UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 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............................................................. 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 36
ITEM 4. CONTROLS AND PROCEDURES................................................................... 36
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 37
ITEM 6. EXHIBITS.................................................................................. 37
SIGNATURES............................................................................................. 38
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2007 2006
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................ $ 190,903 215,974
Short-term investments......................................................... 239,305 153,583
----------- ----------
Total cash and cash equivalents........................................... 430,208 369,557
----------- ----------
Investment securities:
Trading........................................................................ 68,110 81,168
Available for sale............................................................. 1,265,437 1,359,729
Held to maturity (fair value of $19,497 and $23,971, respectively)............. 19,944 24,049
----------- ----------
Total investment securities............................................... 1,353,491 1,464,946
----------- ----------
Loans:
Commercial, financial and agricultural......................................... 2,082,303 1,934,912
Real estate construction and development....................................... 1,952,495 1,832,504
Real estate mortgage........................................................... 3,678,997 3,615,148
Consumer and installment....................................................... 90,452 83,008
Loans held for sale............................................................ 197,320 216,327
----------- ----------
Total loans............................................................... 8,001,567 7,681,899
Unearned discount.............................................................. (12,991) (15,418)
Allowance for loan losses...................................................... (142,922) (145,729)
----------- ----------
Net loans................................................................. 7,845,654 7,520,752
----------- ----------
Bank premises and equipment, net.................................................... 209,885 178,417
Goodwill and other intangible assets................................................ 317,786 295,382
Bank-owned life insurance........................................................... 114,768 113,778
Deferred income taxes............................................................... 106,683 100,175
Other assets........................................................................ 100,260 115,707
----------- ----------
Total assets.............................................................. $10,478,735 10,158,714
=========== ==========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand..................................................... $ 1,250,173 1,281,108
Interest-bearing demand........................................................ 932,114 981,939
Savings........................................................................ 2,710,802 2,352,575
Time deposits of $100 or more.................................................. 1,475,110 1,419,579
Other time deposits............................................................ 2,385,195 2,407,885
----------- ----------
Total deposits............................................................ 8,753,394 8,443,086
Other borrowings.................................................................... 434,971 373,899
Notes payable....................................................................... 35,000 65,000
Subordinated debentures............................................................. 302,166 297,966
Deferred income taxes............................................................... 39,591 42,826
Accrued expenses and other liabilities.............................................. 75,750 130,033
Minority interest in subsidiary..................................................... 5,568 5,469
----------- ----------
Total liabilities......................................................... 9,646,440 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................................................................... 825,979 784,864
Accumulated other comprehensive loss................................................ (22,347) (13,092)
----------- ----------
Total stockholders' equity................................................ 832,295 800,435
----------- ----------
Total liabilities and stockholders' equity................................ $10,478,735 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 Six Months Ended
June 30, June 30,
-------------------- --------------------
2007 2006 2007 2006
---- ---- ---- ----
Interest income:
Interest and fees on loans........................................ $ 157,822 141,728 311,579 273,062
Investment securities............................................. 17,182 14,856 33,374 29,633
Short-term investments............................................ 2,315 1,147 4,193 2,270
--------- -------- -------- --------
Total interest income........................................ 177,319 157,731 349,146 304,965
--------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand......................................... 2,313 1,947 4,929 3,775
Savings......................................................... 20,460 12,255 38,797 23,438
Time deposits of $100 or more................................... 18,204 14,258 35,234 25,814
Other time deposits............................................. 28,180 23,146 55,970 43,180
Other borrowings.................................................. 4,941 3,246 9,292 7,941
Notes payable..................................................... 636 1,477 1,544 2,897
Subordinated debentures........................................... 5,814 5,722 11,748 11,374
--------- -------- -------- --------
Total interest expense....................................... 80,548 62,051 157,514 118,419
--------- -------- -------- --------
Net interest income.......................................... 96,771 95,680 191,632 186,546
Provision for loan losses.............................................. 5,500 5,000 9,000 6,000
--------- -------- -------- --------
Net interest income after provision for loan losses.......... 91,271 90,680 182,632 180,546
--------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees..... 11,661 10,996 22,269 21,228
Gain on loans sold and held for sale.............................. 4,558 6,099 8,484 12,920
Net loss on investment securities................................. (1,533) (1,216) (1,240) (3,987)
Bank-owned life insurance investment income....................... 999 652 1,712 1,767
Investment management income...................................... 1,542 2,296 3,052 4,597
Insurance fee and commission income............................... 1,868 1,834 3,563 1,834
Other............................................................. 4,942 5,218 10,780 13,017
--------- -------- -------- --------
Total noninterest income..................................... 24,037 25,879 48,620 51,376
--------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits.................................... 43,732 42,610 88,960 82,104
Occupancy, net of rental income................................... 7,747 6,425 15,168 12,660
Furniture and equipment........................................... 4,676 4,116 9,227 8,079
Postage, printing and supplies.................................... 1,649 1,988 3,431 3,414
Information technology fees....................................... 9,189 9,190 18,520 18,251
Legal, examination and professional fees.......................... 2,681 2,408 4,414 4,505
Amortization of intangible assets................................. 3,227 1,680 6,153 3,197
Advertising and business development.............................. 1,670 2,150 3,570 3,877
Charitable contributions.......................................... 1,462 1,707 3,378 3,324
Other............................................................. 8,402 8,777 17,315 16,455
--------- -------- -------- --------
Total noninterest expense.................................... 84,435 81,051 170,136 155,866
--------- -------- -------- --------
Income before provision for income taxes and minority
interest in income (loss) of subsidiary.................. 30,873 35,508 61,116 76,056
Provision for income taxes............................................. 11,092 13,500 22,042 25,203
--------- -------- -------- --------
Income before minority interest in income (loss)
of subsidiary............................................ 19,781 22,008 39,074 50,853
Minority interest in income (loss) of subsidiary....................... 31 (78) 101 (236)
--------- -------- -------- -------
Net income................................................... 19,750 22,086 38,973 51,089
Preferred stock dividends.............................................. 132 132 328 328
--------- -------- -------- --------
Net income available to common stockholders.................. $ 19,618 21,954 38,645 50,761
========= ======== ======== ========
Basic earnings per common share........................................ $ 829.17 927.86 1,633.29 2,145.35
========= ======== ======== ========
Diluted earnings per common share...................................... $ 821.63 916.31 1,620.45 2,118.11
========= ======== ======== ========
Weighted average shares of common stock outstanding.................... 23,661 23,661 23,661 23,661
========= ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Six Months Ended June 30, 2007 and 2006 and Six 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
-------
Six months ended June 30, 2006:
Comprehensive income: (1)
Net income............................................ -- -- -- -- 51,089 -- 51,089
Other comprehensive loss, net of tax:
Unrealized losses on investment securities.......... -- -- -- -- -- (11,903) (11,903)
Reclassification adjustment for investment
securities losses included in net income.......... -- -- -- -- -- 1,739 1,739
Derivative instruments:
Current period transactions....................... -- -- -- -- -- (162) (162)
-------
Total comprehensive income.............................. 40,763
Class A preferred stock dividends, $0.50 per share...... -- -- -- -- (321) -- (321)
Class B preferred stock dividends, $0.04 per share...... -- -- -- -- (7) -- (7)
------- --- ----- ----- ------- ------- -------
Balances, June 30, 2006.................................... 12,822 241 5,915 5,910 724,717 (30,232) 719,373
-------
Six months ended December 31, 2006:
Comprehensive income:
Net income............................................ -- -- -- -- 60,605 -- 60,605
Other comprehensive income, net of tax:
Unrealized gains on investment securities........... -- -- -- -- -- 15,569 15,569
Reclassification adjustment for investment
securities gains included in net income........... -- -- -- -- -- (497) (497)
Derivative instruments:
Current period transactions....................... -- -- -- -- -- 2,068 2,068
-------
Total comprehensive income.............................. 77,745
Adjustment for the utilization of net operating
losses associated with prior acquisitions........... -- -- -- 3,775 -- -- 3,775
Class A preferred stock dividends, $0.70 per share...... -- -- -- -- (448) -- (448)
Class B preferred stock dividends, $0.07 per share...... -- -- -- -- (10) -- (10)
------- --- ----- ----- ------- ------- -------
Balances, December 31, 2006................................ 12,822 241 5,915 9,685 784,864 (13,092) 800,435
-------
Six months ended June 30, 2007:
Comprehensive income: (1)
Net income............................................ -- -- -- -- 38,973 -- 38,973
Other comprehensive loss, net of tax:
Unrealized losses on investment securities.......... -- -- -- -- -- (8,565) (8,565)
Reclassification adjustment for investment
securities gains included in net income........... -- -- -- -- -- (94) (94)
Derivative instruments:
Current period transactions....................... -- -- -- -- -- (596) (596)
-------
Total comprehensive income.............................. 29,718
Cumulative effect of change in accounting principle..... -- -- -- -- 2,470 -- 2,470
Class A preferred stock dividends, $0.50 per share...... -- -- -- -- (321) -- (321)
Class B preferred stock dividends, $0.04 per share...... -- -- -- -- (7) -- (7)
------- --- ----- ----- ------- ------- -------
Balances, June 30, 2007.................................... $12,822 241 5,915 9,685 825,979 (22,347) 832,295
======= === ===== ===== ======= ======= =======
- ------------------
(1) Disclosure of comprehensive income:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2007 2006 2007 2006
---- ---- ---- ----
Comprehensive income:
Net income........................................................ $ 19,750 22,086 38,973 51,089
Other comprehensive loss, net of tax:
Unrealized losses on investment securities..................... (11,185) (8,343) (8,565) (11,903)
Reclassification adjustment for investment securities
losses (gains) included in net income....................... -- 201 (94) 1,739
Derivative instruments:
Current period transactions................................. (2,318) 141 (596) (162)
-------- ------- ------- -------
Total comprehensive income............................................ $ 6,247 14,085 29,718 40,763
======== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Six Months Ended
June 30,
----------------------
2007 2006
---- ----
Cash flows from operating activities:
Net income.......................................................................... $ 38,973 51,089
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment...................... 9,774 8,975
Amortization, net of accretion.................................................... 8,311 7,018
Originations of loans held for sale............................................... (372,254) (369,752)
Proceeds from sales of loans held for sale........................................ 404,076 444,231
Payments received on loans held for sale.......................................... 11,506 19,163
Provision for loan losses......................................................... 9,000 6,000
Provision for current income taxes................................................ 19,943 22,143
Provision for deferred income taxes............................................... 2,099 3,060
Decrease in accrued interest receivable........................................... 2,317 153
(Decrease) increase in accrued interest payable................................... (5,403) 527
Proceeds from sales of trading securities......................................... 13,177 4,463
Maturities of trading securities.................................................. 16,476 304
Purchases of trading securities................................................... (17,939) (53,580)
Gain on loans sold and held for sale.............................................. (8,484) (12,920)
Net loss on investment securities................................................. 1,240 3,987
Other operating activities, net................................................... (3,754) (2,785)
Minority interest in income (loss) of subsidiary.................................. 101 (236)
--------- --------
Net cash provided by operating activities...................................... 129,159 131,840
--------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received.......... (16,233) (221,092)
Proceeds from sales of investment securities available for sale..................... 487 197,027
Maturities of investment securities available for sale.............................. 606,058 659,466
Maturities of investment securities held to maturity................................ 4,223 2,053
Purchases of investment securities available for sale............................... (520,751) (515,951)
Purchases of investment securities held to maturity................................. (134) (865)
Net increase in loans............................................................... (205,254) (543,069)
Recoveries of loans previously charged-off.......................................... 3,546 8,450
Purchases of bank premises and equipment............................................ (36,244) (10,670)
Other investing activities, net..................................................... 4,088 (1,820)
--------- --------
Net cash used in investing activities.......................................... (160,214) (426,471)
--------- --------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits.................................. 224,746 (53,534)
(Decrease) increase in time deposits................................................ (73,677) 442,740
Decrease in Federal Home Loan Bank advances......................................... (33,283) (18,328)
Increase (decrease) in securities sold under agreements to repurchase............... 61,155 (197,985)
Repayments of notes payable......................................................... (30,000) (15,000)
Proceeds from issuance of subordinated debentures................................... 25,774 87,631
Repayments of subordinated debentures............................................... (82,681) --
Payment of preferred stock dividends................................................ (328) (328)
--------- --------
Net cash provided by financing activities...................................... 91,706 245,196
--------- --------
Net increase (decrease) in cash and cash equivalents........................... 60,651 (49,435)
Cash and cash equivalents, beginning of period........................................... 369,557 286,652
--------- --------
Cash and cash equivalents, end of period................................................. $ 430,208 237,217
========= ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest on liabilities........................................................... $ 162,917 117,892
Income taxes...................................................................... (7,462) 11,290
========= ========
Noncash investing and financing activities:
Securitization and transfer of loans to investment securities..................... $ -- 138,944
Loans transferred to other real estate............................................ 6,400 3,452
========= ========
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 and six months ended June 30, 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. (collectively, UPAC); and Small Business Loan Source LLC
(SBLS LLC). All of the subsidiaries are wholly owned, except for SBLS LLC, which
is 76.0% owned by First Bank and 24.0% owned by First Capital America, Inc.
(FCA) as of June 30, 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, INTEGRATION COSTS AND OTHER CORPORATE TRANSACTIONS
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 $23.1 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 $219,000 as of June 30, 2007, as summarized in the following table,
is comprised of contractual obligations under salary continuation agreements to
five individuals with remaining terms ranging from approximately one 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
Six Months Ended June 30, 2007:
Amounts accrued during the period.................... 100 512 612
Payments............................................. (267) (512) (779)
----- ---- ----
Balance at June 30, 2007................................. $ 219 -- 219
===== ==== ====
Other Corporate Transactions. On May 18, 2007, First Bank entered into
a Purchase and Assumption Agreement providing for Synergy Bank, SSB, a
subsidiary of Premier Bancshares, Inc., to acquire First Bank's two banking
offices located in Denton and Garland, Texas (collectively, Branch Offices). As
further described in Note 14 to the Consolidated Financial Statements, First
Bank completed its sale of the Branch Offices on July 19, 2007.
During the six months ended June 30, 2007, First Bank opened the
following de novo branch offices:
Branch Office Location Date Opened
---------------------- -----------
St. Louis, Missouri January 22, 2007
Katy (Houston), Texas February 26, 2007
Lincoln (Sacramento), California March 12, 2007
Dardenne Prairie (St. Louis), Missouri May 9, 2007
Chula Vista (San Diego), California June 25, 2007
(3) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of amortization, were
comprised of the following at June 30, 2007 and December 31, 2006:
June 30, 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 (24,184) 60,867 (18,850)
Customer list intangibles............... 23,320 (1,660) 23,320 (913)
Goodwill associated with
P&A Transactions (1)................. 2,210 (1,360) 2,210 (1,288)
--------- ------- ------- -------
Total............................. $ 90,897 (27,204) 86,397 (21,051)
========= ======= ======= =======
Unamortized intangible assets:
Goodwill associated with
stock purchases...................... $ 254,093 230,036
========= =======
------------------
(1) P&A Transactions represent transactions structured as purchases of certain assets and assumption
of selected liabilities.
Amortization of intangible assets was $3.2 million and $6.2 million for
the three and six months ended June 30, 2007, respectively, and $1.7 million and
$3.2 million for the comparable periods in 2006. 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......................................................... $ 6,302
2008................................................................... 12,606
2009................................................................... 10,703
2010................................................................... 10,242
2011................................................................... 7,941
2012................................................................... 2,392
Thereafter............................................................. 13,507
--------
Total............................................................... $ 63,693
========
Changes in the carrying amount of goodwill for the three and six months
ended June 30, 2007 and 2006 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2007 2006 2007 2006
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $253,504 181,955 230,958 167,056
Goodwill acquired during the period................. 1,476 44,910 24,659 59,806
Acquisition-related adjustments (1)................. -- (18) (602) 20
Amortization - P&A Transactions..................... (37) (36) (72) (71)
-------- -------- -------- --------
Balance, end of period.............................. $254,943 226,811 254,943 226,811
======== ======== ======== ========
------------------
(1) Acquisition-related adjustments recorded in 2007 pertain to the acquisition of San Diego
Community Bank in August 2006. Acquisition-related adjustments include additional purchase
accounting adjustments necessary to appropriately adjust preliminary goodwill recorded at the
time of the acquisition, which was based upon current estimates available at that time, to
reflect the receipt of additional valuation data.
(4) SERVICING RIGHTS
Mortgage Banking Activities. At June 30, 2007 and December 31, 2006,
First Banks serviced mortgage loans for others totaling $983.0 million and $1.04
billion, respectively. Changes in mortgage servicing rights, net of
amortization, for the three and six months ended June 30, 2007 and 2006 were as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2007 2006 2007 2006
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $5,407 7,034 5,867 6,623
Originated mortgage servicing rights (1)............ 322 1,270 655 2,728
Amortization........................................ (725) (1,067) (1,518) (2,114)
------ ------ ------ ------
Balance, end of period.............................. $5,004 7,237 5,004 7,237
====== ====== ====== ======
-------------------
(1) In March 2006, First Banks capitalized mortgage servicing rights of $1.2 million associated
with the securitization of $77.1 million of certain residential mortgage loans held in the
Company's loan portfolio, resulting in the recognition of $1.2 million in loan servicing
income related to the future servicing of the underlying loans. Additionally, in April 2006,
First Banks capitalized mortgage servicing rights of $927,000 associated with the
securitization of $61.8 million of certain residential mortgage loans held in the Company's
loan portfolio, resulting in the recognition of $927,000 in loan servicing income related to
the future servicing of the underlying loans.
First Banks did not incur any impairment of mortgage servicing rights
during the three and six months ended June 30, 2007 and 2006.
Amortization of mortgage servicing rights at June 30, 2007 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2007 remaining........................................................ $ 998
2008.................................................................. 1,248
2009.................................................................. 810
2010.................................................................. 631
2011.................................................................. 518
2012.................................................................. 518
Thereafter............................................................ 281
-------
Total............................................................. $ 5,004
=======
Other Servicing Activities. At June 30, 2007 and December 31, 2006,
First Banks serviced United States Small Business Administration (SBA) loans for
others totaling $145.6 million and $143.4 million, respectively. Changes in SBA
servicing rights, net of amortization and impairment, for the three and six
months ended June 30, 2007 and 2006 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2007 2006 2007 2006
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $ 7,795 8,942 8,064 9,489
Originated SBA servicing rights..................... 523 146 990 318
Amortization........................................ (403) (417) (816) (858)
Impairment.......................................... (295) (462) (618) (740)
------- ------ ------ ------
Balance, end of period.............................. $ 7,620 8,209 7,620 8,209
======= ====== ====== ======
First Banks recognized impairment of $295,000 and $618,000 for the
three and six months ended June 30, 2007, respectively, and $462,000 and
$740,000 for the comparable periods in 2006. The impairment recorded for the
three and six months ended June 30, 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
recorded for the three and six months ended June 30, 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 June 30, 2007 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2007 remaining........................................................ $ 779
2008.................................................................. 1,340
2009.................................................................. 1,101
2010.................................................................. 902
2011.................................................................. 737
2012.................................................................. 600
Thereafter............................................................ 2,161
-------
Total............................................................. $ 7,620
=======
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of basic and diluted earnings per
share (EPS) for the three and six months ended June 30, 2007 and 2006:
Per Share
Income Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Three months ended June 30, 2007:
Basic EPS - income available to common stockholders...... $19,618 23,661 $ 829.17
Effect of dilutive securities:
Class A convertible preferred stock.................... 128 373 (7.54)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $19,746 24,034 $ 821.63
======= ======= =========
Three months ended June 30, 2006:
Basic EPS - income available to common stockholders...... $21,954 23,661 $ 927.86
Effect of dilutive securities:
Class A convertible preferred stock.................... 128 438 (11.55)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $22,082 24,099 $ 916.31
======= ======= =========
Six months ended June 30, 2007:
Basic EPS - income available to common stockholders...... $38,645 23,661 $1,633.29
Effect of dilutive securities:
Class A convertible preferred stock.................... 321 385 (12.84)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $38,966 24,046 $1,620.45
======= ======= =========
Six months ended June 30, 2006:
Basic EPS - income available to common stockholders...... $50,761 23,661 $2,145.35
Effect of dilutive securities:
Class A convertible preferred stock.................... 321 456 (27.24)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $51,082 24,117 $2,118.11
======= ======= =========
(6) TRANSACTIONS WITH RELATED PARTIES
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and members of his immediate family, provides information
technology, item processing and various related services to First Banks, Inc.
and its subsidiaries. Fees paid under agreements with First Services, L.P. were
$7.7 million and $15.5 million for the three and six months ended June 30, 2007,
respectively, and $7.3 million and $15.0 million for the comparable periods in
2006. First Services, L.P. leases information technology and other equipment
from First Bank. During the three months ended June 30, 2007 and 2006, First
Services, L.P. paid First Bank $885,000 and $1.0 million, respectively, and
during the six months ended June 30, 2007 and 2006, First Services, L.P. paid
First Bank $2.0 million and $2.2 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 $1.4 million and $2.4 million for the three and six months ended
June 30, 2007, respectively, and $809,000 and $1.4 million, respectively, for
the comparable periods in 2006, 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. (Foundation), 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 second quarter of 2007, First Bank contributed $1.3 million in cash
to the Foundation, thereby bringing the total value of charitable contributions
to the Foundation to $1.3 million and $3.0 million for the three and six months
ended June 30, 2007, respectively. During the three and six months ended June
30, 2006, First Bank contributed $2.5 million and $3.0 million in cash,
respectively, to the Foundation.
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 $197,000 for the three and six
months ended June 30, 2007, respectively, and $105,000 and $191,000 for the
comparable periods in 2006.
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%. On June 29, 2007, First Bank
contributed an additional $7.8 million to SBLS LLC in the form of a capital
contribution, thereby increasing First Bank's ownership of SBLS LLC to 76.0% and
decreasing FCA's ownership to 24.0%.
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 $51.8 million and $47.5 million at
June 30, 2007 and December 31, 2006, respectively. Interest expense recorded
under the Agreement by SBLS LLC for the three and six months ended June 30, 2007
was $947,000 and $1.9 million, respectively, and $652,000 and $1.2 million for
the comparable periods in 2006. 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 $51.4 million and $55.9 million at June 30, 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 $471,000 in payments were made during 2005 and an
additional $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 six months ended June 30, 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 June 30, 2007, First Banks and First Bank were each well
capitalized. As of June 30, 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 June 30, 2007 and December 31, 2006, First Banks' and First Bank's
required and actual capital ratios were as follows:
Actual
----------------------------------------- For To be Well
June 30, 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.......................... $ 955,729 10.05% $ 929,688 10.25% 8.0% 10.0%
First Bank........................... 956,810 10.08 925,013 10.23 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks.......................... 820,810 8.63 789,967 8.71 4.0 6.0
First Bank........................... 837,825 8.83 811,530 8.97 4.0 6.0
Tier 1 capital (to average assets):
First Banks.......................... 820,810 8.14 789,967 8.13 3.0 5.0
First Bank........................... 837,825 8.33 811,530 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 June 30, 2007, would reduce First Banks' Tier 1 capital (to
risk-weighted assets) and Tier 1 capital (to average assets) to 7.73% and 7.29%,
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 Consolidated Totals
------------------------ ------------------------- -------------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................. $ 1,330,037 1,439,118 23,454 25,828 1,353,491 1,464,946
Loans, net of unearned discount....... 7,988,576 7,666,481 -- -- 7,988,576 7,666,481
Goodwill and other intangible assets.. 317,786 295,382 -- -- 317,786 295,382
Total assets.......................... 10,450,564 10,116,246 28,171 42,468 10,478,735 10,158,714
Deposits.............................. 8,779,348 8,550,062 (25,954) (106,976) 8,753,394 8,443,086
Other borrowings...................... 434,971 373,899 -- -- 434,971 373,899
Notes payable......................... -- -- 35,000 65,000 35,000 65,000
Subordinated debentures............... -- -- 302,166 297,966 302,166 297,966
Stockholders' equity.................. 1,128,623 1,086,876 (296,328) (286,441) 832,295 800,435
=========== ========== ========= ========= ========== ==========
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
------------------------ ------------------------- -------------------------
Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30,
------------------------ ------------------------- -------------------------
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income....................... $ 177,077 157,503 242 228 177,319 157,731
Interest expense...................... 74,123 54,979 6,425 7,072 80,548 62,051
----------- ---------- --------- --------- ---------- ----------
Net interest income................ 102,954 102,524 (6,183) (6,844) 96,771 95,680
Provision for loan losses............. 5,500 5,000 -- -- 5,500 5,000
----------- ---------- --------- --------- ---------- ----------
Net interest income after provision
for loan losses.................. 97,454 97,524 (6,183) (6,844) 91,271 90,680
----------- ---------- --------- --------- ---------- ----------
Noninterest income.................... 24,180 26,015 (143) (136) 24,037 25,879
Amortization of intangible assets..... 3,227 1,680 -- -- 3,227 1,680
Other noninterest expense............. 81,174 78,766 34 605 81,208 79,371
----------- ---------- --------- --------- ---------- ----------
Income before provision for income
taxes and minority interest in
income (loss) of subsidiary...... 37,233 43,093 (6,360) (7,585) 30,873 35,508
Provision for income taxes............ 13,329 16,152 (2,237) (2,652) 11,092 13,500
----------- ---------- --------- --------- ---------- ----------
Income before minority interest in
income (loss) of subsidiary...... 23,904 26,941 (4,123) (4,933) 19,781 22,008
Minority interest in income (loss)
of subsidiary.................... 31 (78) -- -- 31 (78)
----------- ---------- --------- --------- ---------- ----------
Net income......................... $ 23,873 27,019 (4,123) (4,933) 19,750 22,086
=========== ========== ========= ========= ========== ==========
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
------------------------ ------------------------- -------------------------
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
------------------------ ------------------------- -------------------------
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income....................... $ 348,646 304,527 500 438 349,146 304,965
Interest expense...................... 144,324 104,363 13,190 14,056 157,514 118,419
----------- ---------- --------- --------- ---------- ----------
Net interest income................ 204,322 200,164 (12,690) (13,618) 191,632 186,546
Provision for loan losses............. 9,000 6,000 -- -- 9,000 6,000
----------- ---------- --------- --------- ---------- ----------
Net interest income after provision
for loan losses.................. 195,322 194,164 (12,690) (13,618) 182,632 180,546
----------- ---------- --------- --------- ---------- ----------
Noninterest income.................... 48,796 51,756 (176) (380) 48,620 51,376
Amortization of intangible assets..... 6,153 3,197 -- -- 6,153 3,197
Other noninterest expense............. 161,064 150,418 2,919 2,251 163,983 152,669
----------- ---------- --------- --------- ---------- ----------
Income before provision for income
taxes and minority interest in
income (loss) of subsidiary...... 76,901 92,305 (15,785) (16,249) 61,116 76,056
Provision for income taxes............ 27,955 30,890 (5,913) (5,687) 22,042 25,203
----------- ---------- --------- --------- ---------- ----------
Income before minority interest in
income (loss) of subsidiary...... 48,946 61,415 (9,872) (10,562) 39,074 50,853
Minority interest in income (loss)
of subsidiary..................... 101 (236) -- -- 101 (236)
----------- ---------- --------- --------- ---------- ----------
Net income......................... $ 48,845 61,651 (9,872) (10,562) 38,973 51,089
=========== ========== ========= ========= ========== ==========
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at June 30, 2007 and
December 31, 2006:
June 30, December 31,
2007 2006
---- ----
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily......................................................... $ 231,029 169,874
Term.......................................................... 200,000 200,000
FHLB advances...................................................... 3,942 4,025
--------- --------
Total..................................................... $ 434,971 373,899
========= ========
The maturity dates, par amounts, interest rate spreads and interest
rate floor strike prices on First Bank's term repurchase agreements as of June
30, 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 June 30, 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 June 30, 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 six months ended June 30,
2007, First Banks made payments of $30.0 million on the outstanding principal
balance of the Term Loan, reducing the balance from $65.0 million at December
31, 2006 to $35.0 million at June 30, 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 June 30, 2007 and December 31, 2006.
Subsequent to June 30, 2007, First Banks entered into a $125.0 million
Secured Credit Agreement with a group of unaffiliated financial institutions
(Secured Credit Agreement) to renew and modify First Banks' existing Credit
Agreement, as further described in Note 14 to the Consolidated Financial
Statements.
(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 $5.8 million and $11.7 million for
the three and six months ended June 30, 2007, respectively, and $5.4 million and
$10.0 million for the comparable periods in 2006.
A summary of the subordinated debentures issued to the Trusts in
conjunction with the trust preferred securities offerings at June 30, 2007 and
December 31, 2006 were as follows:
Subordinated
Debentures
Trust ---------------------
Maturity Call Interest Preferred June 30, 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
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 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 subordinated debentures that were issued by First
Banks to First Bank Capital Trust. The funds necessary for the redemption of the subordinated debentures were provided by
internally generated funds and the net proceeds from the issuance of $25.8 million of subordinated debentures to First Bank
Statutory Trust VIII (FBST VIII) on February 23, 2007, as further described below.
(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 the subordinated debentures of Royal Oaks Capital Trust I, a Delaware statutory
trust.
(5) On February 23, 2007, 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 Trust 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. The Company's liability for
unrecognized tax benefits was $12.1 million at June 30, 2007, of which $2.0
million would affect the effective tax rate, if recognized. During the six
months ended June 30, 2007, the Company recorded additional liabilities for
unrecognized tax benefits of $9.6 million that, if recognized, would decrease
the effective tax rate by $600,000, net of the Federal tax benefit. First Banks
expects a reduction of $1.8 million in unrecognized tax benefits during the
remainder of 2007 as a result of the statute of limitations closing for the 2002
and 2003 tax years, of which the impact to the effective tax rate is estimated
to be approximately $492,000, net of the Federal tax benefit.
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 and June 30, 2007, the balance of
interest accrued on unrecognized tax benefits was $944,000 and $1.4 million,
respectively. The amount of interest recognized during the three and six months
ended June 30, 2007 was $281,000 and $470,000, respectively. First Banks expects
a reduction of approximately $510,000 in the accrued interest on unrecognized
tax benefits during the remainder of 2007 as a result of the statute of
limitations closing for the 2002 and 2003 tax years. There were no penalties
related to tax matters accrued at January 1, 2007, nor did the Company recognize
any penalties during the three and six months ended June 30, 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 subject to 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 prior to 2001. At June 30, 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 June 30, 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 July 19, 2007, First Bank completed its sale of the Branch Offices
to Synergy Bank, SSB, a subsidiary of Premier Bancshares, Inc. At June 30, 2007,
the Branch Offices had loans, net of unearned discount, of $911,000 and deposits
of $52.0 million.
On August 8, 2007, First Banks entered into a Secured Credit Agreement
with a group of unaffiliated financial institutions to renew and modify its
existing Credit Agreement, dated August 10, 2006. The terms and conditions of
the Secured Credit Agreement provide for a $125.0 million revolving credit
facility that includes: (i) a $5.0 million subfacility for the issuance of
standby letters of credit; (ii) a $10.0 million subfacility for swingline loans
(from the Agent as Swingline Lender); and (iii) three-year term loan options
that may be drawn in minimum borrowing amounts of $10.0 million, amortizing with
equal quarterly installments of principal based on a four-year straight-line
amortization schedule and a final maturity of three years from execution of each
term loan, including the existing $35.0 million term loan. Each term loan,
including the existing $35.0 million term loan, will reduce the availability
under the revolving credit facility. First Banks, at its option, may increase
the Secured Credit Agreement to $150.0 million, with a minimum increase of $10.0
million and additional increments of $5.0 million. Interest is payable on
outstanding principal loan balances of the revolving credit loan and each term
loan at a floating rate equal to either the lender's prime rate or, at First
Banks' option, LIBOR plus a margin determined by the outstanding principal loan
balances and First Banks' net income for the preceding four calendar quarters.
If the outstanding principal loan balances under the revolving credit loan and
each term loan are accruing at the prime rate, interest is payable quarterly in
arrears. If the outstanding principal loan balances under the revolving credit
loan and each term loan are accruing at LIBOR, interest is payable based on the
one, two, three or six-month LIBOR, as selected by First Banks. First Banks is
also subject to a quarterly commitment fee on the unused portion of the
revolving credit facility. Amounts may be borrowed under the revolving credit
facility until August 7, 2008, at which time the principal and interest is due
and payable, excluding the term loans. First Banks' existing $35.0 million term
loan is payable in quarterly installments of $5.0 million, at a minimum, with
the remaining term loan balance to be repaid in full, including any unpaid
interest, upon maturity on March 31, 2009. Interest is payable on outstanding
principal loan balances of the swingline loans at a floating rate equal to the
lender's prime rate. The principal balances of the swingline loans, together
with accrued and unpaid interest, are payable on the next to occur date of
either the fifteenth day of the month or the last business day of the month
following the date of the swingline loans.
The Secured Credit Agreement requires maintenance of certain minimum
capital ratios for First Banks and First Bank, certain maximum nonperforming
assets ratios for First Bank and a minimum return on assets ratio for First
Banks. In addition, it contains additional covenants, including a limitation on
the amount of dividends on First Banks' common stock that may be paid to
stockholders. The Secured Credit Agreement is secured by First Banks' ownership
interest in the capital stock of SFC and First Bank.
On August 3, 2007, First Banks entered into an Agreement and Plan of
Merger providing for the acquisition of Coast Financial Holdings, Inc. (CFHI)
and its wholly owned banking subsidiary, Coast Bank of Florida (collectively,
Coast). Coast, headquartered in Bradenton, Florida, operates 20 banking offices
in Florida's Manatee, Pinellas, Hillsborough and Pasco counties, and has two
planned de novo branch offices, one located in the Pinellas County community of
Clearwater, and the other located in Sarasota County. At June 30, 2007, Coast
had assets of $741.7 million, loans, net of unearned discount, of $581.2
million, deposits of $681.3 million and stockholders' equity of $36.1 million.
Under the terms of the Agreement and Plan of Merger, each outstanding
share of Coast's common stock will be converted into and will represent the
right to receive an amount equal to approximately $22.1 million divided by the
number of shares of Coast's common stock outstanding, or approximately $3.40 per
share in cash, without interest thereon. This price is subject to adjustment if,
on or about the date that the transaction closes each of the following
conditions exist: (a) Coast's allowance for loan and lease losses plus its
tangible equity is less than 75% of Coast's nonperforming loans and leases plus
other real estate owned (such difference is referred to as the "Deficiency"),
and (b) the Deficiency is greater than $1.0 million. If each of the above
conditions exists on or about the date that the transaction closes, then the
$22.1 million will be reduced to the nearest $500,000 increment, upward or
downward, to the full amount of the Deficiency and the per share merger price
will be reduced accordingly. The transaction, which is subject to regulatory and
shareholder approvals, is expected to be completed during the fourth quarter of
2007.
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, pending
litigation, unknown liabilities and/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 76.0% owned by First Bank
and 24.0% owned by First Capital America, Inc. as of June 30, 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
>> SBLS LLC.
At June 30, 2007, we had assets of $10.48 billion, loans, net of unearned
discount, of $7.99 billion, deposits of $8.75 billion and stockholders' equity
of $832.3 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 and commissions 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 $10.48 billion at June 30, 2007 reflecting a $320.0 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 five de novo branch offices
during the first six months 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 $322.1 million to $7.99 billion at
June 30, 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, as further discussed under "--Loans and Allowance for
Loan Losses." Funds available from deposit growth were utilized to fund internal
loan growth.
Our investment securities portfolio decreased $111.5 million to $1.35 billion at
June 30, 2007, from $1.46 billion at December 31, 2006. The majority of the
funds provided by maturities and sales of investment securities during the first
six months of 2007 were reinvested in short-term investments, which include
federal funds sold and interest-bearing deposits, resulting in an $85.7 million
increase in our short-term investments to $239.3 million at June 30, 2007. The
decrease in our investment securities portfolio also includes a $13.1 million
reduction in our trading portfolio to $68.1 million at June 30, 2007. We
liquidated our remaining trading portfolio in July 2007.
Goodwill and other intangible assets increased $22.4 million to $317.8 million
at June 30, 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 of $31.5
million in net bank premises and equipment, primarily due to our acquisition of
Royal Oaks and capital expenditures associated with de novo branch offices,
branch remodels and/or relocations, along with an increase in deferred income
taxes of $6.5 million, as more fully described in Note 12 to our Consolidated
Financial Statements. The overall increase in our total assets was partially
offset by a $15.4 million decrease 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 five de novo branch offices during the first six months of 2007,
located in Sacramento and San Diego, California, Houston, Texas, and two in St.
Louis, Missouri.
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 $310.3 million to $8.75 billion at June 30, 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. Deposits provided by our acquisition of Royal
Oaks were $159.1 million, in aggregate. 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 strategies and our ongoing efforts to further
develop multiple account relationships with our customers. Our deposit growth
during the six months ended June 30, 2007 reflects a $358.2 million increase in
our savings and money market accounts, and a $55.5 million increase in our time
deposits of $100,000 or more; partially offset by a $49.8 million decline in our
interest-bearing demand deposits, a $30.9 million decline in our
noninterest-bearing demand accounts and a $22.7 million decline in our other
time deposits.
Other borrowings, which are comprised of securities sold under agreements to
repurchase and Federal Home Loan Bank, or FHLB, advances, were $435.0 million at
June 30, 2007 compared to $373.9 million at December 31, 2006 and reflect a
$61.2 million increase in retail securities sold under agreements to repurchase.
Notes payable decreased $30.0 million to $35.0 million at June 30, 2007 as a
result of scheduled quarterly principal installment payments of $5.0 million and
additional prepayments of $20.0 million on our term loan facility, as further
described in Note 10 to our Consolidated Financial Statements.
Our subordinated debentures increased $4.2 million to $302.2 million at June 30,
2007, from $298.0 million at December 31, 2006. On February 23, 2007, we issued
$25.8 million of variable rate subordinated debentures in a private placement to
First Bank Statutory Trust VIII, a newly formed statutory trust. A portion of
the proceeds from the issuance of these subordinated debentures was utilized to
fund our acquisition of Royal Oaks. We also assumed $4.1 million of subordinated
debentures with our acquisition of Royal Oaks that Royal Oaks Bancshares, Inc.
had previously issued to Royal Oaks Capital Trust I. On April 22, 2007, we
repaid in full $25.8 million of variable rate subordinated debentures that were
issued by First Banks to First Bank Capital Trust, or FBCT, in conjunction with
the redemption of the cumulative variable rate trust preferred securities issued
by FBCT, as further described in Note 11 to our Consolidated Financial
Statements.
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 decrease in our accrued expenses and other liabilities,
which declined $54.3 million to $75.8 million at June 30, 2007 from $130.0
million at December 31, 2006.
Stockholders' equity was $832.3 million and $800.4 million at June 30, 2007 and
December 31, 2006, respectively. The increase of $31.9 million is attributable
to: (a) net income of $39.0 million; (b) a $2.5 million cumulative effect 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; partially offset by (c) a $9.3
million increase in accumulated other comprehensive loss, comprised of $8.7
million associated with changes in unrealized gains and losses on our
available-for-sale investment securities portfolio and $596,000 associated with
changes in the fair value of our derivative financial instruments; and (d)
dividends of $328,000 paid on our Class A and Class B preferred stock.
Results of Operations
Net Income. Net income was $19.8 million for the three months ended June 30,
2007, compared to $22.1 million for the comparable period in 2006. Net income
was $39.0 million for the six months ended June 30, 2007, compared to $51.1
million for the comparable period in 2006. Our return on average assets was
0.76% and 0.77% for the three and six months ended June 30, 2007, respectively,
compared to 0.94% and 1.10% for the comparable periods in 2006. Our return on
average stockholders' equity was 9.50% and 9.56% for the three and six months
ended June 30, 2007, respectively, compared to 12.35% and 14.58% for the
comparable periods in 2006. The decline in earnings for the three and six months
ended June 30, 2007 reflects compression of our net interest margin due
primarily to increased deposit costs and competitive pressure on loan yields
along with the inverted yield curve, higher noninterest expense levels primarily
related to recent acquisitions and expansionary de novo branch offices, and an
increase in our provision for loan losses.
Our net interest income was $96.8 million and $191.6 million for the three and
six months ended June 30, 2007, respectively, compared to $95.7 million and
$186.5 million for the comparable periods in 2006. Our net interest margin
declined to 4.09% and 4.12% for the three and six months ended June 30, 2007,
respectively, compared to 4.41% and 4.36% for the comparable periods in 2006,
reflecting declines of 32 and 24 basis points, respectively. The decline in our
net interest margin primarily resulted from an increase in higher priced
deposits driven by highly competitive pricing within our markets and a shift in
our deposit mix to higher volumes of time deposit accounts and savings and money
market accounts, coupled with the inverted yield curve. The average rates paid
on interest-bearing deposits increased 62 and 75 basis points for the three and
six months ended June 30, 2007, respectively, compared to the same periods in
2006, while the average yield earned on interest-earning assets increased 22 and
38 basis points for the three and six months ended June 30, 2007, respectively,
compared to the same periods in 2006, contributing to a reduction in our net
interest margin. Average interest-earning assets increased 9.2% and 8.6% to
$9.54 billion and $9.42 billion, respectively, for the three and six months
ended June 30, 2007, from $8.73 billion and $8.67 billion for the comparable
periods in 2006. See further discussion under "--Net Interest Income."
Our provision for loan losses increased to $5.5 million and $9.0 million for the
three and six months ended June 30, 2007, respectively, compared to $5.0 million
and $6.0 million for the comparable periods in 2006. The increase in our
provision for loan losses was primarily driven by loan growth, increased net
loan charge-offs and deterioration in asset quality within our one-to-four
family residential mortgage and real estate construction and development loan
portfolios, as further discussed under "--Loans and Allowance for Loan Losses."
Noninterest income was $24.0 million and $48.6 million for the three and six
months ended June 30, 2007, respectively, compared to $25.9 million and $51.4
million for the comparable periods in 2006. The decline in our noninterest
income primarily resulted from a decline in mortgage banking revenues, including
significantly reduced gains on loans sold and held for sale, and reduced fee
income from our institutional money management subsidiary. The overall decline
in noninterest income was partially offset by increased revenue from service
charges on deposits and customer service fees generated by higher deposit levels
and changes in the overall mix of our deposit portfolio, and increased fee and
commission income associated with our insurance brokerage subsidiary acquired in
2006. See further discussion under "--Noninterest Income."
Noninterest expense was $84.4 million and $170.1 million for the three and six
months ended June 30, 2007, respectively, compared to $81.1 million and $155.9
million for the same periods in 2006. 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 five de novo branch offices during
the first six months 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 reduce our noninterest expense levels in
future periods. See further discussion under "--Noninterest Expense."
Net Interest Income. Net interest income, expressed on a tax-equivalent basis,
increased to $97.2 million and $192.5 million for the three and six months ended
June 30, 2007, respectively, compared to $96.1 million and $187.3 million for
the comparable periods in 2006. Our net interest margin declined by 32 and 24
basis points to 4.09% and 4.12% for the three and six months ended June 30,
2007, respectively, from 4.41% and 4.36% for comparable periods in 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 increase in net interest income during the three and six months ended June
30, 2007 compared to the same periods in 2006 reflects an increase in average
interest-earning assets provided by internal growth and our 2006 and 2007
acquisitions, increasing rates earned on our interest-earning assets, partially
offset by an increase in average interest-bearing liabilities and interest rates
paid on those liabilities. The decline in our net interest margin was primarily
due to an increase in higher priced deposits driven by competitive conditions
within our markets and a shift in our deposit mix that reflects increased
average time deposits and savings accounts, in contrast to demand accounts. The
average rates paid on our interest-bearing deposits increased 62 and 75 basis
points during the three and six months ended June 30, 2007, respectively,
compared to the same periods in 2006, whereas the average yield earned on our
interest-earning assets increased 22 and 38 basis points for the three and six
months ended June 30, 2007, respectively, from the same periods in 2006,
contributing to a reduction of our net interest margin. Average interest-earning
assets increased $802.9 million, or 9.2%, to $9.54 billion for the three months
ended June 30, 2007, from $8.73 billion for the comparable period in 2006, and
average interest-earning assets increased $749.5 million, or 8.6%, to $9.42
billion for the six months ended June 30, 2007, from $8.67 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. Average interest-bearing liabilities
increased $823.2 million, or 11.2%, to $8.20 billion for the three months ended
June 30, 2007, from $7.37 billion for the comparable period in 2006, and average
interest-bearing liabilities increased $779.0 million, or 10.7%, to $8.09
billion for the six months ended June 30, 2007, from $7.31 billion for the
comparable period in 2006.
Interest income on our loan portfolio, expressed on a tax-equivalent basis,
increased to $158.0 million and $312.0 million for the three and six months
ended June 30, 2007, respectively, compared to $141.9 million and $273.3 million
for the comparable periods in 2006. Average loans, net of unearned discount,
increased $616.2 million and $640.9 million to $7.97 billion and $7.89 billion
for the three and six months ended June 30, 2007, respectively, from $7.35
billion and $7.25 billion for the comparable periods in 2006. The yield on our
loan portfolio increased 22 and 37 basis points to 7.96% and 7.97% for the three
and six months ended June 30, 2007, respectively, compared to 7.74% and 7.60%
for the same periods in 2006. The increase in average loans reflects internal
growth and our acquisitions completed in 2006 and 2007, partially offset by the
sale of certain loans in the second quarter of 2007, as further described under
"--Loans and Allowance for Loan Losses," and 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 and other
loans, loan payoffs and external refinancing of various credits. 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 six
months of 2007 compared to the same period in 2006 primarily resulted from: an
increase in average commercial, financial and agricultural loans of $343.8
million; an increase in average real estate construction and development loans
of $251.6 million; an increase in average real estate mortgage loans of $35.5
million; and an increase in average consumer and installment loans of $19.3
million.
Interest income on our investment securities, expressed on a tax-equivalent
basis, increased to $17.4 million and $33.8 million for the three and six months
ended June 30, 2007, respectively, compared to $15.1 million and $30.1 million
for the comparable periods in 2006. Average investment securities were $1.39
billion and $1.36 billion for the three and six months ended June 30, 2007,
respectively, compared to $1.29 billion and $1.32 billion for the comparable
periods in 2006. The yield on our investment portfolio was 5.00% and 5.01% for
the three and six months ended June 30, 2007, respectively, compared to 4.70%
and 4.60% for the comparable periods 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 were primarily 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 $150.0 million and $50.0 million of our term repurchase agreements
during the first and second quarters of 2006, respectively, and sold $200.0
million of available-for-sale investment securities associated with the
termination of the term repurchase agreements. Additionally, 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.
Interest expense on our interest-bearing deposits increased to $69.2 million and
$134.9 million for the three and six months ended June 30, 2007, respectively,
compared to $51.6 million and $96.2 million for the comparable periods in 2006.
Average deposits increased to $8.72 billion and $8.60 billion for the three and
six months ended June 30, 2007, respectively, from $7.95 billion and $7.84
billion for the comparable periods 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. The aggregate weighted average rate paid on our deposit
portfolio was 3.71% and 3.70% for the three and six months ended June 30, 2007,
respectively, compared to 3.09% and 2.95% for the comparable periods in 2006,
reflecting increases of 62 and 75 basis points, respectively. The increase in
the aggregate weighted average rate paid for these periods is reflective of
competitive pricing 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 $3.87
billion and $3.85 billion for the three and six months ended June 30, 2007,
respectively, compared to $3.61 billion and $3.48 billion for the comparable
periods in 2006. Average savings and money market deposits were $2.63 billion
and $2.54 billion for the three and six months ended June 30, 2007,
respectively, compared to $2.12 billion for the comparable periods in 2006.
Average noninterest-bearing demand deposits were $1.25 billion and $1.24 billion
for the three and six months ended June 30, 2007, respectively, compared to
$1.26 billion and $1.27 billion for the comparable periods in 2006, and average
interest-bearing demand deposits were $959.3 million and $971.5 million for the
three and six months ended June 30, 2007, respectively, compared to $961.0
million and $965.5 million for the comparable periods in 2006.
Interest expense on our other borrowings was $4.9 million and $9.3 million for
the three and six months ended June 30, 2007, respectively, compared to $3.2
million and $7.9 million for the comparable periods in 2006. Average other
borrowings were $382.6 million and $375.2 million for the three and six months
ended June 30, 2007, respectively, and $311.8 million and $385.8 million for the
comparable periods in 2006. The aggregate weighted average rate paid on our
other borrowings was 5.18% and 4.99% for the three and six months ended June 30,
2007, respectively, compared to 4.18% and 4.15% for the comparable periods in
2006. The increased rate paid on our other borrowings reflects the rising
short-term interest rate environment. The decrease in average other borrowings
for the six months ended June 30, 2007 compared to the same period in 2006 is
primarily attributable to the termination of $200.0 million of term repurchase
agreements during the first two quarters of 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, we prepaid $35.3 million of FHLB
advances during 2006 that we assumed with certain bank acquisitions.
Interest expense on our notes payable was $636,000 and $1.5 million for the
three and six months ended June 30, 2007, respectively, compared to $1.5 million
and $2.9 million for the comparable periods in 2006. Our notes payable averaged
$37.9 million and $47.2 million for the three and six months ended June 30,
2007, respectively, compared to $95.2 million and $97.5 million for the
comparable periods in 2006. The aggregate weighted average rate paid on our
notes payable was 6.73% and 6.60% for the three and six months ended June 30,
2007, respectively, compared to 6.23% and 5.99% for the comparable periods 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 6.68% and 6.55% for the three and six
months ended June 30, 2007, respectively, compared to 6.17% and 5.93% for the
same periods in 2006. The decrease in our average notes payable is attributable
to contractual payments and additional prepayments made on our term loan, as
further described in Note 10 to our Consolidated Financial Statements.
Interest expense on our subordinated debentures was $5.8 million and $11.7
million for the three and six months ended June 30, 2007, respectively, compared
to $5.7 million and $11.4 million for the comparable periods in 2006. Average
subordinated debentures were $308.4 million and $309.2 million for the three and
six months ended June 30, 2007, respectively, compared to $276.5 million and
$253.4 million for the comparable periods in 2006. The aggregate weighted
average rate paid on our subordinated debentures was 7.56% and 7.66% for the
three and six months ended June 30, 2007, respectively, compared to 8.30% and
9.05% for the comparable periods in 2006. 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; (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;
and (c) the repayment of $25.8 million of variable rate subordinated debentures
on April 22, 2007. Although we have increased the overall level of outstanding
subordinated debentures, we have significantly reduced the cost of these
long-term borrowings through the refinancing of certain higher fixed and
variable rate issues.
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 June 30, Six Months Ended June 30,
-------------------------------------------------- --------------------------------------------------
2007 2006 2007 2006
------------------------- ------------------------ ------------------------- ------------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1)(2)(3)(4)........ $ 7,966,082 158,041 7.96% $7,349,881 141,876 7.74% $ 7,894,765 311,967 7.97% $7,253,904 273,337 7.60%
Investment securities (4). 1,394,677 17,400 5.00 1,289,270 15,112 4.70 1,362,127 33,824 5.01 1,320,108 30,145 4.60
Short-term investments.... 175,158 2,315 5.30 93,877 1,147 4.90 162,451 4,193 5.20 95,819 2,270 4.78
----------- ------- ---------- ------- ----------- ------- ---------- -------
Total interest-
earning assets.... 9,535,917 177,756 7.48 8,733,028 158,135 7.26 9,419,343 349,984 7.49 8,669,831 305,752 7.11
------- ------- ------- -------
Nonearning assets............ 870,747 726,127 853,380 716,081
----------- ---------- ----------- ----------
Total assets........ $10,406,664 $9,459,155 $10,272,723 $9,385,912
=========== ========== =========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits.............. $ 959,300 2,313 0.97% $ 960,951 1,947 0.81% $ 971,471 4,929 1.02% $ 965,467 3,775 0.79%
Savings deposits........ 2,634,607 20,460 3.11 2,119,269 12,255 2.32 2,536,496 38,797 3.08 2,124,351 23,438 2.22
Time deposits of $100
or more............... 1,478,324 18,204 4.94 1,315,690 14,258 4.35 1,452,159 35,234 4.89 1,247,926 25,814 4.17
Other time deposits..... 2,396,534 28,180 4.72 2,295,087 23,146 4.05 2,397,226 55,970 4.71 2,235,407 43,180 3.90
----------- ------- ---------- ------- ----------- ------- ---------- -------
Total interest-
bearing deposits.. 7,468,765 69,157 3.71 6,690,997 51,606 3.09 7,357,352 134,930 3.70 6,573,151 96,207 2.95
Other borrowings.......... 382,557 4,941 5.18 311,753 3,246 4.18 375,172 9,292 4.99 385,839 7,941 4.15
Notes payable (5)......... 37,906 636 6.73 95,154 1,477 6.23 47,198 1,544 6.60 97,536 2,897 5.99
Subordinated
debentures (3).......... 308,387 5,814 7.56 276,493 5,722 8.30 309,217 11,748 7.66 253,366 11,374 9.05
----------- ------- ---------- ------- ----------- ------- ---------- -------
Total interest-
bearing
liabilities....... 8,197,615 80,548 3.94 7,374,397 62,051 3.37 8,088,939 157,514 3.93 7,309,892 118,419 3.27
------- ------- ------- -------
Noninterest-bearing
liabilities:
Demand deposits........... 1,251,213 1,262,590 1,237,840 1,266,847
Other liabilities......... 124,013 104,851 123,573 102,695
----------- ---------- ----------- ----------
Total liabilities... 9,572,841 8,741,838 9,450,352 8,679,434
Stockholders' equity......... 833,823 717,317 822,371 706,478
----------- ---------- ----------- ----------
Total liabilities
and stockholders'
equity............ $10,406,664 $9,459,155 $10,272,723 $9,385,912
=========== ========== =========== ==========
Net interest income.......... 97,208 96,084 192,470 187,333
======= ======= ======= =======
Interest rate spread......... 3.54 3.89 3.56 3.84
Net interest margin (6)...... 4.09% 4.41% 4.12% 4.36%
==== ==== ==== ====
- ------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were
approximately $437,000 and $838,000 for the three and six months ended June 30, 2007, and $404,000 and $787,000 for the
comparable periods in 2006, respectively.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees. Exclusive of these fees, the interest
rates paid were 6.68% and 6.55% for the three and six months ended June 30, 2007, and 6.17% and 5.93% for the comparable
periods in 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 $5.5
million and $9.0 million for the three and six months ended June 30, 2007,
respectively, compared to $5.0 million and $6.0 million for the comparable
periods in 2006. The increase in our provision for loan losses was primarily
driven by growth within our loan portfolio during 2007, increased loan
charge-offs in the first and second quarters of 2007 compared to the same
periods in 2006, and deterioration in asset quality within certain segments of
our loan portfolio, primarily our one-to-four family residential mortgage
portfolio and real estate construction and development loan portfolio, as
further discussed under "--Loans and Allowance for Loan Losses."
Tables summarizing nonperforming assets, past due loans and loan charge-off and
recovery experience are presented under "--Loans and Allowance for Loan Losses."
Noninterest Income. Noninterest income was $24.0 million and $48.6 million for
the three and six months ended June 30, 2007, respectively, in comparison to
$25.9 million and $51.4 million for the comparable periods in 2006. 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 $11.7 million
and $22.3 million for the three and six months ended June 30, 2007,
respectively, in comparison to $11.0 million and $21.2 million for the
comparable periods in 2006. 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, in addition to changes in the overall mix of
our deposit portfolio. The increase is also attributable to pricing increases on
certain service charges and customer service fees instituted to reflect current
market conditions.
The gain on loans sold and held for sale was $4.6 million and $8.5 million for
the three and six months ended June 30, 2007, respectively, in comparison to
$6.1 million and $12.9 million for the comparable periods in 2006. We primarily
attribute the decrease to: (a) a decrease in the volume of mortgage loans
originated and subsequently sold in the secondary market; (b) an $851,000 gain,
before applicable income taxes, recorded on the sale of approximately $13.4
million of certain repurchased and other residential mortgage loans on April 27,
2007, compared to a $1.7 million gain, before applicable income taxes, recorded
on the sale of certain nonperforming loans in March 2006; and (c) the
recognition of $1.2 million and $927,000 of income in March 2006 and April 2006,
respectively, generated from the capitalization of mortgage servicing rights
pertaining to the securitization and transfer to our investment portfolio of
$77.1 million and $61.8 million, respectively, of residential mortgage loans
held in our loan portfolio, as further described in Note 4 to our Consolidated
Financial Statements. As further discussed under "--Loans and Allowance for Loan
Losses," we discontinued the origination and sale in the secondary market of
sub-prime loans in the first quarter of 2007, and as such, we expect the
discontinuation of these activities will reduce the amount of future gains on
loans sold and held for sale, in comparison to the level that we had
historically generated through the origination and sale of these sub-prime loan
products. Historically, approximately 40% of our origination and sale volume has
been related to sub-prime loan products.
We recorded a net loss on investment securities of $1.5 million and $1.2 million
for the three and six months ended June 30, 2007, respectively, in comparison to
a net loss on investment securities of $1.2 million and $4.0 million for the
comparable periods in 2006. The net loss in 2007 primarily resulted from a net
loss of $1.5 million and $1.4 million for the three and six months ended June
30, 2007, respectively, related to changes in the fair value of securities held
in our trading portfolio. We liquidated our remaining trading portfolio in July
2007, and as such, there will be no impact to noninterest income related to the
trading portfolio subsequent to July 2007. The net loss in 2006 primarily
resulted from: (a) 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, and the termination of $50.0
million of a $150.0 million term repurchase agreement in April 2006, resulting
in a net loss of $2.7 million, in aggregate, as further described under
"--Interest Rate Risk Management;" and (b) a net loss of $907,000 and $1.3
million for the three and six months ended June 30, 2006, respectively, related
to changes in the fair value of securities held in our trading portfolio.
Bank-owned life insurance investment income was $999,000 and $1.7 million for
the three and six months ended June 30, 2007, respectively, in comparison to
$652,000 and $1.8 million for the comparable periods in 2006, reflecting changes
in the performance of the underlying investments surrounding the insurance
contracts attributable to the portfolio mix of investments and overall market
conditions during the respective periods.
Investment management income generated by MVP, our institutional money
management subsidiary, was $1.5 million and $3.1 million for the three and six
months ended June 30, 2007, respectively, in comparison to $2.3 million and $4.6
million for the comparable periods in 2006, reflecting decreased portfolio
management fee income associated with changes in the level of assets under
management.
Insurance fee and commission income generated by Adrian Baker, our insurance
brokerage agency acquired in March 2006, was $1.9 million and $3.6 million for
the three and six months ended June 30, 2007, respectively, in comparison to
$1.8 million for the comparable periods in 2006.
Other income was $4.9 million and $10.8 million for the three and six months
ended June 30, 2007, respectively, in comparison to $5.2 million and $13.0
million for the comparable periods in 2006. We primarily attribute the decline
in other income for the six months ended June 30, 2007 to:
>> a decrease of $1.6 million in gains on sales of other real estate for
the six months ended June 30, 2007 in comparison to the comparable
period in 2006, primarily attributable to a gain of $1.5 million
recognized on the sale of a parcel of other real estate in January
2006;
>> 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; and
>> an increase in net losses on our derivative financial instruments, as
further discussed under "--Interest Rate Risk Management;" partially
offset by
>> an increase of $810,000 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 $84.4 million and $170.1 million
for the three and six months ended June 30, 2007, respectively, in comparison to
$81.1 million and $155.9 million for the comparable periods in 2006. Our
efficiency ratio was 69.89% and 70.82% for the three and six months ended June
30, 2007, respectively, in comparison to 66.68% and 65.51% for the comparable
periods in 2006. The increase in noninterest expense was primarily attributable
to our de novo branch openings and our acquisitions completed in 2006 and 2007,
which contributed to increased salaries and employee benefits expense, occupancy
and furniture and equipment expense and amortization of intangible assets, as
well as increases in other expense.
Salaries and employee benefits expense was $43.7 million and $89.0 million for
the three and six months ended June 30, 2007, respectively, in comparison to
$42.6 million and $82.1 million for the comparable periods in 2006. 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, five de novo branch
offices opened in 2007 and generally higher salary and employee benefit costs
associated with employing and retaining qualified personnel. We expect salaries
and employee benefits expense associated with our mortgage banking division to
decline in future periods as a result of expense reduction measures taken by
management in light of the discontinuation of the origination and sale in the
secondary market of sub-prime loans, as further discussed under "--Loans and
Allowance for Loan Losses."
Occupancy, net of rental income, and furniture and equipment expense was $12.4
million and $24.4 million for the three and six months ended June 30, 2007,
respectively, in comparison to $10.5 million and $20.7 million for the
comparable periods in 2006. 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,
increased expenses associated with the purchase and/or lease of properties that
will be utilized for future branch office locations, and increased depreciation
expense associated with acquisitions and capital expenditures.
Information technology and item processing fees were $9.2 million and $18.5
million for the three and six months ended June 30, 2007, respectively, in
comparison to $9.2 million and $18.3 million for the comparable periods in 2006.
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, and Adrian Baker, MVP, SBLS LLC and UPAC. The
relatively stable level of these fees in 2007 is primarily attributable to a
reduction in the number of acquisitions completed coupled with enhanced
automation of certain services, including remote deposit, branch capture, and
electronic image exchange, which has significantly contributed to reduced manual
processes and reduced costs associated with these services partially offset by
depreciation associated with the related capital expenditures necessary to
support the enhanced delivery channels.
Legal, examination and professional fees were $2.7 million and $4.4 million for
the three and six months ended June 30, 2007, respectively, in comparison to
$2.4 million and $4.5 million for the comparable periods in 2006. 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 $3.2 million and $6.2 million for the
three and six months ended June 30, 2007, respectively, in comparison to $1.7
million and $3.2 million for the comparable periods in 2006, 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 $1.5 million and $3.4 million for the three
and six months ended June 30, 2007, respectively, in comparison to $1.7 million
and $3.3 million for the comparable periods in 2006. Our charitable contribution
expense levels are primarily attributable to 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 $8.4 million and $17.3 million for the three and six months
ended June 30, 2007, respectively, in comparison to $8.8 million and $16.5
million for the comparable periods in 2006. Other expense encompasses numerous
general and administrative expenses including communications, insurance, freight
and courier services, correspondent bank charges, miscellaneous losses and
recoveries, expenses on other real estate owned, memberships and subscriptions,
transfer agent fees, sales taxes and travel, meals and entertainment. The
decrease and increase in other expense for the three and six months ended June
30, 2007, respectively, in comparison to the comparable periods in 2006, was
primarily attributable to:
>> a $617,000 specific reserve established in March 2006 and an increase
of $746,000 to the specific reserve in June 2006 for the estimated
loss associated with a $3.1 million unfunded letter of credit acquired
in conjunction with the acquisition of CIB Bank;
>> a $470,000 loss recognized on a liquidation sale of residential real
estate and personal property of an SBA guaranteed loan in June 2006;
and
>> expenses associated with continued growth and expansion of our banking
franchise, including our de novo branch offices and our acquisitions
completed during 2006 and 2007.
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 reduce our noninterest
expenses levels in future periods.
Provision for Income Taxes. The provision for income taxes was $11.1 million and
$22.0 million, representing an effective income tax rate of 35.9% and 36.1%, for
the three and six months ended June 30, 2007, respectively, in comparison to
$13.5 million and $25.2 million, representing an effective income tax rate of
38.0% and 33.1%, respectively, for the comparable periods in 2006. The decrease
in our provision for income taxes primarily reflects our decreased earnings,
partially offset by the reversal of a federal tax reserve of $2.5 million and a
state tax reserve of $748,000 in the first quarter of 2006, as they were no
longer deemed necessary due to the resolution of a potential tax liability.
Interest Rate Risk Management
We utilize derivative financial instruments to assist in our management of
interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The derivative financial
instruments we held as of June 30, 2007 and December 31, 2006 are summarized as
follows:
June 30, 2007 December 31, 2006
--------------------- -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................. $ 600,000 4,313 600,000 4,369
Interest rate floor agreements............... 300,000 63 300,000 376
Interest rate cap agreements................. 400,000 111 400,000 139
Interest rate lock commitments............... 3,700 -- 5,900 --
Forward commitments to sell
mortgage-backed securities................. 57,000 -- 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 and six months ended June 30, 2007, we realized net interest
expense of $1.4 million and $2.8 million, respectively, on our derivative
financial instruments, in comparison to net interest expense of $990,000 and
$2.3 million for the comparable periods in 2006. We recorded net losses on
derivative instruments, which are included in noninterest income in the
consolidated statements of income, of $344,000 and $342,000 for the three and
six months ended June 30, 2007, respectively, in comparison to net losses of
$3,000 and $69,000 for the comparable periods in 2006. The net losses recorded
for the three and six months ended June 30, 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 and six months ended June
30, 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:
>> In July 2003, we entered into an interest rate swap agreement of
$200.0 million notional amount. The underlying hedged assets are
certain variable rate loans within our commercial loan portfolio. The
swap agreement provides 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 2.85%. The terms of the swap agreement
provide for us to pay and receive interest on a quarterly basis. The
interest rate swap agreement matured on July 31, 2007.
>> 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 $6.9 million and $7.0
million at June 30, 2007 and December 31, 2006, respectively, and the amount
payable by us under the swap agreements was $2.6 million and $2.7 million at
June 30, 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
June 30, 2007 and December 31, 2006 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
June 30, 2007:
July 31, 2007........................... $ 200,000 5.40% 3.08% $ (431)
September 18, 2009...................... 200,000 5.39 5.20 (1,003)
September 20, 2010...................... 200,000 5.39 5.20 (1,641)
--------- --------
$ 600,000 5.39 4.49 $ (3,075)
========= ===== ===== ========
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)
========= ===== ===== ========
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 $63,000 and $376,000 at June 30, 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; 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; and 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. Our termination transactions completed in the first
and second quarters of 2006 resulted in a reduction of $200.0 million of our
term repurchase agreements, the recognition of a $2.7 million loss on the sale
of $200.0 million of investment securities held in our available-for-sale
investment portfolio, and prepayment penalties of $306,000 incurred in
conjunction with the early termination of the term repurchase agreements.
Additionally, 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 $111,000 and $139,000 at June 30, 2007 and
December 31, 2006, respectively.
Pledged Collateral. At June 30, 2007 and December 31, 2006, we had accepted cash
of $1.4 million 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, which is included in other assets in our consolidated
balance sheets, was $216,000 and ($17,000) at June 30, 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 represented 89.0% and 89.2% of total
interest income for the three and six months ended June 30, 2007, respectively,
in comparison to 89.9% and 89.5% for the comparable periods in 2006. Loans, net
of unearned discount, increased $322.1 million to $7.99 billion, or 76.2% of
assets, at June 30, 2007, compared to $7.67 billion, or 75.5% of assets, at
December 31, 2006. The overall increase in loans, net of unearned discount,
during the first six months of 2007 reflects internal loan growth of $160.0
million and our acquisition of Royal Oaks, which provided loans, net of unearned
discount, of $175.5 million, partially offset by the sale of approximately $13.4
million of certain repurchased and other residential mortgage loans. We
primarily attribute the net increase in our loan portfolio to:
>> an increase of $147.4 million in our commercial, financial and
agricultural portfolio due to continued internal loan production
growth and $45.1 million of loans provided by our acquisition of
Royal Oaks;
>> an increase of $120.0 million in our real estate construction and
development portfolio resulting primarily from new loan
originations and seasonal fluctuations on existing and available
credit lines, as well as $54.8 million of loans provided by our
acquisition of Royal Oaks; and
>> an increase of $63.8 million in our real estate mortgage
portfolio, primarily attributable to: (a) loans totaling $70.6
million provided by our acquisition of Royal Oaks; and (b) a
modest increase in internal loan growth; partially offset by (c)
the transfer of approximately $17.5 million of certain
repurchased and other residential mortgage loans to our loans
held for sale portfolio in March 2007; partially offset by
>> a decrease of $19.0 million in our loans held for sale portfolio,
reflecting: (a) the timing of loan originations and subsequent
sales in the secondary mortgage market, including the
discontinuation of originations and sales of sub-prime
residential mortgage loan products in the first quarter of 2007
in light of the overall deterioration experienced throughout the
mortgage banking industry; (b) the transfer of approximately
$17.5 million of certain repurchased and other residential
mortgage loans to our loans held for sale portfolio in March
2007, as discussed above; partially offset by (c) the completion
of the sale of approximately $13.4 million of the repurchased and
other 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, in the second quarter of
2007, we received payoffs on a portion of the loans held for sale
at March 31, 2007 of approximately $1.1 million. We also
transferred approximately $2.6 million of loans that were not
ultimately included in the sale back into our residential
mortgage loan portfolio.
Nonperforming assets include nonaccrual loans, restructured loans and other real
estate. The following table presents the categories of nonperforming assets and
certain ratios as of June 30, 2007 and December 31, 2006:
June 30, December 31,
2007 2006
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual................................................... $ 8,280 9,879
Real estate construction and development:
Nonaccrual................................................... 21,016 13,344
Real estate mortgage:
One-to-four family residential:
Nonaccrual............................................... 27,219 18,885
Restructured............................................. 8 9
Multi-family residential loans:
Nonaccrual............................................... 168 272
Commercial real estate loans:
Nonaccrual............................................... 6,352 6,260
Consumer and installment:
Nonaccrual................................................... 425 81
---------- ----------
Total nonperforming loans.............................. 63,468 48,730
Other real estate................................................. 8,040 6,433
---------- ----------
Total nonperforming assets............................. $ 71,508 55,163
========== ==========
Loans, net of unearned discount................................... $7,988,576 7,666,481
========== ==========
Loans past due 90 days or more and still accruing................. $ 4,387 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................ 225.19 299.05
Nonperforming assets to loans and other real estate............. 0.89 0.72
========== ==========
Nonperforming loans, consisting of loans on nonaccrual status and restructured
loans, were $63.5 million at June 30, 2007, compared to $62.5 million at March
31, 2007, $48.7 million at December 31, 2006 and $73.0 million at June 30, 2006.
Nonperforming loans were 0.79% of loans, net of unearned discount, at June 30,
2007, compared to 0.79%, 0.64% and 0.96% of loans, net of unearned discount, at
March 31, 2007, December 31, 2006 and June 30, 2006, respectively. Other real
estate owned was $8.0 million $8.5 million, $6.4 million and $5.5 million at
June 30, 2007, March 31, 2007, December 31, 2006 and June 30, 2006,
respectively. Our nonperforming assets, consisting of nonperforming loans and
other real estate owned, were $71.5 million at June 30, 2007, compared to $71.0
million, $55.2 million and $78.5 million at March 31, 2007, December 31, 2006
and June 30, 2006, respectively. Our loans past due 90 days or more and still
accruing interest were $4.4 million, $4.2 million, $5.7 million and $5.7 million
at June 30, 2007, March 31, 2007, December 31, 2006 and June 30, 2006,
respectively.
Nonperforming loans at June 30, 2007 increased $950,000, or 1.5%, and $14.7
million, or 30.2%, from nonperforming loans at March 31, 2007 and December 31,
2006, respectively. Nonperforming loans decreased $9.6 million, or 13.1%, from
nonperforming loans at June 30, 2006. The increase in the overall level of our
nonperforming loans during the first six months of 2007 primarily resulted from
an increase of $8.3 million in our one-to-four family residential mortgage loan
portfolio to $27.2 million at June 30, 2007, compared to $18.9 million at
December 31, 2006. This increase was driven by 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 mortgage
loan portfolio, and the overall deterioration of sub-prime products experienced
throughout the mortgage banking industry. Our involvement in the sub-prime
market had been limited to the origination and subsequent sale of these loans in
the secondary market, and historically represented approximately 40% of our
mortgage banking loan origination and sale volumes. During the first quarter of
2007, we discontinued loan originations of this product following a decline in
bid prices and in market liquidity for these loan products. In March 2007, we
entered into a commitment to sell certain repurchased and other residential
mortgage loans that were either nonperforming loans or were deemed by management
to be problem credits. Subsequent to recording loan charge-offs to reduce these
loans to the lower of cost or estimated fair value at the time of transfer, as
further discussed below, we transferred approximately $17.5 million of certain
repurchased and other residential mortgage loans to our held for sale loan
portfolio. In April 2007, we completed the sale of approximately $13.4 million
of these loans, received payoffs on a portion of the loans held for sale at
March 31, 2007 of approximately $1.1 million, and transferred approximately $2.6
million of loans that were not ultimately included in the sale back into our
residential mortgage loan portfolio. These transactions resulted in a decrease
in nonperforming loans of approximately $11.5 million, in aggregate. However,
this decrease in nonperforming loans was offset by further deterioration within
our residential mortgage portfolio during the second quarter of 2007, including
additional repurchases of certain residential mortgage loans sold with recourse.
Repurchases of mortgage loans sold with recourse were approximately $17.2
million and $21.5 million for the three and six months ended June 30, 2007,
respectively. Our recourse risk on sub-prime loan products that we previously
sold in the secondary market expires throughout the remainder of 2007.
The increase in nonperforming loans during the first six months of 2007 was also
attributable to an increase of $7.7 million within our real estate construction
and development portfolio to $21.0 million at June 30, 2007, compared to $13.3
million at December 31, 2006, resulting from a slowdown in home sales and real
estate values in many of our markets. The decrease in the overall level of our
nonperforming loans from June 30, 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.
We recorded net loan charge-offs of $4.7 million and $14.7 million for the three
and six months ended June 30, 2007, respectively, compared to net loan
charge-offs of $1.2 million and net loan recoveries of $2.1 million for the
comparable periods in 2006. The increased level of net loan charge-offs recorded
for the six months ended June 30, 2007 reflect $8.7 million of charge-offs
associated with our one-to-four family residential portfolio, of which $4.3
million was recorded in conjunction with the transfer of certain repurchased and
other residential mortgage loans to our loans held for sale portfolio and
subsequent sale in April 2007, as previously discussed. Net loan charge-offs for
the first six months of 2007 also include a charge-off of $2.5 million on a
residential development and construction credit relationship and a $1.5 million
charge-off on a commercial credit relationship. Net loan recoveries recorded for
the six months ended June 30, 2006 reflect a loan recovery of $5.0 million on
the payoff of a single nonperforming loan in the first quarter of 2006. Our net
loan charge-offs as a percentage of average loans were 0.19% for the six months
ended June 30, 2007, representing a significant increase from our net loan
recoveries as a percentage of average loans of 0.03% for the same period in
2006.
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 and six months ended June
30, 2007 and 2006 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period................... $142,148 140,235 145,729 135,330
Acquired allowance for loan losses............. -- 3,368 2,925 3,944
-------- -------- -------- --------
142,148 143,603 148,654 139,274
-------- -------- -------- --------
Loans charged-off.............................. (6,563) (2,896) (18,278) (6,341)
Recoveries of loans previously charged-off..... 1,837 1,676 3,546 8,450
-------- -------- -------- --------
Net loan (charge-offs) recoveries............ (4,726) (1,220) (14,732) 2,109
-------- -------- -------- --------
Provision for loan losses...................... 5,500 5,000 9,000 6,000
-------- -------- -------- --------
Balance, end of period......................... $142,922 147,383 142,922 147,383
======== ======== ======== ========
Our allowance for loan losses was $142.9 million at June 30, 2007, compared to
$142.1 million, $145.7 million and $147.4 million at March 31, 2007, December
31, 2006 and June 30, 2006, respectively, representing 1.79%, 1.79%, 1.90% and
1.94% of loans, net of unearned discount, respectively. Our allowance for loan
losses as a percentage of nonperforming loans was 225.19% at June 30, 2007,
compared to 227.37%, 299.05% and 201.81% at March 31, 2007, December 31, 2006
and June 30, 2006, respectively. Our allowance for loan losses at June 30, 2007
includes $2.9 million of balances acquired in conjunction with our acquisition
of Royal Oaks. 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, highly competitive markets and
pricing within certain sectors of our loan portfolio. We also continue to
closely monitor our level of nonperforming loans in an effort to continue to
reduce the overall level of nonperforming loans in our loan portfolio. We
consider these factors in our overall assessment of the adequacy of the
allowance for loan losses.
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
$1.95 billion and $1.86 billion at June 30, 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 June 30, 2007:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less............................. $ 523,988 236,029 760,017
Over three months through six months............. 376,100 8,000 384,100
Over six months through twelve months............ 430,163 10,000 440,163
Over twelve months............................... 144,859 215,942 360,801
---------- -------- ----------
Total....................................... $1,475,110 469,971 1,945,081
========== ======== ==========
In addition to these sources of funds, First Bank has established a borrowing
relationship with the Federal Reserve Bank of St. Louis. This borrowing
relationship, which is secured by commercial loans, provides an additional
liquidity facility that may be utilized for contingency purposes. At June 30,
2007 and December 31, 2006, First Bank's borrowing capacity under the agreement
was approximately $559.5 million and $639.1 million, respectively. In addition,
First Bank's borrowing capacity through its relationship with the FHLB was
approximately $729.9 million and $666.0 million at June 30, 2007 and December
31, 2006, respectively. We had FHLB advances outstanding of $3.9 million and
$4.0 million at June 30, 2007 and December 31, 2006, respectively, 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 June 30, 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........................ $ 15,440 27,161 16,104 41,671 100,376
Certificates of deposit (2)............. 3,392,663 366,611 89,527 11,504 3,860,305
Other borrowings (2).................... 234,029 133 200,809 -- 434,971
Notes payable (2)(3).................... 20,000 15,000 -- -- 35,000
Subordinated debentures (2)............. -- -- -- 302,166 302,166
Other contractual obligations........... 607 207 136 111 1,061
---------- -------- -------- -------- ----------
Total.............................. $3,662,739 409,112 306,576 355,452 4,733,879
========== ======== ======== ======== ==========
-------------------
(1) Amounts exclude FIN 48 unrecognized tax liabilities of $12.1 million and related accrued
interest expense of $1.4 million for which the timing of payment of such liabilities cannot be
reasonably estimated as of June 30, 2007.
(2) Amounts exclude the related interest expense accrued on these obligations as of June 30, 2007.
(3) On August 8, 2007, First Banks entered into a $125.0 million Secured Credit Agreement to renew
and modify its existing credit agreement, as further described in Note 10 and Note 14 to our
Consolidated Financial Statements.
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 June 30, 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 and six months ended June 30,
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 discontinued 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
sales of these loans, we believe such risk will decline throughout the remainder
of 2007. 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 and six months ended June 30, 2007, our asset-sensitive
position and overall susceptibility to market risks have not changed materially.
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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the May 3, 2007 Annual Meeting of Shareholders of First Banks, Messrs. James
F. Dierberg, Gordon A. Gundaker, Terrance M. McCarthy, Steven F. Schepman, David
L. Steward and Douglas H. Yaeger, constituting all of the directors, were
unanimously re-elected.
ITEM 6 - EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit Number Description
-------------- -----------
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Executive Officer - filed herewith.
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Financial Officer - filed herewith.
32.1 Section 1350 Certifications of Chief Executive Officer -
filed herewith.
32.2 Section 1350 Certifications of Chief Financial Officer -
filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: August 13, 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
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Lisa K. Vansickle
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)