UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares Outstanding
Class at April 30, 2007
----- ------------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS............................................................... 1
CONSOLIDATED STATEMENTS OF INCOME......................................................... 2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME.............................................................. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................. 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 33
ITEM 4. CONTROLS AND PROCEDURES................................................................... 33
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.................................................................................. 34
SIGNATURES........................................................................................... 35
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
March 31, December 31,
2007 2006
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................ $ 215,917 215,974
Short-term investments......................................................... 295,620 153,583
----------- ----------
Total cash and cash equivalents........................................... 511,537 369,557
----------- ----------
Investment securities:
Trading........................................................................ 83,254 81,168
Available for sale............................................................. 1,160,515 1,359,729
Held to maturity (fair value of $23,450 and $23,971, respectively)............. 23,516 24,049
----------- ----------
Total investment securities............................................... 1,267,285 1,464,946
----------- ----------
Loans:
Commercial, financial and agricultural......................................... 2,077,968 1,934,912
Real estate construction and development....................................... 1,907,962 1,832,504
Real estate mortgage........................................................... 3,652,227 3,615,148
Consumer and installment....................................................... 85,559 83,008
Loans held for sale............................................................ 221,550 216,327
----------- ----------
Total loans............................................................... 7,945,266 7,681,899
Unearned discount.............................................................. (13,137) (15,418)
Allowance for loan losses...................................................... (142,148) (145,729)
----------- ----------
Net loans................................................................. 7,789,981 7,520,752
----------- ----------
Bank premises and equipment, net.................................................... 187,933 178,417
Goodwill and other intangible assets................................................ 319,537 295,382
Bank-owned life insurance........................................................... 114,066 113,778
Deferred income taxes............................................................... 94,961 100,175
Other assets........................................................................ 100,056 115,707
----------- ----------
Total assets.............................................................. $10,385,356 10,158,714
=========== ==========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand..................................................... $ 1,258,668 1,281,108
Interest-bearing demand........................................................ 983,906 981,939
Savings........................................................................ 2,591,599 2,352,575
Time deposits of $100 or more.................................................. 1,467,310 1,419,579
Other time deposits............................................................ 2,398,987 2,407,885
----------- ----------
Total deposits............................................................ 8,700,470 8,443,086
Other borrowings.................................................................... 374,827 373,899
Notes payable....................................................................... 40,000 65,000
Subordinated debentures............................................................. 327,921 297,966
Deferred income taxes............................................................... 42,986 42,826
Accrued expenses and other liabilities.............................................. 67,433 130,033
Minority interest in subsidiary..................................................... 5,539 5,469
----------- ----------
Total liabilities......................................................... 9,559,176 9,358,279
----------- ----------
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 9,685
Retained earnings................................................................... 806,361 784,864
Accumulated other comprehensive loss................................................ (8,844) (13,092)
----------- ----------
Total stockholders' equity................................................ 826,180 800,435
----------- ----------
Total liabilities and stockholders' equity................................ $10,385,356 10,158,714
=========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
Three Months Ended
March 31,
--------------------------
2007 2006
---- ----
Interest income:
Interest and fees on loans....................................................... $ 153,757 131,334
Investment securities............................................................ 16,192 14,777
Short-term investments........................................................... 1,878 1,123
--------- ---------
Total interest income....................................................... 171,827 147,234
--------- ---------
Interest expense:
Deposits:
Interest-bearing demand........................................................ 2,616 1,828
Savings........................................................................ 18,337 11,183
Time deposits of $100 or more.................................................. 17,030 11,556
Other time deposits............................................................ 27,790 20,034
Other borrowings................................................................. 4,351 4,695
Notes payable.................................................................... 908 1,420
Subordinated debentures.......................................................... 5,934 5,652
--------- ---------
Total interest expense...................................................... 76,966 56,368
--------- ---------
Net interest income......................................................... 94,861 90,866
Provision for loan losses............................................................. 3,500 1,000
--------- ---------
Net interest income after provision for loan losses......................... 91,361 89,866
--------- ---------
Noninterest income:
Service charges on deposit accounts and customer service fees.................... 10,608 10,232
Gain on loans sold and held for sale............................................. 3,926 6,821
Net gain (loss) on investment securities......................................... 293 (2,771)
Bank-owned life insurance investment income...................................... 713 1,115
Investment management income..................................................... 1,510 2,301
Insurance fee and commission income.............................................. 1,695 --
Other............................................................................ 5,838 7,799
--------- ---------
Total noninterest income.................................................... 24,583 25,497
--------- ---------
Noninterest expense:
Salaries and employee benefits................................................... 45,228 39,494
Occupancy, net of rental income.................................................. 7,421 6,235
Furniture and equipment.......................................................... 4,551 3,963
Postage, printing and supplies................................................... 1,782 1,426
Information technology fees...................................................... 9,331 9,061
Legal, examination and professional fees......................................... 1,733 2,097
Amortization of intangible assets................................................ 2,926 1,517
Communications................................................................... 761 554
Advertising and business development............................................. 1,900 1,727
Charitable contributions......................................................... 1,916 1,617
Other............................................................................ 8,152 7,124
--------- ---------
Total noninterest expense................................................... 85,701 74,815
--------- ---------
Income before provision for income taxes and minority interest in
income (loss) of subsidiary.............................................. 30,243 40,548
Provision for income taxes............................................................ 10,950 11,703
--------- ---------
Income before minority interest in income (loss) of subsidiary.............. 19,293 28,845
Minority interest in income (loss) of subsidiary...................................... 70 (158)
--------- ---------
Net income.................................................................. 19,223 29,003
Preferred stock dividends............................................................. 196 196
--------- ---------
Net income available to common stockholders................................. $ 19,027 28,807
========= =========
Basic earnings per common share....................................................... $ 804.12 1,217.49
========= =========
Diluted earnings per common share..................................................... $ 799.23 1,202.46
========= =========
Weighted average shares of common stock outstanding................................... 23,661 23,661
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Three Months Ended March 31, 2007 and 2006 and Nine Months 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
----- ------- ----- ------- -------- ------ ------
Balances, December 31, 2005................................ $12,822 241 5,915 5,910 673,956 (19,906) 678,938
--------
Three months ended March 31, 2006:
Comprehensive income:
Net income............................................ -- -- -- -- 29,003 -- 29,003
Other comprehensive loss, net of tax:
Unrealized losses on investment securities.......... -- -- -- -- -- (3,560) (3,560)
Reclassification adjustment for investment
securities losses included in net income.......... -- -- -- -- -- 1,538 1,538
Derivative instruments:
Current period transactions....................... -- -- -- -- -- (303) (303)
--------
Total comprehensive income.............................. 26,678
Class A preferred stock dividends, $0.30 per share...... -- -- -- -- (192) -- (192)
Class B preferred stock dividends, $0.03 per share...... -- -- -- -- (4) -- (4)
------- --- ----- ----- ------- ------- --------
Balances, March 31, 2006................................... 12,822 241 5,915 5,910 702,763 (22,231) 705,420
--------
Nine months ended December 31, 2006:
Comprehensive income:
Net income............................................ -- -- -- -- 82,691 -- 82,691
Other comprehensive income, net of tax:
Unrealized gains on investment securities........... -- -- -- -- -- 7,226 7,226
Reclassification adjustment for investment
securities gains included in net income........... -- -- -- -- -- (296) (296)
Derivative instruments:
Current period transactions....................... -- -- -- -- -- 2,209 2,209
--------
Total comprehensive income.............................. 91,830
Adjustment for the utilization of net operating
losses associated with prior acquisitions........... -- -- -- 3,775 -- -- 3,775
Class A preferred stock dividends, $0.90 per share...... -- -- -- -- (577) -- (577)
Class B preferred stock dividends, $0.08 per share...... -- -- -- -- (13) -- (13)
------- --- ----- ----- ------- ------- --------
Balances, December 31, 2006................................ 12,822 241 5,915 9,685 784,864 (13,092) 800,435
--------
Three months ended March 31, 2007:
Comprehensive income:
Net income............................................ -- -- -- -- 19,223 -- 19,223
Other comprehensive income, net of tax:
Unrealized gains on investment securities........... -- -- -- -- -- 2,620 2,620
Reclassification adjustment for investment
securities gains included in net income........... -- -- -- -- -- (94) (94)
Derivative instruments:
Current period transactions....................... -- -- -- -- -- 1,722 1,722
--------
Total comprehensive income.............................. 23,471
Cumulative effect of change in accounting principle..... -- -- -- -- 2,470 -- 2,470
Class A preferred stock dividends, $0.30 per share...... -- -- -- -- (192) -- (192)
Class B preferred stock dividends, $0.03 per share...... -- -- -- -- (4) -- (4)
------- --- ----- ----- ------- ------- --------
Balances, March 31, 2007................................... $12,822 241 5,915 9,685 806,361 (8,844) 826,180
======= === ===== ===== ======= ======= ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Three Months Ended
March 31,
------------------------
2007 2006
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 19,223 29,003
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment..................... 4,819 4,458
Amortization, net of accretion................................................... 4,107 3,288
Originations of loans held for sale.............................................. (243,739) (137,837)
Proceeds from sales of loans held for sale....................................... 252,507 220,255
Provision for loan losses........................................................ 3,500 1,000
Provision for deferred income taxes.............................................. 733 5,062
Decrease in accrued interest receivable.......................................... 6,287 574
(Decrease) increase in accrued interest payable.................................. (4,283) 1,126
Net increase in trading securities............................................... (1,904) (46,957)
Gain on loans sold and held for sale............................................. (3,926) (6,821)
Net (gain) loss on investment securities......................................... (293) 2,771
Other operating activities, net.................................................. 22,958 30,463
Minority interest in income (loss) of subsidiary................................. 70 (158)
--------- ---------
Net cash provided by operating activities..................................... 60,059 106,227
--------- ---------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received......... (14,719) (20,532)
Proceeds from sales of investment securities available for sale.................... 487 147,439
Maturities of investment securities available for sale............................. 242,548 151,539
Maturities of investment securities held to maturity............................... 524 1,497
Purchases of investment securities available for sale.............................. (34,219) (281,704)
Purchases of investment securities held to maturity................................ -- (120)
Net increase in loans.............................................................. (115,652) (275,150)
Recoveries of loans previously charged-off......................................... 1,709 6,774
Purchases of bank premises and equipment........................................... (9,288) (4,197)
Other investing activities, net.................................................... 946 (833)
--------- ---------
Net cash provided by (used in) investing activities........................... 72,336 (275,287)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits................................. 165,830 (58,267)
(Decrease) increase in time deposits............................................... (67,644) 342,881
Decrease in Federal Home Loan Bank advances........................................ (33,241) (24,500)
Increase (decrease) in securities sold under agreements to repurchase.............. 969 (167,030)
Repayments of notes payable........................................................ (25,000) (5,000)
Proceeds from issuance of subordinated debentures.................................. 25,774 41,238
Repayments of subordinated debentures.............................................. (56,907) --
Payment of preferred stock dividends............................................... (196) (196)
--------- ---------
Net cash provided by financing activities..................................... 9,585 129,126
--------- ---------
Net increase (decrease) in cash and cash equivalents.......................... 141,980 (39,934)
Cash and cash equivalents, beginning of period.......................................... 369,557 286,652
--------- ---------
Cash and cash equivalents, end of period................................................ $ 511,537 246,718
========= =========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest on liabilities......................................................... $ 81,249 55,242
Income taxes.................................................................... (14,572) 36
========= =========
Noncash investing and financing activities:
Loans transferred to other real estate.......................................... $ 3,067 1,557
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of First Banks, Inc. and
subsidiaries (First Banks or the Company) are unaudited and should be read in
conjunction with the consolidated financial statements contained in the 2006
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles and
conform to predominant practices within the banking industry. Management of
First Banks has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare the consolidated financial statements in conformity with
U.S. generally accepted accounting principles. Actual results could differ from
those estimates. In the opinion of management, all adjustments, consisting of
normal recurring accruals considered necessary for a fair presentation of the
results of operations for the interim periods presented herein, have been
included. Operating results for the three months ended March 31, 2007 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007.
The consolidated financial statements include the accounts of the
parent company and its subsidiaries, giving effect to the minority interest in
one subsidiary, as more fully described below, and in Note 6 to the Consolidated
Financial Statements. All significant intercompany accounts and transactions
have been eliminated. Certain reclassifications of 2006 amounts have been made
to conform to the 2007 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;
Universal Premium Acceptance Corporation 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 63.9% owned by
First Bank and 36.1% owned by First Capital America, Inc. (FCA) as of March 31,
2007, as further described in Note 6 to the Consolidated Financial Statements.
Significant Accounting Policies. First Banks implemented Financial
Accounting Standards Board (FASB) Interpretation No. 48 -- Accounting for
Uncertainty in Income Taxes, an Interpretation of SFAS No. 109 -- Accounting for
Income Taxes, on January 1, 2007 (FIN 48). The implementation of FIN 48 resulted
in the recognition of a cumulative effect of change in accounting principle of
$2.5 million, which was recorded as an increase to beginning retained earnings,
as further described in Note 12 to the Consolidated Financial Statements.
Interest related to unrecognized tax benefits is included in interest expense
and penalties related to unrecognized tax benefits are included in noninterest
expense.
(2) ACQUISITIONS AND INTEGRATION COSTS
Completed Acquisitions. On February 28, 2007, First Banks completed its
acquisition of Royal Oaks Bancshares, Inc. and its wholly owned banking
subsidiary, Royal Oaks Bank, ssb (collectively, Royal Oaks) for $38.6 million in
cash. 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 subsequently opened on April 16, 2007.
The acquisition served to expand First Banks' banking franchise in Houston,
Texas. 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 11 to the Consolidated Financial
Statements. 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 $23.2 million, and
preliminary core deposit intangibles, which are being amortized over five years
utilizing the straight-line method, were $4.5 million. Royal Oaks was merged
with and into First Bank at the time of the acquisition.
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 $385,000 as of March 31, 2007, as summarized in the following table,
is comprised of contractual obligations under salary continuation agreements to
seven individuals with remaining terms ranging from approximately one month 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, 2006............................. $ 386 -- 386
Three Months Ended March 31, 2007:
Amounts accrued at acquisition date.................. 100 579 679
Payments............................................. (101) -- (101)
------ ---- ----
Balance at March 31, 2007................................ $ 385 579 964
====== ==== ====
(3) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of amortization, were
comprised of the following at March 31, 2007 and December 31, 2006:
March 31, 2007 December 31, 2006
------------------------ -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles................ $ 65,367 (21,367) 60,867 (18,850)
Customer list intangibles............... 23,320 (1,287) 23,320 (913)
Goodwill associated with
P&A Transactions (1)................. 2,210 (1,323) 2,210 (1,288)
--------- ------- ------- -------
Total............................. $ 90,897 (23,977) 86,397 (21,051)
========= ======= ======= =======
Unamortized intangible assets:
Goodwill associated with
stock purchases...................... $ 252,617 230,036
========= =======
--------------------
(1) P&A Transactions represent transactions structured as purchases of certain assets and
assumption of selected liabilities.
Amortization of intangible assets was $2.9 million and $1.5 million for
the three months ended March 31, 2007 and 2006, 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 remaining........................................................ $ 9,529
2008.................................................................. 12,606
2009.................................................................. 10,703
2010.................................................................. 10,242
2011.................................................................. 7,941
2012.................................................................. 2,392
Thereafter............................................................ 13,507
--------
Total............................................................. $ 66,920
========
Changes in the carrying amount of goodwill for the three months ended
March 31, 2007 and 2006 were as follows:
Three Months Ended
March 31,
----------------------
2007 2006
---- ----
(dollars expressed in thousands)
Balance, beginning of period........................................ $230,958 167,056
Goodwill acquired during the period................................. 23,183 14,896
Acquisition-related adjustments (1)................................. (602) 38
Amortization - P&A Transactions..................................... (35) (35)
-------- --------
Balance, end of period.............................................. $253,504 181,955
======== ========
------------------
(1) Acquisition-related adjustments recorded in the first quarter of 2007 pertain to the acquisition
of San Diego Community Bank in August 2006. Acquisition-related adjustments included additional
purchase accounting adjustments necessary to appropriately adjust preliminary goodwill recorded
at the time of the acquisition, which was based upon current estimates available at that time,
to reflect the receipt of additional valuation data.
(4) SERVICING RIGHTS
Mortgage Banking Activities. At March 31, 2007 and December 31, 2006,
First Banks serviced mortgage loans for others totaling $1.01 billion and $1.04
billion, respectively. Changes in mortgage servicing rights, net of
amortization, for the three months ended March 31, 2007 and 2006 were as
follows:
Three Months Ended
March 31,
----------------------
2007 2006
---- ----
(dollars expressed in thousands)
Balance, beginning of period........................................ $5,867 6,623
Originated mortgage servicing rights (1)............................ 333 1,458
Amortization........................................................ (793) (1,047)
------ ------
Balance, end of period.............................................. $5,407 7,034
====== ======
------------------
(1) In March 2006, First Banks capitalized mortgage servicing rights of $1.2 million associated with
the securitization of $77.1 million of certain residential mortgage loans held in the Company's
loan portfolio, resulting in the recognition of $1.2 million in loan servicing income related to
the future servicing of the underlying loans.
First Banks did not incur any impairment of mortgage servicing rights
during the three months ended March 31, 2007 and 2006.
Amortization of mortgage servicing rights at March 31, 2007 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2007 remaining......................................................... $ 1,607
2008................................................................... 1,224
2009................................................................... 788
2010................................................................... 599
2011................................................................... 484
2012................................................................... 487
Thereafter............................................................. 218
-------
Total.............................................................. $ 5,407
=======
Other Servicing Activities. At March 31, 2007 and December 31, 2006,
First Banks serviced United States Small Business Administration (SBA) loans for
others totaling $145.5 million and $143.4 million, respectively. Changes in SBA
servicing rights, net of amortization and impairment, for the three months ended
March 31, 2007 and 2006 were as follows:
Three Months Ended
March 31,
----------------------
2007 2006
---- ----
(dollars expressed in thousands)
Balance, beginning of period........................................ $8,064 9,489
Originated SBA servicing rights..................................... 467 172
Amortization........................................................ (413) (441)
Impairment.......................................................... (323) (278)
------ ------
Balance, end of period.............................................. $7,795 8,942
====== ======
First Banks recognized impairment of $323,000 and $278,000 for the
three months ended March 31, 2007 and 2006, respectively. The impairment of
$323,000 recorded for the three months ended March 31, 2007 resulted from a
decline in the fair value of the SBA servicing assets below the carrying value
primarily attributable to payoffs received on certain existing loans. The
impairment of $278,000 recorded for the three months ended March 31, 2006
resulted from a decline in the fair value of the SBA servicing assets below the
carrying value primarily attributable to the placement of certain loans on
nonaccrual status and payoffs received on certain existing loans.
Amortization of SBA servicing rights at March 31, 2007 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2007 remaining......................................................... $ 1,144
2008................................................................... 1,287
2009................................................................... 1,061
2010................................................................... 872
2011................................................................... 714
2012................................................................... 584
Thereafter............................................................. 2,133
-------
Total.............................................................. $ 7,795
=======
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of basic and diluted earnings per
share (EPS) for the three months ended March 31, 2007 and 2006:
Per Share
Income Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Three months ended March 31, 2007:
Basic EPS - income available to common stockholders...... $19,027 23,661 $ 804.12
Effect of dilutive securities:
Class A convertible preferred stock.................... 192 385 (4.89)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $19,219 24,046 $ 799.23
======= ======= =========
Three months ended March 31, 2006:
Basic EPS - income available to common stockholders...... $28,807 23,661 $1,217.49
Effect of dilutive securities:
Class A convertible preferred stock.................... 192 456 (15.03)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $28,999 24,117 $1,202.46
======= ======= =========
(6) TRANSACTIONS WITH RELATED PARTIES
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and members of his immediate family, provides information
technology, item processing and various related services to First Banks, Inc.
and its subsidiaries. Fees paid under agreements with First Services, L.P. were
$7.8 million and $7.7 million for the three months ended March 31, 2007 and
2006, respectively. First Services, L.P. leases information technology and other
equipment from First Bank. During the three months ended March 31, 2007 and
2006, First Services, L.P. paid First Bank $1.1 million and $1.2 million,
respectively, in rental fees for the use of that equipment.
First Brokerage America, L.L.C., a limited liability company indirectly
owned by First Banks' Chairman and members of his immediate family, received
approximately $913,000 and $547,000 for the three months ended March 31, 2007
and 2006, 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.
On January 16, 2007, First Banks contributed 48,796 shares of common
stock held in its available-for-sale investment securities portfolio with a fair
value of $1.7 million to the Dierberg Operating Foundation, Inc., a charitable
foundation established by First Banks' Chairman and members of his immediate
family. In conjunction with this transaction, First Banks recorded charitable
contributions expense of $1.7 million, which was partially offset by a gain on
the contribution of these available-for-sale investment securities of $147,000,
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 $1.0 million associated with this transaction.
During the three months ended March 31, 2006, First Bank contributed $500,000 to
the Dierberg Operating Foundation, Inc.
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 $99,000 and $86,000 for the three months
ended March 31, 2007 and 2006, respectively.
In June 2005, FCA, a corporation owned by First Banks' Chairman and
members of his immediate family, became a 49.0% owner of SBLS LLC in exchange
for $7.4 million pursuant to a written option agreement with First Bank. On
January 2, 2007, First Bank contributed $4.0 million to SBLS LLC in the form of
a capital contribution, which increased First Bank's ownership of SBLS LLC to
63.9% and decreased FCA's ownership to 36.1%.
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 provided 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 was payable monthly, in arrears, on the
outstanding balances at a rate equal to First Bank's prime lending rate minus 50
basis points. On March 1, 2007, SBLS LLC modified the Agreement with First Bank.
The primary modifications to the structure of the financing arrangement include
(a) an increase in the warehouse line of credit from $50.0 million to $60.0
million; and (b) interest is payable monthly, in arrears, on the outstanding
balances at a rate equal to First Bank's prime lending rate minus 50 basis
points, with the option of electing to have a portion of the outstanding
principal balance in amounts not greater than $40.0 million, in minimum
increments of $500,000, bear interest at a fixed rate per annum equal to the
one-month London Interbank Offering Rate (LIBOR) plus 215 basis points, the
three-month LIBOR plus 215 basis points or the long-term interest rate swap rate
plus 215 basis points, provided that no more than three fixed-rate interest
periods may be in effect at any given time and no interest period may extend
beyond the maturity date. 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 $47.8 million and $47.5 million at
March 31, 2007 and December 31, 2006, respectively. Interest expense recorded
under the Agreement by SBLS LLC was $934,000 and $580,000 for the three months
ended March 31, 2007 and 2006, 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 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 $48.1 million and $55.9 million at March 31, 2007 and December 31,
2006, 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 a corporate-wide 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 $478,000 under the contract for the first
phase of the project, of which $7,000 in payments were made during the three
months ended March 31, 2006. During 2006, First Bank evaluated the second phase
of its corporate-wide personal computer upgrade project and entered into a
contract with WWT in August 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 $379,000 under the
contract for the second phase of the project which is now complete, of which
$12,000 in payments were made during the three months ended March 31, 2007.
(7) REGULATORY CAPITAL
First Banks and First Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
First Banks and First Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and First Bank to maintain minimum amounts and
ratios of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of March 31, 2007, First Banks and First Bank were each well
capitalized. As of March 31, 2007, 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 March 31, 2007 and December 31, 2006, First Banks' and First Bank's
required and actual capital ratios were as follows:
Actual
----------------------------------------- For To be Well
March 31, 2007 December 31, 2006 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.......................... $ 959,758 10.22% $ 929,688 10.25% 8.0% 10.0%
First Bank........................... 949,572 10.15 925,013 10.23 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks.......................... 794,425 8.46 789,967 8.71 4.0 6.0
First Bank........................... 832,228 8.89 811,530 8.97 4.0 6.0
Tier 1 capital (to average assets):
First Banks.......................... 794,425 8.09 789,967 8.13 3.0 5.0
First Bank........................... 832,228 8.51 811,530 8.38 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 determined that the
Federal Reserve's final rules that will be effective in March 2009, if
implemented as of March 31, 2007, would reduce First Banks' Tier 1 capital (to
risk-weighted assets) and Tier 1 capital (to average assets) to 7.56% and 7.23%,
respectively, and would not have an impact on total capital (to risk-weighted
assets).
(8) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business
segment is consistent with the management structure of First Banks, First Bank
and the internal reporting system that monitors performance. First Bank provides
similar products and services in its defined geographic areas through its branch
network. The products and services offered include a broad range of commercial
and personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, First Bank markets combined basic services for
various customer groups, including packaged accounts for more affluent
customers, and sweep accounts, lock-box deposits and cash management products
for commercial customers. First Bank also offers consumer and commercial loans.
Consumer lending includes residential real estate, home equity and installment
lending. Commercial lending includes commercial, financial and agricultural
loans, real estate construction and development loans, commercial real estate
loans, small business lending, asset-based loans, trade financing and insurance
premium financing. Other financial services include mortgage banking, debit
cards, brokerage services, employee benefit and commercial and personal
insurance services, internet banking, remote deposit, 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
deposit products and services, and fees generated by First Banks' mortgage
banking, insurance, and trust, private banking and institutional money
management business units. First Banks' products and services are offered to
customers primarily within its respective 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.
The business segment results are consistent with First Banks' internal
reporting system and, in all material respects, with U.S. generally accepted
accounting principles and practices predominant in the banking industry. The
business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
-------------------------- ------------------------- -------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $ 1,241,023 1,439,118 26,262 25,828 1,267,285 1,464,946
Loans, net of unearned discount......... 7,932,129 7,666,481 -- -- 7,932,129 7,666,481
Goodwill and other intangible assets.... 319,537 295,382 -- -- 319,537 295,382
Total assets............................ 10,354,621 10,116,246 30,735 42,468 10,385,356 10,158,714
Deposits................................ 8,727,506 8,550,062 (27,036) (106,976) 8,700,470 8,443,086
Other borrowings........................ 374,827 373,899 -- -- 374,827 373,899
Notes payable........................... -- -- 40,000 65,000 40,000 65,000
Subordinated debentures................. -- -- 327,921 297,966 327,921 297,966
Stockholders' equity.................... 1,136,242 1,086,876 (310,062) (286,441) 826,180 800,435
=========== ========== ========= ========= ========== ==========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
-------------------------- ------------------------- -------------------------
Three Months Ended Three Months Ended Three Months Ended
March 31, March 31, March 31,
-------------------------- ------------------------- -------------------------
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income......................... $ 171,569 147,024 258 210 171,827 147,234
Interest expense........................ 70,201 49,384 6,765 6,984 76,966 56,368
----------- ---------- --------- --------- ---------- ----------
Net interest income.................. 101,368 97,640 (6,507) (6,774) 94,861 90,866
Provision for loan losses............... 3,500 1,000 -- -- 3,500 1,000
----------- ---------- --------- --------- ---------- ----------
Net interest income after provision
for loan losses................... 97,868 96,640 (6,507) (6,774) 91,361 89,866
----------- ---------- --------- --------- ---------- ----------
Noninterest income...................... 24,616 25,741 (33) (244) 24,583 25,497
Noninterest expense..................... 82,816 73,169 2,885 1,646 85,701 74,815
----------- ---------- --------- --------- ---------- ----------
Income before provision for income
taxes and minority interest in
income (loss) of subsidiary....... 39,668 49,212 (9,425) (8,664) 30,243 40,548
Provision for income taxes.............. 14,626 14,738 (3,676) (3,035) 10,950 11,703
----------- ---------- --------- --------- ---------- ----------
Income before minority interest in
income (loss) of subsidiary....... 25,042 34,474 (5,749) (5,629) 19,293 28,845
Minority interest in income (loss)
of subsidiary..................... 70 (158) -- -- 70 (158)
----------- ---------- --------- --------- ---------- ----------
Net income........................... $ 24,972 34,632 (5,749) (5,629) 19,223 29,003
=========== ========== ========= ========= ========== ==========
- ------------------
(1) Corporate and other includes $3.8 million and $3.7 million of interest expense on subordinated debentures, after applicable
income tax benefit of $2.1 million and $2.0 million, for the three months ended March 31, 2007 and 2006, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at March 31, 2007 and
December 31, 2006:
March 31, December 31,
2007 2006
---- ----
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily......................................................... $ 170,843 169,874
Term.......................................................... 200,000 200,000
FHLB advances...................................................... 3,984 4,025
--------- --------
Total..................................................... $ 374,827 373,899
========= ========
The maturity dates, par amounts, interest rate spreads and interest
rate floor strike prices on First Bank's term repurchase agreements as of March
31, 2007 and December 31, 2006 were as follows:
Interest Rate Interest Rate Floor
Maturity Date Par Amount Spread (1) Strike Price (1)
------------- ---------- ---------- ----------------
(dollars expressed
in thousands)
July 19, 2010.................................... $ 100,000 LIBOR + 0.5475% 5.00%
October 12, 2010................................. 100,000 LIBOR - 0.5100% 4.50%
---------
$ 200,000
=========
----------------------
(1) 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.
(10) NOTES PAYABLE
First Banks' $96.0 million First Amendment to its Amended and Restated
Secured Credit Agreement, dated August 10, 2006, with a group of unaffiliated
financial institutions (Credit Agreement) is secured by First Banks' ownership
interest in the capital stock of SFC and First Bank. Letters of credit issued to
unaffiliated third parties on behalf of First Banks under the $1.0 million
senior secured standby letter of credit facility portion of the Credit Agreement
were $450,000 at March 31, 2007 and December 31, 2006, and had not been drawn on
by the counterparties. First Banks had not drawn any advances on the $10.0
million senior secured revolving credit facility portion of the Credit Agreement
as of March 31, 2007 and December 31, 2006. The outstanding principal balance of
the senior secured term loan facility (Term Loan) of the Credit Agreement 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 maturity on August 10, 2008. During the three months ended March
31, 2007, First Banks made payments of $25.0 million on the outstanding
principal balance of the Term Loan, reducing the balance from $65.0 million at
December 31, 2006 to $40.0 million at March 31, 2007.
The Credit Agreement requires maintenance of certain minimum capital
ratios for First Banks and First Bank, certain maximum nonperforming assets
ratios for First Bank and a minimum return on assets ratio for First Banks. In
addition, it contains additional covenants, including a limitation on the amount
of dividends on First Banks' common stock that may be paid to stockholders.
First Banks and First Bank were in compliance with all restrictions and
requirements of the Credit Agreement at March 31, 2007 and December 31, 2006.
(11) SUBORDINATED DEBENTURES
First Banks has formed or assumed 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 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.
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 $5.9 million and $4.6 million for
the three months ended March 31, 2007 and 2006, respectively.
A summary of the subordinated debentures issued to the Trusts in
conjunction with the trust preferred securities offerings at March 31, 2007 and
December 31, 2006 were as follows:
Subordinated
Debentures
Trust ----------------------
Maturity Call Interest Preferred March 31, December 31,
Name of Trust Issuance Date Date Date(1) Rate (2) Securities 2007 2006
------------- ------------- ---- ---- ---- ---------- ---- ----
Variable Rate
- -------------
First Bank Capital Trust (3) 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
Royal Oaks Capital Trust I (4) October 2004 January 7, 2035 January 7, 2010 + 240.0 bp 4,000 4,124 --
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 41,238
First Bank Statutory Trust V April 2006 June 15, 2036 June 15, 2011 + 145.0 bp 20,000 20,619 20,619
First Bank Statutory Trust VI June 2006 July 7, 2036 July 7, 2011 + 165.0 bp 25,000 25,774 25,774
First Bank Statutory Trust VII December 2006 December 15, 2036 December 15, 2011 + 185.0 bp 50,000 51,547 51,547
First Bank Statutory
Trust VIII (5) February 2007 March 30, 2037 March 30, 2012 + 161.0 bp 25,000 25,774 --
Fixed Rate
- ----------
First Preferred
Capital Trust III (6) November 2001 December 31, 2031 December 31, 2006 9.00% 55,200 -- --
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 subordinated debentures are callable at the option of First Banks on the call date shown at 100% of the principal amount
plus accrued and unpaid interest.
(2) 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 shown, with the exception of First Bank Capital Trust,
which was based on the six-month LIBOR plus the basis point spread shown.
(3) On April 22, 2007, First Banks redeemed the cumulative variable rate trust preferred securities and paid in full its
outstanding $25.8 million of subordinated debentures, as further described in Note 14 to the Consolidated Financial Statements.
(4) In conjunction with the acquisition of Royal Oaks on February 28, 2007, as further described in Note 2 to the Consolidated
Financial Statements, First Banks assumed Royal Oaks Capital Trust I, a Delaware statutory trust.
(5) 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. Interest is payable quarterly in arrears, beginning on March 30, 2007.
(6) 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.
(12) INCOME TAXES
On January 1, 2007, First Banks implemented FIN 48. The implementation
of FIN 48 resulted in the recognition of a cumulative effect of change in
accounting principle of $2.5 million, which was recorded as an increase to
beginning retained earnings.
The Company's liability for unrecognized tax benefits was $2.5 million
at January 1, 2007, after consideration of the $2.5 million cumulative effect of
change in accounting principle adjustment to the beginning balance of retained
earnings. The total amount of federal and state unrecognized tax benefits at
January 1, 2007 that, if recognized, would affect the effective tax rate, was
$1.4 million, net of the federal tax benefit. There have been no significant
changes to the unrecognized tax benefits during the three months ended March 31,
2007. First Banks expects a reduction of $730,000 in unrecognized tax benefits
during the remaining nine-month period ending December 31, 2007 as a result of
the statute of limitations closing for the 2002 and 2003 tax years. The
unrecognized tax benefits are related to California tax benefits associated with
enterprise zone interest deductions, Missouri tax benefits associated with
dividends received from a former Regulated Investment Company and other certain
apportionment assumptions.
In accordance with FIN 48, it is management's policy to separately
disclose any interest or penalties arising from the application of federal or
state income taxes. Interest related to unrecognized tax benefits is included in
interest expense and penalties related to unrecognized tax benefits are included
in noninterest expense. At January 1, 2007, the balance of interest accrued on
unrecognized tax benefits was $944,000. The amount of interest recognized during
the three months ended March 31, 2007 was $189,000. There were no penalties
related to tax matters accrued at January 1, 2007, nor did the Company recognize
any penalties during the three months ended March 31, 2007.
First Banks and its subsidiaries file income tax returns in the U.S.
federal jurisdiction and various states. Management of First Banks believes the
accrual for tax liabilities is adequate for all open audit years based on its
assessment of many factors, including past experience and interpretations of tax
law applied to the facts of each matter. This assessment relies on estimates and
assumptions. First Banks is no longer open for U.S. federal, state and local
income tax examination by tax authorities for the years prior to 2002, with the
exception of certain states where the statute of limitations is four years. In
those circumstances, First Banks is no longer subject to examination for the
years before 2001. At March 31, 2007, there were no federal or state income tax
examinations in process.
(13) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty
contracts. For value received, and for the purpose of inducing a pension fund
and its trustees and a welfare fund and its trustees (the Funds) to conduct
business with MVP, First Bank's institutional investment management subsidiary,
First Banks irrevocably and unconditionally guaranteed payment of and promised
to pay to each of the Funds any amounts up to the sum of $5.0 million to the
extent MVP is liable to the Funds for a breach of the Investment Management
Agreements (including the Investment Policy Statement and Investment
Guidelines), by and between MVP and the Funds and/or any violation of the
Employee Retirement Income Security Act by MVP resulting in liability to the
Funds. The guaranties are continuing guaranties of all obligations that may
arise for transactions occurring prior to termination of the Investment
Management Agreements and are coexistent with the term of the Investment
Management Agreements. The Investment Management Agreements have no specified
term but may be terminated at any time upon written notice by the Trustees or,
at First Banks' option, upon thirty days written notice to the Trustees. In the
event of termination of the Investment Management Agreements, such termination
shall have no effect on the liability of First Banks with respect to obligations
incurred before such termination. The obligations of First Banks are joint and
several with those of MVP. First Banks does not have any recourse provisions
that would enable it to recover from third parties any amounts paid under the
contracts nor does First Banks hold any assets as collateral that, upon
occurrence of a required payment under the contract, could be liquidated to
recover all or a portion of the amount(s) paid. At March 31, 2007 and 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.
(14) SUBSEQUENT EVENTS
On April 22, 2007, First Banks redeemed the First Bank Capital Trust
(FBCT) cumulative variable rate trust preferred securities at the liquidation
value of $1,000 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 $25.8 million of variable rate subordinated
debentures that were issued by First Banks to FBCT. The funds necessary for the
redemption of the subordinated debentures were provided by internally generated
funds and net proceeds from the issuance of $25.8 million of subordinated
debentures to FBST VIII on February, 23, 2007, as further described in Note 11
to the Consolidated Financial Statements.
On April 27, 2007, First Bank completed the sale of approximately $13.4
million of certain repurchased residential mortgage loans that were classified
as loans held for sale at March 31, 2007, resulting in a pre-tax gain of
approximately $851,000. In addition, First Bank received payoffs of a portion of
the loans held for sale at March 31, 2007 of approximately $1.1 million. These
transactions resulted in a decrease in nonperforming loans of approximately
$11.5 million, in aggregate. First Bank also transferred approximately $2.6
million of loans that were not ultimately included in the sale back into its
residential mortgage loan portfolio.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
with respect to our financial condition, results of operations and business.
Generally, forward-looking statements may be identified through the use of words
such as: "believe," "expect," "anticipate," "intend," "plan," "estimate," or
words of similar meaning or future or conditional terms such as: "will,"
"would," "should," "could," "may," "likely," "probably," or "possibly." Examples
of forward-looking statements include, but are not limited to, estimates or
projections with respect to our future financial condition, 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. For
discussion of these and other risk factors, refer to our 2006 Annual Report on
Form 10-K, as filed with the Securities and Exchange Commission. We do not have
a duty to and will not update these forward-looking statements. Readers of this
Quarterly Report on Form 10-Q should therefore consider these risks and
uncertainties in evaluating forward-looking statements and should not place undo
reliance on these statements.
General
We are a registered bank holding company incorporated in Missouri in 1978 and
headquartered in St. Louis, Missouri. We operate through our wholly owned
subsidiary bank holding company, The San Francisco Company, or SFC, 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
Small Business Loan Source LLC, or SBLS LLC, which is 63.9% owned by First Bank
and 36.1% owned by First Capital America, Inc. as of March 31, 2007.
>> 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., collectively UPAC; and
>> Small Business Loan Source LLC.
At March 31, 2007, we had assets of $10.39 billion, loans, net of unearned
discount, of $7.93 billion, deposits of $8.70 billion and stockholders' equity
of $826.2 million, and currently operate 197 branch banking offices in
California, Illinois, Missouri and Texas.
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, 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
deposit products and services, and fees generated by our mortgage banking,
insurance, and trust, private banking and institutional money management
business units. 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 unit rests with the officers and
directors of each unit, but we centralize many of our overall corporate
policies, procedures and administrative functions and provide centralized
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our banking units to focus
on customer service.
Financial Condition
Total assets were $10.39 billion at March 31, 2007 reflecting a $226.6 million
increase from $10.16 billion at December 31, 2006. The increase in our total
assets was attributable to our acquisition of Royal Oaks Bancshares, Inc., or
Royal Oaks, on February 28, 2007, the opening of three de novo branch offices
during the first quarter of 2007, and internal growth. Our acquisition of Royal
Oaks provided assets of $206.9 million, as summarized in the table below and
further described in Note 2 to our Consolidated Financial Statements.
Loans, net of unearned discount, increased $265.6 million to $7.93 billion at
March 31, 2007, from $7.67 billion at December 31, 2006, reflecting internal
growth and the addition of $175.5 million of loans associated with our
acquisition of Royal Oaks. Funds available from deposit growth were utilized to
fund internal loan growth. Maturities of investment securities and the
reinvestment of the majority of these funds in short-term investments, which
include federal funds sold and interest-bearing deposits, resulted in a $197.7
million decrease in our investment securities portfolio to $1.27 billion at
March 31, 2007, and a $142.0 million increase in our short-term investments to
$295.6 million at March 31, 2007. On January 2, 2007, we repaid in full $56.9
million of subordinated debentures in conjunction with the December 31, 2006
redemption of the trust preferred securities of our former business trust, First
Preferred Capital Trust III. This payment contributed to a partial reduction in
short-term investments and a decrease in our accrued expenses and other
liabilities, which declined to $67.4 million at March 31, 2007 from $130.0
million at December 31, 2006. Goodwill and other intangible assets increased
$24.2 million to $319.5 million at March 31, 2007, primarily resulting from
goodwill and core deposit intangibles recorded in conjunction with our
acquisition of Royal Oaks, as more fully described in Note 2 and Note 3 to our
Consolidated Financial Statements. The overall increase in our total assets also
reflects an increase in net bank premises and equipment of $9.5 million,
partially offset by reductions of $5.2 million in deferred income taxes and
$15.7 million in other assets.
As shown in the following table, we completed our acquisition of Royal Oaks,
located in Houston, Texas, on February 28, 2007, adding a total of six branch
offices. In addition, we further expanded our branch office network with the
opening of three de novo branch offices during the first quarter of 2007,
located in downtown St. Louis, Missouri, Sacramento, California, and Houston,
Texas.
Loans, Number
Net of Goodwill of
Entity / Total Unearned Investment Purchase and Other Banking
Closing Date Assets Discount Securities Deposits Price Intangibles Locations
------------ ------ -------- ---------- -------- ----- ----------- ---------
(dollars expressed in thousands)
Royal Oaks Bancshares, Inc.
Houston, Texas
February 28, 2007 $206,900 175,500 4,100 159,100 38,600 27,700 6
======== ======= ===== ======= ====== ====== ==
Deposits increased $257.4 million to $8.70 billion at March 31, 2007, from $8.44
billion at December 31, 2006, reflecting growth in savings and money market
deposits through enhanced product campaigns, in addition to growth in time
deposits greater than $100,000. The increase in deposits also reflects $159.1
million of deposits provided by our acquisition of Royal Oaks. The impact of
continued aggressive competition within our market areas, coupled with an
anticipated amount of attrition associated with our 2006 and 2007 acquisitions,
continues to have a significant influence on the level of our deposits and the
interest rates paid on those deposits. Growth in our savings, money market and
time deposits is primarily attributable to our continued focus on marketing
these deposit products, our deposit pricing strategy and our ongoing efforts to
further develop multiple account relationships with our customers. Our deposit
growth during the three months ended March 31, 2007 reflects a $239.0 million
increase in our savings and money market accounts, and a $38.8 million increase
in our time deposits; partially offset by a $22.4 million decline in our
noninterest-bearing demand accounts.
Other borrowings, which are comprised of securities sold under agreements to
repurchase and Federal Home Loan Bank, or FHLB, advances, remained relatively
flat during the period, totaling $374.8 million at March 31, 2007 compared to
$373.9 million at December 31, 2006.
Notes payable decreased $25.0 million to $40.0 million at March 31, 2007 as a
result of scheduled quarterly principal installment payments of $5.0 million and
additional prepayments of $20.0 million on our $100.0 million term loan
facility, as further described in Note 10 to our Consolidated Financial
Statements.
Our subordinated debentures increased $30.0 million to $327.9 million at March
31, 2007, from $298.0 million at December 31, 2006, due to the issuance of $25.8
million of variable rate subordinated debentures in a private placement to First
Bank Statutory Trust VIII, a newly formed statutory trust, on February 23, 2007.
A portion of the proceeds from the issuance of these subordinated debentures
were utilized to fund our acquisition of Royal Oaks. The increase is also
attributable to our Royal Oaks acquisition, in which we assumed $4.1 million of
subordinated debentures that Royal Oaks Bancshares, Inc. previously issued to
Royal Oaks Capital Trust I, as further described in Note 11 to our Consolidated
Financial Statements.
Stockholders' equity was $826.2 million and $800.4 million at March 31, 2007 and
December 31, 2006, respectively, reflecting an increase of $25.7 million during
the first quarter of 2007. The increase is attributable to: (a) net income of
$19.2 million; (b) a $4.2 million increase in accumulated other comprehensive
income, comprised of $2.5 million associated with changes in unrealized gains
and losses on our available-for-sale investment securities portfolio and $1.7
million associated with changes in the fair value of our derivative financial
instruments; and (c) a $2.5 million increase representing the cumulative effect
adjustment of a change in accounting principle recorded in conjunction with our
adoption of Financial Accounting Standards Board, or FASB, Interpretation No. 48
- -- Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109
- -- Accounting for Income Taxes, or FIN 48, as further discussed in Note 1 and
Note 12 to our Consolidated Financial Statements. The overall increase in
stockholders' equity was partially offset by dividends we paid on our Class A
and Class B preferred stock.
Results of Operations
Net Income
Net income was $19.2 million for the three months ended March 31, 2007, compared
to $29.0 million for the comparable period in 2006. Our return on average assets
and return on average stockholders' equity were 0.77% and 9.62% for the three
months ended March 31, 2007, compared to 1.26% and 16.91% for the comparable
period in 2006. Net income for the three months ended March 31, 2007 reflects
increased net interest income, offset by a slight decline in our noninterest
income, an increase in our provision for loan losses, and higher levels of
noninterest expense.
The decrease in earnings for 2007 primarily reflects the impact of significantly
higher noninterest expense levels, compression of our net interest margin, and
an increase in our provision for loan losses. The net interest margin declined
15 basis points to 4.15% for the first quarter of 2007, compared to 4.30% for
the same period in 2006. The decline primarily resulted from increased interest
expense on our deposit portfolio driven by highly competitive pricing within our
markets. Our net interest income increased to $94.9 million for the three months
ended March 31, 2007, from $90.9 million for the comparable period in 2006. The
increase in net interest income for the three months ended March 31, 2007
compared to the same period in 2006 reflects: (a) an overall increase in average
interest-earning assets of 8.1% to $9.30 billion for the three months ended
March 31, 2007, from $8.61 billion for the comparable period in 2006; (b)
internal loan growth coupled with higher prevailing interest rates on loans,
which contributed to an increase of $22.4 million, or 17.1%, in interest income;
(c) the transfer of funding from lower-yielding investment securities to
higher-yielding loans; (d) the reduction of the use of higher cost funding
sources, such as term repurchase agreements and FHLB advances; and (e) the
acquisition of banks and other financial service companies completed in 2006 and
2007. The increase was partially offset by (a) increased interest expense
stemming from higher interest rates paid on an increasing deposit base driven by
highly competitive pricing within our markets, organic growth, and our 2006 and
2007 acquisitions, as well as a shift in our deposit mix to higher volumes of
time deposit accounts and savings and money market accounts; and (b) higher
interest rates paid on other borrowings and our notes payable. While our
earnings have benefited from the increasing interest rate environment, overall
competitive conditions within our markets continue to exert pressure on our net
interest income and net interest margin.
We successfully improved our overall asset quality levels during 2006, reducing
nonperforming assets by 44.4%; however, we experienced an increase in our
nonperforming assets of nearly 28.8% during the first three months of 2007. Our
nonperforming assets for the first three months of 2007 increased to $71.0
million at March 31, 2007, from $55.2 million at December 31, 2006.
Nonperforming loans were $62.5 million, or 0.79% of loans, net of unearned
discount, at March 31, 2007, compared to $48.7 million, or 0.64% of loans, net
of unearned discount, at December 31, 2006. The $13.8 million increase in the
level of nonperforming loans during the three months ended March 31, 2007
primarily resulted from the deterioration of two residential construction
projects and the placement of these credits on nonaccrual status. The increase
also resulted from increased levels of delinquencies within our one-to-four
family residential loan portfolio driven by current market conditions and
repurchases of certain residential mortgage loans sold with recourse that were
placed back into our one-to-four family residential loan portfolio, as well as
the global impact of sub-prime products experienced throughout the mortgage
banking industry. Our involvement in the sub-prime market has been limited to
the origination and subsequent sale of these loans in the secondary market.
During the latter part of the first quarter of 2007, we substantially reduced
our activities in the sub-prime market in an effort to reduce our risk exposure
in this lending area. However, we expect future noninterest income to decline as
a result of decreased gains on sales of such loans related to this product line.
We recorded net loan charge-offs of $10.0 million for the three months ended
March 31, 2007 and net loan recoveries of $3.3 million for the three months
ended March 31, 2006, and we recorded a provision for loan losses of $3.5
million and $1.0 million for the three months ended March 31, 2007 and 2006,
respectively, as further discussed under "--Provision for Loan Losses" and
"--Loans and Allowance for Loan Losses."
Noninterest income was $24.6 million and $25.5 million for the three months
ended March 31, 2007 and 2006 respectively. Noninterest income for the three
months ended March 31, 2007 reflects fee and commission income of $1.7 million
associated with our insurance brokerage agency acquired on March 31, 2006. The
decline in noninterest income reflects significantly reduced gains on loans sold
and held for sale and reduced fee income from our institutional money management
subsidiary. A gain on the sale of certain nonperforming loans of $1.7 million
and increased loan servicing income of $1.2 million generated from the
capitalization of mortgage servicing rights related to the securitization of
$77.1 million of certain residential mortgage loans recorded in the first
quarter of 2006 contributed to a decrease in gains on loans sold and held for
sale period to period. Noninterest income for the first quarter of 2006 also
includes a $1.5 million gain on the sale of a parcel of other real estate,
partially offset by a $2.4 million pre-tax loss on the sale of
available-for-sale investment securities associated with the termination of
$150.0 million of term repurchase agreements.
Noninterest expense was $85.7 million and $74.8 million for the three months
ended March 31, 2007 and 2006, respectively. The significant expansion of our
branch office network and employee base following the completion of numerous
acquisitions of banks and branch offices in 2006 and 2007; the acquisition of
UPAC, our insurance premium financing company, and Adrian Baker, our insurance
brokerage agency, in 2006; and the opening of three de novo branch offices
during the first quarter of 2007 contributed to the increase in overall expense
levels, specifically salaries and employee benefits expense, occupancy and
furniture and equipment expense, and amortization of intangible assets
associated with these transactions. The increased expense levels were
anticipated and are commensurate with the expansion of our banking franchise. We
continue to closely monitor our noninterest expense levels, and have implemented
certain expense reduction measures and are further evaluating additional expense
reduction measures in an effort to improve our expense control in future
periods.
Net Interest Income
Net interest income, expressed on a tax-equivalent basis, increased to $95.3
million for the three months ended March 31, 2007, compared to $91.2 million for
the comparable period in 2006. Our net interest margin declined by 15 basis
points to 4.15% for the three months ended March 31, 2007, from 4.30% for the
three months ended March 31, 2006. Net interest income is the difference between
interest earned on our interest-earning assets, such as loans and investment
securities, and interest paid on our interest-bearing liabilities, such as
deposits and borrowings. Net interest income is affected by the level and
composition of assets, liabilities and stockholders' equity, as well as the
general level of interest rates and changes in interest rates. Interest income
on a tax-equivalent basis includes the additional amount of interest income that
would have been earned if our investment in certain tax-exempt interest-earning
assets had been made in assets subject to federal, state and local income taxes
yielding the same after-tax income. Net interest margin is determined by
dividing net interest income computed 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.
The decrease in our net interest margin during the first quarter of 2007
primarily resulted from an increase in higher priced deposits driven by
competitive conditions within our markets. The average rates paid on our
interest-bearing deposits increased 88 basis points to 3.68% for the first three
months of 2007, from 2.80% for the same period in 2006, while the average yield
earned on our interest-earning assets increased only 55 basis points to 7.51%
for the first three months of 2007, from 6.96% for the same period in 2006, thus
contributing to compression of our net interest margin. The increase in our net
interest income reflects: (a) an increase in interest-earning assets provided by
internal growth and our 2006 and 2007 acquisitions; (b) higher interest rates
earned on increased loan volumes and short-term investments, and higher interest
rates earned on reduced investment securities; in addition to (c) decreased
interest expense on reduced volumes of other borrowings and notes payable. The
increase was partially offset by increased interest expense associated with
higher interest rates paid on a changing and increasing deposit base mix that
reflects increased average time deposits and savings accounts, in contrast to
demand accounts; and increased interest expense on higher levels of subordinated
debentures. Average interest-earning assets increased $695.5 million, or 8.1%,
to $9.30 billion for the three months ended March 31, 2007, from $8.61 billion
for the comparable period in 2006. The increase is primarily attributable to
continued internal loan growth, and interest-earning assets provided by our
acquisitions completed in 2006 and 2007, which provided assets, in aggregate, of
$794.3 million and $206.9 million, respectively. Despite the increased interest
rate environment, overall competitive conditions within our market areas
continue to exert pressure on our net interest income and net interest margin.
In addition, during the third quarter of 2006, we expanded our utilization of
derivative financial instruments, as further discussed under "--Interest Rate
Risk Management," in accordance with our interest rate risk management program.
Average loans, net of unearned discount, increased $665.8 million to $7.82
billion for the three months ended March 31, 2007, from $7.16 billion for the
comparable period in 2006. The yield on our loan portfolio increased 53 basis
points to 7.98% for the three months ended March 31, 2007, in comparison to
7.45% for the same period in 2006. The increase in average loans reflects
internal growth and our acquisitions completed in 2006 and 2007, partially
offset by a reduction in loans throughout 2006 related to the securitization of
certain of our residential mortgage loans held in our loan portfolio, the sale
of certain residential mortgage loans, the sale of certain performing and
nonperforming loans, loan payoffs and/or external refinancing of various
credits, as further described under "--Loans and Allowance for Loan Losses." Our
acquisitions completed in 2006 and 2007 provided loans, net of unearned
discount, of $545.1 million and $175.5 million, in aggregate, respectively, as
of the dates of acquisition. The increase in average loans for the first three
months of 2007 compared to the same period in 2006 primarily resulted from: an
increase in average commercial, financial and agricultural loans of $367.3
million; an increase in average real estate construction and development loans
of $277.0 million; an increase in average consumer and installment loans of
$21.0 million; and an increase in average real estate mortgage loans of $13.9
million.
Average investment securities were $1.33 billion and $1.35 billion for the three
months ended March 31, 2007 and 2006, respectively. The yield on our investment
portfolio was 5.01% for the three months ended March 31, 2007, compared to 4.51%
for the comparable period in 2006. Investment securities provided by our
acquisitions completed in 2006 and 2007 were $37.3 million and $4.1 million, in
aggregate, respectively, as of the dates of acquisition. Funds available from
deposit growth, as well as maturities of investment securities, were utilized to
fund internal loan growth. Additional funds available from maturities of
investment securities were utilized to partially reinvest in higher-yielding
available-for-sale investment securities. In March 2006 and April 2006, our
investment securities increased $77.1 million and $61.8 million, respectively,
due to the securitization of $138.9 million of certain of our residential
mortgage loans held in our loan portfolio. Additionally, as further discussed
under "--Interest Rate Risk Management," we terminated $200.0 million of our
term repurchase agreements during 2006 and sold $200.0 million of
available-for-sale investment securities associated with the termination of the
term repurchase agreements. Furthermore, in July 2006, we entered into a $100.0
million term repurchase agreement and purchased $100.0 million of
available-for-sale investment securities associated with the new term repurchase
agreement.
Average deposits increased to $8.47 billion for the three months ended March 31,
2007, from $7.73 billion for the comparable period in 2006. For the three months
ended March 31, 2007, the aggregate weighted average rate paid on our deposit
portfolio increased 88 basis points to 3.68%, from 2.80% for the comparable
period in 2006, reflective of competitive conditions within our markets, the
rising interest rate environment and a change in the mix of our average deposits
to increased time deposits and savings and money market accounts. Average time
deposits were $3.82 billion for the three months ended March 31, 2007, compared
to $3.35 billion for the comparable period in 2006. Average savings and money
market deposits were $2.44 billion for the three months ended March 31, 2007,
compared to $2.13 billion for the comparable period in 2006. Average
noninterest-bearing demand deposits were $1.22 billion for the three months
ended March 31, 2007, compared to $1.27 billion for the comparable period in
2006, and average interest-bearing demand deposits were $983.8 million for the
three months ended March 31, 2007, compared to $970.0 million for the comparable
period in 2006. The increase in average deposits reflects internal growth
through enhanced product campaigns, and growth provided by our acquisitions
completed during 2006 and 2007, which provided deposits of $475.6 million and
$159.1 million, in aggregate, respectively, as of the dates of acquisition.
Average other borrowings decreased to $367.7 million for the three months ended
March 31, 2007, from $460.7 million for the comparable period in 2006. The
aggregate weighted average rate paid on our other borrowings was 4.80% and 4.13%
for the three months ended March 31, 2007 and 2006, respectively. The increased
rate paid on our other borrowings reflects the rising short-term interest rate
environment. The decrease in average other borrowings of $93.0 million is
primarily attributable to the termination of $200.0 million of term repurchase
agreements during 2006 partially offset by an increase of $100.0 million
associated with a term repurchase agreement that we entered into in the third
quarter of 2006. In addition, during 2006, we prepaid $35.3 million of FHLB
advances that were assumed with certain bank acquisitions.
Notes payable averaged $56.6 million for the three months ended March 31, 2007,
compared to $99.9 million for the comparable period in 2006. The aggregate
weighted average rate paid on our notes payable was 6.51% for the three months
ended March 31, 2007, compared to 5.76% for the comparable period in 2006. The
weighted average rate paid on our notes payable includes unused commitment,
arrangement and renewal fees. Exclusive of these fees, the weighted average rate
paid on our notes payable was 6.46% and 5.69% for the three months ended March
31, 2007 and 2006, respectively. The decrease in our average notes payable is
attributable to contractual payments and additional prepayments made on our term
loan beginning on March 31, 2006, as further described in Note 10 to our
Consolidated Financial Statements.
Average subordinated debentures were $310.1 million and $230.0 million for the
three months ended March 31, 2007 and 2006, respectively. The aggregate weighted
average rate paid on our subordinated debentures was 7.76% for the three months
ended March 31, 2007, compared to 9.97% for the comparable period in 2006.
Interest expense on our subordinated debentures was $5.9 million and $5.7
million for the three months ended March 31, 2007 and 2006, respectively. The
change in volumes and average rates paid reflects: (a) the issuance of $139.2
million of variable rate subordinated debentures in private placements during
2006 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; and (b) the issuance of $25.8 million of variable rate
subordinated debentures in a private placement through a newly formed statutory
trust that we completed on February 23, 2007. The refinancing of the outstanding
subordinated debentures that carried a higher fixed interest rate improved our
net interest income and net interest margin.
The following table sets forth, on a tax-equivalent basis, certain information
relating to our average balance sheets, and reflects the average yield earned on
interest-earning assets, the average cost of our interest-bearing liabilities
and the resulting net interest income for the periods presented.
Three Months Ended March 31,
-----------------------------------------------------------
2007 2006
----------------------------- ----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1) (2) (3) (4)............................ $ 7,822,656 153,926 7.98% $7,156,860 131,461 7.45%
Investment securities (4)........................ 1,329,215 16,424 5.01 1,351,287 15,033 4.51
Short-term investments........................... 149,604 1,878 5.09 97,784 1,123 4.66
----------- ------- ---------- -------
Total interest-earning assets.............. 9,301,475 172,228 7.51 8,605,931 147,617 6.96
------- -------
Nonearning assets.................................... 835,818 705,925
----------- ----------
Total assets............................... $10,137,293 $9,311,856
=========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand deposits.............. $ 983,776 2,616 1.08% $ 970,032 1,828 0.76%
Savings deposits.............................. 2,437,295 18,337 3.05 2,129,488 11,183 2.13
Time deposits of $100 or more................. 1,425,704 17,030 4.84 1,179,410 11,556 3.97
Other time deposits (3)....................... 2,397,926 27,790 4.70 2,175,064 20,034 3.74
----------- ------- ---------- -------
Total interest-bearing deposits............ 7,244,701 65,773 3.68 6,453,994 44,601 2.80
Other borrowings................................. 367,704 4,351 4.80 460,748 4,695 4.13
Notes payable (5)................................ 56,594 908 6.51 99,944 1,420 5.76
Subordinated debentures (3)...................... 310,056 5,934 7.76 229,981 5,652 9.97
----------- ------- ---------- -------
Total interest-bearing liabilities......... 7,979,055 76,966 3.91 7,244,667 56,368 3.16
------- -------
Noninterest-bearing liabilities:
Demand deposits.................................. 1,224,318 1,271,153
Other liabilities................................ 123,129 100,517
----------- ----------
Total liabilities.......................... 9,326,502 8,616,337
Stockholders' equity................................. 810,791 695,519
----------- ----------
Total liabilities and stockholders' equity. $10,137,293 $9,311,856
=========== ==========
Net interest income.................................. 95,262 91,249
======= =======
Interest rate spread................................. 3.60 3.80
Net interest margin (6).............................. 4.15% 4.30%
==== ====
- --------------------
(1) For purposes of these calculations, nonaccrual loans are included in average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments
were approximately $401,000 and $383,000 for the three months ended March 31, 2007 and 2006, respectively.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees. Exclusive of these
fees, the interest rates paid were 6.46% and 5.69% for the three months ended March 31, 2007 and 2006,
respectively.
(6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average
interest-earning assets.
Provision for Loan Losses
We recorded provisions for loan losses of $3.5 million and $1.0 million for the
three months ended March 31, 2007 and 2006, respectively. The increase in our
provision for loan losses for the first quarter of 2007 was primarily driven by
increased loan charge-offs, an increase in nonperforming loans and growth within
our loan portfolio, as further discussed below and under "--Loans and Allowance
for Loan Losses."
We recorded net loan charge-offs of $10.0 million for the three months ended
March 31, 2007, compared to net loan recoveries of $3.3 million for the three
months ended March 31, 2006. Our net loan charge-offs for the first quarter of
2007 were 0.13% of average loans, representing an increase over our net loan
charge-offs for the year 2006, which were 0.09% of average loans. Our net loan
recoveries for the first quarter of 2006 were 0.05% of average loans. Net loan
charge-offs for the first quarter of 2007 included $5.5 million of charge-offs
associated with our one-to-four family residential mortgage portfolio, of which
$3.5 million was recorded in conjunction with the transfer of certain
repurchased residential mortgage loans to our loans held for sale portfolio, as
further discussed below and under "--Loans and Allowance for Loan Losses." Net
loan charge-offs for the first quarter of 2007 also include a charge-off of $2.5
million on a residential development and construction credit relationship. Net
loan recoveries for the first quarter of 2006 include a loan recovery of $5.0
million on the payoff of a single nonperforming loan.
Our nonperforming loans increased to $62.5 million, or 0.79% of loans, net of
unearned discount, at March 31, 2007, from $48.7 million, or 0.64% of loans, net
of unearned discount, at December 31, 2006, and $67.1 million, or 0.94% of
loans, net of unearned discount, at March 31, 2006. The increase in the overall
level of nonperforming loans during the first quarter of 2007 was primarily
attributable to the deterioration of two residential construction projects
totaling $10.2 million and the placement of these credits on nonaccrual status.
The increase is also attributable to increased levels of delinquencies within
our one-to-four family residential portfolio driven by current market conditions
and repurchases of certain residential mortgage loans sold with recourse that
were placed back into our one-to-four family residential loan portfolio, in
addition to the global impact of sub-prime products experienced throughout the
mortgage banking industry, as further discussed under "--Loans and Allowance for
Loan Losses." 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.
Our allowance for loan losses was $142.1 million at March 31, 2007, compared to
$145.7 million at December 31, 2006 and $140.2 million at March 31, 2006,
representing 1.79%, 1.90% and 1.96% of loans, net of unearned discount,
respectively. Our allowance for loan losses as a percentage of nonperforming
loans was 227.37% at March 31, 2007, compared to 299.05% at December 31, 2006
and 209.00% at March 31, 2006. The allowance for loan losses at March 31, 2007
includes $2.9 million of balances acquired in conjunction with our 2007
acquisition of Royal Oaks. We continue to closely monitor our operations to
address the ongoing challenges posed by the changing level of nonperforming
loans and we continue to focus our efforts on reducing the overall level of
nonperforming loans in our loan portfolio, with attention to the loan portfolios
acquired through our bank acquisitions. Management considers these factors in
its overall assessment of the adequacy of the allowance for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off and
recovery experience are presented under "--Loans and Allowance for Loan Losses."
Noninterest Income. Noninterest income was $24.6 million and $25.5 million for
the three months ended March 31, 2007 and 2006, respectively. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, investment management income, insurance fee and
commission income and other income.
Service charges on deposit accounts and customer service fees were $10.6 million
and $10.2 million for the three months ended March 31, 2007 and 2006,
respectively. The increase in service charges and customer service fees was
primarily attributable to increased deposit account balances associated with
internal growth and our acquisitions of banks completed in 2006 and 2007, as
further described under "--Financial Condition" and in Note 2 to our
Consolidated Financial Statements.
The gain on loans sold and held for sale was $3.9 million and $6.8 million for
the three months ended March 31, 2007 and 2006, respectively. We primarily
attribute the decrease to the following transactions during the first quarter of
2006: (a) a $1.7 million gain, before applicable income taxes, recorded on the
sale of certain nonperforming loans in March 2006; and (b) the recognition of
$1.2 million of income in March 2006 generated from the capitalization of
mortgage servicing rights pertaining to the securitization and transfer to our
investment portfolio of $77.1 million of residential mortgage loans held in our
loan portfolio, as further described in Note 4 to our Consolidated Financial
Statements.
We recorded a net gain on investment securities of $293,000 for the three months
ended March 31, 2007, in comparison to a net loss on investment securities of
$2.8 million for the comparable period in 2006. The net loss in 2006 primarily
resulted from sales of certain available-for-sale investment securities
associated with the full termination of three $50.0 million term repurchase
agreements during the first quarter of 2006, as further described under
"--Interest Rate Risk Management."
Bank-owned life insurance investment income was $713,000 and $1.1 million for
the three months ended March 31, 2007 and 2006, respectively, reflecting 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 $1.5 million and $2.3 million for the three months
ended March 31, 2007 and 2006, respectively, reflecting decreased portfolio
management fee income associated with changes in assets under management.
Insurance fee and commission income generated by Adrian Baker, our insurance
brokerage agency acquired in March 2006, was $1.7 million for the three months
ended March 31, 2007.
Other income was $5.8 million and $7.8 million for the three months ended March
31, 2007 and 2006, respectively. The decline in other income is primarily
attributable to:
>> a decrease of $1.6 million in gains on sales of other real estate.
Gains on sales of other real estate were $11,000 for the three months
ended March 31, 2007. Gains on sales of other real estate were $1.6
million for the three months ended March 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 in November
2004; and
>> a release fee of $938,000 received during the first quarter of 2006 on
funds collected from a loan previously sold 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; partially offset by
>> an increase of $854,000 in recoveries of certain loan principal
balances that had been previously charged-off by the financial
institutions prior to their acquisition by First Banks.
Noninterest Expense. Noninterest expense was $85.7 million and $74.8 million for
the three months ended March 31, 2007 and 2006, respectively. Our efficiency
ratio was 71.75% for the three months ended March 31, 2007, in comparison to
64.29% for the comparable period in 2006. The increase in noninterest expense
was primarily attributable to our de novo branch openings and our acquisitions
in 2006 and 2007, which resulted in increased salaries and employee benefits
expense, occupancy expense and information technology fees, as well as increases
in other expense.
Salaries and employee benefits expense was $45.2 million and $39.5 million for
the three months ended March 31, 2007 and 2006, respectively. We attribute the
overall increase to higher salaries and employee benefits expenses associated
with an aggregate of 18 additional branch offices acquired in 2006 and 2007, our
acquisitions of Adrian Baker and UPAC in 2006 and three de novo branch offices
opened in 2007, 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 2,720 at
March 31, 2007 from approximately 2,350 at March 31, 2006, representing an
increase of 15.7%.
Occupancy, net of rental income, and furniture and equipment expense was $12.0
million and $10.2 million for the three months ended March 31, 2007 and 2006,
respectively. The increase reflects higher levels of expense resulting from our
de novo branch openings and acquisitions in 2006 and 2007, 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 $9.3 million and $9.1
million for the three months ended March 31, 2007 and 2006, respectively. As
more fully described in Note 6 to our Consolidated Financial Statements, First
Services, L.P., a limited partnership indirectly owned by our Chairman and
members of his immediate family, provides information technology and various
operational support services to our subsidiaries and us. Information technology
fees also include fees paid to outside servicers associated with our mortgage
banking and trust divisions, our small business lending and institutional money
management subsidiaries, and Adrian Baker and UPAC.
Legal, examination and professional fees were $1.7 million and $2.1 million for
the three months ended March 31, 2007 and 2006, respectively. The continued
expansion of overall corporate activities, the ongoing professional services
utilized by certain of our acquired entities, and the level of legal fees
associated with certain litigation matters have all contributed to the overall
expense levels in 2006 and 2007.
Amortization of intangible assets was $2.9 million and $1.5 million for the
three months ended March 31, 2007 and 2006, respectively, as further described
in Note 3 to our Consolidated Financial Statements. The increase was
attributable to core deposit intangibles associated with our acquisitions
completed in 2006 and 2007, in addition to the customer list intangibles
associated with our acquisitions of Adrian Baker and UPAC in March 2006 and May
2006, respectively.
Charitable contributions expense was $1.9 million and $1.6 million for the three
months ended March 31, 2007 and 2006, respectively. The increase in charitable
contributions expense was primarily attributable to an increase in charitable
contributions made to the Dierberg Operating Foundation, Inc., a charitable
foundation established by our Chairman and members of his immediate family, as
further described in Note 6 to our Consolidated Financial Statements.
Other expense was $8.2 million and $7.1 million for the three months ended March
31, 2007 and 2006, 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 continued growth and expansion of our banking
franchise, including our de novo branch offices and our acquisitions completed
during 2006 and 2007.
Provision for Income Taxes. The provision for income taxes was $11.0 million for
the three months ended March 31, 2007, representing an effective income tax rate
of 36.2%, in comparison to $11.7 million, representing an effective income tax
rate of 28.9%, for the comparable period in 2006. The decrease in our provision
for income taxes primarily reflects: (a) our decreased earnings; partially
offset by (b) the reversal of a federal tax reserve of $2.5 million and a state
tax reserve of $748,000 recorded in the first quarter of 2006, as they were no
longer deemed necessary due to the resolution of a potential tax liability; and
(c) tax benefits of approximately $380,000 relating to the utilization of
certain federal and state tax credits recorded in the first quarter of 2006.
Interest Rate Risk Management
We utilize derivative financial instruments to assist in our management of
interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The derivative financial
instruments we held as of March 31, 2007 and December 31, 2006 are summarized as
follows:
March 31, 2007 December 31, 2006
---------------------- -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................. $ 600,000 -- 600,000 4,369
Interest rate floor agreements............... 300,000 432 300,000 376
Interest rate cap agreements................. 400,000 86 400,000 139
Interest rate lock commitments............... 5,400 -- 5,900 --
Forward commitments to sell
mortgage-backed securities................. 52,000 -- 54,000 --
========= ====== ========= ======
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 three months ended March 31, 2007 and 2006, we realized net interest
expense of $1.4 million on our derivative financial instruments. We recorded net
gains on derivative instruments, which are included in noninterest income in the
consolidated statements of income, of $2,000 for the three months ended March
31, 2007, in comparison to net losses of $66,000 for the comparable period in
2006. The net gains recorded for the three months ended March 31, 2007 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 for the three
months ended March 31, 2006 reflect changes in the value of our interest rate
floor agreement entered into in September 2005.
Cash Flow Hedges. We 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 April 2001 and July 2003, we entered into interest rate swap
agreements of $175.0 million and $200.0 million notional amount,
respectively. The underlying hedged assets are certain variable rate
loans within our commercial loan portfolio. The swap agreements
provide for us to receive a fixed rate of interest and pay an
adjustable rate of interest equivalent to the weighted average prime
lending rate minus 2.82% and 2.85%, respectively. The terms of the
swap agreements provide for us to pay and receive interest on a
quarterly basis. In November 2001, we terminated $75.0 million
notional amount of the swap agreements originally entered into in
April 2001 in order to appropriately modify our overall hedge position
in accordance with our interest rate risk management program, and in
April 2006, the remaining $100.0 million notional amount of these swap
agreements matured.
>> In September 2006, we 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 variable rate loans within our commercial loan
portfolio. The swap agreements provide for us to receive a fixed rate
of interest and pay an adjustable rate of interest equivalent to the
weighted average prime lending rate minus 2.86%. The terms of the swap
agreements provide for us to pay and receive interest on a quarterly
basis.
The amount receivable by us under the swap agreements was $1.7 million and $7.0
million at March 31, 2007 and December 31, 2006, respectively, and the amount
payable by us under the swap agreements was $2.5 million and $2.7 million at
March 31, 2007 and December 31, 2006, respectively.
The maturity dates, notional amounts, interest rates paid and received and fair
value of our interest rate swap agreements designated as cash flow hedges as of
March 31, 2007 and December 31, 2006 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
March 31, 2007:
July 31, 2007........................... $ 200,000 5.40% 3.08% $ (1,586)
September 18, 2009...................... 200,000 5.39 5.20 829
September 20, 2010...................... 200,000 5.39 5.20 1,249
--------- --------
$ 600,000 5.39 4.49 $ 492
========= ===== ===== ========
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)
========= ===== ===== ========
Fair Value Hedges. We 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 May 2002, March 2003 and April 2003, we entered into $55.2
million, $25.0 million and $46.0 million notional amount,
respectively, of interest rate swap agreements that provided for us to
receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the three-month LIBOR plus 2.30%, 2.55% and
2.58%, respectively. The underlying hedged liabilities were a portion
of our subordinated debentures. The terms of the swap agreements
provided for us to pay and receive interest on a quarterly basis. In
May 2005, we terminated the $55.2 million and $46.0 million notional
swap agreements in order to appropriately modify future hedge
positions in accordance with our interest rate risk management
program. The resulting $854,000 basis adjustment of the underlying
hedged liabilities, in aggregate, was being recorded as a reduction of
interest expense over the remaining maturities of the underlying
hedged liabilities, which ranged from 26 to 28 years at the time of
the termination. In February 2006, we terminated the remaining $25.0
million notional swap agreement. In conjunction with this transaction,
we recorded the resulting $1.7 million basis adjustment of the
underlying hedged liabilities and the remaining balance of the basis
adjustments associated with the swap agreements that were terminated
in May 2005, totaling $834,000, in our consolidated statements of
income. The recognition of the net basis adjustments on all of the
terminated fair value interest rate swap agreements resulted in a
pre-tax loss of $849,000 that was recorded in February 2006.
Interest Rate Floor Agreements. In September 2005, we entered into a $100.0
million notional amount three-year interest rate floor agreement in conjunction
with our interest rate risk management program. The interest rate floor
agreement provides for us to receive a quarterly fixed rate of interest of 5.00%
should the three-month LIBOR equal or fall below the strike price of 2.00%. In
August 2006, we entered into a $200.0 million notional amount three-year
interest rate floor agreement in conjunction with the restructuring of one of
our $100.0 million term repurchase agreements, as further described below, to
further stabilize net interest income in the event of a declining rate scenario.
The interest rate floor agreement provides for us 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 fair value of the interest rate floor
agreements, which is included in other assets in our consolidated balance
sheets, was $432,000 and $376,000 at March 31, 2007 and December 31, 2006,
respectively.
Interest Rate Floor Agreements Embedded in Term Repurchase Agreements. We have
term repurchase agreements under master repurchase agreements with unaffiliated
third parties, as further described in Note 9 to our Consolidated Financial
Statements. The underlying securities associated with the term repurchase
agreements are mortgage-backed securities and callable U.S. Government agency
securities and are held by other financial institutions under safekeeping
agreements. The term repurchase agreements were entered into with the objective
of stabilizing net interest income over time, further protecting our net
interest margin against changes in interest rates and providing funding for
security purchases. The interest rate floor agreements included within the term
repurchase agreements represent embedded derivative instruments which, in
accordance with existing accounting literature governing derivative instruments,
are not required to be separated from the term repurchase agreements and
accounted for separately as a derivative financial instrument. As such, the term
repurchase agreements are reflected in other borrowings in our consolidated
balance sheets and the related interest expense is reflected as interest expense
on other borrowings in our consolidated statements of income.
In February 2006, we terminated our 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; and in March 2006, we
terminated our $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. Our termination transactions entered into in the
first quarter of 2006 resulted in a reduction of $150.0 million of our term
repurchase agreements, the recognition of a $2.4 million loss on the sale of
$150.0 million of investment securities held in our available-for-sale
investment portfolio, and prepayment penalties of $223,000 incurred in
conjunction with the early termination of the term repurchase agreements.
Additionally, in April 2006, we terminated $50.0 million of the $150.0 million
term repurchase agreement with a maturity date of January 12, 2007, and
recognized a $310,000 loss on the sale of $50.0 million of available-for-sale
investment securities associated with the termination of the term repurchase
agreement; and in August 2006, we 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. We
did not incur any costs associated with the restructuring of the agreement.
In July 2006, we 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 9 to our 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. In September 2006, we 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 we
entered into in September 2006, as previously described, to limit the net
interest expense associated with our 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 us 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 us 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 fair value of the
interest rate cap agreements, which is included in other assets in our
consolidated balance sheets, was $86,000 and $139,000 at March 31, 2007 and
December 31, 2006, respectively.
Pledged Collateral. At March 31, 2007 and December 31, 2006, we had accepted
cash of $677,000 and $4.2 million, respectively, as collateral in connection
with our interest rate swap agreements.
Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed
Securities. Derivative financial instruments issued by us consist of interest
rate lock commitments to originate fixed-rate loans to be sold. Commitments to
originate fixed-rate loans consist primarily of residential real estate loans.
These net loan commitments and loans held for sale are hedged with forward
contracts to sell mortgage-backed securities. The fair value of these interest
rate lock commitments included in other assets in our consolidated balance
sheets was $32,000 and ($17,000) at March 31, 2007 and December 31, 2006,
respectively.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source of income
for First Bank. Interest and fees on loans were 89.5% of total interest income
for the three months ended March 31, 2007, in comparison to 89.2% for the
comparable period in 2006. Loans, net of unearned discount, increased to $7.93
billion, or 76.4% of our assets, at March 31, 2007, compared to $7.67 billion,
or 75.5% of our assets, at December 31, 2006. The overall increase in loans, net
of unearned discount, during the first quarter of 2007 reflects internal loan
growth of $90.1 million and our acquisition of Royal Oaks, which provided loans,
net of unearned discount, of $175.5 million. We primarily attribute the net
increase in our loan portfolio to:
>> an increase of $143.1 million in our commercial, financial and
agricultural portfolio, primarily attributable to continued internal
loan production growth and $45.1 million of loans provided by our
acquisition of Royal Oaks;
>> an increase of $75.5 million in our real estate construction and
development portfolio resulting primarily from new loan originations
and seasonal fluctuations on existing and available credit lines, as
well as $54.8 million of loans provided by our acquisition of Royal
Oaks;
>> an increase of $37.1 million in our real estate mortgage portfolio,
primarily attributable to loans totaling $70.6 million provided by our
acquisition of Royal Oaks; partially offset by (a) a decrease of $12.9
million within this loan portfolio, primarily due to loan payoffs; and
(b) the transfer of approximately $17.5 million of certain repurchased
residential mortgage loans to our loans held for sale portfolio in
March 2007, after recording loan charge-offs of $3.5 million to adjust
the loan balances to their estimated fair value at the time of
transfer based on the commitment from a third-party purchaser. The
repurchased residential mortgage loans included approximately $14.5
million of nonperforming loans. The sale of the majority of these
loans occurred in April 2007, as further described in Note 14 to our
Consolidated Financial Statements; and
>> an increase of $5.2 million in our loans held for sale portfolio,
reflecting the transfer of approximately $17.5 million of certain
residential mortgage loans to our loans held for sale portfolio, as
discussed above, partially offset by the timing of loan originations
and subsequent sales in the secondary mortgage market, including a
reduction in the originations and sales of sub-prime residential
mortgage loan products in light of the global impact experienced
throughout the mortgage banking industry during the first quarter of
2007, as further discussed below.
Nonperforming assets include nonaccrual loans, restructured loans and other real
estate. The following table presents the categories of nonperforming assets and
certain ratios as of March 31, 2007 and December 31, 2006:
March 31, December 31,
2007 2006
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual................................................... $ 12,483 9,879
Real estate construction and development:
Nonaccrual................................................... 21,764 13,344
Real estate mortgage:
One-to-four family residential:
Nonaccrual............................................... 21,567 18,885
Restructured............................................. 8 9
Multi-family residential loans:
Nonaccrual............................................... 269 272
Commercial real estate loans:
Nonaccrual............................................... 6,410 6,260
Consumer and installment:
Nonaccrual................................................... 17 81
---------- ---------
Total nonperforming loans.............................. 62,518 48,730
Other real estate................................................. 8,505 6,433
---------- ---------
Total nonperforming assets............................. $ 71,023 55,163
========== =========
Loans, net of unearned discount................................... $7,932,129 7,666,481
========== =========
Loans past due 90 days or more and still accruing................. $ 4,152 5,653
========== =========
Ratio of:
Allowance for loan losses to loans.............................. 1.79% 1.90%
Nonperforming loans to loans.................................... 0.79 0.64
Allowance for loan losses to nonperforming loans................ 227.37 299.05
Nonperforming assets to loans and other real estate............. 0.89 0.72
========== =========
Nonperforming loans, consisting of loans on nonaccrual status and restructured
loans, were $62.5 million at March 31, 2007, compared to $48.7 million at
December 31, 2006 and $67.1 million at March 31, 2006. Nonperforming loans were
0.79% of loans, net of unearned discount, at March 31, 2007, compared to 0.64%
and 0.94% of loans, net of unearned discount, at December 31, 2006 and March 31,
2006, respectively. Other real estate owned was $8.5 million, $6.4 million and
$3.3 million at March 31, 2007, December 31, 2006 and March 31, 2006,
respectively. Our nonperforming assets, consisting of nonperforming loans and
other real estate owned, were $71.0 million at March 31, 2007, compared to $55.2
million at December 31, 2006 and $70.4 million at March 31, 2006. Additionally,
loans past due 90 days or more and still accruing interest were $4.2 million at
March 31, 2007, compared to $5.7 million and $2.2 million at December 31, 2006
and March 31, 2006, respectively.
Nonperforming loans at March 31, 2007 increased $13.8 million, or 28.3%, from
nonperforming loans at December 31, 2006. Nonperforming loans at December 31,
2006 decreased $18.4 million, or 27.4%, from nonperforming loans at March 31,
2006. During 2006, we successfully reduced the overall level of our
nonperforming loans through the sale of nonperforming loans, payoffs on loans
and the strengthening of certain credit relationships. However, we experienced
an increase in the overall level of our nonperforming loans during the first
quarter of 2007, primarily in our real estate construction and development and
residential real estate mortgage loan portfolios. Specifically, the increase
reflects the deterioration of two residential construction projects totaling
$10.2 million and the placement of these credits on nonaccrual status during the
first quarter of 2007. The increase during 2007 also reflects increased levels
of delinquencies within our one-to-four family residential portfolio driven by:
(a) current market conditions, including slowdowns in unit sales; (b)
repurchases of certain residential mortgage loans sold with recourse, primarily
due to early payment default, that were placed back into our one-to-four family
residential loan portfolio; and (c) the global impact of sub-prime products
experienced throughout the mortgage banking industry. Our involvement in the
sub-prime market has been limited to the origination and subsequent sale of
these loans in the secondary market, and represents only a portion of our
mortgage banking loan origination volumes. During the first quarter of 2007, we
curtailed our loan originations of this product following a decline in bid
prices and in market liquidity for these loan products. We expect the
curtailment of these activities will likely reduce the amount of future
noninterest income that we will realize, in comparison to the level of
noninterest income that we had historically generated through the origination
and sale of these sub-prime loan products. In addition, in March 2007, we
entered into a commitment to sell certain repurchased residential mortgage loans
that were either nonperforming loans or were deemed by management to be problem
credits. Subsequent to recording loan charge-offs of $3.5 million to reduce
these loans to their estimated fair value at the time of transfer, we
transferred approximately $17.5 million of certain repurchased residential
mortgage loans to our held for sale portfolio, including approximately $14.5
million of nonperforming residential mortgage loans. The sale of the majority of
these loans was completed in April 2007, as further described in Note 14 to our
Consolidated Financial Statements.
We recorded net loan charge-offs of $10.0 million for the three months ended
March 31, 2007, compared to net loan recoveries of $3.3 million for the three
months ended March 31, 2006. Net loan charge-offs recorded for the three months
ended March 31, 2007 include loan charge-offs of $11.7 million, partially offset
by loan recoveries of $1.7 million. The increased level of net loan charge-offs
recorded for the first quarter of 2007 reflects $5.5 million of charge-offs
associated with our one-to-four family residential portfolio, of which $3.5
million was recorded in conjunction with the transfer of certain repurchased
residential mortgage loans to our loans held for sale portfolio, as previously
discussed. Net loan charge-offs for the first quarter of 2007 also include a
charge-off of $2.5 million on a residential development and construction credit
relationship. Net loan recoveries recorded for the three months ended March 31,
2006 reflect loan recoveries of $6.8 million, including a loan recovery of $5.0
million on the payoff of a single loan, partially offset by loan charge-offs of
$3.4 million. Our net loan charge-offs were 0.13% of average loans for the first
three months of 2007, representing a significant increase over the same quarter
last year. Our net loan recoveries for the first three months of 2006 were 0.05%
of average loans. Our allowance for loan losses was $142.1 million at March 31,
2007, compared to $145.7 million at December 31, 2006 and $140.2 million at
March 31, 2006. Our allowance for loan losses as a percentage of loans, net of
unearned discount, was 1.79%, 1.90% and 1.96% at March 31, 2007, December 31,
2006 and March 31, 2006, respectively. Our allowance for loan losses as a
percentage of nonperforming loans was 227.37%, 299.05% and 209.00% at March 31,
2007, December 31, 2006 and March 31, 2006, respectively. We continue to closely
monitor our loan portfolio and address the ongoing challenges posed by the
current economic environment and market conditions, including reduced loan
demand and highly competitive markets and pricing within certain sectors of our
loan portfolio. We consider this in our overall assessment of the adequacy of
the allowance for loan losses.
Each month, the credit administration department provides management with
detailed lists of loans on the watch list and summaries of the entire loan
portfolio by risk rating. These are coupled with analyses of changes in the risk
profile of the portfolio, changes in past-due and nonperforming loans and
changes in watch list and classified loans over time. In this manner, we
continually monitor the overall increases or decreases in the level of risk in
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 loan 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.
Changes in the allowance for loan losses for the three months ended March 31,
2007 and 2006 were as follows:
Three Months Ended
March 31,
------------------------
2007 2006
---- ----
(dollars expressed in thousands)
Balance, beginning of period............................................. $ 145,729 135,330
Acquired allowance for loan losses....................................... 2,925 576
--------- ---------
148,654 135,906
--------- ---------
Loans charged-off........................................................ (11,715) (3,445)
Recoveries of loans previously charged-off............................... 1,709 6,774
--------- ---------
Net loan (charge-offs) recoveries................................... (10,006) 3,329
--------- ---------
Provision for loan losses................................................ 3,500 1,000
--------- ---------
Balance, end of period................................................... $ 142,148 140,235
========= =========
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
$1.88 billion and $1.86 billion at March 31, 2007 and December 31, 2006,
respectively.
The following table presents the maturity structure of these other sources of
funds, which consists of certificates of deposit of $100,000 or more and other
borrowings, including our notes payable, at March 31, 2007:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less............................. $ 514,329 175,842 690,171
Over three months through six months............. 347,576 5,000 352,576
Over six months through twelve months............ 449,972 13,000 462,972
Over twelve months............................... 155,433 220,985 376,418
---------- -------- ----------
Total....................................... $1,467,310 414,827 1,882,137
========== ======== ==========
In addition to these sources of funds, First Bank has established a borrowing
relationship with the Federal Reserve Bank of St. Louis. This borrowing
relationship, which is secured by commercial loans, provides an additional
liquidity facility that may be utilized for contingency purposes. At March 31,
2007 and December 31, 2006, First Bank's borrowing capacity under the agreement
was approximately $634.6 million and $639.1 million, respectively. In addition,
First Bank's borrowing capacity through its relationship with the FHLB was
approximately $679.4 million and $666.0 million at March 31, 2007 and December
31, 2006, respectively. We had FHLB advances outstanding of $4.0 million at
March 31, 2007 and December 31, 2006, all of which represent advances assumed in
conjunction with various acquisitions.
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 March 31, 2007 were as follows:
Less than 1-3 3-5 Over
1 Year Years Years 5 Years Total (1)
------ ------ ----- ------- -----
(dollars expressed in thousands)
Operating leases....................... $ 14,818 26,489 15,964 38,169 95,440
Certificates of deposit (2)............ 3,304,284 444,459 105,948 11,606 3,866,297
Other borrowings (2)................... 173,842 159 200,826 -- 374,827
Notes payable (2)...................... 20,000 20,000 -- -- 40,000
Subordinated debentures (2)............ 25,774 -- -- 302,147 327,921
Other contractual obligations.......... 1,556 236 136 128 2,056
----------- -------- -------- -------- ----------
Total............................. $ 3,540,274 491,343 322,874 352,050 4,706,541
=========== ======== ======== ======== ==========
---------------
(1) Amounts exclude FIN 48 unrecognized tax liabilities of $2.5 million and related accrued
interest expense of $1.1 million for which the timing of payment of such liabilities cannot
be reasonably estimated as of March 31, 2007.
(2) Amounts exclude the related interest expense accrued on these obligations as of March 31, 2007.
Management believes the available liquidity and operating results of First Bank
will be sufficient to provide funds for growth and to permit the distribution of
dividends to us sufficient to meet our operating and debt service requirements,
both on a short-term and long-term basis, and to pay interest on the
subordinated debentures that we issued to our affiliated statutory and business
financing trusts.
Effects of New Accounting Standards
In February 2006, the FASB issued Statement of Financial Accounting Standards,
or 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 implemented SFAS No. 155 on January 1,
2007, which did not have a material impact on our financial condition or results
of operations.
In March 2006, the FASB issued SFAS No. 156 -- Accounting for Servicing of
Financial Assets. SFAS No.156, an amendment of FASB SFAS No. 140 -- Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, 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 FIN 48 -- Accounting for Uncertainty in Income
Taxes, an Interpretation of SFAS No. 109 -- Accounting for Income Taxes. FIN 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. FIN 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. We implemented
FIN 48 on January 1, 2007, as further described in Note 1 and Note 12 to our
Consolidated Financial Statements.
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 their 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 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2006, our risk management program's simulation model indicated a
loss of projected net interest income should interest rates decline. We are
"asset-sensitive," indicating that our assets would generally reprice with
changes in rates more rapidly than our liabilities. While a decline in interest
rates of less than 100 basis points was projected to have a relatively minimal
impact on our net interest income, an instantaneous parallel decline in the
interest yield curve of 100 basis points indicated a pre-tax projected loss of
approximately 3.7% of net interest income, based on assets and liabilities at
December 31, 2006. At March 31, 2007, we remain in an "asset-sensitive" position
and thus, remain subject to a higher level of risk in a declining interest rate
environment. Although we do not anticipate that instantaneous shifts in the
yield curve as projected in our simulation model are likely, these are
indications of the effects that changes in interest rates would have over time.
Our asset-sensitive position, coupled with reduced income associated with our
interest rate swap agreements and increases in prevailing interest rates, is
reflected in our net interest margin for the three months ended March 31, 2007
as compared to the comparable period in 2006 and further discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
During the first quarter of 2007, we reduced our activities in the sub-prime
residential mortgage market in response to increased market risk experienced
within the industry associated with these product lines. While we are
susceptible to the risk of future repurchases of loans associated with the
recent sales of these loans, we believe such risk will significantly decline
over time. Our reduced activities within the sub-prime market will also likely
result in a decline in our future noninterest income, as further discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
During the three months ended March 31, 2007, our asset-sensitive position and
overall susceptibility to market risks have not changed materially. Prevailing
interest rates have remained relatively constant during the three months ended
March 31, 2007.
ITEM 4 - CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our "disclosure controls and procedures" (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the
Exchange Act), as of the end of the period covered by this report. Based on such
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that, as of the end of such period, the Company's disclosure controls
and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act. There
have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit Number Description
-------------- -----------
4.1 Junior Subordinated Indenture between First Banks,
Inc. and Wilmington Trust Company, as Trustee, dated
as of February 23, 2007 - filed herewith.
4.2 Amended and Restated Trust Agreement of First Bank
Statutory Trust VIII among First Banks, Inc., as
Depositor, Wilmington Trust Company, as Property
Trustee and as Delaware Trustee, and Terrance M.
McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as
Administrative Trustees, dated as of February 23,
2007 - filed herewith.
4.3 Guarantee Agreement of First Bank Statutory Trust
VIII between First Banks, Inc., as Guarantor, and
Wilmington Trust Company, as Guarantee Trustee, dated
as of February 23, 2007 - filed herewith.
4.4 Purchase Agreement among First Banks, Inc., First
Bank Statutory Trust VIII and TWE, Ltd., and Credit
Suisse, acting through its Cayman Islands branch, as
Purchasers, dated as of February 23, 2007 - filed
herewith.
4.5 Floating Rate Junior Subordinated Note due 2037 of
First Banks, Inc., dated as of February 23, 2007 -
filed herewith.
4.6 Junior Subordinated Note Subscription Agreement
between First Banks, Inc. and First Bank Statutory
Trust VIII, dated as of February 23, 2007 - filed
herewith.
4.7 Preferred Securities Certificate P-1 of First Bank
Statutory Trust VIII, dated as of February 23, 2007 -
filed herewith.
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Executive Officer - filed herewith.
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Financial Officer - filed herewith.
32.1 Section 1350 Certifications of Chief Executive
Officer - filed herewith.
32.2 Section 1350 Certifications of Chief Financial
Officer - filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: May 14, 2007
FIRST BANKS, INC.
By: /s/ Terrance M. McCarthy
------------------------------------------
Terrance M. McCarthy
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Lisa K. Vansickle
------------------------------------------
Lisa K. Vansickle
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)