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 September 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 October 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................................ 37
ITEM 4. CONTROLS AND PROCEDURES................................................................... 37
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.................................................................................. 38
SIGNATURES............................................................................................. 40
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
September 30, December 31,
2007 2006
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................ $ 183,580 215,974
Short-term investments......................................................... 76,956 153,583
----------- ----------
Total cash and cash equivalents........................................... 260,536 369,557
----------- ----------
Investment securities:
Trading........................................................................ -- 81,168
Available for sale............................................................. 1,145,870 1,359,729
Held to maturity (fair value of $19,403 and $23,971, respectively)............. 19,647 24,049
----------- ----------
Total investment securities............................................... 1,165,517 1,464,946
----------- ----------
Loans:
Commercial, financial and agricultural......................................... 2,181,136 1,934,912
Real estate construction and development....................................... 2,001,226 1,832,504
Real estate mortgage........................................................... 3,773,803 3,615,148
Consumer and installment....................................................... 89,351 83,008
Loans held for sale............................................................ 99,470 216,327
----------- ----------
Total loans............................................................... 8,144,986 7,681,899
Unearned discount.............................................................. (12,213) (15,418)
Allowance for loan losses...................................................... (140,165) (145,729)
----------- ----------
Net loans................................................................. 7,992,608 7,520,752
----------- ----------
Bank premises and equipment, net.................................................... 216,633 178,417
Goodwill and other intangible assets................................................ 314,084 295,382
Bank-owned life insurance........................................................... 115,831 113,778
Deferred income taxes............................................................... 102,459 100,175
Other assets........................................................................ 104,368 115,707
----------- ----------
Total assets.............................................................. $10,272,036 10,158,714
=========== ==========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand..................................................... $ 1,195,950 1,281,108
Interest-bearing demand........................................................ 921,447 981,939
Savings and money market....................................................... 2,676,244 2,352,575
Time deposits of $100 or more.................................................. 1,478,159 1,419,579
Other time deposits............................................................ 2,350,545 2,407,885
----------- ----------
Total deposits............................................................ 8,622,345 8,443,086
Other borrowings.................................................................... 310,772 373,899
Notes payable....................................................................... 10,000 65,000
Subordinated debentures............................................................. 353,733 297,966
Deferred income taxes............................................................... 40,854 42,826
Accrued expenses and other liabilities.............................................. 71,829 130,033
Minority interest in subsidiary..................................................... 5,642 5,469
----------- ----------
Total liabilities......................................................... 9,415,175 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................................................................... 840,779 784,864
Accumulated other comprehensive loss................................................ (12,581) (13,092)
----------- ----------
Total stockholders' equity................................................ 856,861 800,435
----------- ----------
Total liabilities and stockholders' equity................................ $10,272,036 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 Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2007 2006 2007 2006
---- ---- ---- ----
Interest income:
Interest and fees on loans....................................... $ 160,134 153,394 471,713 426,456
Investment securities............................................ 16,493 13,881 49,867 43,514
Short-term investments........................................... 1,478 1,018 5,671 3,288
--------- --------- --------- ---------
Total interest income....................................... 178,105 168,293 527,251 473,258
--------- --------- --------- ---------
Interest expense:
Deposits:
Interest-bearing demand........................................ 2,242 2,057 7,171 5,832
Savings and money market....................................... 21,012 13,491 59,809 36,929
Time deposits of $100 or more.................................. 18,299 15,902 53,533 41,716
Other time deposits............................................ 27,881 25,526 83,851 68,706
Other borrowings................................................. 4,361 4,322 13,653 12,263
Notes payable.................................................... 544 1,434 2,088 4,331
Subordinated debentures.......................................... 5,920 6,377 17,668 17,751
--------- --------- --------- ---------
Total interest expense...................................... 80,259 69,109 237,773 187,528
--------- --------- --------- ---------
Net interest income......................................... 97,846 99,184 289,478 285,730
Provision for loan losses............................................. 17,000 2,000 26,000 8,000
--------- --------- --------- ---------
Net interest income after provision for loan losses......... 80,846 97,184 263,478 277,730
--------- --------- --------- ---------
Noninterest income:
Service charges on deposit accounts and customer service fees.... 12,053 11,122 34,322 32,350
Gain on loans sold and held for sale............................. 3,535 4,604 12,019 17,524
Net (loss) gain on investment securities......................... (74) 1,603 (1,314) (2,384)
Bank-owned life insurance investment income...................... 1,081 665 2,793 2,432
Investment management income..................................... 1,447 2,036 4,499 6,633
Insurance fee and commission income.............................. 1,750 1,491 5,313 3,325
Other............................................................ 7,048 8,473 17,828 21,490
--------- --------- --------- ---------
Total noninterest income.................................... 26,840 29,994 75,460 81,370
--------- --------- --------- ---------
Noninterest expense:
Salaries and employee benefits................................... 43,093 42,454 132,053 124,558
Occupancy, net of rental income.................................. 8,321 6,997 23,489 19,657
Furniture and equipment.......................................... 4,944 4,158 14,171 12,237
Postage, printing and supplies................................... 1,609 1,550 5,040 4,964
Information technology fees...................................... 8,995 9,365 27,515 27,616
Legal, examination and professional fees......................... 2,535 2,078 6,949 6,583
Amortization of intangible assets................................ 3,142 2,243 9,295 5,440
Advertising and business development............................. 1,577 1,826 5,147 5,703
Charitable contributions......................................... 1,664 1,594 5,042 4,918
Other............................................................ 8,649 8,208 25,964 24,663
--------- --------- --------- ---------
Total noninterest expense................................... 84,529 80,473 254,665 236,339
--------- --------- --------- ---------
Income before provision for income taxes and minority
interest in income (loss) of subsidiary................. 23,157 46,705 84,273 122,761
Provision for income taxes............................................ 8,087 17,249 30,129 42,452
--------- --------- --------- ---------
Income before minority interest in income (loss)
of subsidiary........................................... 15,070 29,456 54,144 80,309
Minority interest in income (loss) of subsidiary...................... 74 (204) 175 (440)
--------- --------- --------- ---------
Net income.................................................. 14,996 29,660 53,969 80,749
Preferred stock dividends............................................. 196 196 524 524
--------- --------- --------- ---------
Net income available to common stockholders................. $ 14,800 29,464 53,445 80,225
========= ========= ========= =========
Basic earnings per common share....................................... $ 625.48 1,245.28 2,258.77 3,390.62
========= ========= ========= =========
Diluted earnings per common share..................................... $ 623.84 1,231.06 2,243.90 3,347.84
========= ========= ========= =========
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)
Nine Months Ended September 30, 2007 and 2006 and Three 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
-------
Nine months ended September 30, 2006:
Comprehensive income: (1)
Net income........................................... -- -- -- -- 80,749 -- 80,749
Other comprehensive income, net of tax:
Unrealized gains on investment securities.......... -- -- -- -- -- 1,460 1,460
Reclassification adjustment for investment
securities losses included in net income........ -- -- -- -- -- 1,487 1,487
Derivative instruments:
Current period transactions..................... -- -- -- -- -- 1,773 1,773
-------
Total comprehensive income............................. 85,469
Class A preferred stock dividends, $0.80 per share..... -- -- -- -- (513) -- (513)
Class B preferred stock dividends, $0.07 per share..... -- -- -- -- (11) -- (11)
------- --- ----- ----- ------- ------- -------
Balances, September 30, 2006............................. 12,822 241 5,915 5,910 754,181 (15,186) 763,883
-------
Three months ended December 31, 2006:
Comprehensive income:
Net income........................................... -- -- -- -- 30,945 -- 30,945
Other comprehensive income, net of tax:
Unrealized gains on investment securities.......... -- -- -- -- -- 2,206 2,206
Reclassification adjustment for investment
securities gains included in net income......... -- -- -- -- -- (245) (245)
Derivative instruments:
Current period transactions..................... -- -- -- -- -- 133 133
-------
Total comprehensive income............................. 33,039
Adjustment for the utilization of net operating
losses associated with prior acquisitions.......... -- -- -- 3,775 -- -- 3,775
Class A preferred stock dividends, $0.40 per share..... -- -- -- -- (256) -- (256)
Class B preferred stock dividends, $0.04 per share..... -- -- -- -- (6) -- (6)
------- --- ----- ----- ------- ------- -------
Balances, December 31, 2006.............................. 12,822 241 5,915 9,685 784,864 (13,092) 800,435
-------
Nine months ended September 30, 2007:
Comprehensive income: (1)
Net income........................................... -- -- -- -- 53,969 -- 53,969
Other comprehensive income, net of tax:
Unrealized losses on investment securities......... -- -- -- -- -- (4,448) (4,448)
Reclassification adjustment for investment
securities gains included in net income......... -- -- -- -- -- (94) (94)
Derivative instruments:
Current period transactions..................... -- -- -- -- -- 5,053 5,053
-------
Total comprehensive income............................. 54,480
Cumulative effect of change in accounting principle.... -- -- -- -- 2,470 -- 2,470
Class A preferred stock dividends, $0.80 per share..... -- -- -- -- (513) -- (513)
Class B preferred stock dividends, $0.07 per share..... -- -- -- -- (11) -- (11)
------- --- ----- ----- ------- ------- -------
Balances, September 30, 2007............................. $12,822 241 5,915 9,685 840,779 (12,581) 856,861
======= === ===== ===== ======= ======= =======
- -------------------------
(1) Disclosure of comprehensive income:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2007 2006 2007 2006
---- ---- ---- ----
Comprehensive income:
Net income....................................................... $14,996 29,660 53,969 80,749
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment securities............. 4,117 13,363 (4,448) 1,460
Reclassification adjustment for investment
securities (gains) losses included in net income............ -- (252) (94) 1,487
Derivative instruments:
Current period transactions................................. 5,649 1,935 5,053 1,773
------- ------- ------- -------
Total comprehensive income......................................... $24,762 44,706 54,480 85,469
======= ======= ======= =======
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)
Nine Months Ended
September 30,
-------------------------
2007 2006
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 53,969 80,749
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment..................... 15,162 13,698
Amortization of intangible assets................................................ 9,295 5,440
Other amortization, net of accretion............................................. 2,800 5,458
Originations of loans held for sale.............................................. (433,016) (731,297)
Proceeds from sales of loans held for sale....................................... 484,899 723,368
Payments received on loans held for sale......................................... 14,507 25,289
Provision for loan losses........................................................ 26,000 8,000
Provision for current income taxes............................................... 28,773 39,242
Provision for deferred income taxes.............................................. 1,356 3,210
Decrease (increase) in accrued interest receivable............................... 6,667 (4,365)
(Decrease) increase in accrued interest payable.................................. (9,581) 6,902
Proceeds from sales of trading securities........................................ 81,038 6,840
Maturities of trading securities................................................. 16,651 657
Purchases of trading securities.................................................. (17,939) (60,877)
Gain on loans sold and held for sale............................................. (12,019) (17,524)
Net loss on investment securities................................................ 1,314 2,384
Gain on sales of branches, net of expenses....................................... (1,018) --
Other operating activities, net.................................................. (9,085) (17,724)
Minority interest in income (loss) of subsidiary................................. 175 (440)
--------- ---------
Net cash provided by operating activities..................................... 259,948 89,010
--------- ---------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received......... (16,233) (245,031)
Cash paid for sale of branches, net of cash and cash equivalents sold.............. (48,926) --
Proceeds from sales of investment securities available for sale.................... 487 198,009
Maturities of investment securities available for sale............................. 858,873 771,714
Maturities of investment securities held to maturity............................... 4,510 2,177
Purchases of investment securities available for sale.............................. (643,548) (571,153)
Purchases of investment securities held to maturity................................ (133) (865)
Proceeds from sales of commercial loans held for sale.............................. 33,471 34,228
Net increase in loans.............................................................. (437,023) (499,582)
Recoveries of loans previously charged-off......................................... 6,360 12,405
Purchases of bank premises and equipment........................................... (48,734) (22,041)
Other investing activities, net.................................................... 7,159 (2,307)
--------- ---------
Net cash used in investing activities......................................... (283,737) (322,446)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in demand, savings and money market deposits................... 139,206 (202,750)
(Decrease) increase in time deposits............................................... (67,228) 488,795
Decrease in Federal Home Loan Bank advances........................................ (33,325) (43,368)
Decrease in securities sold under agreements to repurchase......................... (63,002) (113,733)
Repayments of notes payable........................................................ (55,000) (25,000)
Proceeds from issuance of subordinated debentures.................................. 77,322 87,631
Repayments of subordinated debentures.............................................. (82,681) --
Payment of preferred stock dividends............................................... (524) (524)
--------- ---------
Net cash (used in) provided by financing activities........................... (85,232) 191,051
--------- ---------
Net decrease in cash and cash equivalents..................................... (109,021) (42,385)
Cash and cash equivalents, beginning of period.......................................... 369,557 286,652
--------- ---------
Cash and cash equivalents, end of period................................................ $ 260,536 244,267
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on liabilities......................................................... $ 247,354 180,626
Income taxes.................................................................... 1,636 28,472
========= =========
Noncash investing and financing activities:
Securitization and transfer of loans to investment securities................... $ -- 138,944
Loans held for sale transferred to loan portfolio............................... 86,559 --
Loans transferred to other real estate.......................................... 10,169 6,199
========= =========
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 nine months ended September 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 SBLS LLC, which is 76.0%
owned by First Bank and 24.0% owned by First Capital America, Inc. (FCA) as of
September 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 Statement of Financial Accounting Standards
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. Goodwill was $23.0 million and core deposit intangibles, which
are being amortized over five years utilizing the straight-line method, were
$4.7 million. Goodwill and core deposit intangibles associated with this
acquisition are not deductible for tax purposes. Royal Oaks Bancshares, Inc. and
Royal Oaks Bank, ssb were merged with and into SFC and First Bank, respectively,
at the time of the acquisition.
Pending Acquisitions. On August 3, 2007, First Banks entered into an Agreement
and Plan of Merger providing for the acquisition of Coast Financial Holdings,
Inc. 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 September
30, 2007, Coast had assets of $664.5 million, loans, net of unearned discount,
of $564.9 million, deposits of $632.3 million and stockholders' equity of $22.3
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 a specified date immediately prior to the date the transaction closes
(Determination Date), 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 the
Determination Date, 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. As of September 30,
2007, the Deficiency, which is subject to further adjustment prior to the
closing date of the transaction, was $1.3 million. The transaction, which is
subject to regulatory and shareholder approvals, is expected to be completed
during the fourth quarter of 2007.
Acquisition and Integration Costs. First Banks accrues certain costs associated
with its acquisitions as of the respective consummation dates. The accrued costs
relate to adjustments to the staffing levels of the acquired entities or to the
anticipated termination of information technology or item processing contracts
of the acquired entities prior to their stated contractual expiration dates. The
most significant costs that First Banks incurs relate to salary continuation
agreements, or other similar agreements, of executive management and certain
other employees of the acquired entities that were in place prior to the
acquisition dates. These agreements provide for payments over periods generally
ranging from two to 15 years and are triggered as a result of the change in
control of the acquired entity. Other severance benefits for employees that are
terminated in conjunction with the integration of the acquired entities into
First Banks' existing operations are normally paid to the recipients within 90
days of the respective consummation date and are expensed in the consolidated
statements of income as incurred. The accrued severance balance of $189,000 as
of September 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
Nine Months Ended September 30, 2007:
Amounts accrued during the period.................... 100 512 612
Payments............................................. (297) (512) (809)
------ ----- -----
Balance at September 30, 2007............................ $ 189 -- 189
====== ===== =====
Other Corporate Transactions. On July 19, 2007, First Bank completed the sale of
two banking offices located in Denton and Garland, Texas (collectively, Branch
Offices) to Synergy Bank, SSB, a subsidiary of Premier Bancshares, Inc.,
resulting in a pre-tax gain of $1.0 million. At the time of the transaction, the
Branch Offices had loans, net of unearned discount, of $911,000 and deposits of
$52.0 million.
During the nine months ended September 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
Brentwood (San Francisco), California September 24, 2007
(3) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of amortization, were comprised of the
following at September 30, 2007 and December 31, 2006:
September 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 (1)............ $ 64,201 (25,917) 60,867 (18,850)
Customer list intangibles............... 23,320 (2,034) 23,320 (913)
Goodwill associated with
P&A Transactions (2)................. 2,210 (1,395) 2,210 (1,288)
-------- -------- -------- --------
Total............................. $ 89,731 (29,346) 86,397 (21,051)
======== ======== ======== ========
Unamortized intangible assets:
Goodwill associated with
stock purchases...................... $253,699 230,036
======== ========
---------------
(1) The core deposit intangibles' gross carrying amount and accumulated amortization were reduced
by $1.4 million and $1.0 million, respectively, during the third quarter of 2007 in conjunction
with the sale of the Branch Offices on July 19, 2007, as further described in Note 2 to the
Consolidated Financial Statements.
(2) P&A Transactions represent transactions structured as purchases of certain assets and assumption
of selected liabilities.
Amortization of intangible assets was $3.1 million and $9.3 million for the
three and nine months ended September 30, 2007, respectively, and $2.2 million
and $5.4 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....................................................... $ 3,111
2008................................................................. 12,446
2009................................................................. 10,660
2010................................................................. 10,282
2011................................................................. 7,980
2012................................................................. 2,399
Thereafter........................................................... 13,507
--------
Total............................................................ $ 60,385
========
Changes in the carrying amount of goodwill for the three and nine months ended
September 30, 2007 and 2006 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2007 2006 2007 2006
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $254,943 226,811 230,958 167,056
Goodwill acquired during the period (1)............. (121) 4,365 24,538 64,171
Acquisition-related adjustments (2)................. (23) 646 (625) 666
Other adjustments (3)............................... (250) -- (250) --
Amortization - P&A Transactions..................... (35) (36) (107) (107)
-------- -------- -------- --------
Balance, end of period.............................. $254,514 231,786 254,514 231,786
======== ======== ======== ========
---------------
(1) Goodwill acquired during the period includes additional purchase accounting adjustments
pertaining to the acquisition of Royal Oaks 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.
(2) Acquisition-related adjustments include additional purchase accounting adjustments for prior
years' acquisitions 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. Acquisition-related adjustments recorded in 2007 primarily
pertain to the acquisition of San Diego Community Bank in August 2006 and acquisition-related
adjustments recorded in 2006 primarily pertain to the acquisition of Northway State Bank in
October 2005.
(3) Other adjustments recorded in 2007 pertain to the sale of the Branch Offices on July 19, 2007,
as further described in Note 2 to the Consolidated Financial Statements.
(4) SERVICING RIGHTS
Mortgage Banking Activities. At September 30, 2007 and December 31, 2006, First
Banks serviced mortgage loans for others totaling $982.8 million and $1.04
billion, respectively. Changes in mortgage servicing rights, net of
amortization, for the three and nine months ended September 30, 2007 and 2006
were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2007 2006 2007 2006
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................... $ 5,004 7,237 5,867 6,623
Originated mortgage servicing rights (1)............... 286 275 941 3,003
Amortization........................................... (637) (998) (2,155) (3,112)
------- ------ ------ ------
Balance, end of period................................. $ 4,653 6,514 4,653 6,514
======= ====== ====== ======
------------------------
(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 nine months ended September 30, 2007 and 2006.
Amortization of mortgage servicing rights at September 30, 2007 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2007 remaining........................................................... $ 460
2008..................................................................... 1,258
2009..................................................................... 836
2010..................................................................... 660
2011..................................................................... 548
2012..................................................................... 548
Thereafter............................................................... 343
-------
Total................................................................ $ 4,653
=======
Other Servicing Activities. At September 30, 2007 and December 31, 2006, First
Banks serviced United States Small Business Administration (SBA) loans for
others totaling $150.0 million and $143.4 million, respectively. Changes in SBA
servicing rights, net of amortization and impairment, for the three and nine
months ended September 30, 2007 and 2006 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2007 2006 2007 2006
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................... $ 7,620 8,209 8,064 9,489
Originated SBA servicing rights........................ 709 215 1,699 533
Amortization........................................... (417) (396) (1,233) (1,254)
Impairment............................................. (56) (180) (674) (920)
------- ------ ------ ------
Balance, end of period................................. $ 7,856 7,848 7,856 7,848
======= ====== ====== ======
Amortization of SBA servicing rights at September 30, 2007 has been estimated in
the following table:
(dollars expressed in thousands)
Year ending December 31:
2007 remaining........................................................... $ 426
2008..................................................................... 1,493
2009..................................................................... 1,219
2010..................................................................... 992
2011..................................................................... 805
2012..................................................................... 651
Thereafter............................................................... 2,270
-------
Total................................................................ $ 7,856
=======
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of basic and diluted earnings per share (EPS)
for the three and nine months ended September 30, 2007 and 2006:
Per Share
Income Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Three months ended September 30, 2007:
Basic EPS - income available to common stockholders...... $14,800 23,661 $ 625.48
Effect of dilutive securities:
Class A convertible preferred stock.................... 192 370 (1.64)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $14,992 24,031 $ 623.84
======= ======= =========
Three months ended September 30, 2006:
Basic EPS - income available to common stockholders...... $29,464 23,661 $1,245.28
Effect of dilutive securities:
Class A convertible preferred stock.................... 192 430 (14.22)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $29,656 24,091 $1,231.06
======= ======= =========
Nine months ended September 30, 2007:
Basic EPS - income available to common stockholders...... $53,445 23,661 $2,258.77
Effect of dilutive securities:
Class A convertible preferred stock.................... 513 385 (14.87)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $53,958 24,046 $2,243.90
======= ======= =========
Nine months ended September 30, 2006:
Basic EPS - income available to common stockholders...... $80,225 23,661 $3,390.62
Effect of dilutive securities:
Class A convertible preferred stock.................... 513 456 (42.78)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $80,738 24,117 $3,347.84
======= ======= =========
(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 $7.5
million and $23.0 million for the three and nine months ended September 30,
2007, respectively, and $7.8 million and $22.8 million for the comparable
periods in 2006. First Services, L.P. leases information technology and other
equipment from First Bank. First Services, L.P. paid First Bank rental fees for
the use of that equipment of $903,000 and $2.9 million during the three and nine
months ended September 30, 2007, respectively, and $976,000 and $3.2 million for
the comparable periods in 2006.
First Brokerage America, L.L.C., a limited liability company indirectly owned by
First Banks' Chairman and members of his immediate family, received
approximately $1.2 million and $3.6 million for the three and nine months ended
September 30, 2007, respectively, and $703,000 and $2.1 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. First Brokerage America, L.L.C. paid approximately
$51,000 and $137,000 for the three and nine months ended September 30, 2007,
respectively, and $28,000 and $79,000 for the comparable periods in 2006, to
First Bank in rental payments for occupancy of First Bank premises from which
brokerage business is conducted.
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 and third quarter of 2007, First Bank contributed $1.3 million
and $1.5 million, respectively, to the Foundation, thereby bringing the total
value of charitable contributions to the Foundation to $4.5 million for the nine
months ended September 30, 2007. During the three and nine months ended
September 30, 2006, First Bank contributed $1.5 million and $4.5 million,
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 $296,000 for the three and nine
months ended September 30, 2007, respectively, and $96,000 and $287,000 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 included
(a) an increase in the warehouse line of credit from $50.0 million to $60.0
million; and (b) 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, 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 Offered 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. During the third quarter of 2007, SBLS LLC further
modified the Agreement with First Bank. The primary modifications to the
structure of the financing arrangement included (a) an extension of the maturity
date to June 30, 2010 and (b) interest was payable monthly, in arrears, on the
outstanding balances at a rate equal to First Bank's prime lending rate minus
100 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 LIBOR plus 165 basis points, the three-month LIBOR plus 165 basis
points or the long-term interest rate swap rate plus 165 basis points, provided
that no more than three fixed-rate interest periods would be in effect at any
given time and no interest period would extend beyond the maturity date.
On September 28, 2007, the existing loan under the Agreement was refinanced by a
Promissory Note entered into between SBLS LLC and First Bank that provides a
$75.0 million unsecured revolving line of credit with a maturity date of
September 30, 2008. Interest is payable monthly, in arrears, on the outstanding
loan balances at a current rate equal to the 30-day LIBOR plus 40 basis points.
The balance of advances outstanding under the Promissory Note was $47.7 million
at September 30, 2007. The balance of advances outstanding under the Agreement
was $47.5 million at December 31, 2006. Interest expense recorded by SBLS LLC
under the Agreement and the Promissory Note for the three and nine months ended
September 30, 2007 was $835,000 and $2.7 million, respectively, and $796,000 and
$2.0 million for the comparable periods in 2006. The balance of the advances
under the Promissory Note 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 $54.8
million and $55.9 million at September 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 now
completed second phase of the project, of which $367,000 in payments were made
in the fourth quarter of 2006 and an additional $12,000 in payments were made
during the first quarter of 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
September 30, 2007, First Banks and First Bank were each well capitalized. As of
September 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 September 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
September 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.......................... $1,024,818 10.64% $ 929,688 10.25% 8.0% 10.0%
First Bank........................... 981,660 10.22 925,013 10.23 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks.......................... 843,366 8.76 789,967 8.71 4.0 6.0
First Bank........................... 861,302 8.96 811,530 8.97 4.0 6.0
Tier 1 capital (to average assets):
First Banks.......................... 843,366 8.41 789,967 8.13 3.0 5.0
First Bank........................... 861,302 8.61 811,530 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 September 30, 2007, would reduce First Banks'
Tier 1 capital (to risk-weighted assets) and Tier 1 capital (to average assets)
to 7.88% and 7.56%, 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 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
---------------------------- --------------------------- ---------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities.................. $ 1,141,782 1,439,118 23,735 25,828 1,165,517 1,464,946
Loans, net of unearned discount........ 8,132,773 7,666,481 -- -- 8,132,773 7,666,481
Goodwill and other intangible assets... 314,084 295,382 -- -- 314,084 295,382
Total assets........................... 10,241,940 10,116,246 30,096 42,468 10,272,036 10,158,714
Deposits............................... 8,668,137 8,550,062 (45,792) (106,976) 8,622,345 8,443,086
Other borrowings....................... 310,772 373,899 -- -- 310,772 373,899
Notes payable.......................... -- -- 10,000 65,000 10,000 65,000
Subordinated debentures................ -- -- 353,733 297,966 353,733 297,966
Stockholders' equity................... 1,158,969 1,086,876 (302,108) (286,441) 856,861 800,435
=========== ========== ======== ======== ========== ==========
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
---------------------------- --------------------------- ---------------------------
Three Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
---------------------------- --------------------------- ---------------------------
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income........................ $ 177,769 168,024 336 269 178,105 168,293
Interest expense....................... 73,840 61,445 6,419 7,664 80,259 69,109
----------- ---------- -------- -------- ---------- ----------
Net interest income.................. 103,929 106,579 (6,083) (7,395) 97,846 99,184
Provision for loan losses.............. 17,000 2,000 -- -- 17,000 2,000
----------- ---------- -------- -------- ---------- ----------
Net interest income after provision
for loan losses.................... 86,929 104,579 (6,083) (7,395) 80,846 97,184
----------- ---------- -------- -------- ---------- ----------
Noninterest income..................... 26,991 29,840 (151) 154 26,840 29,994
Amortization of intangible assets...... 3,142 2,243 -- -- 3,142 2,243
Other noninterest expense.............. 80,244 78,117 1,143 113 81,387 78,230
----------- ---------- -------- -------- ---------- ----------
Income before provision for income
taxes and minority interest in
income (loss) of subsidiary........ 30,534 54,059 (7,377) (7,354) 23,157 46,705
Provision for income taxes............. 10,703 19,827 (2,616) (2,578) 8,087 17,249
----------- ---------- -------- -------- ---------- ----------
Income before minority interest in
income (loss) of subsidiary........ 19,831 34,232 (4,761) (4,776) 15,070 29,456
Minority interest in income (loss)
of subsidiary...................... 74 (204) -- -- 74 (204)
----------- ---------- -------- -------- ---------- ----------
Net income........................... $ 19,757 34,436 (4,761) (4,776) 14,996 29,660
=========== ========== ======== ======== ========== ==========
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
---------------------------- --------------------------- ---------------------------
Nine Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30,
---------------------------- --------------------------- ---------------------------
2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income........................ $ 526,415 472,551 836 707 527,251 473,258
Interest expense....................... 218,164 165,808 19,609 21,720 237,773 187,528
----------- ---------- -------- -------- ---------- ----------
Net interest income.................. 308,251 306,743 (18,773) (21,013) 289,478 285,730
Provision for loan losses.............. 26,000 8,000 -- -- 26,000 8,000
----------- ---------- -------- -------- ---------- ----------
Net interest income after provision
for loan losses.................... 282,251 298,743 (18,773) (21,013) 263,478 277,730
----------- ---------- -------- -------- ---------- ----------
Noninterest income..................... 75,787 81,596 (327) (226) 75,460 81,370
Amortization of intangible assets...... 9,295 5,440 -- -- 9,295 5,440
Other noninterest expense.............. 241,308 228,535 4,062 2,364 245,370 230,899
----------- ---------- -------- -------- ---------- ----------
Income before provision for income
taxes and minority interest in
income (loss) of subsidiary........ 107,435 146,364 (23,162) (23,603) 84,273 122,761
Provision for income taxes............. 38,658 50,717 (8,529) (8,265) 30,129 42,452
----------- ---------- -------- -------- ---------- ----------
Income before minority interest in
income (loss) of subsidiary........ 68,777 95,647 (14,633) (15,338) 54,144 80,309
Minority interest in income (loss)
of subsidiary...................... 175 (440) -- -- 175 (440)
----------- ---------- -------- -------- ---------- ----------
Net income........................... $ 68,602 96,087 (14,633) (15,338) 53,969 80,749
=========== ========== ======== ======== ========== ==========
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at September 30, 2007 and
December 31, 2006:
September 30, December 31,
2007 2006
---- ----
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily......................................................... $206,872 169,874
Term.......................................................... 100,000 200,000
FHLB advances..................................................... 3,900 4,025
-------- --------
Total.................................................... $310,772 373,899
======== ========
The maturity dates, par amounts, interest rate spreads and interest rate floor
strike prices on First Bank's term repurchase agreements as of September 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)
September 30, 2007:
October 12, 2010............................. $ 100,000 LIBOR - 0.5100% 4.50%
=========
December 31, 2006:
July 19, 2010 (2)............................ $ 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 the term repurchase agreements is based on the three-month LIBOR plus or
minus 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.
(2) First Bank terminated this term repurchase agreement on August 7, 2007, resulting in a prepayment
penalty of $330,000.
(10) NOTES PAYABLE
On August 8, 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 its existing $96.0 million First Amendment to its
Amended and Restated Secured Credit Agreement, dated August 10, 2006
(Predecessor Agreement). 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 sub-facility for the issuance of standby letters of credit;
(ii) a $10.0 million sub-facility for swingline loans (from the Agent as
Swingline Lender); and (iii) three-year term loan conversion options with
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 term loan, which had a balance of $35.0 million as of
August 8, 2007 (Existing Term Loan). Each term loan, including the Existing Term
Loan, will reduce the availability under the revolving credit facility. First
Banks has the right to request an increase in 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 Term Loan is payable in
quarterly installments of $5.0 million, at a minimum, with the remaining 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 advance date(s) of
the swingline loans.
Letters of credit issued to unaffiliated third parties on behalf of First Banks
under the $5.0 million standby letter of credit sub-facility portion of the
Secured Credit Agreement were $450,000 at September 30, 2007 and December 31,
2006, and had not been drawn on by the counterparties. First Banks had not drawn
any advances on the revolving credit sub-facility portion of the Secured Credit
Agreement as of September 30, 2007 and December 31, 2006. During the nine months
ended September 30, 2007, First Banks made payments of $55.0 million on the
outstanding principal balance of the Existing Term Loan, reducing the balance
from $65.0 million at December 31, 2006 to $10.0 million at September 30, 2007.
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. First Banks and First Bank were in
compliance with all restrictions and requirements of the Secured Credit
Agreement and the Predecessor Agreement at September 30, 2007 and December 31,
2006.
(11) SUBORDINATED DEBENTURES
First Banks has formed or assumed various affiliated Delaware or Connecticut
statutory and business trusts (collectively, the Trusts) that were created for
the sole purpose of issuing trust preferred securities. The trust preferred
securities were issued in private placements, with the exception of First
Preferred Capital Trust III and First Preferred Capital Trust IV, which were
issued in underwritten public offerings. First Banks owns all of the common
securities of the Trusts. The gross proceeds of the offerings were used by the
Trusts to purchase fixed rate or variable rate subordinated debentures from
First Banks. The subordinated debentures are the sole asset of the Trusts. In
connection with the issuance of the trust preferred securities, First Banks made
certain guarantees and commitments that, in the aggregate, constitute a full and
unconditional guarantee by First Banks of the obligations of the Trusts under
the trust preferred securities. First Banks' distributions accrued on the
subordinated debentures were $5.9 million and $17.6 million for the three and
nine months ended September 30, 2007, respectively, and $6.1 million and $16.1
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 September 30, 2007 and December
31, 2006 were as follows:
Subordinated
Debentures
--------------------
Trust September December
Maturity Call Interest Preferred 30, 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 --
First Bank Statutory Trust
X (6) August 2007 September 15, 2037 September 15, 2012 + 230.0 bp 15,000 15,464 --
First Bank Statutory Trust
IX (7) September 2007 December 15, 2037 December 15, 2012 + 225.0 bp 25,000 25,774 --
First Bank Statutory Trust
XI (8) September 2007 December 15, 2037 December 15, 2012 + 285.0 bp 10,000 10,310 --
Fixed Rate
- ----------
First Preferred Capital
Trust III (9) 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 are based on either a fixed rate or a variable rate. The variable
rate is 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.
(6) On August 31, 2007, First Bank Statutory Trust X, a newly formed Delaware statutory trust, issued 15,000 variable rate trust
preferred securities at$1,000 per security in a private placement, and issued 464 common securities to First Banks at $1,000
per security. Interest is payable quarterly in arrears, beginning on December 15, 2007.
(7) On September 20, 2007, First Bank Statutory Trust IX, 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 December 15, 2007.
(8) On September 28, 2007, First Bank Statutory Trust XI, a newly formed Delaware statutory trust, issued 10,000 variable rate
trust preferred securities at $1,000 per security in a private placement, and issued 310 common securities to First Banks at
$1,000 per security. Interest is payable quarterly in arrears, beginning on December 15, 2007.
(9) 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.
First Banks' 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. First Banks' liability for unrecognized tax
benefits was $11.7 million at September 30, 2007, of which $2.1 million would
affect the effective tax rate, if recognized. During the nine months ended
September 30, 2007, First Banks recorded additional liabilities for unrecognized
tax benefits of $9.2 million that, if recognized, would decrease the effective
tax rate by $684,000, net of the Federal tax benefit. First Banks expects a
reduction of $759,000 in unrecognized state 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 $442,000, net of the Federal tax benefit.
In accordance with FIN 48, it is First Banks' 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 September 30, 2007, the balance of
interest accrued on unrecognized tax benefits was $944,000 and $1.4 million,
respectively. The amount of interest expense recognized during the three and
nine months ended September 30, 2007 was ($2,000) and $468,000, respectively.
First Banks expects a reduction of approximately $216,000 in 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 nine months ended September 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 September 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 September 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
In October 2007, First Banks completed the sale of approximately $9.4 million of
certain repurchased and other residential mortgage loans that were transferred
to loans held for sale during the quarter ended September 30, 2007. First Banks
did not recognize a gain or loss on the sale of these loans in October 2007 as
these loans were carried at lower of cost or market value at September 30, 2007.
The sale resulted in a decrease in nonperforming loans of approximately $8.6
million, in aggregate.
In November 2007, First Banks securitized approximately $102.0 million of
certain residential mortgage loans held in its loan portfolio and subsequently
sold the securities. In conjunction with the securitization of the loans and the
sale of the securities, First Banks recorded a net gain of approximately
$146,000.
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 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 September 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 September 30, 2007, we had assets of $10.27 billion, loans, net of unearned
discount, of $8.13 billion, deposits of $8.62 billion and stockholders' equity
of $856.9 million, and currently operate 198 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 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 $10.27 billion at September 30, 2007 reflecting a $113.3
million increase from $10.16 billion at December 31, 2006. The net increase in
our total assets reflects internal loan growth, our acquisition of Royal Oaks
Bancshares, Inc., or Royal Oaks, on February 28, 2007, and the opening of six de
novo branch offices during the first nine months of 2007, offset by a net
decrease in our investment securities portfolio and in cash and short-term
investments, which include federal funds sold and interest-bearing deposits. 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 $466.3 million to $8.13 billion at
September 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, partially offset by a decrease in loans held for sale
as a result of a decline in one-to-four family mortgage loan production volumes,
as further discussed under "--Loans and Allowance for Loan Losses." Funds
available from maturities of investment securities and deposit growth, as well
as funds available from short-term investments, were utilized to fund internal
loan growth.
Our investment securities portfolio decreased $299.4 million to $1.17 billion at
September 30, 2007, from $1.46 billion at December 31, 2006. Funds provided by
maturities of investment securities were reinvested in higher-yielding
investment securities as well as used to fund internal loan growth. The decrease
in our investment securities portfolio also includes an $81.2 million reduction
in our trading portfolio following the liquidation of our trading portfolio in
July 2007.
Goodwill and other intangible assets increased $18.7 million to $314.1 million
at September 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 $38.2
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 branch relocations, along with an increase in deferred
income taxes of $2.3 million, as more fully described in Note 12 to our
Consolidated Financial Statements. The overall increase in our total assets was
partially offset by an $11.3 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 six de novo branch offices during the first nine months of 2007,
located in Sacramento, San Diego and San Francisco, California, Houston, Texas,
and two in the St. Louis, Missouri metropolitan area.
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 $179.3 million to $8.62 billion at September 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. Our deposit growth during the nine
months ended September 30, 2007 reflects a $323.7 million increase in our
savings and money market accounts, and a $58.6 million increase in our time
deposits of $100,000 or more; partially offset by an $85.2 million decline in
our noninterest-bearing demand accounts, a $60.5 million decline in our
interest-bearing demand deposits, and a $57.3 million decline in our other time
deposits. Organic 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. Deposits at September
30, 2007 decreased $131.0 million from $8.75 billion at June 30, 2007. The
decrease in deposits during the third quarter of 2007 reflects the sale of two
banking offices located in Denton and Garland, Texas on July 19, 2007, which
resulted in a decrease in deposits of $52.0 million. In addition, we completed
certain margin improvement initiatives associated with our deposit portfolio
during the third quarter of 2007. These initiatives, in addition to increased
competition on interest rates within our market areas, contributed to the
attrition of certain deposits during the quarter. The impact of continued
aggressive competition within our market areas, coupled with an anticipated
amount of attrition associated with our 2006 and 2007 acquisitions and our
recent margin improvement initiatives, continue to have a significant influence
on the level of our deposits and the interest rates paid on those deposits.
Other borrowings, which are comprised of securities sold under agreements to
repurchase and Federal Home Loan Bank, or FHLB, advances, were $310.8 million at
September 30, 2007 compared to $373.9 million at December 31, 2006. The decrease
reflects the termination of a $100.0 million term repurchase agreement in August
2007, as further described in Note 9 to our Consolidated Financial Statements,
partially offset by a $37.0 million increase in retail securities sold under
agreements to repurchase.
Notes payable decreased $55.0 million to $10.0 million at September 30, 2007 as
a result of scheduled quarterly principal installment payments of $5.0 million
and additional prepayments of $40.0 million on our term loan facility, as
further described in Note 10 to our Consolidated Financial Statements.
Subordinated debentures increased $55.8 million to $353.7 million at September
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 to First Bank Capital Trust, or FBCT, in conjunction
with the redemption of the cumulative variable rate trust preferred securities
issued by FBCT. During the third quarter of 2007, we issued an additional $51.5
million of variable rate subordinated debentures in private placements to three
newly formed statutory trusts. On August 31, 2007, we issued $15.5 million of
variable rate subordinated debentures to First Bank Statutory Trust X; on
September 20, 2007, we issued $25.8 million of variable rate subordinated
debentures to First Bank Statutory Trust IX; and on September 28, 2007, we
issued $10.3 million of variable rate subordinated debentures to First Bank
Statutory Trust XI, 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 $58.2 million to $71.8 million at September 30, 2007 from $130.0
million at December 31, 2006.
Stockholders' equity was $856.9 million and $800.4 million at September 30, 2007
and December 31, 2006, respectively. The increase of $56.4 million is
attributable to: (a) net income of $54.0 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; and (c) a $511,000 decrease in
accumulated other comprehensive loss, comprised of a $5.1 million increase in
accumulated other comprehensive income related to an increase in the fair value
of our derivative financial instruments, and a $4.5 million increase in
accumulated other comprehensive loss related to a decrease in the fair value of
our available-for-sale investment securities portfolio; partially offset by (d)
dividends of $524,000 paid on our Class A and Class B preferred stock.
Results of Operations
Net Income. Net income was $15.0 million for the three months ended September
30, 2007, compared to $29.7 million for the comparable period in 2006. Net
income was $54.0 million for the nine months ended September 30, 2007, compared
to $80.7 million for the comparable period in 2006. Our return on average assets
was 0.58% and 0.70% for the three and nine months ended September 30, 2007,
respectively, compared to 1.22% and 1.14% for the comparable periods in 2006.
Our return on average stockholders' equity was 7.06% and 8.70% for the three and
nine months ended September 30, 2007, respectively, compared to 16.01% and
15.08% for the comparable periods in 2006. The decline in earnings for the three
and nine months ended September 30, 2007 reflects an increase in our provision
for loan losses; compression of our net interest margin due primarily to
increased deposit costs and competitive pressure on loan yields; lower
noninterest income levels primarily attributable to reduced mortgage banking
revenues; and higher noninterest expense levels primarily related to recent
acquisitions and expansionary de novo branch offices.
Our net interest income was $97.8 million and $289.5 million for the three and
nine months ended September 30, 2007, respectively, compared to $99.2 million
and $285.7 million for the comparable periods in 2006. Our net interest margin
declined to 4.12% for the three and nine months ended September 30, 2007,
compared to 4.45% and 4.39% for the comparable periods in 2006. 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 increased time deposits and savings and money market
accounts, in contrast to demand accounts, as well as competitive pressures on
loan yields. The average rates paid on interest-bearing deposits increased to
3.70% for the three and nine months ended September 30, 2007, respectively,
compared to the same periods in 2006, while the average yield earned on
interest-earning assets decreased to 7.48% for the three months ended September
30, 2007 and increased to 7.49% for the nine months ended September 30, 2007,
compared to the same periods in 2006, contributing to a reduction in our net
interest margin. Average interest-earning assets increased 6.6% and 7.9% to
$9.47 billion and $9.44 billion for the three and nine months ended September
30, 2007, respectively, from $8.88 billion and $8.74 billion for the comparable
periods in 2006. See further discussion under "--Net Interest Income."
Our provision for loan losses increased to $17.0 million and $26.0 million for
the three and nine months ended September 30, 2007, respectively, compared to
$2.0 million and $8.0 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 $26.8 million and $75.5 million for the three and nine
months ended September 30, 2007, respectively, compared to $30.0 million and
$81.4 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. The gain on loans
sold and held for sale decreased to $3.5 million and $12.0 million for the three
and nine months ended September 30, 2007, respectively, compared to $4.6 million
and $17.5 million for the same periods in 2006 due primarily to a decrease in
the volume of loans originated and sold. Gains on loans sold and held for sale
for the nine months ended September 30, 2006 also include a $1.7 million gain on
the sale of certain nonperforming loans and $2.1 million of increased loan
servicing income generated from the capitalization of mortgage servicing rights
related to the securitization of $138.9 million of residential mortgage loans.
The decrease in noninterest income is also attributable to a $2.8 million gain
recognized in the third quarter of 2006 on the cash exchange of stock received
as settlement in full of a previously charged-off loan. 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; increased insurance fee
and commission income generated through our recently acquired insurance
brokerage subsidiary in March 2006; a gain on the sale of First Bank's Denton
and Garland, Texas branches of $1.0 million during the third quarter of 2007;
and a decrease in losses on sales of investment securities. See further
discussion under "--Noninterest Income."
Noninterest expense was $84.5 million and $254.7 million for the three and nine
months ended September 30, 2007, respectively, compared to $80.5 million and
$236.3 million for the same periods in 2006. We attribute the increase in
overall expense levels, specifically salaries and employee benefits expense,
occupancy and furniture and equipment expense, and amortization of intangible
assets, to 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 six de novo branch offices during the first nine months of
2007. We continue to closely monitor our noninterest expense levels, and have
implemented certain expense reduction measures, including but not limited to,
certain staffing reductions primarily associated with our mortgage banking
division in light of the discontinuation of the origination and sale of
sub-prime loans in the secondary market. We are also 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 $290.7 million for the nine months ended September 30, 2007,
compared to $286.9 million for the comparable period in 2006. Net interest
income, expressed on a tax-equivalent basis, decreased to $98.3 million for the
three months ended September 30, 2007, compared to $99.6 million for the
comparable period in 2006. Our net interest margin declined 33 and 27 basis
points to 4.12% for the three and nine months ended September 30, 2007, from
4.45% and 4.39% for the 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 expressed 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 tax-equivalent yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
The increase in net interest income during the nine months ended September 30,
2007 compared to the same period in 2006 reflects an increase in average
interest-earning assets provided by internal growth and our 2006 and 2007
acquisitions, and 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 decrease in net interest income
during the three months ended September 30, 2007 compared to the same period in
2006 reflects lower rates earned on interest-earning assets, primarily
attributable to a reduction in yields on our loan portfolio, as discussed below,
and an increase in average interest-bearing liabilities and interest rates paid
on those liabilities, partially offset by an increase in average
interest-earning assets.
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 and money market accounts, in contrast to demand accounts. The average
rates paid on our interest-bearing deposits increased 37 and 62 basis points to
3.70% during the three and nine months ended September 30, 2007, respectively,
compared to 3.33% and 3.08% for the same periods in 2006. The average yield
earned on our interest-earning assets decreased five basis points to 7.48% for
the three months ended September 30, 2007, compared to 7.53% for the same period
in 2006, and increased 23 basis points to 7.49% for the nine months ended
September 30, 2007, from 7.26% for the same period in 2006, contributing to a
reduction of our net interest margin. Average interest-earning assets increased
$586.3 million, or 6.6%, to $9.47 billion for the three months ended September
30, 2007, from $8.88 billion for the comparable period in 2006, and average
interest-earning assets increased $694.5 million, or 7.9%, to $9.44 billion for
the nine months ended September 30, 2007, from $8.74 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
$619.3 million, or 8.2%, to $8.16 billion for the three months ended September
30, 2007, from $7.54 billion for the comparable period in 2006, and average
interest-bearing liabilities increased $725.2 million, or 9.8%, to $8.11 billion
for the nine months ended September 30, 2007, from $7.39 billion for the
comparable period in 2006.
Interest income on our loan portfolio, expressed on a tax-equivalent basis,
increased to $160.4 million and $472.3 million for the three and nine months
ended September 30, 2007, respectively, compared to $153.5 million and $426.9
million for the comparable periods in 2006. Average loans, net of unearned
discount, increased $441.7 million and $573.8 million to $8.08 billion and $7.96
billion for the three and nine months ended September 30, 2007, respectively,
from $7.63 billion and $7.38 billion for the comparable periods in 2006. The
yield on our loan portfolio decreased 10 basis points to 7.88% for the three
months ended September 30, 2007, compared to 7.98% for the comparable period in
2006, reflecting competitive pressures on loan yields within our markets, an
increase in the average amount of nonaccrual loans during the third quarter of
2007 compared to the same period in 2006, and a 50 basis point drop in the prime
rate on September 18, 2007. The yield on our loan portfolio increased 21 basis
points to 7.94% for the nine months ended September 30, 2007, compared to 7.73%
for the same period in 2006, reflecting the rise in short-term interest rates
during the period. 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 and third quarters 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 nine months of 2007 compared to the same period in 2006 primarily
resulted from an increase in average commercial, financial and agricultural
loans of $332.8 million; an increase in average real estate construction and
development loans of $208.8 million; and an increase in average real estate
mortgage loans of $88.0 million.
Interest income on our investment securities, expressed on a tax-equivalent
basis, increased to $16.7 million and $50.5 million for the three and nine
months ended September 30, 2007, respectively, compared to $14.1 million and
$44.3 million for the comparable periods in 2006. Average investment securities
were $1.28 billion and $1.34 billion for the three and nine months ended
September 30, 2007, respectively, compared to $1.17 billion and $1.27 billion
for the comparable periods in 2006. The yield on our investment portfolio was
5.16% and 5.06% for the three and nine months ended September 30, 2007,
respectively, compared to 4.78% and 4.66% 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 maturities of investment securities were
partially utilized to reinvest in higher-yielding available-for-sale investment
securities. The remaining funds were utilized to fund internal loan growth,
along with funds available from deposit growth and short-term investments. In
March 2006 and April 2006, our investment securities increased $77.1 million and
$61.8 million, respectively, due to the securitization of $138.9 million of
certain of our residential mortgage loans held in our loan portfolio.
Additionally, as further discussed under "--Interest Rate Risk Management," we
terminated $200.0 million of our term repurchase agreements during the first and
second quarters of 2006 and sold $200.0 million of available-for-sale investment
securities associated with the termination of the term repurchase agreements.
During the second quarter of 2006, we also 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 $69.4 million and
$204.4 million for the three and nine months ended September 30, 2007,
respectively, compared to $57.0 million and $153.2 million for the comparable
periods in 2006. Average interest-bearing deposits increased to $7.45 billion
and $7.39 billion for the three and nine months ended September 30, 2007,
respectively, from $6.78 billion and $6.64 billion for the comparable periods in
2006. The increase in average interest-bearing deposits reflects internal growth
through enhanced product campaigns, and growth provided by our acquisitions
completed during 2006 and 2007, which provided interest-bearing deposits of
$405.1 million and $134.2 million, in aggregate, respectively, as of the dates
of acquisition. The aggregate weighted average rate paid on our deposit
portfolio was 3.70% for the three and nine months ended September 30, 2007,
compared to 3.33% and 3.08% for the comparable periods in 2006, reflecting
increases of 37 and 62 basis points, respectively. The increase in the aggregate
weighted average rate paid for these periods is reflective of competitive
pricing conditions within our markets and a change in the mix of our average
deposits to increased time deposits and savings and money market accounts.
Average time deposits were $3.82 billion and $3.84 billion for the three and
nine months ended September 30, 2007, respectively, compared to $3.73 billion
and $3.57 billion for the comparable periods in 2006. Average savings and money
market deposits were $2.69 billion and $2.59 billion for the three and nine
months ended September 30, 2007, respectively, compared to $2.10 billion and
$2.12 billion for the comparable periods in 2006. Average interest-bearing
demand deposits were $944.5 million and $962.4 million for the three and nine
months ended September 30, 2007, respectively, compared to $949.2 million and
$960.0 million for the comparable periods in 2006.
Interest expense on our other borrowings was $4.4 million and $13.7 million for
the three and nine months ended September 30, 2007, respectively, compared to
$4.3 million and $12.3 million for the comparable periods in 2006. Average other
borrowings were $374.1 million and $374.8 million for the three and nine months
ended September 30, 2007, respectively, and $375.3 million and $382.3 million
for the comparable periods in 2006. The aggregate weighted average rate paid on
our other borrowings was 4.62% and 4.87% for the three and nine months ended
September 30, 2007, respectively, compared to 4.57% and 4.29% for the comparable
periods in 2006. The increased rates paid on our other borrowings reflect the
rise in short-term interest rates during the periods. Average other borrowings
reflect: (a) the termination of $200.0 million of term repurchase agreements
during the first six months of 2006; (b) a $100.0 million term repurchase
agreement entered into during the third quarter of 2006; and (c) the subsequent
termination of the $100.0 million term repurchase agreement in August 2007. 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 $544,000 and $2.1 million for the
three and nine months ended September 30, 2007, respectively, compared to $1.4
million and $4.3 million for the comparable periods in 2006. Our notes payable
averaged $29.1 million and $41.1 million for the three and nine months ended
September 30, 2007, respectively, compared to $85.3 million and $93.4 million
for the comparable periods in 2006. The aggregate weighted average rate paid on
our notes payable was 7.42% and 6.79% for the three and nine months ended
September 30, 2007, respectively, compared to 6.67% and 6.20% for the comparable
periods in 2006, reflecting the rise in short-term interest rates during the
periods. 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 6.51% and 6.54% for the three and
nine months ended September 30, 2007, respectively, compared to 6.36% and 6.06%
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 $5.9 million and $17.7
million for the three and nine months ended September 30, 2007, respectively,
compared to $6.4 million and $17.8 million for the comparable periods in 2006.
Average subordinated debentures were $310.8 million and $309.8 million for the
three and nine months ended September 30, 2007, respectively, compared to $304.4
million and $270.6 million for the comparable periods in 2006. The aggregate
weighted average rate paid on our subordinated debentures was 7.56% and 7.63%
for the three and nine months ended September 30, 2007, respectively, compared
to 8.31% and 8.77% 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;
(c) the repayment of $25.8 million of variable rate subordinated debentures on
April 22, 2007; and (d) the issuance of $51.5 million of variable rate
subordinated debentures in private placements through three newly formed
statutory trusts that we completed during the third quarter of 2007, as further
described in Note 11 to our Consolidated Financial Statements. Although we have
increased the overall level of our 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 September 30, Nine Months Ended September 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).......... $ 8,076,224 160,352 7.88% $7,634,494 153,540 7.98% $ 7,955,916 472,319 7.94% $7,382,161 426,877 7.73%
Investment securities (4)... 1,284,707 16,702 5.16 1,174,077 14,134 4.78 1,336,036 50,526 5.06 1,270,896 44,279 4.66
Short-term investments...... 109,800 1,478 5.34 75,835 1,018 5.33 144,709 5,671 5.24 89,084 3,288 4.93
----------- ------- ---------- ------- ----------- ------- ---------- -------
Total interest-earning
assets................ 9,470,731 178,532 7.48 8,884,406 168,692 7.53 9,436,661 528,516 7.49 8,742,141 474,444 7.26
------- ------- ------- -------
Nonearning assets............. 875,622 776,127 860,875 736,317
----------- ---------- ----------- ----------
Total assets............ $10,346,353 $9,660,533 $10,297,536 $9,478,458
=========== ========== =========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand... $ 944,542 2,242 0.94% $ 949,195 2,057 0.86% $ 962,396 7,171 1.00% $ 959,983 5,832 0.81%
Savings and money market.. 2,687,208 21,012 3.10 2,104,323 13,491 2.54 2,587,286 59,809 3.09 2,117,601 36,929 2.33
Time deposits of $100
or more................. 1,462,548 18,299 4.96 1,369,503 15,902 4.61 1,455,660 53,533 4.92 1,288,897 41,716 4.33
Other time deposits....... 2,355,710 27,881 4.70 2,356,661 25,526 4.30 2,383,236 83,851 4.70 2,276,270 68,706 4.04
----------- ------- ---------- ------- ----------- ------- ---------- -------
Total interest-bearing
deposits.............. 7,450,008 69,434 3.70 6,779,682 56,976 3.33 7,388,578 204,364 3.70 6,642,751 153,183 3.08
Other borrowings............ 374,143 4,361 4.62 375,278 4,322 4.57 374,825 13,653 4.87 382,280 12,263 4.29
Notes payable (5)........... 29,070 544 7.42 85,315 1,434 6.67 41,089 2,088 6.79 93,417 4,331 6.20
Subordinated debentures (3). 310,804 5,920 7.56 304,412 6,377 8.31 309,752 17,668 7.63 270,568 17,751 8.77
----------- ------- ---------- ------- ----------- ------- ---------- -------
Total interest-bearing
liabilities........... 8,164,025 80,259 3.90 7,544,687 69,109 3.63 8,114,244 237,773 3.92 7,389,016 187,528 3.39
------- ------- ------- -------
Noninterest-bearing
liabilities:
Demand deposits............. 1,225,157 1,257,277 1,233,565 1,263,623
Other liabilities........... 114,555 123,611 120,534 109,743
----------- ---------- ----------- ----------
Total liabilities....... 9,503,737 8,925,575 9,468,343 8,762,382
Stockholders' equity.......... 842,616 734,958 829,193 716,076
----------- ---------- ----------- ----------
Total liabilities and
stockholders' equity.. $10,346,353 $9,660,533 $10,297,536 $9,478,458
=========== ========== =========== ==========
Net interest income........... 98,273 99,583 290,743 286,916
======= ======= ======= =======
Interest rate spread.......... 3.58 3.90 3.57 3.87
Net interest margin (6)....... 4.12% 4.45% 4.12% 4.39%
==== ==== ==== ====
- --------------------
(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
$427,000 and $1.3 million for the three and nine months ended September 30, 2007, and $399,000 and $1.2 million 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 6.51% and 6.54% for the three and nine months ended September 30, 2007, and 6.36% and 6.06% 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 $17.0
million and $26.0 million for the three and nine months ended September 30,
2007, respectively, compared to $2.0 million and $8.0 million for the comparable
periods in 2006. The increase in our provision for loan losses was primarily
driven by an increase in nonperforming loans within certain segments of our loan
portfolio, primarily our one-to-four family residential mortgage portfolio and
real estate construction and development portfolio, increased net loan
charge-offs and growth within our 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 $26.8 million and $75.5 million for
the three and nine months ended September 30, 2007, respectively, in comparison
to $30.0 million and $81.4 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 $12.1 million
and $34.3 million for the three and nine months ended September 30, 2007,
respectively, in comparison to $11.1 million and $32.4 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 $3.5 million and $12.0 million for
the three and nine months ended September 30, 2007, respectively, in comparison
to $4.6 million and $17.5 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 in
April 2007 and a $266,000 gain, before applicable income taxes, recorded on the
sale of approximately $33.2 million of certain commercial, commercial real
estate and real estate construction loans in September 2007, as further
discussed under "--Loans and Allowance for Loan Losses," 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 $2.1 million of
income generated from the capitalization of mortgage servicing rights in March
and April 2006 pertaining to the securitization and transfer to our investment
portfolio of $138.9 million in aggregate 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, the discontinuation of these
activities has reduced the amount of 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 was related to sub-prime
loan products.
We recorded a net loss on investment securities of $74,000 and $1.3 million for
the three and nine months ended September 30, 2007, respectively, in comparison
to a net gain on investment securities of $1.6 million and a net loss on
investment securities of $2.4 million for the comparable periods in 2006. These
amounts reflect a net loss of $74,000 and $1.5 million for the three and nine
months ended September 30, 2007, respectively, compared to a net gain of $1.2
million and a net loss of $96,000 for the comparable periods in 2006, related to
changes in the fair value of securities held in our trading portfolio. We
liquidated our trading portfolio in July 2007. The net loss on investment
securities for the nine months ended September 30, 2006 also includes a gain of
$389,000 recognized in August 2006 on the redemption of common stock held as an
available-for-sale investment security and a net loss of $2.7 million in
aggregate on the sale of certain available-for-sale investment securities
associated with the termination of $200.0 million of term repurchase agreements
during the first and second quarters of 2006, as further described under
"--Interest Rate Risk Management."
Bank-owned life insurance investment income was $1.1 million and $2.8 million
for the three and nine months ended September 30, 2007, respectively, in
comparison to $665,000 and $2.4 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 $1.4 million and $4.5 million for the three and nine
months ended September 30, 2007, respectively, in comparison to $2.0 million and
$6.6 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 $1.8 million and $5.3 million for
the three and nine months ended September 30, 2007, respectively, in comparison
to $1.5 million and $3.3 million for the comparable periods in 2006, reflecting
increased customer volumes, partially offset by reductions in premiums
attributable to current market conditions within the insurance industry.
Other income was $7.0 million and $17.8 million for the three and nine months
ended September 30, 2007, respectively, in comparison to $8.5 million and $21.5
million for the comparable periods in 2006. We primarily attribute the decline
in other income to:
>> a decrease of $2.8 million in gains on sales of other assets,
attributable to a $2.8 million gain recognized in September 2006 on
the sale of stock that was acquired as settlement in full of a loan
previously charged-off;
>> a decrease of $1.9 million in gains on sales of other real estate,
primarily attributable to a gain of $1.5 million recognized on the
sale of a parcel of other real estate in January 2006; and
>> a release fee of $938,000 received during the first quarter of 2006 on
funds collected from a loan previously sold in which First Bank was
entitled to 25% of any future fees collected on the loan under a
defined release fee agreement that was entered into in conjunction
with the loan sale; partially offset by
>> a pre-tax gain of $1.0 million recorded in July 2007 on the sale of
our two banking offices located in Denton and Garland, Texas, as
further described in Note 2 to our Consolidated Financial Statements.
Noninterest Expense. Noninterest expense was $84.5 million and $254.7 million
for the three and nine months ended September 30, 2007, respectively, in
comparison to $80.5 million and $236.3 million for the comparable periods in
2006. Our efficiency ratio was 67.79% and 69.78% for the three and nine months
ended September 30, 2007, respectively, in comparison to 62.30% and 64.38% 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 $43.1 million and $132.1 million for
the three and nine months ended September 30, 2007, respectively, in comparison
to $42.5 million and $124.6 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, six de novo branch
offices opened in 2007 and generally higher salary and employee benefit costs
associated with employing and retaining qualified personnel. These increases
were partially offset by a decrease in salaries and employee benefits expense
associated with our mortgage banking division 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." We continue our efforts to monitor and
reduce our noninterest expense levels with the implementation of these and other
employee related expense reduction measures.
Occupancy, net of rental income, and furniture and equipment expense was $13.3
million and $37.7 million for the three and nine months ended September 30,
2007, respectively, in comparison to $11.2 million and $31.9 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 $9.0 million and $27.5
million for the three and nine months ended September 30, 2007, respectively, in
comparison to $9.4 million and $27.6 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 to moderate decrease of these fees in 2007 reflects a
reduction in the number of acquisitions completed during 2007 compared to 2006
and 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 and the
addition of de novo branch offices.
Legal, examination and professional fees were $2.5 million and $6.9 million for
the three and nine months ended September 30, 2007, respectively, in comparison
to $2.1 million and $6.6 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 $3.1 million and $9.3 million for the
three and nine months ended September 30, 2007, respectively, in comparison to
$2.2 million and $5.4 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 $1.7 million and $5.0 million for the three
and nine months ended September 30, 2007, respectively, in comparison to $1.6
million and $4.9 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 $8.6 million and $26.0 million for the three and nine months
ended September 30, 2007, respectively, in comparison to $8.2 million and $24.7
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
increase in other expense was primarily attributable to:
>> 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; partially offset by
>> 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 a bank in late 2004; and
>> a $470,000 loss recognized on a liquidation sale of residential real
estate and personal property of an SBA guaranteed loan in June 2006.
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 $8.1 million and
$30.1 million, representing an effective income tax rate of 34.9% and 35.8%, for
the three and nine months ended September 30, 2007, respectively, in comparison
to $17.2 million and $42.5 million, representing an effective income tax rate of
36.9% and 34.6%, respectively, for the comparable periods in 2006. The decrease
in our provision for income taxes primarily reflects our reduced earnings. The
increase in the effective tax rate for the nine months ended September 30, 2007
compared to the same period in 2006 is primarily due to 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 September 30, 2007 and December 31, 2006 are
summarized as follows:
September 30, 2007 December 31, 2006
------------------------ -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................. $ 400,000 45 600,000 4,369
Interest rate floor agreements............... 300,000 679 300,000 376
Interest rate cap agreements................. 400,000 98 400,000 139
Interest rate lock commitments............... 6,300 -- 5,900 --
Forward commitments to sell
mortgage-backed securities................. 50,000 -- 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 nine months ended September 30, 2007, we realized net interest
expense of $652,000 and $3.5 million, respectively, on our derivative financial
instruments, in comparison to net interest expense of $1.2 million and $3.6
million for the comparable periods in 2006. We recorded net gains on derivative
instruments, which are included in noninterest income in the consolidated
statements of income, of $603,000 and $261,000 for the three and nine months
ended September 30, 2007, respectively, in comparison to net gains of $10,000
and net losses of $59,000 for the comparable periods in 2006. The net gains
recorded for the three and nine months ended September 30, 2007 and the net
gains and net losses recorded for the three and nine months ended September 30,
2006, respectively, reflect changes in the value of our interest rate floor
agreements entered into in September 2005 and August 2006, and changes in the
value of our interest rate cap agreements entered into in September 2006.
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 with a
$200.0 million notional amount. The underlying hedged assets were
certain variable rate loans within our commercial loan portfolio. The
swap agreement provided 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
provided 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 $752,000 and $7.0
million at September 30, 2007 and December 31, 2006, respectively, and the
amount payable by us under the swap agreements was $706,000 and $2.7 million at
September 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
September 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)
September 30, 2007:
September 18, 2009...................... $ 200,000 4.89% 5.20% $ 2,528
September 20, 2010...................... 200,000 4.89 5.20 3,088
--------- --------
$ 400,000 4.89 5.20 $ 5,616
========= ===== ===== ========
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 London Interbank Offered Rate, or 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 $679,000 and $376,000 at September 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 the first and second quarters of 2006, we terminated $200.0 million of the
$300.0 million of term repurchase agreements outstanding at December 31 2005,
resulting in 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 these 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.
On August 7, 2007, we terminated this $100.0 million term repurchase agreement
with a maturity date of July 19, 2010, and incurred a prepayment penalty of
$330,000 in conjunction with the early termination of the term repurchase
agreement, as further described in Note 9 to our Consolidated Financial
Statements.
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 $98,000 and $139,000 at September 30, 2007 and
December 31, 2006, respectively.
Pledged Collateral. At September 30, 2007 and December 31, 2006, we had accepted
cash of $7.0 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 was $142,000 and ($17,000) at September 30, 2007 and
December 31, 2006, respectively. The fair value of the forward contracts to sell
mortgage-backed securities was ($273,000) and $86,000 at September 30, 2007 and
December 31, 2006, respectively.
Loans and Allowance for Loan Losses
Interest earned on First Bank's loan portfolio represents the principal source
of our income. Interest and fees on loans represented 89.9% and 89.5% of total
interest income for the three and nine months ended September 30, 2007,
respectively, in comparison to 91.1% and 90.1% for the comparable periods in
2006. Loans, net of unearned discount, increased $466.3 million to $8.13
billion, or 79.2% of assets, at September 30, 2007, compared to $7.67 billion,
or 75.5% of assets, at December 31, 2006. The following table summarizes the
composition of our loan portfolio at September 30, 2007 and December 31, 2006:
September 30, December 31,
2007 2006
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural............................ $2,181,136 1,934,912
Real estate construction and development.......................... 2,001,226 1,832,504
Real estate mortgage:
One-to-four family residential loans.......................... 1,356,513 1,270,158
Multi-family residential loans................................ 154,393 141,341
Commercial real estate loans.................................. 2,262,897 2,203,649
Consumer and installment, net of unearned discount................ 77,138 67,590
Loans held for sale............................................... 99,470 216,327
---------- ----------
Total loans, net of unearned discount......................... $8,132,773 7,666,481
========== ==========
We primarily attribute the net increase in our loan portfolio during the first
nine months of 2007 to:
>> an increase of $246.2 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 $168.7 million in our real estate construction and
development portfolio resulting primarily from new loan originations
and seasonal fluctuations on existing and available credit lines, as
well as $54.8 million of loans provided by our acquisition of Royal
Oaks; and
>> an increase of $158.7 million in our real estate mortgage portfolio,
primarily attributable to loans totaling $70.6 million provided by our
acquisition of Royal Oaks, and internal loan growth; partially offset
by
>> a decrease of $116.9 million in our loans held for sale portfolio,
reflecting the discontinuation of the origination and sale of
sub-prime loan products in early 2007 which has led to a significant
decrease in loan production volume of real estate mortgage loans that
are subsequently sold in the secondary mortgage market, and the timing
of loan originations and subsequent sales in the secondary mortgage
market.
In addition to internal loan growth of $341.3 million and our acquisition of
Royal Oaks, which provided loans, net of unearned discount, of $175.5 million,
the overall increase in loans, net of unearned discount was partially offset by
the sale of approximately $13.4 million of certain repurchased and other
residential mortgage loans and $33.2 million of certain commercial, commercial
real estate and real estate construction loans, as further discussed below.
Nonperforming assets include nonaccrual loans, restructured loans and other real
estate. The following table presents the categories of nonperforming assets and
certain ratios as of September 30, 2007 and December 31, 2006:
September 30, December 31,
2007 2006
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual................................................... $ 5,749 9,879
Real estate construction and development:
Nonaccrual................................................... 42,291 13,344
Real estate mortgage:
One-to-four family residential:
Nonaccrual............................................... 38,081 18,885
Restructured............................................. 7 9
Multi-family residential loans:
Nonaccrual............................................... 336 272
Commercial real estate loans:
Nonaccrual............................................... 8,131 6,260
Consumer and installment:
Nonaccrual................................................... 201 81
---------- ---------
Total nonperforming loans.............................. 94,796 48,730
Other real estate................................................. 7,854 6,433
---------- ---------
Total nonperforming assets............................. $ 102,650 55,163
========== =========
Loans, net of unearned discount................................... $8,132,773 7,666,481
========== =========
Loans past due 90 days or more and still accruing................. $ 7,555 5,653
========== =========
Ratio of:
Allowance for loan losses to loans.............................. 1.72% 1.90%
Nonperforming loans to loans.................................... 1.17 0.64
Allowance for loan losses to nonperforming loans................ 147.86 299.05
Nonperforming assets to loans and other real estate............. 1.26 0.72
========== =========
Nonperforming loans, consisting of loans on nonaccrual status and restructured
loans, were $94.8 million at September 30, 2007, compared to $63.5 million at
June 30, 2007, $48.7 million at December 31, 2006 and $79.1 million at September
30, 2006. Nonperforming loans were 1.17% of loans, net of unearned discount, at
September 30, 2007, compared to 0.79%, 0.64% and 1.02% of loans, net of unearned
discount, at June 30, 2007, December 31, 2006 and September 30, 2006,
respectively. Other real estate owned was $7.9 million, $8.0 million, $6.4
million and $6.9 million at September 30, 2007, June 30, 2007, December 31, 2006
and September 30, 2006, respectively. Our nonperforming assets, consisting of
nonperforming loans and other real estate owned, were $102.7 million at
September 30, 2007, compared to $71.5 million, $55.2 million and $86.0 million
at June 30, 2007, December 31, 2006 and September 30, 2006, respectively. Our
loans past due 90 days or more and still accruing interest were $7.6 million,
$4.4 million, $5.7 million and $6.4 million at September 30, 2007, June 30,
2007, December 31, 2006 and September 30, 2006, respectively.
Nonperforming loans at September 30, 2007 increased $31.3 million, or 49.4%,
from nonperforming loans at June 30, 2007, $46.1 million, or 94.5%, from
nonperforming loans at December 31, 2006, and $15.7 million, or 19.9%, from
nonperforming loans at September 30, 2006. The increase in the overall level of
our nonperforming loans during the first nine months of 2007 primarily resulted
from an increase in nonperforming loans within our real estate construction and
development loan portfolio and within our one-to-four family residential loan
portfolio. This increase was partially offset by the sale of approximately $19.2
million of certain nonperforming loans, in aggregate, during the nine months
ended September 30, 2007, as further discussed below.
The amount of nonperforming loans within our real estate construction and
development loan portfolio increased $21.3 million to $42.3 million at September
30, 2007, from $21.0 at June 30, 2007, and increased $29.0 million from $13.3
million at December 31, 2006. The increase in the third quarter of 2007 was
primarily attributable to two significant credits placed on nonaccrual status
with a total combined principal balance of $32.9 million, partially offset by
the payoff of a single nonperforming loan of $4.6 million and loan sales of $2.8
million. The increase for the first nine months of 2007 is primarily
attributable to the third quarter events in addition to two significant credits
with a combined principal balance of $10.2 million being placed on nonaccrual
status early in 2007, of which one credit in the amount of $4.6 million was paid
off in the third quarter of 2007. The increase in nonperforming loans within our
real estate construction and development portfolio reflects a continued decline
in market conditions, resulting in increased developer inventories, slower lot
and home sales, and declining real estate market values in many of our markets.
The increase in nonperforming loans is also attributable to an increase of $10.9
million in our one-to-four family residential mortgage loan portfolio to $38.1
million at September 30, 2007, compared to $27.2 million at June 30, 2007, and
an increase of 19.2 million from $18.9 million at December 31, 2006. This
increase was driven by current market conditions, repurchases of certain
sub-prime 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 residential
mortgage loan 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.
During the nine months ended September 30, 2007, we placed approximately $63.5
million of one-to-four family residential mortgage loans associated with our
mortgage banking division on nonaccrual status. This increase in nonaccrual
loans was partially offset by net loan charge-offs of $20.4 million, loan sales
resulting in a decrease in nonperforming loans of $11.5 million, and other
payment activity. Of the $63.5 million placed on nonaccrual status,
approximately $27.8 million represented repurchases of residential mortgage
loans sold with recourse. Repurchases of mortgage loans sold with recourse
declined to $6.3 million for the third quarter of 2007, compared to $17.2
million for the second quarter of 2007. The reduced level of repurchase activity
is reflective of our exit from the sub-prime market in early 2007. Our primary
recourse risk, attributable to early payment default on sub-prime residential
mortgage loan products that we previously sold in the secondary market, expires
throughout the remainder of 2007 and the first quarter of 2008.
We have taken measures throughout 2007 to reduce the level of our nonperforming
loans through the sale of certain loans. The sales resulted in a reduction in
nonperforming loans of approximately $19.2 million during the nine months ended
September 30, 2007, as described below:
>> 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; and
>> During the third quarter of 2007, we entered into a commitment to sell
certain commercial, commercial real estate and real estate
construction 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 $36.5 million of these loans to our held for
sale loan portfolio. We completed the sale of approximately $33.2
million of these loans in September 2007, resulting in a pre-tax gain
of $266,000 and a decrease in nonperforming loans of approximately
$7.7 million, in aggregate. At September 30, 2007, approximately $3.3
million of these loans remain in our held for sale portfolio.
Also in the third quarter of 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 $10.5 million of certain repurchased and other
residential mortgage loans to our held for sale loan portfolio. In October 2007,
we completed the sale of approximately $9.4 million of these loans and received
payoffs on the remaining portion of the loans held for sale. We did not record a
gain or loss on the sale of these loans. These transactions resulted in a
decrease in nonperforming loans of approximately $8.6 million, in aggregate, as
further described in Note 14 to our Consolidated Financial Statements.
We expect the declining market conditions associated with our real estate
construction and development and one-to-four family residential mortgage loan
portfolios to continue in the near term, which could increase the amount of our
nonperforming loans.
Changes in the allowance for loan losses for the three and nine months ended
September 30, 2007 and 2006 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2007 2006 2007 2006
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period.................... $ 142,922 147,383 145,729 135,330
Acquired allowances for loan losses............. -- 1,264 2,925 5,208
--------- -------- -------- --------
142,922 148,647 148,654 140,538
--------- -------- -------- --------
Loans charged-off............................... (22,571) (5,292) (40,849) (11,633)
Recoveries of loans previously charged-off...... 2,814 3,955 6,360 12,405
--------- -------- -------- --------
Net loan (charge-offs) recoveries............. (19,757) (1,337) (34,489) 772
--------- -------- -------- --------
Provision for loan losses....................... 17,000 2,000 26,000 8,000
--------- -------- -------- --------
Balance, end of period ......................... $ 140,165 149,310 140,165 149,310
========= ======== ======== ========
Our allowance for loan losses was $140.2 million at September 30, 2007, compared
to $142.9 million, $145.7 million and $149.3 million at June 30, 2007, December
31, 2006 and September 30, 2006, respectively, representing 1.72%, 1.79%, 1.90%
and 1.93% of loans, net of unearned discount, respectively. Our allowance for
loan losses as a percentage of nonperforming loans was 147.86% at September 30,
2007, compared to 225.19%, 299.05% and 188.79% at June 30, 2007, December 31,
2006 and September 30, 2006, respectively.
We recorded net loan charge-offs of $19.8 million and $34.5 million for the
three and nine months ended September 30, 2007, respectively, compared to net
loan charge-offs of $1.3 million and net loan recoveries of $772,000 for the
comparable periods in 2006. The increased level of net loan charge-offs recorded
for the nine months ended September 30, 2007 reflects $20.4 million of
charge-offs associated with our one-to-four family residential portfolio, of
which $4.3 million and $4.6 million were recorded in the first and third
quarters of 2007, respectively, 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 and October 2007, as previously
discussed. Furthermore, net loan charge-offs include $9.3 million of charge-offs
recorded in the third quarter of 2007 in conjunction with the transfer of
approximately $36.5 million of certain nonperforming and problem commercial
credits to our loans held for sale portfolio, of which $33.2 million were sold
in September 2007, as previously discussed. Net loan charge-offs for the first
nine 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 nine
months ended September 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 0.43% for the nine months
ended September 30, 2007, compared to net loan recoveries as a percentage of
average loans of 0.01% 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.
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
$1.80 billion and $1.86 billion at September 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 September 30, 2007:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less............................. $ 546,216 214,872 761,088
Over three months through six months............. 377,261 5,000 382,261
Over six months through twelve months............ 402,583 107 402,690
Over twelve months............................... 152,099 100,793 252,892
---------- -------- ----------
Total....................................... $1,478,159 320,772 1,798,931
========== ======== ==========
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 September
30, 2007 and December 31, 2006, First Bank's borrowing capacity under the
agreement was approximately $553.8 million and $639.1 million, respectively. In
addition, First Bank's borrowing capacity through its relationship with the FHLB
was approximately $745.8 million and $666.0 million at September 30, 2007 and
December 31, 2006, respectively. We had FHLB advances outstanding of $3.9
million and $4.0 million at September 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 September 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........................ $ 15,892 27,318 15,776 45,631 104,617
Certificates of deposit (2)............. 3,342,686 398,764 76,349 10,905 3,828,704
Other borrowings (2).................... 209,872 107 100,793 -- 310,772
Notes payable (2)....................... 10,000 -- -- -- 10,000
Subordinated debentures (2)............. -- -- -- 353,733 353,733
Other contractual obligations........... 560 177 136 94 967
---------- -------- -------- -------- ----------
Total.............................. $3,579,010 426,366 193,054 410,363 4,608,793
========== ======== ======== ======== ==========
---------------
(1) Amounts exclude FIN 48 unrecognized tax liabilities of $11.7 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 September 30, 2007.
(2) Amounts exclude the related interest expense accrued on these obligations as of September 30,
2007.
Management believes the available liquidity and operating results of First Bank
will be sufficient to provide funds for growth and to permit the distribution of
dividends to us sufficient to meet our operating and debt service requirements,
both on a short-term and long-term basis, and to pay interest on the
subordinated debentures that we issued to our affiliated statutory and business
financing trusts.
Effects of New Accounting Standards
In February 2006, the FASB issued Statement of Financial Accounting Standards,
or SFAS, No. 155 -- Accounting For Certain Hybrid Financial Instruments, an
amendment of SFAS No. 133 -- Accounting For Derivative Instruments and Hedging
Activities and SFAS No. 140. SFAS No. 155 allows entities to remeasure at fair
value a hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation from the host instrument, if the holder
irrevocably elects to account for the whole instrument on a fair value basis.
Subsequent changes in the fair value of the instrument would be recognized in
earnings. In January 2007, the FASB posted to its website revisions to certain
SFAS No. 133 implementation issues that were affected by the issuance of SFAS
No. 155 and SFAS No. 156 (discussed below). These revisions provide a narrow
scope exception for securitized interests in prepayable financial assets that
only contain an embedded derivative that results from the embedded call options
in the underlying prepayable financial assets if certain criteria are met. SFAS
No. 155 is effective for financial instruments acquired, issued, or subject to a
remeasurement event occurring after the beginning of the first fiscal year that
begins after September 15, 2006. Early adoption is permitted as of the beginning
of the fiscal year unless the entity has already issued interim financial
statements during that fiscal year. We implemented SFAS No. 155 on January 1,
2007, which did not have a material impact on our financial condition or results
of operations.
In March 2006, the FASB issued SFAS No. 156 - Accounting for Servicing of
Financial Assets. SFAS No. 156, an amendment of FASB SFAS No. 140 - Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, addresses the recognition and measurement of separately recognized
servicing assets and liabilities and allows mark-to-market accounting for
servicing rights resulting in reporting that is similar to fair value hedge
accounting, but without the effort and system costs needed to identify effective
hedging instruments and document hedging relationships. SFAS No. 156 is
effective for fiscal years beginning after September 15, 2006. Early adoption is
permitted as of the beginning of an entity's fiscal year unless the entity has
already issued interim financial statements during that fiscal year. We
implemented SFAS No. 156 on January 1, 2007, which did not have a material
impact on our financial condition or results of operations.
In June 2006, the FASB issued FIN 48 -- Accounting for Uncertainty in Income
Taxes, an Interpretation of SFAS No. 109 -- Accounting for Income Taxes. FIN 48
clarifies the accounting for uncertainty in income taxes in financial statements
and prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be
taken. FIN 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. We implemented
FIN 48 on January 1, 2007, as further described in Note 1 and Note 12 to our
Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157 - Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
U.S. generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, and does not
require any new fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. Early adoption is permitted as of the beginning of an entity's fiscal
year unless the entity has already issued interim financial statements during
that fiscal year. We are currently evaluating the requirements of SFAS No. 157
to determine their impact on our financial condition and results of operations.
In February 2007, the FASB issued SFAS No. 159 - The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of SFAS No.
115. SFAS No. 159 provides entities with an option to report selected financial
assets and liabilities at fair value in an effort to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. Retrospective application is
not allowed. Early adoption is permitted as of the beginning of an entity's
fiscal year that begins on or before November 15, 2007, provided the entity also
elects to adopt all of the provisions of SFAS No. 157 at the early adoption
date. We are currently evaluating the requirements of SFAS No. 159 to determine
their impact on our financial condition and results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2006, our risk management program's simulation model indicated a
loss of projected net interest income should interest rates decline. We are
"asset-sensitive," indicating that our assets would generally reprice with
changes in rates more rapidly than our liabilities. While a decline in interest
rates of less than 100 basis points was projected to have a relatively minimal
impact on our net interest income, an instantaneous parallel decline in the
interest yield curve of 100 basis points indicated a pre-tax projected loss of
approximately 3.7% of net interest income, based on assets and liabilities at
December 31, 2006. At September 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 nine months ended
September 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
continue to be susceptible to the risk of future repurchases of loans associated
with the sales of these loans, such risk has declined throughout the remainder
of 2007 as we initially expected. Our repurchases of mortgage loans sold with
recourse has declined to $6.3 million for the third quarter of 2007, compared to
$17.2 million for the second quarter of 2007, as further discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Loans and Allowance for Loan Losses." Our reduced activities
within the sub-prime market have resulted in a decline in our 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 nine months ended September 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 6 - EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit Number Description
-------------- -----------
4.1 Indenture between First Banks, Inc., as Company, and
LaSalle Bank National Association, as Trustee, dated
as of August 31, 2007 - filed herewith.
4.2 Amended and Restated Declaration of Trust of First Bank
Statutory Trust X by and among LaSalle National Trust
Delaware, as Delaware Trustee, LaSalle Bank National
Association, as Institutional Trustee, First Banks,
Inc., as Sponsor, and Peter D. Wimmer and Lisa K.
Vansickle, as Administrators, dated as of August 31,
2007 - filed herewith.
4.3 Guarantee Agreement by and between First Banks, Inc.
and LaSalle Bank National Association, dated as of
August 31, 2007 - filed herewith.
4.4 Placement Agreement by and among First Bank Statutory
Trust X, as Issuer, First Banks, Inc., as Sponsor, and
Cohen & Company, as Placement Agent, dated as of August
29, 2007 - filed herewith.
4.5 Junior Subordinated Debt Security due 2037 of First
Banks, Inc., dated as of August 31, 2007 - filed
herewith.
4.6 Debenture Subscription Agreement by and between First
Banks, Inc. and First Bank Statutory Trust X, dated
as of August 31, 2007 - filed herewith.
4.7 Capital Securities Certificate P-001 of First Bank
Statutory Trust X, dated as of August 31, 2007 - filed
herewith.
4.8 Indenture between First Banks, Inc., as Issuer,
and Wilmington Trust Company, as Trustee, dated as of
September 20, 2007 - filed herewith.
4.9 Amended and Restated Declaration of Trust of First
Bank Statutory Trust IX by and among Wilmington Trust
Company, as Delaware Trustee and Institutional Trustee,
First Banks, Inc., as Sponsor, and Terrance M.
McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as
Administrators, dated as of September 20, 2007 - filed
herewith.
4.10 Guarantee Agreement by and between First Banks, Inc.
and Wilmington Trust Company, dated as of September 20,
2007 - filed herewith.
4.11 Placement Agreement by and among First Banks, Inc.,
First Bank Statutory Trust IX and FTN Financial Capital
Markets and Keefe, Bruyette & Woods, Inc., as Placement
Agents, dated as of September 13, 2007 - filed
herewith.
4.12 Floating Rate Junior Subordinated Deferrable Interest
Debenture of First Banks, Inc., dated as of September
20, 2007 - filed herewith.
4.13 Capital Securities Subscription Agreement by and among
First Bank Statutory Trust IX, First Banks, Inc. and
Preferred Term Securities XXVII, Ltd., dated as of
September 20, 2007 - filed herewith.
4.14 Capital Securities Subscription Agreement by and among
First Bank Statutory Trust IX, First Banks, Inc.
and First Tennessee Bank National Association, dated
as of September 20, 2007 - filed herewith.
4.15 Capital Securities Certificate P-1 of First Bank
Statutory Trust IX, dated as of September 20, 2007 -
filed herewith.
4.16 Capital Securities Certificate P-2 of First Bank
Statutory Trust IX, dated as of September 20, 2007 -
filed herewith.
4.17 Indenture between First Banks, Inc., as Issuer, and
Wilmington Trust Company, as Trustee, dated as of
September 28, 2007 - filed herewith.
4.18 Amended and Restated Declaration of Trust of First
Bank Statutory Trust XI by and among Wilmington Trust
Company, as Delaware Trustee and Institutional Trustee,
First Banks, Inc., as Sponsor, and Terrance M.
McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as
Administrators, dated as of September 28, 2007 - filed
herewith.
4.19 Guarantee Agreement by and between First Banks, Inc.
and Wilmington Trust Company, dated as of September 28,
2007 - filed herewith.
4.20 Placement Agreement by and among First Banks, Inc.,
First Bank Statutory Trust XI and FTN Financial Capital
Markets and Keefe, Bruyette & Woods, Inc., as
Placement Agents, dated as of September 27, 2007 -
filed herewith.
4.21 Floating Rate Junior Subordinated Deferrable Interest
Debenture of First Banks, Inc., dated as of September
28, 2007 - filed herewith.
4.22 Capital Securities Subscription Agreement by and among
First Bank Statutory Trust XI, First Banks, Inc.
and First Tennessee Bank National Association, dated
as of September 28, 2007 - filed herewith.
4.23 Capital Securities Certificate P-1 of First Bank
Statutory Trust XI, dated as of September 28, 2007 -
filed herewith.
10 Secured Credit Agreement ($125.0 million Revolving
Credit Facility, Including $10.0 million Swingline Sub-
Facility and $5.0 million Letter of Credit Sub-
Facility), dated as of August 8, 2007, by and among
First Banks, Inc. and Wells Fargo Bank, National
Association, as Agent, JP Morgan Chase Bank, N.A.,
LaSalle Bank National Association, The Northern Trust
Company, Union Bank of California, N.A., Fifth Third
Bank (Chicago) and U.S. Bank National Association -
filed herewith.
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Executive Officer - filed herewith.
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Financial Officer - filed herewith.
32.1 Section 1350 Certifications of Chief Executive Officer
- filed herewith.
32.2 Section 1350 Certifications of Chief Financial Officer
- filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: November 14, 2007
FIRST BANKS, INC.
By: /s/ Terrance M. McCarthy
-------------------------------------------
Terrance M. McCarthy
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Lisa K. Vansickle
-------------------------------------------
Lisa K. Vansickle
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)