on the sale of
$50.0 million of available-for-sale investment securities associated with the termination of the
term repurchase agreement, as further described in Note 3 and Note 5 to the Consolidated Financial
Statements. On August 24, 2006, First Bank restructured the remaining $100.0 million term
repurchase agreement to extend the maturity date to October 12, 2010 and to modify the pricing
structure, including the interest rate floor strike price, which was effective immediately
following the next quarterly scheduled interest payment date of October 12, 2006. First Bank did
not incur any costs in conjunction with the restructure of this term repurchase agreement.
(3) The interest rate paid on these term repurchase agreements is based on the three-month LIBOR plus
the spread amount shown minus a floating rate, subject to a 0% floor, equal to two times the
differential between the three-month LIBOR and the strike price shown, if the three-month LIBOR
falls below the strike price associated with the interest rate floor agreements.
(4) The interest rate paid on these term repurchase agreements is based on the LIBOR reset in arrears
plus or minus the spread amount shown minus a floating amount equal to the differential between
the three-month LIBOR reset in arrears and the strike price shown, if the three-month LIBOR reset
in arrears falls below the strike price associated with the interest rate floor agreements.
(5) 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, as further described in Note 3 and Note 5
to the Consolidated Financial Statements.
(6) 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, as further described in Note 3 and Note 5 to the Consolidated Financial Statements.
(11) NOTES PAYABLE
On August 10, 2006, First Banks entered into a First Amendment to its
Amended and Restated Secured Credit Agreement with a group of unaffiliated
financial institutions (Amended Credit Agreement). The Amended Credit Agreement,
in the amount of $96.0 million, amended the previous Amended and Restated
Secured Credit Agreement dated August 11, 2005 in the amount of $122.5 million
that provided a $15.0 million senior secured revolving credit facility, a $7.5
million senior secured standby letter of credit facility and a $100.0 million
senior secured term loan facility (Term Loan) (collectively, the Credit
Agreements). 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 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 existing Term Loan that matures on August 10,
2008 and had a balance of $85.0 million at the time of the amendment. 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 had not drawn any advances on the Revolving Credit
as of December 31, 2006. First Banks borrowed $80.0 million on the Term Loan in
August 2005 and borrowed the remaining $20.0 million in November 2005. Interest
is payable on the outstanding principal loan balance of the Term Loan at a
floating rate equal to LIBOR plus a margin determined by the outstanding loan
balance 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. As of December 31, 2006, First Banks had made payments of $35.0 million on
the outstanding principal balance of the Term Loan, reducing the balance from
$100.0 million at December 31, 2005 to $65.0 million at December 31, 2006. The
interest rate for outstanding borrowings under the Credit Agreements at December
31, 2006 and 2005 was 6.25% and 5.38%, respectively. Letters of credit issued to
unaffiliated third parties on behalf of First Banks under the Credit Agreements
were $450,000 and $2.9 million at December 31, 2006 and 2005, respectively, and
had not been drawn on by the counterparties.
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. First Banks and First Bank
were in compliance with all restrictions and requirements of the Credit
Agreements at December 31, 2006 and 2005.
The average balance and maximum month-end balance of borrowings
outstanding under the Credit Agreements during the years ended December 31, 2006
and 2005 were as follows:
2006 2005
---- ----
(dollars expressed in thousands)
Average balance.......................................................... $ 88,843 36,849
Maximum month-end balance................................................ 100,000 100,000
======== ========
The average rates paid on the outstanding borrowings during the years
ended December 31, 2006, 2005 and 2004 were 6.22%, 6.26% and 13.84%,
respectively. Interest expense recognized on borrowings under the Amended Credit
Agreement includes commitment, arrangement and renewal fees. During 2004, the
average rate paid on the outstanding borrowings reflects a marginal increased
level of commitment, arrangement and renewal fees on a much smaller base of
borrowings outstanding during the year, thereby causing the average rate paid to
be significantly higher than in 2006 and 2005.
(12) SUBORDINATED DEBENTURES
First Banks has formed various affiliated Delaware or Connecticut
statutory and business trusts (collectively, the Trusts) that were created for
the sole purpose of issuing trust preferred securities. The trust preferred
securities were issued in private placements, with the exception of First
Preferred Capital Trust II, First Preferred Capital Trust III and First
Preferred Capital Trust IV, which were issued in underwritten public offerings.
First Banks owns all of the common securities of the Trusts. The gross proceeds
of the offerings were used by the Trusts to purchase fixed rate or variable rate
subordinated debentures from First Banks. The subordinated debentures are the
sole asset of the Trusts.
A summary of the subordinated debentures issued to the Trusts in
conjunction with the trust preferred securities offerings at December 31, 2006
and 2005 were as follows:
Subordinated
Trust Debentures
Maturity Call Interest Preferred ---------------
Name of Trust Issuance Date Date Date Rate (1) Securities 2006 2005
------------- ------------- ---- ---- ---- ---------- ---- ----
Variable Rate
- -------------
First Bank Capital Trust April 2002 April 22, 2032 April 22, 2007 + 387.5 bp $25,000 25,774 25,774
First Bank Statutory Trust II September 2004 September 20, 2034 September 20, 2009 + 205.0 bp 20,000 20,619 20,619
First Bank Statutory Trust III November 2004 December 15, 2034 December 15, 2009 + 218.0 bp 40,000 41,238 41,238
First Bank Statutory Trust IV March 2006 March 15, 2036 March 15, 2011 + 142.0 bp 40,000 41,238 --
First Bank Statutory Trust V April 2006 June 15, 2036 June 15, 2011 + 145.0 bp 20,000 20,619 --
First Bank Statutory Trust VI June 2006 July 7, 2036 July 7, 2011 + 165.0 bp 25,000 25,774 --
First Bank Statutory Trust VII December 2006 December 15, 2036 December 15, 2011 + 185.0 bp 50,000 51,547 --
Fixed Rate
- ----------
First Preferred Capital
Trust II (2) October 2000 September 30, 2030 September 30, 2005 10.24% 57,500 -- --
First Preferred Capital
Trust III (3) November 2001 December 31, 2031 December 31, 2006 9.00% 55,200 -- 56,907
First Bank Statutory Trust March 2003 March 20, 2033 March 20, 2008 8.10% 25,000 25,774 25,774
First Preferred Capital
Trust IV April 2003 June 30, 2033 June 30, 2008 8.15% 46,000 47,423 47,423
- ----------------------------
(1) The interest rates paid on the trust preferred securities were based on either a fixed rate or a variable rate. The variable
rate was based on the three-month LIBOR plus the basis point spread as shown above, with the exception of First Bank Capital
Trust, which was based on the six-month LIBOR plus the basis point spread shown above.
(2) On September 30, 2005, First Banks redeemed the cumulative fixed rate trust preferred securities at the liquidation value of
$25 per preferred security, together with distributions accumulated and unpaid to the redemption date. In conjunction with this
transaction, First Banks paid in full its outstanding $59.3 million of subordinated debentures that were issued by First Banks
to First Preferred Capital Trust II. The funds necessary for the redemption of the subordinated debentures were provided from a
portion of the proceeds of First Banks' Term Loan.
(3) On December 31, 2006, First Banks redeemed the cumulative fixed rate trust preferred securities at the liquidation value of $25
per preferred security, together with distributions accumulated and unpaid to the redemption date. In conjunction with this
transaction, First Banks paid in full its outstanding $56.9 million of subordinated debentures that were issued by First Banks
to First Preferred Capital Trust III. The net proceeds associated with these transactions were paid on January 2, 2007. The
funds necessary for the redemption of the subordinated debentures were provided by internally generated funds and the net
proceeds from the issuance of additional subordinated debentures to First Bank Statutory VII on December 14, 2006.
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
accrued on the subordinated debentures were $22.4 million, $20.9 million and
$19.0 million for the years ended December 31, 2006, 2005 and 2004,
respectively. The distributions payable on all of First Banks' subordinated
debentures are included in interest expense in the consolidated statements of
income. Deferred issuance costs associated with First Banks' subordinated
debentures are included as a reduction of subordinated debentures in the
consolidated balance sheets and are amortized on a straight-line basis.
Subsequent to December 31, 2006, First Banks, through a newly formed
statutory trust affiliate, issued $25.8 million of subordinated debentures, as
more fully described in Note 25 to the Consolidated Financial Statements. The
structure of the trust preferred securities currently satisfies the regulatory
requirements for inclusion, subject to certain limitations, in First Banks'
capital base.
(13) INCOME TAXES
Provision for income taxes attributable to income from continuing
operations for the years ended December 31, 2006, 2005 and 2004 consists of:
2006 2005 2004
---- ---- ----
(dollars expressed in thousands)
Current provision for taxes:
Federal........................................................ $41,582 48,306 36,578
State.......................................................... 3,272 5,419 9,507
------- ------- -------
44,854 53,725 46,085
------- ------- -------
Deferred provision for taxes:
Federal........................................................ 10,062 116 236
State.......................................................... 146 (1,332) (983)
------- ------- -------
10,208 (1,216) (747)
------- ------- -------
Total...................................................... $55,062 52,509 45,338
======= ======= =======
The effective rates of federal income taxes for the years ended
December 31, 2006, 2005 and 2004 differ from the federal statutory rates of
taxation as follows:
Years Ended December 31,
-----------------------------------------------------------
2006 2005 2004
------------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Income before provision for income taxes
and minority interest in loss of
subsidiary................................ $ 166,169 $148,128 $ 128,246
========= ======== =========
Provision for income taxes calculated
at federal statutory income tax rates..... $ 58,159 35.0% $ 51,845 35.0% $ 44,886 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income, net of
tax preference adjustment............. (908) (0.5) (814) (0.5) (791) (0.6)
State income taxes........................ 3,487 2.0 4,773 3.2 5,541 4.3
Reduction in prior year contingency
reserve............................... (4,154) (2.5) (2,116) (1.4) (2,825) (2.2)
Bank owned life insurance, net of
premium............................... (1,039) (0.6) (1,602) (1.1) (1,670) (1.3)
Other, net................................ (483) (0.3) 423 0.3 197 0.2
--------- ---- -------- ---- --------- ----
Provision for income taxes.......... $ 55,062 33.1% $ 52,509 35.5% $ 45,338 35.4%
========= ==== ======== ==== ========= ====
The $4.2 million, $2.1 million and $2.8 million reductions in the prior
year contingency reserve, reflected in 2006, 2005 and 2004, respectively,
resulted from reversals of federal and state tax reserves no longer deemed
necessary.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2006 and 2005 were as follows:
December 31,
------------
2006 2005
---- ----
(dollars expressed in thousands)
Deferred tax assets:
Net operating loss carryforwards................................ $ 26,267 35,513
Deferred built-in loss carryforward............................. 3,345 3,824
Allowance for loan losses....................................... 60,052 57,137
Loans held for sale............................................. 572 5,562
Alternative minimum and general business tax credits............ 3,510 2,770
Interest on nonaccrual loans.................................... 2,286 3,582
Servicing rights................................................ -- 10,081
Deferred compensation........................................... 7,732 6,462
Net fair value adjustment for available-for-sale
investment securities........................................ 6,312 8,954
Net fair value adjustment for derivative instruments............ 755 1,782
Partnership investments......................................... 7,079 4,161
State taxes..................................................... -- 515
Other........................................................... 3,666 6,349
--------- --------
Gross deferred tax assets................................... 121,576 146,692
--------- --------
Valuation allowance............................................. (21,401) (17,754)
--------- --------
Deferred tax assets, net of valuation allowance............. 100,175 128,938
--------- --------
Deferred tax liabilities:
Depreciation on bank premises and equipment..................... 8,445 8,407
Servicing rights................................................ 919 --
Unrealized gains on investment securities....................... -- 144
Core deposit intangibles........................................ 8,887 6,491
Customer list intangibles....................................... 9,307 --
Discount on loans............................................... 5,446 4,878
Equity investments.............................................. 6,103 6,331
State taxes..................................................... 2,594 --
Other........................................................... 1,125 853
--------- --------
Deferred tax liabilities.................................... 42,826 27,104
--------- --------
Net deferred tax assets..................................... $ 57,349 101,834
========= ========
The realization of First Banks' net deferred tax assets is based on the
availability of carrybacks to prior taxable periods, the expectation of future
taxable income and the utilization of tax planning strategies. Based on these
factors, management believes it is more likely than not that First Banks will
realize the recognized net deferred tax assets of $57.5 million at December 31,
2006.
Changes in the deferred tax asset valuation allowance for the years
ended December 31, 2006, 2005 and 2004 were as follows:
2006 2005 2004
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year........................................... $17,754 17,767 --
Purchase acquisitions................................................ -- -- 17,767
Adjustment to purchase acquisitions completed in prior periods....... 3,647 (13) --
------- ------- -------
Balance, end of year................................................. $21,401 17,754 17,767
======= ======= =======
Upon completion of the acquisition of CIB Bank, the net deferred tax
assets associated with the acquisition were evaluated to determine whether it is
more likely than not that the net deferred tax assets will be recognized in the
future. The ability to utilize the net deferred tax assets recorded in
connection with the acquisition is subject to a number of limitations. Among
these limitations is the restriction that any built-in loss (the fair value was
less than the tax basis) that existed at the date of acquisition, if realized
within the first five years subsequent to the date of acquisition, will be
deferred and must be carried forward and subjected to rules similar to the rules
for carrying forward net operating losses. Based upon these factors, management
determined that a valuation allowance should be established for CIB Bank in the
amount of $21.4 million. Subsequent reductions in the valuation allowance will
be credited to goodwill.
At December 31, 2006 and 2005, the accumulation of prior years'
earnings representing tax bad debt deductions was approximately $29.8 million.
If these tax bad debt reserves were charged for losses other than bad debt
losses, First Banks would be required to recognize taxable income in the amount
of the charge. It is not contemplated that such tax-restricted retained earnings
will be used in a manner that would create federal income tax liabilities.
At December 31, 2006 and 2005, for federal income taxes purposes, First
Banks had net operating loss carryforwards relating to pre-acquisition tax
losses of acquired entities of approximately $75.0 million and $101.5 million,
respectively. At December 31, 2006, the net operating loss carryforwards for
First Banks expire as follows:
(dollars expressed in thousands)
Year ending December 31:
2007.................................................................. $ 1,718
2008.................................................................. 11,924
2009.................................................................. 6,114
2010.................................................................. 7
2011 - 2025........................................................... 55,287
---------
Total............................................................. $ 75,050
=========
During 2004, First Banks recognized built-in losses associated with the
acquisition of CIB Bank. A portion of the realized built-in losses was deferred
for 2004 and is required to be carried forward subject to rules similar to the
rules for carrying forward net operating losses. Utilization of the realized
built-in losses is allowed subsequent to the utilization of any net operating
loss carryforwards associated with the acquisition of CIB Bank. Consequently, at
December 31, 2006, First Banks had deferred built-in loss carryforwards of
approximately $8.0 million. Utilization of the deferred built-in loss
carryforwards is allowed beginning in the year 2020, and such losses will expire
in the year 2024.
(14) EARNINGS PER COMMON SHARE
The following is a reconciliation of basic and diluted EPS for the
years ended December 31, 2006, 2005 and 2004:
Per Share
Income Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Year ended December 31, 2006:
Basic EPS - income available to common stockholders......... $ 110,908 23,661 $4,687.38
Effect of dilutive securities:
Class A convertible preferred stock...................... 769 456 (56.66)
--------- -------- ---------
Diluted EPS - income available to common stockholders....... $ 111,677 24,117 $4,630.72
========= ======== =========
Year ended December 31, 2005:
Basic EPS - income available to common stockholders......... $ 96,120 23,661 $4,062.36
Effect of dilutive securities:
Class A convertible preferred stock...................... 769 516 (54.90)
--------- -------- ---------
Diluted EPS - income available to common stockholders....... $ 96,889 24,177 $4,007.46
========= ======== =========
Year ended December 31, 2004:
Basic EPS - income available to common stockholders......... $ 82,123 23,661 $3,470.80
Effect of dilutive securities:
Class A convertible preferred stock...................... 769 565 (49.22)
--------- -------- ---------
Diluted EPS - income available to common stockholders....... $ 82,892 24,226 $3,421.58
========= ======== =========
(15) CREDIT COMMITMENTS
First Banks is a party to commitments to extend credit and commercial
and standby letters of credit in the normal course of business to meet the
financing needs of its customers. These instruments involve, in varying degrees,
elements of credit risk and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The interest rate risk associated
with these credit commitments relates primarily to the commitments to originate
fixed-rate loans. As more fully described in Note 5 to the Consolidated
Financial Statements, the interest rate risk of the commitments to originate
fixed-rate loans has been hedged with forward commitments to sell
mortgage-backed securities. The credit risk amounts are equal to the contractual
amounts, assuming the amounts are fully advanced and the collateral or other
security is of no value. First Banks uses the same credit policies in granting
commitments and conditional obligations as it does for on-balance sheet items.
Commitments to extend fixed and variable rate credit, and commercial
and standby letters of credit at December 31, 2006 and 2005 were as follows:
December 31,
--------------------------------
2006 2005
---- ----
(dollars expressed in thousands)
Commitments to extend credit............................................. $ 3,092,804 2,785,028
Commercial and standby letters of credit................................. 171,097 191,634
----------- ----------
$ 3,263,901 2,976,662
=========== ==========
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, income-producing commercial properties or
single family residential properties. In the event of nonperformance, First
Banks may obtain and liquidate the collateral to recover amounts paid under its
guarantees on these financial instruments.
Commercial and standby letters of credit are conditional commitments
issued to guarantee the performance of a customer to a third party. The letters
of credit are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. Most letters of credit extend for less than one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Upon issuance of the
commitments, First Banks typically holds marketable securities, certificates of
deposit, inventory, real property or other assets as collateral supporting those
commitments for which collateral is deemed necessary. The standby letters of
credit at December 31, 2006 expire, at various dates, within 10 years.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is management's estimate of the
values at which the instruments could be exchanged in a transaction between
willing parties. These estimates are subjective and may vary significantly from
amounts that would be realized in actual transactions. In addition, other
significant assets are not considered financial assets including servicing
assets, deferred income tax assets, bank premises and equipment and goodwill and
other intangible assets. Furthermore, the income taxes that would be incurred if
First Banks were to realize any of the unrealized gains or unrealized losses
indicated between the estimated fair values and corresponding carrying values
could have a significant effect on the fair value estimates and have not been
considered in any of the estimates.
The estimated fair value of First Banks' financial instruments at
December 31, 2006 and 2005 were as follows:
2006 2005
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(dollars expressed in thousands)
Financial Assets:
Cash and cash equivalents................... $ 369,557 369,557 286,652 286,652
Investment securities:
Trading................................. 81,168 81,168 3,389 3,389
Available for sale...................... 1,359,729 1,359,729 1,311,289 1,311,289
Held to maturity........................ 24,049 23,971 26,105 25,791
Net loans................................... 7,520,752 7,471,250 6,885,441 6,847,421
Derivative instruments...................... (1,659) (1,659) (6,530) (6,530)
Bank-owned life insurance................... 113,778 113,778 111,442 111,442
Accrued interest receivable................. 55,464 55,464 43,280 43,280
Interest rate lock commitments.............. (17) (17) (49) (49)
Forward commitments to sell
mortgage-backed securities.............. 86 86 (538) (538)
========== ========== ========== ==========
Financial Liabilities:
Deposits:
Noninterest-bearing demand.............. $1,281,108 1,281,108 1,299,350 1,299,350
Interest-bearing demand................. 981,939 981,939 981,837 981,837
Savings................................. 2,352,575 2,352,575 2,106,470 2,106,470
Time deposits........................... 3,827,464 3,827,464 3,154,174 3,154,174
Other borrowings............................ 373,899 373,899 539,174 539,174
Notes payable............................... 65,000 65,000 100,000 100,000
Accrued interest payable.................... 28,176 28,176 21,023 21,023
Subordinated debentures..................... 297,966 303,302 215,461 219,675
========== ========== ========== ==========
Off-Balance Sheet Financial Instruments....... $ -- -- -- --
========== ========== ========== ==========
The following methods and assumptions were used in estimating the fair
value of financial instruments:
Cash and cash equivalents and accrued interest receivable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Investment securities: The fair value of trading and available-for-sale
investment securities is the amount reported in the consolidated balance sheets.
The fair value of held-to-maturity investment securities is based on quoted
market prices where available. If quoted market prices were not available, the
fair value was based on quoted market prices of comparable instruments.
Net loans: The fair value of most loans held for portfolio was
estimated utilizing discounted cash flow calculations that applied interest
rates currently being offered for similar loans to borrowers with similar risk
profiles. The fair value of loans held for sale, which is the amount reported in
the consolidated balance sheets, is based on quoted market prices where
available. If quoted market prices were not available, the fair value was based
on quoted market prices of comparable instruments. The carrying value of loans
is net of the allowance for loan losses and unearned discount.
Derivative instruments and bank-owned life insurance: The fair value of
derivative instruments, including cash flow hedges, fair value hedges, interest
rate floor and cap agreements, and interest rate lock commitments, and
bank-owned life insurance is based on quoted market prices where available. If
quoted market prices were not available, the fair value was based on quoted
market prices of comparable instruments.
Forward commitments to sell mortgage-backed securities: The fair value
of forward commitments to sell mortgage-backed securities is based on quoted
market prices. The fair value of these commitments has been reflected in the
consolidated balance sheets in the carrying value of the loans held for sale
portfolio.
Deposits: The fair value of deposits generally payable on demand (i.e.,
noninterest-bearing and interest-bearing demand and savings accounts) is
considered equal to their respective carrying amounts as reported in the
consolidated balance sheets. The fair value of demand deposits does not include
the benefit that results from the low-cost funding provided by deposit
liabilities compared to the cost of borrowing funds in the market. The fair
value disclosed for time deposits was estimated utilizing a discounted cash flow
calculation that applied interest rates currently being offered on similar
deposits to a schedule of aggregated monthly maturities of time deposits. If the
estimated fair value is lower than the carrying value, the carrying value is
reported as the fair value of time deposits.
Other borrowings, notes payable and accrued interest payable: The
carrying values reported in the consolidated balance sheets approximate fair
value.
Subordinated debentures: The fair value is based on quoted market
prices.
Off-Balance Sheet Financial Instruments: The fair value of commitments
to extend credit, standby letters of credit and financial guarantees is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements, the likelihood of the
counterparties drawing on such financial instruments and the credit worthiness
of the counterparties. These fees in aggregate are not considered material, and
as such, were not assigned a value for purposes of this disclosure.
(17) EMPLOYEE BENEFITS
First Banks' 401(k) plan is a self-administered savings and incentive
plan covering substantially all employees. Employer match contributions are
determined annually under the plan by First Banks' Board of Directors. Employee
contributions were limited to $15,000 of gross compensation for 2006. Total
employer contributions under the plan were $3.9 million, $2.4 million and $2.1
million for the years ended December 31, 2006, 2005 and 2004, respectively. The
plan assets are held and managed under a trust agreement with First Bank's trust
department.
First Banks' nonqualified deferred compensation plan, which covers a
select group of employees, is administered by an independent third party. The
plan is exempt from the participation, vesting, funding and fiduciary
requirements of the Employee Retirement Income Security Act of 1974.
Participants may contribute from 1% to 25% of their salary and up to 100% of
their bonuses on a pre-tax basis. Balances outstanding under the plan, which are
reflected in accrued and other liabilities in the consolidated balance sheets,
were $8.1 million and $6.2 million at December 31, 2006 and 2005, respectively.
Plan expense recorded under the plan, which is reflected in salaries and
employee benefits expense in the consolidated statements of income, was
$845,000, $592,000 and $450,000 for the years ended December 31, 2006, 2005 and
2004, respectively.
(18) STOCKHOLDERS' EQUITY
First Banks has two classes of preferred stock outstanding. The Class A
preferred stock is convertible into shares of common stock at a rate based on
the ratio of the par value of the preferred stock to the current market value of
the common stock at the date of conversion, to be determined by independent
appraisal at the time of conversion. Shares of Class A preferred stock may be
redeemed by First Banks at any time at 105.0% of par value. The Class B
preferred stock may not be redeemed or converted. The redemption of any issue of
preferred stock requires the prior approval of the Board of Governors of the
Federal Reserve System (Federal Reserve). The holders of the Class A and Class B
preferred stock have full voting rights. Dividends on the Class A and Class B
preferred stock are adjustable quarterly based on the highest of the Treasury
Bill Rate or the Ten Year Constant Maturity Rate for the two-week period
immediately preceding the beginning of the quarter. This rate shall not be less
than 6.0% nor more than 12.0% on the Class A preferred stock, or less than 7.0%
nor more than 15.0% on the Class B preferred stock. The annual dividend rates
for the Class A and Class B preferred stock were 6.0% and 7.0%, respectively,
for the years ended December 31, 2006, 2005 and 2004.
Other comprehensive income (loss) of $6.8 million, ($18.1) million and
($31.0) million, as presented in the accompanying Consolidated Statements of
Changes in Stockholders' Equity and Comprehensive Income, is reflected net of
income tax expense (benefit) of $3.7 million, ($9.7) million and ($16.7) million
at December 31, 2006, 2005 and 2004, respectively.
In December 2006, First Banks recorded an increase in additional
paid-in capital of $3.8 million which related to the utilization of net
operating losses that were acquired with the acquisition of First Banks America,
Inc. (FBA) and its wholly-owned subsidiary BankTEXAS N.A., in 1994. Effective
December 1994, the FBA Board of Directors approved the implementation of a
quasi-reorganization. In accordance with the provisions of SFAS No. 109 and
under the requirements for completing the quasi-reorganization, tax benefits for
deductible temporary differences and net operating loss carryforwards that
existed at the date of the quasi-reorganization and are subsequently recognized
are generally reported as a direct addition to contributed capital.
(19) TRANSACTIONS WITH RELATED PARTIES
Outside of normal customer relationships, no directors or officers of
First Banks, no shareholders holding over 5% of First Banks' voting securities
and no corporations or firms with which such persons or entities are associated
currently maintain or have maintained, since the beginning of the last full
fiscal year, any significant business or personal relationships with First Banks
or its subsidiaries, other than that which arises by virtue of such position or
ownership interest in First Banks or its subsidiaries, except as described in
the following paragraphs.
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and members of his immediate family, provides information
technology, item processing and various related services to First Banks, Inc.
and its subsidiaries. Fees paid under agreements with First Services, L.P. were
$30.6 million, $29.6 million and $26.6 million for the years ended December 31,
2006, 2005 and 2004, respectively. First Services, L.P. leases information
technology and other equipment from First Bank. During 2006, 2005 and 2004,
First Services, L.P. paid First Bank $4.2 million, $4.3 million and $4.3
million, respectively, in rental fees for the use of that equipment.
First Brokerage America, L.L.C., a limited liability company indirectly
owned by First Banks' Chairman and members of his immediate family, received
approximately $3.0 million, $2.6 million and $3.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively, in gross commissions paid by
unaffiliated third-party companies. The commissions received were primarily in
connection with the sales of annuities, securities and other insurance products
to customers of First Bank.
First Title Guaranty LLC D/B/A First Banc Insurors (First Title), a
limited liability company owned by First Banks' Chairman and members of his
immediate family, received approximately $221,000, $379,000 and $514,000 for the
years ended December 31, 2006, 2005 and 2004, respectively, in commissions for
insurance 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.
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. First Bank engaged an independent third party to perform a business
valuation of the personal and commercial insurance book of business of First
Title, which was determined to be approximately $270,000 and is being amortized
over seven years utilizing the straight-line method.
During 2006, First Bank contributed $5.0 million in cash to the
Dierberg Operating Foundation, Inc., a charitable foundation established by
First Banks' Chairman and members of his immediate family. In addition, on
November 15, 2006, First Banks contributed 26,962 shares of common stock held in
its available-for-sale investment securities portfolio with a fair value of $1.0
million to the Dierberg Operating Foundation, Inc. In conjunction with this
transaction, First Banks recorded charitable contribution expense of $1.0
million, which was partially offset by a gain on the contribution of these
available-for-sale investment securities of $121,000, representing the
difference between the cost basis and the fair value of the common stock on the
date of the contribution. In addition, First Banks recognized a tax benefit of
$522,000 associated with this transaction. During 2005, First Bank contributed
$2.5 million in cash to The Dierberg Foundation, a charitable foundation
established by First Banks' Chairman and members of his immediate family, and
$1.5 million in cash to the Dierberg Operating Foundation, Inc. First Banks did
not make any charitable contributions to these organizations during 2004.
First Banks periodically purchases various products from Hermannhof,
Inc. and Dierberg Star Lane Vineyards, entities that are controlled by First
Banks' Chairman and members of his immediate family. First Banks utilizes these
products primarily for customer and employee events and promotions, and business
development functions. During the years ended December 31, 2006, 2005 and 2004,
First Banks purchased products aggregating approximately $376,000, $320,000 and
$189,000, respectively, from these entities.
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 $385,000, $335,000 and $297,000 for the years
ended December 31, 2006, 2005 and 2004, respectively.
In August 2004, First Bank granted to FCA, a corporation owned by First
Banks' Chairman and members of his immediate family, a written option to
purchase 735 Membership Interests of SBLS LLC, a wholly owned limited liability
company of First Bank, at a price of $10,000 per Membership Interest, or $7.4
million in aggregate. The option could have been exercised by FCA at any time
prior to its expiration, which was extended to June 30, 2005. On June 30, 2005,
FCA exercised this option and paid $7.4 million in cash. Consequently, SBLS LLC
became 51.0% owned by First Bank and 49.0% owned by FCA as of June 30, 2005.
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 loan balances at a rate equal to First Bank's prime lending rate
minus 50 basis points. 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 $47.5 million and $31.4 million at
December 31, 2006 and 2005, respectively. Interest expense recorded under the
Agreement by SBLS LLC was $3.0 million and $1.9 million for the years ended
December 31, 2006 and 2005, respectively. The balance of the advances under the
Agreement and the related interest expense recognized by SBLS LLC are fully
eliminated for purposes of the Consolidated Financial Statements.
First Bank has had in the past, and may have in the future, loan
transactions in the ordinary course of business with its directors and/or their
affiliates. These loan transactions have been made on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and did not involve more than the normal
risk of collectibility or present other unfavorable features. Loans to
directors, their affiliates and executive officers of First Banks, Inc. were
approximately $55.9 million and $37.9 million at December 31, 2006 and 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 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 initial phase of the upgrade of personal computers
to 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
for this phase of the project with fees not to exceed $500,000. First Bank made
payments of $7,000 and $471,000 under the contract for the first phase of the
project for the years ended December 31, 2006 and 2005, respectively. During
2006, First Bank evaluated the second phase of its corporate-wide personal
computer upgrade project and entered into a contract with WWT on August 21, 2006
for additional information technology services. Prior to entering into this
contract, the Audit Committee of First Banks reviewed and approved the
utilization of WWT for this phase of the project with fees not to exceed
$500,000. First Bank made payments of $367,000 under the contract for the second
phase of the project for the year ended December 31, 2006.
(20) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business
segment is consistent with the management structure of First Banks, First Bank
and the internal reporting system that monitors performance. First Bank provides
similar products and services in its defined geographic areas through its branch
network. The products and services offered include a broad range of commercial
and personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, First Bank markets combined basic services for
various customer groups, including packaged accounts for more affluent
customers, and sweep accounts, lock-box deposits and cash management products
for commercial customers. First Bank also offers both consumer and commercial
loans. Consumer lending includes residential real estate, home equity and
installment lending. Commercial lending includes commercial, financial and
agricultural loans, real estate construction and development loans, commercial
real estate loans, asset-based loans, trade financing and insurance premium
financing. Other financial services include mortgage banking, debit cards,
brokerage services, 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. The revenues generated by First Bank and its subsidiaries consist
primarily of interest income, generated from the loan and investment security
portfolios, service charges and fees generated from the deposit products and
services, and fees generated by our mortgage banking, insurance services, and
trust, private banking and institutional money management services businesses.
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. Such
principles and practices are summarized in Note 1 to the Consolidated Financial
Statements. The business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
--------------------------------- ----------------------------- ----------------------------------
2006 2005 2004 2006 2005 2004 2006 2005 2004
---- ---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities......... $ 1,439,118 1,324,219 1,803,454 25,828 16,564 9,895 1,464,946 1,340,783 1,813,349
Loans, net of unearned
discount................... 7,666,481 7,020,771 6,137,968 -- -- -- 7,666,481 7,020,771 6,137,968
Goodwill and other
intangible assets.......... 295,382 191,901 182,669 -- -- -- 295,382 191,901 182,669
Total assets.................. 10,116,246 9,148,931 8,720,331 42,468 21,402 12,510 10,158,714 9,170,333 8,732,841
Deposits...................... 8,550,062 7,601,162 7,161,636 (106,976) (59,331) (9,666) 8,443,086 7,541,831 7,151,970
Notes payable................. -- -- -- 65,000 100,000 15,000 65,000 100,000 15,000
Subordinated debentures....... -- -- -- 297,966 215,461 273,300 297,966 215,461 273,300
Stockholders' equity.......... 1,086,876 931,192 877,473 (286,441) (252,254) (276,580) 800,435 678,938 600,893
=========== ========= ========= ======== ======== ======== ========== ========= =========
Income statement information:
Interest income............... $ 645,100 493,182 394,196 1,204 758 586 646,304 493,940 394,782
Interest expense.............. 233,982 145,608 79,260 27,880 22,651 15,507 261,862 168,259 94,767
----------- --------- --------- -------- -------- -------- ---------- --------- ---------
Net interest income..... 411,118 347,574 314,936 (26,676) (21,893) (14,921) 384,442 325,681 300,015
Provision for loan losses..... 12,000 (4,000) 25,750 -- -- -- 12,000 (4,000) 25,750
----------- --------- --------- -------- -------- -------- ---------- --------- ---------
Net interest income
after provision
for loan losses.... 399,118 351,574 289,186 (26,676) (21,893) (14,921) 372,442 329,681 274,265
Noninterest income............ 112,549 96,871 87,790 394 (786) (591) 112,943 96,085 87,199
Noninterest expense........... 315,663 274,484 229,896 3,553 3,154 3,322 319,216 277,638 233,218
----------- --------- --------- -------- -------- -------- ---------- --------- ---------
Income before provision
for income taxes and
minority interest in
loss of subsidiary.... 196,004 173,961 147,080 (29,835) (25,833) (18,834) 166,169 148,128 128,246
Provision for income taxes.... 65,752 61,517 54,682 (10,690) (9,008) (9,344) 55,062 52,509 45,338
----------- --------- --------- -------- -------- -------- ---------- --------- ---------
Income before minority
interest in loss
of subsidiary........ 130,252 112,444 92,398 (19,145) (16,825) (9,490) 111,107 95,619 82,908
Minority interest in loss
of subsidiary.............. (587) (1,287) -- -- -- -- (587) (1,287) --
----------- --------- --------- -------- -------- -------- ---------- --------- ---------
Net income.............. $ 130,839 113,731 92,398 (19,145) (16,825) (9,490) 111,694 96,906 82,908
=========== ========= ========= ======== ======== ======== ========== ========= =========
- ------------------------
(1) Corporate and other includes $14.8 million, $13.4 million and $9.8 million of interest expense on subordinated debentures,
after applicable income tax benefit of $8.0 million, $7.2 million and $5.3 million for the years ended December 31, 2006,
2005 and 2004, respectively.
(21) REGULATORY CAPITAL
First Banks and First Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
First Banks and First Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and First Bank to maintain minimum amounts and
ratios of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 2006 and 2005, First Banks and First Bank were each
well capitalized. As of December 31, 2006, the most recent notification from
First Banks' primary regulator categorized First Banks and First Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, First Banks and First Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the following table.
At December 31, 2006 and 2005, First Banks' and First Bank's required
and actual capital ratios were as follows:
Actual
------------------------------------------ For To be Well
2006 2005 Capital Capitalized Under
-------------------- -------------------- Adequacy Prompt Corrective
Amount Ratio Amount Ratio Purposes Action Provisions
------ ----- ------ ----- -------- -----------------
(dollars expressed in thousands)
Total capital (to risk-weighted assets):
First Banks......................... $ 929,688 10.25% $ 826,893 10.14% 8.0% 10.0%
First Bank.......................... 925,013 10.23 868,393 10.66 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks......................... 789,967 8.71 724,501 8.88 4.0 6.0
First Bank.......................... 811,530 8.97 766,148 9.41 4.0 6.0
Tier 1 capital (to average assets):
First Banks......................... 789,967 8.13 724,501 8.13 3.0 5.0
First Bank.......................... 811,530 8.38 766,148 8.61 3.0 5.0
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 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 7.86% and 7.34%,
respectively, and would not have an impact on total capital (to risk-weighted
assets), as of December 31, 2006.
(22) DISTRIBUTION OF EARNINGS OF FIRST BANK
First Bank is restricted by various state and federal regulations as to
the amount of dividends that are available for payment to First Banks, Inc.
Under the most restrictive of these requirements, the future payment of
dividends from First Bank is limited to approximately $135.0 million at December
31, 2006, unless prior permission of the regulatory authorities is obtained.
(23) PARENT COMPANY ONLY FINANCIAL INFORMATION
Following are condensed balance sheets of First Banks, Inc. as of
December 31, 2006 and 2005, and condensed statements of income and cash flows
for the years ended December 31, 2006, 2005 and 2004:
CONDENSED BALANCE SHEETS
December 31,
----------------------
2006 2005
---- ----
(dollars expressed in thousands)
Assets
------
Cash deposited in First Bank............................................ $ 16,688 59,036
Cash deposited in unaffiliated financial institutions................... 26 1,789
---------- ---------
Total cash......................................................... 16,714 60,825
Investment securities................................................... 25,828 16,564
Investment in subsidiaries.............................................. 1,087,356 931,690
Advances due from subsidiary bank holding company....................... 90,000 --
Other assets............................................................ 17,014 3,425
---------- ---------
Total assets....................................................... $1,236,912 1,012,504
========== =========
Liabilities and Stockholders' Equity
Notes payable........................................................... $ 65,000 100,000
Subordinated debentures................................................. 297,966 215,461
Accrued expenses and other liabilities.................................. 73,511 18,105
---------- ---------
Total liabilities.................................................. 436,477 333,566
Stockholders' equity.................................................... 800,435 678,938
---------- ---------
Total liabilities and stockholders' equity......................... $1,236,912 1,012,504
========== =========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------
2006 2005 2004
---- ---- ----
(dollars expressed in thousands)
Income:
Dividends from subsidiaries................................... $ 70,000 94,050 40,000
Management fees from subsidiaries............................. 35,525 31,975 27,853
Gain on sale of available-for-sale investment securities...... 767 -- --
Other......................................................... 2,284 1,049 710
--------- -------- --------
Total income............................................... 108,576 127,074 68,563
--------- -------- --------
Expense:
Interest...................................................... 28,356 22,860 15,597
Salaries and employee benefits................................ 25,530 23,238 20,699
Legal, examination and professional fees...................... 3,796 3,959 2,943
Charitable contributions...................................... 1,068 100 43
Other......................................................... 9,660 8,687 8,114
--------- -------- --------
Total expense.............................................. 68,410 58,844 47,396
--------- -------- --------
Income before benefit for income taxes and equity
in undistributed earnings of subsidiaries................ 40,166 68,230 21,167
Benefit for income taxes........................................ (10,690) (9,004) (9,344)
--------- -------- --------
Income before equity in undistributed earnings
of subsidiaries.......................................... 50,856 77,234 30,511
Equity in undistributed earnings of subsidiaries................ 60,838 19,672 52,397
--------- -------- --------
Net income................................................. $ 111,694 96,906 82,908
========= ======== ========
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------
2006 2005 2004
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
Net income.................................................... $ 111,694 96,906 82,908
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income of subsidiaries............................... (130,838) (113,722) (92,397)
Dividends from subsidiaries.............................. 70,000 94,050 40,000
Other, net............................................... (100,610) 4,882 (3,262)
--------- -------- --------
Net cash (used in) provided by operating activities.... (49,754) 82,116 27,249
--------- -------- --------
Cash flows from investing activities:
Increase in investment securities............................. (6,375) (5,304) (915)
Investment in common securities of affiliated business
and statutory trusts....................................... (4,178) -- (1,857)
Payments from redemption of investment in common securities
of affiliated business and statutory trusts................ -- 1,778 --
Acquisitions of subsidiaries.................................. (85,514) (52,400) (76,067)
Capital contributions to subsidiaries......................... -- -- (15,000)
Other, net.................................................... (1,682) 1,340 (39)
--------- -------- --------
Net cash used in investing activities.................. (97,749) (54,586) (93,878)
--------- -------- --------
Cash flows from financing activities:
Advances drawn on notes payable............................... -- 100,000 15,000
Repayments of notes payable................................... (35,000) (15,000) (17,000)
Proceeds from issuance of subordinated debentures............. 139,178 -- 61,857
Repayments of subordinated debentures......................... -- (59,278) --
Payment of preferred stock dividends.......................... (786) (786) (786)
--------- -------- --------
Net cash provided by financing activities.............. 103,392 24,936 59,071
--------- -------- --------
Net (decrease) increase in cash........................ (44,111) 52,466 (7,558)
Cash, beginning of year......................................... 60,825 8,359 15,917
--------- -------- --------
Cash, end of year............................................... $ 16,714 60,825 8,359
========= ======== ========
Noncash investing activities:
Cash paid for interest........................................ $ 28,843 18,690 13,527
========= ======== ========
(24) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty
contracts. For value received, and for the purpose of inducing a pension fund
and its trustees and a welfare fund and its trustees (the Funds) to conduct
business with MVP, First Bank's institutional investment management subsidiary,
First Banks irrevocably and unconditionally guaranteed payment of and promised
to pay to each of the Funds any amounts up to the sum of $5.0 million to the
extent MVP is liable to the Funds for a breach of the Investment Management
Agreements (including the Investment Policy Statement and Investment
Guidelines), by and between MVP and the Funds and/or any violation of the
Employee Retirement Income Security Act by MVP resulting in liability to the
Funds. The guaranties are continuing guaranties of all obligations that may
arise for transactions occurring prior to termination of the Investment
Management Agreements and are coexistent with the term of the Investment
Management Agreements. The Investment Management Agreements have no specified
term but may be terminated at any time upon written notice by the Trustees or,
at First Banks' option, upon thirty days written notice to the Trustees. In the
event of termination of the Investment Management Agreements, such termination
shall have no effect on the liability of First Banks with respect to obligations
incurred before such termination. The obligations of First Banks are joint and
several with those of MVP. First Banks does not have any recourse provisions
that would enable it to recover from third parties any amounts paid under the
contracts nor does First Banks hold any assets as collateral that, upon
occurrence of a required payment under the contract, could be liquidated to
recover all or a portion of the amount(s) paid. At December 31, 2006, 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 SBLS, as further described in Note 2 to the
Consolidated Financial Statements. The Amended and Restated Asset Purchase
Agreement (Asset Purchase Agreement) governing this transaction provided 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, 2006 and September 30, 2005, the first and second measurement
dates under the terms of the Asset Purchase Agreement. However, in October 2006,
SBLS LLC made a payment of $375,000, as settlement in full of all obligations
associated with these contingent payments pursuant to a mutual agreement amongst
the parties. As of December 31, 2005, SBLS LLC had not recorded a liability for
the obligations associated with these contingent payments, as the likelihood
that SBLS LLC would be required to make payments under the Asset Purchase
Agreement was not ascertainable at that time.
In the ordinary course of business, First Banks and its subsidiaries
become involved in legal proceedings. Management, in consultation with legal
counsel, believes the ultimate resolution of these proceedings will not have a
material adverse effect on the financial condition or results of operations of
First Banks and/or its subsidiaries.
(25) SUBSEQUENT EVENTS (UNAUDITED)
On February 23, 2007, First Bank Statutory Trust VIII (FBST VIII), a
newly formed Delaware statutory trust, issued 25,000 variable rate trust
preferred securities at $1,000 per security in a private placement, and issued
774 common securities to First Banks at $1,000 per security. First Banks owns
all of the common securities of FBST VIII. The gross proceeds of the offering
were used by FBST VIII to purchase $25.8 million of variable rate subordinated
debentures from First Banks, maturing on March 30, 2037. The maturity date of
the subordinated debentures may be shortened, at the option of First Banks, to a
date not earlier than March 30, 2012, if certain conditions are met. The
subordinated debentures are the sole asset of FBST VIII. In connection with the
issuance of the FBST VIII preferred securities, First Banks made certain
guarantees and commitments that, in the aggregate, constitute a full and
unconditional guarantee by First Banks of the obligations of FBST VIII under the
FBST VIII preferred securities. Proceeds from the issuance of the subordinated
debentures to FBST VIII, net of offering expenses, were $25.8 million. The
distribution rate on the FBST VIII preferred securities is equivalent to the
three-month LIBOR plus 161.0 basis points, and is payable quarterly in arrears
beginning March 30, 2007.
On February 28, 2007, First Banks completed its acquisition of Royal
Oaks, located in Houston, Texas, for $38.6 million in cash. The acquisition
served to expand First Banks' banking franchise in Houston, Texas. The
transaction was funded through internally generated funds and the issuance of
the FBST VIII trust preferred securities. At the time of the acquisition, Royal
Oaks had assets of $206.9 million, loans, net of unearned discount, of $175.5
million, deposits of $159.1 million and stockholders' equity of $9.6 million.
The assets acquired and liabilities assumed were recorded at their estimated
fair value on the acquisition date. The fair value adjustments represent current
estimates and are subject to further adjustment as the valuation data is
finalized. Preliminary goodwill, which is not deductible for tax purposes, was
approximately $29.0 million. Royal Oaks was merged with and into First Bank at
the time of the acquisition.
FIRST BANKS, INC.
QUARTERLY CONDENSED FINANCIAL DATA -- UNAUDITED
- ---------------------------------------------------------------------------------------------------------------------
2006 Quarter Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands, except per share data)
Interest income............................................ $ 147,234 157,731 168,293 173,046
Interest expense........................................... 56,368 62,051 69,109 74,334
--------- -------- -------- --------
Net interest income..................................... 90,866 95,680 99,184 98,712
Provision for loan losses.................................. 1,000 5,000 2,000 4,000
--------- -------- -------- --------
Net interest income after provision for loan losses..... 89,866 90,680 97,184 94,712
Noninterest income......................................... 25,497 25,879 29,994 31,573
Noninterest expense........................................ 74,815 81,051 80,473 82,877
--------- -------- -------- --------
Income before provision for income taxes and minority
interest in loss of subsidiary........................ 40,548 35,508 46,705 43,408
Provision for income taxes................................. 11,703 13,500 17,249 12,610
--------- -------- -------- --------
Income before minority interest in loss of subsidiary... 28,845 22,008 29,456 30,798
Minority interest in loss of subsidiary.................... (158) (78) (204) (147)
--------- -------- -------- --------
Net income.............................................. $ 29,003 22,086 29,660 30,945
========= ======== ======== ========
Earnings per common share:
Basic................................................... $1,217.49 927.86 1,245.28 1,296.75
========= ======== ======== ========
Diluted................................................. $1,202.46 916.31 1,231.06 1,285.63
========= ======== ======== ========
2005 Quarter Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands, except per share data)
Interest income............................................ $ 112,228 117,188 127,801 136,723
Interest expense........................................... 34,149 39,367 45,155 49,588
--------- -------- -------- --------
Net interest income..................................... 78,079 77,821 82,646 87,135
Provision for loan losses.................................. -- (8,000) -- 4,000
--------- -------- -------- --------
Net interest income after provision for loan losses..... 78,079 85,821 82,646 83,135
Noninterest income......................................... 21,215 26,191 24,948 23,731
Noninterest expense........................................ 63,869 70,161 67,852 75,756
--------- -------- -------- --------
Income before provision for income taxes and minority
interest in loss of subsidiary........................ 35,425 41,851 39,742 31,110
Provision for income taxes................................. 13,298 15,005 13,265 10,941
--------- -------- -------- --------
Income before minority interest in loss of subsidiary... 22,127 26,846 26,477 20,169
Minority interest in loss of subsidiary.................... -- -- (1,036) (251)
--------- -------- -------- --------
Net income.............................................. $ 22,127 26,846 27,513 20,420
========= ======== ======== ========
Earnings per common share:
Basic................................................... $ 926.87 1,129.05 1,154.52 851.91
========= ======== ======== ========
Diluted................................................. $ 915.04 1,110.42 1,139.46 846.12
========= ======== ======== ========
FIRST BANKS, INC.
INVESTOR INFORMATION
- --------------------------------------------------------------------------------
FIRST BANKS, INC. PREFERRED SECURITIES
- --------------------------------------
The preferred securities of First Preferred Capital Trust IV are traded
on the New York Stock Exchange with the ticker symbol "FBSPrA." The preferred
securities of First Preferred Capital Trust IV are represented by a global
security that has been deposited with and registered in the name of The
Depository Trust Company, New York, New York (DTC). The beneficial ownership
interests of these preferred securities are recorded through the DTC book-entry
system. The high and low preferred securities prices and the dividends declared
for 2006 and 2005 are summarized as follows:
FIRST PREFERRED CAPITAL TRUST IV (ISSUE DATE - APRIL 2003) - FBSPrA
2006 2005
------------------ ------------------- Dividend
High Low High Low Declared
---- --- ---- --- --------
First quarter...................................... $28.00 25.76 27.80 26.00 $ 0.509375
Second quarter..................................... 27.65 26.38 27.55 25.75 0.509375
Third quarter...................................... 28.05 26.70 27.40 26.28 0.509375
Fourth quarter..................................... 29.20 26.75 27.61 25.97 0.509375
----------
$ 2.037500
==========
FOR INFORMATION CONCERNING FIRST BANKS, PLEASE CONTACT:
- -------------------------------------------------------
Allen H. Blake Terrance M. McCarthy Steven F. Schepman
President and Senior Executive Vice President Senior Vice President
Chief Executive Officer and Chief Operating Officer and Chief Financial Officer
600 James S. McDonnell Blvd. 600 James S. McDonnell Blvd. 600 James S. McDonnell Blvd.
Mail Code - M1-199-014 Mail Code - M1-199-071 Mail Code - M1-199-014
Hazelwood, Missouri 63042 Hazelwood, Missouri 63042 Hazelwood, Missouri 63042
Telephone - (314) 592-5000 Telephone - (314) 592-5000 Telephone - (314) 592-5000
www.firstbanks.com www.firstbanks.com www.firstbanks.com
- ------------------ ------------------ ------------------
TRANSFER AGENT:
- --------------
Computershare Investor Services, LLC
2 North LaSalle Street
Chicago, Illinois 60602
Telephone - (312) 588-4990
www.computershare.com
- ---------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANKS, INC.
By: /s/ Allen H. Blake
-----------------------------------------
Allen H. Blake
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Steven F. Schepman
----------------------------------------
Steven F. Schepman
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 28, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
Signatures Title Date
- -------------------------------------------------------------------------------------------------------------------
/s/ James F. Dierberg Director March 28, 2007
-----------------------------------------
James F. Dierberg
/s/ Allen H. Blake Director March 28, 2007
-----------------------------------------
Allen H. Blake
/s/ Terrance M. McCarthy Director March 28, 2007
-----------------------------------------
Terrance M. McCarthy
/s/ Steven F. Schepman Director March 28, 2007
-----------------------------------------
Steven F. Schepman
/s/ Gordon A. Gundaker Director March 28, 2007
-----------------------------------------
Gordon A. Gundaker
/s/ David L. Steward Director March 28, 2007
-----------------------------------------
David L. Steward
/s/ Douglas H. Yaeger Director March 28, 2007
-----------------------------------------
Douglas H. Yaeger
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
2.1 Stock Purchase Agreement by and among First Banks, Inc., The San
Francisco Company, CIB Marine Bancshares, Inc., Hillside
Investors, Ltd., and CIB Bank, dated August 12, 2004 (incorporated
herein by reference to Exhibit 10.6 to the Company's Current
Report on Form 8-K dated August 12, 2004).
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3(i) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993).
3.2 By-Laws of the Company (incorporated herein by reference to
Exhibit 3.2 to Amendment No. 2 to the Company's Registration
Statement on Form S-1, File No. 33-50576, dated September 15,
1992).
4.1 Agreement as to Expenses and Liabilities between First Banks, Inc.
and First Preferred Capital Trust IV, dated April 1, 2003
(relating to First Preferred Capital Trust IV ("First Preferred
IV")) (incorporated herein by reference to Exhibit 10.20 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003).
4.2 Preferred Securities Guarantee Agreement by and between First
Banks, Inc. and Fifth Third Bank, dated April 1, 2003 (relating to
First Preferred IV) (incorporated herein by reference to Exhibit
10.21 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003).
4.3 Indenture between First Banks, Inc. and Fifth Third Bank, as
Trustee, dated April 1, 2003 (relating to First Preferred IV)
(incorporated herein by reference to Exhibit 10.22 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003).
4.4 Amended and Restated Trust Agreement among First Banks, Inc., as
Depositor, Fifth Third Bank, as Property Trustee, Wilmington Trust
Company, as Delaware Trustee, and the Administrative Trustees,
dated April 1, 2003 (relating to First Preferred IV) (incorporated
herein by reference to Exhibit 10.23 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003).
4.5 Indenture between First Banks, Inc., as Issuer, and Wilmington
Trust Company, as Trustee, dated as of April 10, 2002
(incorporated herein by reference to Exhibit 4.15 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
4.6 Guarantee Agreement for First Bank Capital Trust, dated as of
April 10, 2002 (incorporated herein by reference to Exhibit 4.16
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).
4.7 Amended and Restated Declaration of Trust of First Bank Capital
Trust, dated as of April 10, 2002 (incorporated herein by
reference to Exhibit 4.17 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002).
4.8 Floating Rate Junior Subordinated Debt Security Certificate of
First Banks, Inc., dated April 10, 2002 (incorporated herein by
reference to Exhibit 4.18 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002).
4.9 Capital Security Certificate of First Bank Capital Trust, dated as
of April 10, 2002 (incorporated herein by reference to Exhibit
4.19 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
4.10 Indenture between First Banks, Inc., as Issuer, and U.S. Bank
National Association, as Trustee, dated as of March 20, 2003
(incorporated herein by reference to Exhibit 10.6 to Amendment No.
4 to the Company's Registration Statement on Form S-2, File No.
333-102549, dated March 24, 2003).
4.11 Amended and Restated Declaration of Trust by and among U.S. Bank
National Association, as Institutional Trustee, First Banks, Inc.,
as Sponsor, and Allen H. Blake, Terrance M. McCarthy and Lisa K.
Vansickle, as Administrators, dated as of March 20, 2003
(incorporated herein by reference to Exhibit 10.7 to Amendment No.
4 to the Company's Registration Statement on Form S-2, File No.
333-102549, dated March 24, 2003).
4.12 Guarantee Agreement by and between First Banks, Inc. and U.S. Bank
National Association, dated as of March 20, 2003 (incorporated
herein by reference to Exhibit 10.8 to Amendment No. 4 to the
Company's Registration Statement on Form S-2, File No. 333-102549,
dated March 24, 2003).
4.13 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust and SunTrust Capital Markets, Inc., dated as of
March 20, 2003 (incorporated herein by reference to Exhibit 10.9
to Amendment No. 4 to the Company's Registration Statement on Form
S-2, File No. 333-102549, dated March 24, 2003).
4.14 Junior Subordinated Debenture of First Banks, Inc., dated as of
March 20, 2003 (incorporated herein by reference to Exhibit 10.10
to Amendment No. 4 to the Company's Registration Statement on Form
S-2, File No. 333-102549, dated March 24, 2003).
4.15 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust, First Banks, Inc. and STI Investment Management,
Inc., dated as of March 20, 2003 (incorporated herein by reference
to Exhibit 10.11 to Amendment No. 4 to the Company's Registration
Statement on Form S-2, File No. 333-102549, dated March 24, 2003).
4.16 Common Securities Subscription Agreement by and between First Bank
Statutory Trust and First Banks, Inc., dated as of March 20, 2003
(incorporated herein by reference to Exhibit 10.12 to Amendment
No. 4 to the Company's Registration Statement on Form S-2, File
No. 333-102549, dated March 24, 2003).
4.17 Debenture Subscription Agreement by and between First Banks, Inc.
and First Bank Statutory Trust, dated as of March 20, 2003
(incorporated herein by reference to Exhibit 10.13 to Amendment
No. 4 to the Company's Registration Statement on Form S-2, File
No. 333-102549, dated March 24, 2003).
4.18 Indenture between First Banks, Inc., as Issuer, and Wilmington
Trust Company, as Trustee, dated as of September 20, 2004
(incorporated herein by reference to Exhibit 4.26 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004).
4.19 Amended and Restated Declaration of Trust by and among Wilmington
Trust Company, as Delaware Trustee and the Institutional Trustee,
First Banks, Inc., as Sponsor, and Allen H. Blake, Terrance M.
McCarthy and Lisa K. Vansickle, as Administrators, dated as of
September 20, 2004 (incorporated herein by reference to Exhibit
4.27 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2004).
4.20 Guarantee Agreement by and between First Banks, Inc. and
Wilmington Trust Company, dated as of September 20, 2004
(incorporated herein by reference to Exhibit 4.28 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004).
4.21 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust II and FTN Financial Capital Markets and Keefe,
Bruyette & Woods, as Placement Agents, dated as of September 10,
2004 (incorporated herein by reference to Exhibit 4.29 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2004).
4.22 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of September 20, 2004 (incorporated
herein by reference to Exhibit 4.30 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2004).
4.23 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust II, First Banks, Inc. and First Tennessee Bank
National Association, dated as of September 20, 2004 (incorporated
herein by reference to Exhibit 4.31 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2004).
4.24 Capital Securities Subscription Agreement by and between First
Bank Statutory Trust II, First Banks, Inc. and Preferred Term
Securities XV, Ltd., dated as of September 20, 2004 (incorporated
herein by reference to Exhibit 4.32 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2004).
4.25 Capital Securities Certificate P-1 of First Bank Statutory Trust
II, dated September 20, 2004 (incorporated herein by reference to
Exhibit 4.33 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2004).
4.26 Capital Securities Certificate P-2 of First Bank Statutory Trust
II, dated September 20, 2004 (incorporated herein by reference to
Exhibit 4.34 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2004).
4.27 Indenture between First Banks, Inc., as Issuer, and Wilmington
Trust Company, as Trustee, dated as of November 23, 2004
(incorporated herein by reference to Exhibit 4.35 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004).
4.28 Amended and Restated Declaration of Trust by and among Wilmington
Trust Company, as Delaware Trustee and the Institutional Trustee,
First Banks, Inc., as Sponsor, and Terrance M. McCarthy, Peter D.
Wimmer and Lisa K. Vansickle, as Administrators, dated as of
November 23, 2004 (incorporated herein by reference to Exhibit
4.36 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2004).
4.29 Guarantee Agreement by and between First Banks, Inc. and
Wilmington Trust Company, dated as of November 23, 2004
(incorporated herein by reference to Exhibit 4.37 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004).
4.30 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust III and FTN Financial Capital Markets and Keefe,
Bruyette & Woods, as Placement Agents, dated as of November 22,
2004 (incorporated herein by reference to Exhibit 4.38 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2004).
4.31 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of November 23, 2004 (incorporated
herein by reference to Exhibit 4.39 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2004).
4.32 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust III, First Banks, Inc. and First Tennessee Bank
National Association, dated as of November 23, 2004 (incorporated
herein by reference to Exhibit 4.40 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2004).
4.33 Capital Securities Certificate P-1 of First Bank Statutory Trust
III, dated November 23, 2004 (incorporated herein by reference to
Exhibit 4.41 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2004).
4.34 Indenture between First Banks, Inc., as Issuer, and Wilmington
Trust Company, as Trustee, dated as of March 1, 2006 (incorporated
herein by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006).
4.35 Amended and Restated Declaration of Trust by and among Wilmington
Trust Company, as Delaware Trustee and the Institutional Trustee,
First Banks, Inc., as Sponsor, and Allen H. Blake, Peter D. Wimmer
and Lisa K. Vansickle, as Administrators, dated as of March 1,
2006 (incorporated herein by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006).
4.36 Guarantee Agreement by and between First Banks, Inc. and
Wilmington Trust Company, dated as of March 1, 2006 (incorporated
herein by reference to Exhibit 4.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006).
4.37 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust IV and FTN Financial Capital Markets and Keefe,
Bruyette & Woods, as Placement Agents, dated as of February 16,
2006 (incorporated herein by reference to Exhibit 4.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006).
4.38 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of March 1, 2006 (incorporated herein
by reference to Exhibit 4.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2006).
4.39 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust IV, First Banks, Inc. and First Tennessee Bank
National Association, dated as of March 1, 2006 (incorporated
herein by reference to Exhibit 4.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006).
4.40 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust IV, First Banks, Inc. and Preferred Term
Securities XXI, Ltd., dated as of March 1, 2006 (incorporated
herein by reference to Exhibit 4.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006).
4.41 Capital Securities Certificate P-1 of First Bank Statutory Trust
IV, dated March 1, 2006 (incorporated herein by reference to
Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006).
4.42 Capital Securities Certificate P-2 of First Bank Statutory Trust
IV, dated March 1, 2006 (incorporated herein by reference to
Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006).
4.43 Indenture between First Banks, Inc., as Issuer, and Wilmington
Trust Company, as Trustee, dated as of April 28, 2006
(incorporated herein by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006).
4.44 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 (incorporated herein by
reference to Exhibit 4.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2006).
4.45 Guarantee Agreement by and between First Banks, Inc. and
Wilmington Trust Company, dated as of April 28, 2006 (incorporated
herein by reference to Exhibit 4.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2006).
4.46 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust V and FTN Financial Capital Markets and Keefe,
Bruyette & Woods, as Placement Agents, dated as of April 27, 2006
(incorporated herein by reference to Exhibit 4.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006).
4.47 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of April 28, 2006 (incorporated herein
by reference to Exhibit 4.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2006).
4.48 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 (incorporated
herein by reference to Exhibit 4.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2006).
4.49 Capital Securities Certificate P-1 of First Bank Statutory Trust
V, dated as of April 28, 2006 (incorporated herein by reference to
Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2006).
4.50 Indenture between First Banks, Inc., as Issuer, and Wells Fargo
Bank, National Association, as Trustee, dated as of June 16, 2006
(incorporated herein by reference to Exhibit 4.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006).
4.51 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 (incorporated herein by reference to Exhibit 4.9 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2006).
4.52 Guarantee Agreement by and between First Banks, Inc. and Wells
Fargo Bank, National Association, dated as of June 16, 2006
(incorporated herein by reference to Exhibit 4.10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006).
4.53 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 (incorporated herein by
reference to Exhibit 4.11 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2006).
4.54 Junior Subordinated Debt Security due 2036 of First Banks, Inc.,
dated as of June 16, 2006 (incorporated herein by reference to
Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2006).
4.55 Debenture Subscription Agreement by and between First Banks, Inc.
and First Bank Statutory Trust VI, dated as of June 16, 2006
(incorporated herein by reference to Exhibit 4.13 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006).
4.56 Capital Securities Certificate P-001 of First Bank Statutory Trust
VI, dated as of June 16, 2006 (incorporated herein by reference to
Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2006).
4.57 Indenture between First Banks, Inc., as Issuer, and Wilmington
Trust Company, as Trustee, dated as of December 14, 2006 - filed
herewith.
4.58 Amended and Restated Declaration of Trust of First Bank Statutory
Trust VII by and among Wilmington Trust Company, as Delaware
Trustee and the Institutional Trustee, First Banks, Inc., as
Sponsor, and Terrance M. McCarthy, Peter D. Wimmer and Lisa K.
Vansickle, as Administrators, dated as of December 14, 2006 -
filed herewith.
4.59 Guarantee Agreement by and between First Banks, Inc. and
Wilmington Trust Company, dated as of December 14, 2006 - filed
herewith.
4.60 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust VII and FTN Financial Capital Markets and Keefe,
Bruyette & Woods, as Placement Agents, dated as of December 6,
2006 - filed herewith.
4.61 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of December 14, 2006 - filed herewith.
4.62 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust VII, First Banks, Inc. and First Tennessee Bank
National Association, dated as of December 14, 2006 - filed
herewith.
4.63 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust VII, First Banks, Inc. and Preferred Term
Securities XXIV, Ltd., dated as of December 14, 2006 - filed
herewith.
4.64 Capital Securities Certificate P-1 of First Bank Statutory Trust
VII, dated as of December 14, 2006 - filed herewith.
4.65 Capital Securities Certificate P-2 of First Bank Statutory Trust
VII, dated as of December 14, 2006 - filed herewith.
10.1 Shareholders' Agreement by and among James F. Dierberg II and Mary
W. Dierberg, Trustees under the Living Trust of James F. Dierberg
II, dated July 24, 1989, Michael James Dierberg and Mary W.
Dierberg, Trustees under the Living Trust of Michael James
Dierberg, dated July 24, 1989; Ellen C. Dierberg and Mary W.
Dierberg, Trustees under the Living Trust of Ellen C. Dierberg
dated July 17, 1992, and First Banks, Inc. (incorporated herein by
reference to Exhibit 10.3 to the Company's Registration Statement
on Form S-1, File No 33-50576, dated August 6, 1992).
10.2 Comprehensive Banking System License and Service Agreement dated
as of July 24, 1991, by and between the Company and FiServ CIR,
Inc. (incorporated herein by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, File No. 33-50576,
dated August 6, 1992).
10.3 AFS Customer Agreement by and between First Banks, Inc. and
Advanced Financial Solutions, Inc., dated January 29, 2004
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004).
10.4 Management Services Agreement by and between First Banks, Inc. and
First Bank, dated February 28, 2004 (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004).
10.5 Service Agreement by and between First Services, L.P. and First
Banks, Inc., dated May 1, 2004 (incorporated herein by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004).
10.6 Service Agreement by and between First Services, L.P. and First
Bank, dated May 1, 2004 (incorporated herein by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004).
10.7 Service Agreement by and between First Banks, Inc. and First
Services, L.P., dated May 1, 2004 (incorporated herein by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004).
10.8* First Banks, Inc. Executive Incentive Compensation Plan
(incorporated herein by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2004).
10.9* First Banks, Inc. Nonqualified Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2004).
10.10* First Amendment to First Banks, Inc. Nonqualified Deferred
Compensation Plan (incorporated herein by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2004).
10.11 Amended and Restated Secured Credit Agreement ($100.0 million Term
Loan Facility, $15.0 million Revolving Credit Facility and $7.5
million Letter of Credit Facility), dated as of August 11, 2005,
by and among First Banks, Inc. and Wells Fargo Bank, National
Association, as Agent, JP Morgan Chase Bank, N.A., LaSalle Bank
National Association, The Northern Trust Company, Union Bank of
California, N.A., Fifth Third Bank (Chicago) and U.S. Bank
National Association (incorporated herein by reference to Exhibit
10 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005).
10.12 First Amendment to the Amended and Restated Secured Credit
Agreement ($85.0 million Term Loan Facility, $10.0 million
Revolving Credit Facility and $1.0 million Letter of Credit
Facility), dated as of August 10, 2006, by and among First Banks,
Inc. and Wells Fargo Bank, National Association, as Agent, JP
Morgan Chase Bank, N.A., LaSalle Bank National Association, The
Northern Trust Company, Union Bank of California, N.A., Fifth
Third Bank (Chicago) and U.S. Bank National Association
(incorporated herein by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2006).
14.1 Code of Ethics for Principal Executive Officer and Financial
Professionals (incorporated herein by reference to Exhibit 14 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2003).
21.1 Subsidiaries of the Company - filed herewith.
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive
Officer - filed herewith.
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial
Officer - filed herewith.
32.1 Section 1350 Certifications of Chief Executive Officer - filed
herewith.
32.2 Section 1350 Certifications of Chief Financial Officer - filed
herewith.
* Exhibits designated by an asterisk in the Index to Exhibits relate
to management contracts and/or compensatory plans or arrangements.