UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
-------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
8.15% Cumulative Trust Preferred Securities
(issued by First Preferred Capital Trust IV New York Stock Exchange
and guaranteed by First Banks, Inc.)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. [X] Yes [ ] No
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] (Do not check
if a smaller reporting company) Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). [ ] Yes [X] No
None of the voting stock of the Company is held by non-affiliates. All
of the voting stock of the Company is owned by various trusts, which were
established by and for the benefit of Mr. James F. Dierberg, the Company's
Chairman of the Board of Directors, and members of his immediate family.
At March 26, 2008, there were 23,661 shares of the registrant's common
stock outstanding.
FIRST BANKS, INC.
2007 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business............................................................................... 1
Item 1A. Risk Factors........................................................................... 12
Item 1B. Unresolved Staff Comments.............................................................. 14
Item 2. Properties............................................................................. 14
Item 3. Legal Proceedings...................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................... 15
Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.......................................... 15
Item 6. Selected Financial Data................................................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 51
Item 8. Financial Statements and Supplementary Data............................................ 51
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................... 51
Item 9A. Controls and Procedures................................................................ 52
Item 9B. Other Information...................................................................... 52
Part III
Item 10. Directors, Executive Officers and Corporate Governance................................. 53
Item 11. Executive Compensation................................................................. 57
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................................... 62
Item 13. Certain Relationships and Related Transactions, and Director Independence.............. 63
Item 14. Principal Accounting Fees and Services................................................. 64
Part IV
Item 15. Exhibits, Financial Statement Schedules................................................ 65
Signatures........................................................................................ 115
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements with
respect to our financial condition, results of operations and business.
Generally, forward-looking statements may be identified through the use of words
such as: "believe," "expect," "anticipate," "intend," "plan," "estimate," or
words of similar meaning or future or conditional terms such as: "will,"
"would," "should," "could," "may," "likely," "probably," or "possibly." Examples
of forward-looking statements include, but are not limited to, estimates or
projections with respect to our future financial condition, and expected or
anticipated revenues with respect to our results of operations and our business.
These forward-looking statements are subject to certain risks and uncertainties,
not all of which can be predicted or anticipated. Factors that may cause our
actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and in the economy, including the threat of future terrorist activities,
existing and potential wars and/or military actions related thereto, and
domestic responses to terrorism or threats of terrorism; the impact of laws and
regulations applicable to us and changes therein; the impact of accounting
pronouncements applicable to us and changes therein; competitive conditions in
the markets in which we conduct our operations, including competition from
banking and non-banking companies with substantially greater resources than us,
some of which may offer and develop products and services not offered by us; our
ability to control the composition of our loan portfolio, including our real
estate concentration, without adversely affecting interest income; the credit
risk associated with consumers who may not repay loans; the geographic
dispersion of our offices; the impact our hedging activities may have on our
operating results; the highly regulated environment in which we operate; and our
ability to respond to changes in technology. With regard to our efforts to grow
through acquisitions, factors that could affect the accuracy or completeness of
forward-looking statements contained herein include: our ability to consummate
pending acquisitions; the competition of larger acquirers with greater
resources; fluctuations in the prices at which acquisition targets may be
available for sale; the impact of making acquisitions without using our common
stock; and possible asset quality issues, unknown liabilities or integration
issues with the businesses that we have acquired. Refer to further discussion
under "Business --Item 1A Risk Factors" for factors that may impact these
forward-looking statements. We do not have a duty to and will not update these
forward-looking statements. Readers of this Annual Report on Form 10-K should
therefore consider these risks and uncertainties in evaluating forward-looking
statements and should not place undue reliance on these statements.
PART I
Item 1. Business
General. We are a registered bank holding company incorporated in Missouri in
1978 and headquartered in St. Louis, Missouri. We operate through our wholly
owned subsidiary bank holding company, The San Francisco Company, or SFC, and
SFC's majority-owned subsidiary bank, First Bank, both headquartered in St.
Louis, Missouri. In conjunction with the acquisition of Coast Financial
Holdings, Inc., or CFHI, on November 30, 2007, First Bank issued one million
shares of Class B non-voting common stock to CFHI, and thus, First Bank became
96.89% owned by SFC and 3.11% owned by CFHI. First Bank operates through its
subsidiaries, as listed below, and its branch banking offices. First Bank's
subsidiaries are wholly owned, except for SBLS LLC, which was 76.0% owned by
First Bank and 24.0% owned by First Capital America, Inc. as of December 31,
2007.
>> First Bank Business Capital, Inc.;
>> Missouri Valley Partners, Inc., or MVP;
>> Adrian N. Baker & Company, or Adrian Baker;
>> Universal Premium Acceptance Corporation and its wholly owned
subsidiary, UPAC of California, Inc., or collectively, UPAC; and
>> Small Business Loan Source LLC, or SBLS LLC.
First Bank currently operates 217 branch offices in California, Florida,
Illinois, Missouri and Texas, with 253 automated teller machines, or ATMs,
across the five states. Over the last ten years, our organization has grown
significantly, primarily as a result of our acquisition strategy, as well as
through internal growth. At December 31, 2007, we had assets of $10.90 billion,
loans, net of unearned discount, of $8.88 billion, deposits of $9.15 billion and
stockholders' equity of $867.5 million.
Through First Bank, we offer a broad range of financial services, including
commercial and personal deposit products, commercial and consumer lending, and
many other financial products and services. Commercial and personal deposit
products include demand, savings, money market and time deposit accounts. In
addition, we market combined basic services for various customer groups,
including packaged accounts for more affluent customers, and sweep accounts,
lock-box deposits and cash management products for commercial customers.
Commercial lending includes commercial, financial and agricultural loans, real
estate construction and development loans, commercial real estate loans, small
business lending, asset-based loans, trade financing and insurance premium
financing. Consumer lending includes residential real estate, home equity and
installment lending. Other financial services include mortgage banking, debit
cards, brokerage services, employee benefit and commercial and personal
insurance services, internet banking, remote deposit, ATMs, telephone banking,
safe deposit boxes, and trust, private banking and institutional money
management services. The revenues generated by First Bank and its subsidiaries
consist primarily of interest income, generated from our loan and investment
security portfolios, service charges and fees generated from our deposit
products and services, and fees generated by our mortgage banking, insurance,
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, Houston and
Dallas, Texas, and Florida, including Bradenton and the greater Tampa
metropolitan area. Certain loan products, including small business loans and
insurance premium financing loans, are available nationwide through our
subsidiaries, SBLS LLC and UPAC.
Primary responsibility for managing our banking units rests with the officers
and directors of each unit, but we centralize many of our overall corporate
policies, procedures and administrative functions and provide centralized
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our banking units to focus
on customer service.
Various trusts, established by and administered by and for the benefit of Mr.
James F. Dierberg, our Chairman of the Board, and members of his immediate
family, own all of our voting stock. Mr. Dierberg and his family, therefore,
control our management and policies.
We have formed numerous affiliated Delaware or Connecticut business or statutory
trusts. These trusts operate as financing entities and were created for the sole
purpose of issuing trust preferred securities, and the sole assets of the trusts
are our subordinated debentures. In conjunction with the formation of our
financing entities and their issuance of the trust preferred securities, we
issued subordinated debentures to each of our financing entities in amounts
equivalent to the respective trust preferred securities plus the amount of the
common securities of the individual trusts, as outlined in the following table
and more fully described in Note 12 to our Consolidated Financial Statements. We
pay interest on our subordinated debentures to our respective financing
entities. In turn, our financing entities pay distributions to the holders of
the trust preferred securities. The interest payable on our subordinated
debentures is included in interest expense in our consolidated statements of
income.
The trust preferred securities issued by First Preferred Capital Trust IV are
publicly held and traded on the New York Stock Exchange, or NYSE. The remaining
trust preferred securities were issued in private placements. The trust
preferred securities have no voting rights except in certain limited
circumstances. A summary of the outstanding trust preferred securities issued by
our affiliated statutory and business trusts, and our related subordinated
debentures issued to our respective trusts in conjunction with the trust
preferred securities offerings, is as follows:
Date of Interest Preferred Subordinated
Name of Trust Trust Formation Type of Offering Rate Securities Debentures
------------- --------------- ---------------- ---- ---------- ----------
First Preferred Capital Trust IV January 2003 Publicly Underwritten 8.15% $46,000,000 $47,422,700
First Bank Statutory Trust March 2003 Private Placement 8.10% 25,000,000 25,774,000
First Bank Statutory Trust II September 2004 Private Placement Variable 20,000,000 20,619,000
Royal Oaks Capital Trust I October 2004 Private Placement Variable 4,000,000 4,124,000
First Bank Statutory Trust III November 2004 Private Placement Variable 40,000,000 41,238,000
First Bank Statutory Trust IV February 2006 Private Placement Variable 40,000,000 41,238,000
First Bank Statutory Trust V April 2006 Private Placement Variable 20,000,000 20,619,000
First Bank Statutory Trust VI June 2006 Private Placement Variable 25,000,000 25,774,000
First Bank Statutory Trust VII December 2006 Private Placement Variable 50,000,000 51,547,000
First Bank Statutory Trust VIII February 2007 Private Placement Variable 25,000,000 25,774,000
First Bank Statutory Trust X August 2007 Private Placement Variable 15,000,000 15,464,000
First Bank Statutory Trust IX September 2007 Private Placement Variable 25,000,000 25,774,000
First Bank Statutory Trust XI September 2007 Private Placement Variable 10,000,000 10,310,000
Strategy. In the development of our banking franchise, we have focused on
building and reorganizing our infrastructure as necessary to accomplish our
objectives for organic growth, and to supplement this growth with de novo and
acquisition strategies to further expand our banking franchise. Our organization
is structured to leverage a strong sales force in each of our major market areas
in an effort to continue to provide quality financial products and the highest
level of customer service to our expanding customer base. Within the individual
markets, the sales organization is supported by a regional structure to position
it to serve the market opportunities within each area in the five states in
which we operate. We are committed to serving the small business and mid-sized
commercial segments along with the retail consumer market. We have devoted
significant resources to improving our infrastructure dedicated to rapid
approval, underwriting and documentation of consumer loans, strengthening our
small business services area, increasing our commercial business development
staff, reorganizing our marketing and product management areas, improving the
quality and depth of our regional commercial and consumer management groups, and
increasing resources for financial service product line and delivery systems,
branch development and training, and administrative and operational support.
In the past three years, we have added two business lines, including an
insurance premium financing company and an insurance brokerage agency, providing
our customers with new and expanded products and services to complement our
existing line of financial services. In line with our small business lending
strategy, we segmented the loan origination and servicing functions and added
new business development officers throughout our markets. Through our
acquisition of CFHI on November 30, 2007, we entered a fifth state, expanding
our banking franchise by 20 branch offices in Florida's Manatee, Pinellas,
Hillsborough and Pasco counties. Our entrance into Florida should provide
further opportunities for growth and delivery of our full range of financial
products and services. We further expanded our banking franchise in the Houston
and Dallas markets, as well as in southern California. With the significant
expansion of our Chicago banking franchise over recent years, we have created a
complete regional structure in the Chicago area as well as three additional
commercial banking groups to enable our credit administration, commercial real
estate and commercial and industrial banking groups, branch administration,
credit review, and human resources and training functions to better serve our
customers and employees. We continue to focus on modifying and effectively
repositioning our internal and external resources to better serve the markets in
which we operate. Although these efforts have led to certain increased capital
expenditures and noninterest expenses, we expect they will lead to additional
internal growth, more efficient operations and improved profitability over the
long term, in accordance with our long-term corporate vision.
In the development of our banking franchise, we acquire other entities providing
financial services as one means of achieving our growth objectives and to
augment internal growth. Acquisitions may serve to enhance our presence in a
given market, to expand the extent of our market area, to enable us to enter new
or noncontiguous markets or to enable us to expand the array of financial
services that we provide. Due to the nature of our ownership, we have elected to
engage only in those acquisitions that can be accomplished for cash, rather than
by issuing securities, which given the characteristics of the acquisition arena
may, at times, place us at a competitive disadvantage relative to other
acquirers offering stock transactions. This results from the market
attractiveness of other financial institutions' stock and the advantages of
tax-free exchanges to the selling shareholders. Our acquisition activities are
generally somewhat sporadic because we may consummate multiple transactions in a
particular period, followed by a substantially less active acquisition period.
Furthermore, the intangible assets recorded in conjunction with these
acquisitions create an immediate reduction in our regulatory capital, providing
further financial disincentives to paying large premiums in cash acquisitions.
Recognizing these facts, we generally follow certain patterns in our
acquisitions. First, we generally acquire several smaller institutions,
sometimes over an extended period of time, rather than a single larger one. We
attribute this approach to the constraints imposed by the amount of funds
required for a larger transaction, as well as the opportunity to minimize the
aggregate premium required through smaller individual transactions. We may,
however, periodically acquire larger institutions that provide us with the
opportunity to rapidly expand our market presence in a highly desired market
area. Secondly, in some acquisitions, we may acquire institutions having
significant asset-quality, ownership, legal, regulatory or other problems. We
seek to address the risks of these issues by adjusting the acquisition pricing,
accompanied by appropriate remedial attention after consummation of the
transaction. In these institutions, these issues may diminish their
attractiveness to other potential acquirers, and therefore may reduce the amount
of acquisition premium required. Finally, we may pursue our acquisition strategy
in other geographic areas, or pursue internal growth more aggressively because
cash transactions may not be economically viable in extremely competitive
acquisition markets.
Our acquisitions have allowed us to significantly expand our presence throughout
our geographic markets, improve operational efficiencies, convey a more
consistent image and quality of service and more cohesively market and deliver
our products and services. Following our acquisitions, various undertakings are
necessary to effectively integrate the acquired entities into our business
systems and culture. While the specific activities required are dependent upon
the individual circumstances surrounding each acquisition, the majority of our
efforts have been concentrated in various areas including, but not limited to:
(a) improving asset quality; (b) reducing unnecessary, duplicative and/or
excessive expenses including personnel, information technology and certain other
operational and administrative expenses; (c) maintaining, repairing and, in some
cases, refurbishing bank premises necessitated by the deferral of such projects
by some of the acquired entities; (d) renegotiating long-term leases that
provide space in excess of that necessary for banking activities and/or at rates
in excess of current market rates, or subleasing excess space to third parties;
(e) relocating branch offices that are not adequate, conducive or convenient for
banking operations; and (f) managing actual or potential litigation that existed
with respect to acquired entities to minimize the overall costs of negotiation,
settlement or litigation.
The post-acquisition process also includes the combining of separate and
distinct entities together to form a cohesive organization with common
objectives and focus. We have invested and continue to invest significant
resources to reorganize staff, recruit and train personnel where needed, and
establish the direction and focus necessary for the combined entity to take
advantage of the opportunities available to it. This investment generally
contributes to increases in noninterest expense, and results in the creation of
new banking units within the newly integrated combined entity, which convey a
more consistent image and quality of service. The new banking units provide a
broad array of banking products to their customers and generally compete
effectively in their marketplaces, even in the presence of other financial
institutions with much greater resources. While some of these modifications do
not contribute to reductions of noninterest expense, they contribute to the
commercial and retail business development efforts of the combined entity, and
ultimately to their prospects for improving future profitability.
Our business strategy also encompasses the opening of de novo branch offices as
another means of achieving our growth objectives, particularly when our
acquisition prospects are somewhat limited, primarily due to the market
environment requiring significantly higher premiums in order to transact
financial institution acquisitions. Our de novo branch strategy also provides
similar opportunities to our acquisition strategy by allowing us to enhance our
presence in our existing markets and enter new markets. Additionally, we
generally have more flexibility in selecting the most opportunistic sites for
our de novo branches, constructing the branch offices in accordance with our
standard business model and marketing and promoting our customized products and
services under our long-established trade name. We opened nine de novo branch
offices over the past three years and have plans underway to open several de
novo branch offices over the next few years. We expect to further concentrate
our efforts on this portion of our business strategy while continuing to
identify viable acquisition candidates at reasonable acquisition premiums that
are commensurate with our established acquisition strategy.
Acquisitions. In the continuing development of our banking franchise, we
emphasize acquiring other financial institutions and financial services
companies as one means of achieving our growth objectives. After we consummate
an acquisition, we expect to enhance the franchise of the acquired entity by
supplementing the marketing and business development efforts to broaden the
customer base, strengthening particular segments of the business or filling
voids in the overall market coverage.
During the three years ended December 31, 2007, we completed ten bank
acquisitions, four branch office purchases, and the acquisition of an insurance
premium financing company and an insurance brokerage agency. As demonstrated in
the following table, our acquisitions during the past three years have expanded
our banking franchise to a fifth state with our entrance into the Florida
market, significantly increased our banking franchise presence in the dynamic
market areas of Houston, Dallas and southern California, and further augmented
our existing markets in metropolitan Chicago and the Midwest. We funded these
acquisitions from available cash reserves, borrowings under our secured credit
facility and proceeds from the issuance of subordinated debentures.
These transactions, which are further described in Note 2 to our Consolidated
Financial Statements, are summarized as follows:
Loans, Net
Net of Goodwill Banking
Entity / Total Unearned Investment Purchase and Other Locations
Closing Date Assets Discount Securities Deposits Price Intangibles Acquired
------------ ------ -------- ---------- -------- ----- ----------- --------
(dollars expressed in thousands)
2007
- ----
Coast Financial Holdings, Inc.
Bradenton, Florida
November 30, 2007 $ 660,400 518,000 70,400 628,100 12,100 10,600 20
Royal Oaks Bancshares, Inc.
Houston, Texas
February 28, 2007 206,900 175,500 4,100 159,100 38,600 27,700 6
--------- ------- ------ ------- ------- ------- --
$ 867,300 693,500 74,500 787,200 50,700 38,300 26
========= ======= ====== ======= ======= ======= ==
2006
- ----
MidAmerica National Bank
Peoria and Bloomington,
Illinois
Branch Offices (1)
November 10, 2006 $ 158,300 154,100 -- 48,200 -- 2,400 1
First Bank of Beverly Hills
Beverly Hills, California
Branch Office (2)
November 3, 2006 157,500 -- -- 156,100 -- 8,700 1
TeamCo, Inc.
Oak Lawn, Illinois
August 31, 2006 67,900 43,100 16,100 60,100 13,900 9,600 2
San Diego Community Bank
Chula Vista, California
August 15, 2006 91,700 78,600 2,800 76,100 25,500 11,200 3
Universal Premium Acceptance
Corporation
Lenexa, Kansas
May 31, 2006 152,800 149,200 -- -- 52,700 (3) 44,700 --
First Independent National Bank
Plano, Texas
May 1, 2006 68,200 59,600 800 55,500 19,200 11,800 3
Pittsfield Community
Bancorp, Inc.
Pittsfield, Illinois (4)
April 28, 2006 17,600 11,100 3,300 12,300 5,100 1,300 --
Adrian N. Baker & Company
Clayton, Missouri
March 31, 2006 3,000 -- -- -- 7,400 9,500 --
Dallas National Bank
Richardson, Texas
Branch Office (5)
January 20, 2006 1,100 100 -- 1,100 -- -- 1
First National Bank of Sachse
Sachse, Texas
January 3, 2006 76,200 49,300 14,300 66,200 20,800 12,400 1
--------- ------- ------ ------- ------- ------- --
$ 794,300 545,100 37,300 475,600 144,600 111,600 12
========= ======= ====== ======= ======= ======= ==
Loans, Net
Net of Goodwill Banking
Entity / Total Unearned Investment Purchase and Other Locations
Closing Date Assets Discount Securities Deposits Price Intangibles Acquired
------------ ------ -------- ---------- -------- ----- ----------- --------
(dollars expressed in thousands)
2005
- ----
Northway State Bank
Grayslake, Illinois
October 31, 2005 $ 50,400 41,800 -- 45,200 10,300 5,400 1
International Bank
of California
Los Angeles, California
September 30, 2005 151,600 113,500 14,700 132,100 33,700 15,800 5
Bank and Trust Company
Roodhouse, Illinois
Branch Office (6)
September 23, 2005 5,000 -- -- 5,100 -- 100 --
FBA Bancorp, Inc.
Chicago, Illinois
April 29, 2005 73,300 54,300 5,400 55,700 10,500 4,500 3
--------- ------- ------ ------- ------- ------- --
$ 280,300 209,600 20,100 238,100 54,500 25,800 9
========= ======= ====== ======= ======= ======= ==
- --------------------------
(1) The Peoria and Bloomington, Illinois branch offices of MidAmerica National Bank, or MidAmerica, were
acquired by First Bank through a purchase of certain assets and assumption of certain liabilities of the
branch offices. Total assets consisted primarily of loans and fixed assets. Concurrent with this
transaction, First Bank closed and merged one of the former MidAmerica banking offices into an existing
First Bank banking office located in Peoria, Illinois, and, in addition, First Bank closed and merged one
of its existing banking offices into one of the former MidAmerica banking offices located in Peoria,
Illinois.
(2) The Beverly Hills, California branch office of First Bank of Beverly Hills was acquired by First Bank
through a purchase of certain assets and assumption of certain liabilities of the branch office. Total
assets consisted primarily of cash received upon assumption of the deposit liabilities and certain assets.
(3) In conjunction with the acquisition of UPAC, First Bank repaid in full the outstanding senior and
subordinated notes of UPAC, including accumulated accrued and unpaid interest, totaling $125.9 million.
(4) Community Bank operated two banking offices, one in Pittsfield, Illinois and one in Mount Sterling,
Illinois. On June 16, 2006, First Bank sold the Mount Sterling, Illinois banking office to Beardstown
Savings, s.b. At the time of the sale, the Mount Sterling banking office had assets of $2.7 million, loans,
net of unearned discount, of $2.4 million, and deposits of $3.7 million. First Bank consolidated its
existing banking office in Pittsfield with and into the acquired Pittsfield banking office.
(5) The Richardson, Texas branch office of Dallas National Bank was acquired by First Bank through a purchase
of certain assets and assumption of certain liabilities of the branch office. Total assets consisted
primarily of cash received upon assumption of the deposit liabilities and certain assets.
(6) The Roodhouse, Illinois branch of Bank and Trust Company was acquired by First Bank through a purchase of
certain assets and assumption of certain liabilities of the branch office. Total assets consisted primarily
of cash received upon assumption of the deposit liabilities.
For the years ended December 31, 2007, 2006 and 2005, net income was $57.2
million, $111.7 million and $96.9 million, respectively. Additional information
pertaining to our business and results of operations is included in the
information set forth in pages 17 through 51 of Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and in pages 106
through 107 of "Note 20 to our Consolidated Financial Statements," and is
incorporated herein by reference. Although we may encounter certain short-term
adverse effects on our operating results associated with acquisitions, we
believe the long-term benefits of our acquisition program will exceed the
short-term issues encountered with certain acquisitions. Accordingly, in
addition to concentrating on internal growth through continued efforts to
further develop our corporate infrastructure and product and service offerings,
we expect to continue to identify and pursue opportunities for further growth
through acquisitions and expansionary de novo branch activities.
De Novo Branch Offices. During the three years ended December 31, 2007, we
opened the following nine de novo branch offices:
Branch Office Location Date Opened
---------------------- -----------
Farmington, Missouri January 18, 2005
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
Shadow Creek Ranch (Houston), Texas October 15, 2007
Valencia (Los Angeles), California October 29, 2007
Other Corporate Transactions. On July 19, 2007, we completed the sale of two
banking offices located in Denton and Garland, Texas (collectively, Texas 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
Texas Branch Offices had loans, net of unearned discount, of $911,000 and
deposits of $52.0 million.
Acquisition and Integration Costs. Certain costs associated with our
acquisitions are accrued as of the respective consummation dates, including
costs that we incur related to salary continuation agreements, or other similar
agreements, of executive management and certain other employees of the acquired
entities that were in place prior to the acquisition dates, and costs relating
to adjustments to the staffing levels of the acquired entities or to the
anticipated termination of information technology or item processing contracts
of the acquired entities prior to their stated contractual expiration dates. A
summary of the cumulative acquisition and integration costs attributable to our
acquisitions, which were accrued as of the consummation dates of the respective
acquisition, are summarized in Note 2 to our Consolidated Financial Statements.
These acquisition and integration costs are reflected in accrued and other
liabilities in our consolidated balance sheets. As the obligation to make
payments under these agreements is accrued at the consummation date, such
payments do not have any impact on our consolidated statements of income. We
also incur integration costs associated with our acquisitions that are expensed
in our consolidated statements of income that relate principally to additional
costs incurred in conjunction with the information technology conversions of the
respective entities, as further discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Comparison of
Results of Operations for 2007 and 2006, and --Comparison of Results of
Operations for 2006 and 2005."
Lending Activities. As further discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Loans and Allowance
for Loan Losses," our business development efforts are primarily focused on the
origination of the following general loan types: commercial, financial and
agricultural loans; real estate construction and land development loans;
commercial real estate mortgage loans; and to a lesser extent, residential real
estate mortgage loans. Our lending strategy emphasizes quality, growth and
diversification. Throughout our organization, we employ a common credit
underwriting policy. In addition to underwriting based on estimates and
projection of financial strength, collateral values and future cash flows, most
loans to borrowing entities other than individuals require the guarantee of the
parent company or entity sponsor, or in the case of smaller entities, the
personal guarantees of the principals. Our enhanced business development
resources continue to assist in the realignment of certain acquired loan
portfolios, which were skewed toward loan types that reflected the abilities and
experiences of the management members of the acquired entities. In order to
achieve a more diversified portfolio, to address asset-quality issues in the
portfolios and to achieve a higher interest yield on our loan portfolio, we
reduced a substantial portion of the loans that were acquired in certain
acquisitions through payments, refinancing with other financial institutions,
charge-offs and, in certain instances, sales of loans. As the acquired loan
portfolios decrease, we attempt to replenish them with higher yielding loans
that are internally generated by our business development function. With our
acquisitions, we have expanded our business development function into the newly
acquired market areas. We also continued to grow through internal growth.
Consequently, in spite of relatively large reductions in certain acquired
portfolios, our aggregate loan portfolio, net of unearned discount, has
increased 63.5% from $5.43 billion at December 31, 2002, to $8.88 billion at
December 31, 2007.
Commercial, Financial and Agricultural. Our commercial, financial and
agricultural loan portfolio, including lease financing, was $2.38 billion, or
26.8% of total loans, at December 31, 2007, compared to $1.93 billion, or 25.2%
of total loans, at December 31, 2006. The primary component of commercial,
financial and agricultural loans is commercial loans, which are made based on
the borrowers' general credit strength and ability to generate cash flows for
repayment from income sources. Most of these loans are made on a secured basis,
generally involving the use of company equipment, inventory and/or accounts
receivable, and, from time to time, real estate, as collateral. Regardless of
collateral, substantial emphasis is placed on the borrowers' ability to generate
cash flow sufficient to operate the business and provide coverage of debt
servicing requirements. Commercial loans are frequently renewable annually,
although some terms may be as long as five years. These loans typically require
the borrower to maintain certain operating covenants appropriate for the
specific business, such as profitability, debt service coverage and current
asset and leverage ratios, which are generally reported and monitored on a
quarterly basis and subject to more detailed annual reviews. Commercial loans
are made to customers primarily located in First Bank's geographic trade areas
of California, Florida, Illinois, Missouri and Texas that are engaged in
manufacturing, retailing, wholesaling and service businesses. This portfolio is
not concentrated in large specific industry segments that are characterized by
sufficient homogeneity that would result in significant concentrations of credit
exposure. Rather, it is a highly diversified portfolio that encompasses many
industry segments. Within both our real estate and commercial lending
portfolios, we strive for the highest degree of diversity that is practicable.
We also emphasize the development of other service relationships, particularly
deposit accounts, with our commercial borrowers.
Real Estate Construction and Development. Our real estate construction and land
development loan portfolio was $2.14 billion, or 24.1% of total loans, at
December 31, 2007, compared to $1.83 billion, or 23.9% of total loans, at
December 31, 2006. Real estate construction and land development loans include
commitments for construction of both residential and commercial properties.
Commercial real estate projects often require commitments for permanent
financing from other lenders upon completion of the project and, more typically,
may include a short-term amortizing component of the financing from the bank.
Commitments for construction of multi-tenant commercial and retail projects
generally require lease commitments from a substantial primary tenant or tenants
prior to commencement of construction. We typically engage in multi-phase,
multi-tenant projects, as opposed to large vertical projects, that allow us to
complete the projects in phases and limit the number of tenant building starts
based upon successful lease and/or sale of the tenant units. We finance some
projects for borrowers whose home office is located within our trade area but
the particular project may be outside our normal trade area. Although we
generally do not engage in developing commercial and residential construction
lending business outside of our trade area, certain loans acquired in
acquisitions from time to time have been related to projects outside our trade
area. Residential real estate construction and development loans are made based
on the cost of land acquisition and development, as well as the construction of
the residential units. Although we finance the cost of display units and units
held for sale, a substantial portion of the loans for individual residential
units have purchase commitments prior to funding. Residential condominium
projects are funded as the building construction progresses, but funding of unit
finishing is generally based on firm sales contracts.
Commercial Real Estate. Our commercial real estate loan portfolio was $2.43
billion, or 27.4% of total loans, at December 31, 2007, compared to $2.20
billion, or 28.7% of total loans, at December 31, 2006. Commercial real estate
loans include loans for which the intended source of repayment is rental and
other income from the real estate. This includes commercial real estate
developed for lease to third parties as well as the owner's occupancy. The
underwriting of owner occupied commercial real estate loans generally follows
the procedures for commercial lending described above, except that the
collateral is real estate, and the loan term may be longer. The primary emphasis
in underwriting loans for which the source of repayment is the performance of
the collateral is the projected cash flow from the real estate and its adequacy
to cover the operating costs of the project and the debt service requirements.
Secondary emphasis is placed on the appraised value of the real estate, with the
requirement that the appraised liquidation value of the collateral must be
adequate to repay the debt and related interest in the event the cash flow
becomes insufficient to service the debt. Generally, underwriting terms require
the loan principal not to exceed 80% of the appraised value of the collateral
and the loan maturity not to exceed ten years. Commercial real estate loans are
made for commercial office space, retail properties, industrial and warehouse
facilities and recreational properties. We typically only finance commercial
real estate or rental properties that have lease commitments for a majority of
the rentable space.
Residential Real Estate Mortgage. Our residential real estate mortgage loan
portfolio was $1.60 billion, or 18.0% of total loans, at December 31, 2007,
compared to $1.27 billion, or 16.6% of total loans, at December 31, 2006.
Residential real estate mortgage loans are primarily loans secured by
single-family, owner-occupied properties. These loans include both adjustable
rate and fixed rate mortgage loans. Although we typically originate residential
real estate mortgage loans for sale in the secondary mortgage market in the form
of a mortgage-backed security or to various private third-party investors, from
time-to-time, we retain certain residential mortgage loans in our loan portfolio
as directed by management's business strategies. These strategies are reflected
in the expansion of our one-to-four family residential real estate mortgage
loans, excluding loans held for sale, since 2004, with a home equity product
line campaign in 2004 and our business strategy decision, which began in 2003,
to retain a portion of our new loan production in our real estate mortgage
portfolio to provide more diversification within our loan portfolio and to
compensate for continued weak loan demand in other sectors of our loan portfolio
at that time. In addition, in 2005, we began retaining additional mortgage loans
in our residential real estate mortgage portfolio, including 15-year fixed rate,
conforming conventional adjustable rate mortgages and other similar products,
which contributed to an increase in this portion of our loan portfolio and
represented a strategy we employed throughout the first and second quarters of
2006 prior to reverting to our longer-term business strategy of selling the
majority of our mortgage loan production in the secondary mortgage market.
Throughout 2007, we experienced deterioration in our residential real estate
mortgage portfolio, primarily in our sub-prime portfolio (loans that carry a
higher interest rate to compensate for increased credit risk). Our involvement
in the sub-prime market was 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. Our residential
real estate mortgage loans included approximately $54.8 million of sub-prime
mortgage loans, representing approximately 0.6% of our total loan portfolio, at
December 31, 2007, of which approximately $6.6 million were deemed
nonperforming. 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. We expect the declining market conditions
associated with our one-to-four family residential mortgage loan portfolio to
continue in the near term and we are aggressively addressing the risk in our
portfolio through loan sales and other means as further discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Loans and Allowance for Loan Losses."
Nonperforming Loans. Our nonperforming loans were $202.2 million, $48.7 million
and $97.2 million at December 31, 2007, 2006 and 2005, respectively,
representing 2.28%, 0.64% and 1.38%, respectively, of total loans. The level of
nonperforming loans at December 31, 2007 is significantly higher than our
historical averages primarily due to an increase in nonperforming loans in our
Northern California real estate portfolio to $99.2 million at December 31, 2007
from $7.9 million at December 31, 2006; the CFHI acquisition, which added
nonperforming loans of $45.1 million; and an increase in nonperforming loans
within our one-to-four family residential mortgage loan portfolio, as further
discussed under "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Loans and Allowance for Loan Losses."
Market Areas. As of December 31, 2007, First Bank's 217 banking facilities were
located in California, Florida, Illinois, Missouri and Texas. First Bank
operates in the St. Louis metropolitan area, in eastern Missouri and throughout
Illinois, including Chicago. First Bank also operates in southern California,
including San Diego and the greater Los Angeles metropolitan area, including
Ventura County, Riverside County and Orange County; in Santa Barbara County; in
northern California, including the greater San Francisco, San Jose and
Sacramento metropolitan areas; in Texas in the Houston and Dallas metropolitan
areas, and in Florida, including Bradenton and the greater Tampa metropolitan
area. Our larger networks of branch offices are located in high growth markets,
specifically the Los Angeles, San Francisco, Chicago and Tampa metropolitan
areas.
The following table lists the geographic market areas in which First Bank
operates, total deposits, deposits as a percentage of total deposits and the
number of locations as of December 31, 2007:
Total Deposits Number
Deposits as a Percentage of
Geographic Area (in millions) of Total Deposits Locations
--------------- ------------- ----------------- ---------
Southern California.................................................. $ 2,172.9 23.8% 42
Northern Illinois (including Chicago metropolitan area).............. 1,572.0 17.2 36
St. Louis, Missouri metropolitan area................................ 1,542.3 16.9 33
Northern California.................................................. 1,111.5 12.1 20
Central and southern Illinois........................................ 1,082.3 11.8 33
Texas................................................................ 640.4 7.0 21
Florida.............................................................. 614.9 6.7 20
Missouri (excluding the St. Louis metropolitan area)................. 412.9 4.5 12
--------- ----- ---
Total deposits.................................................. $ 9,149.2 100.0% 217
========= ===== ===
Competition and Branch Banking. The activities in which First Bank engages are
highly competitive. Those activities and the geographic markets served primarily
involve competition with other banks, some of which are affiliated with large
regional or national holding companies, and other financial services companies.
Financial institutions compete based upon interest rates offered on deposit
accounts and other credit and service charges, the types of products and quality
of services rendered, the convenience of branch facilities, interest rates
charged on loans and, in the case of loans to large commercial borrowers,
relative lending limits.
Our principal competitors include other commercial banks, savings banks, savings
and loan associations, mutual funds, finance companies, including insurance
premium financing companies, trust companies, insurance brokerage companies,
credit unions, mortgage companies, leasing companies, private issuers of debt
obligations and suppliers of other investment alternatives, such as securities
firms and financial holding companies. Many of our non-bank competitors are not
subject to the same degree of regulation as that imposed on bank holding
companies, federally insured banks and national or state chartered banks. As a
result, such non-bank competitors have advantages over us in providing certain
services. We also compete with major multi-bank holding companies, which are
significantly larger than us and have greater access to capital and other
resources.
We believe we will also continue to face competition in the acquisition of
independent banks, savings banks, branch offices and other financial companies.
We often compete with larger financial institutions that have substantially
greater resources available for making acquisitions.
Subject to regulatory approval, commercial banks operating in California,
Florida, Illinois, Missouri and Texas are permitted to establish branches
throughout their respective states, thereby creating the potential for
additional competition in our service areas.
Supervision and Regulation
General. Along with First Bank, we are extensively regulated by federal and
state laws and regulations which are designed to protect depositors of First
Bank and the safety and soundness of the U.S. banking system, not our
stockholders. To the extent this discussion refers to statutory or regulatory
provisions, it is not intended to summarize all such provisions and is qualified
in its entirety by reference to the relevant statutory and regulatory
provisions. Changes in applicable laws, regulations or regulatory policies may
have a material effect on our business and prospects. We are unable to predict
the nature or extent of the effects on our business and earnings that new
federal and state legislation or regulation may have. The enactment of the
legislation described below has significantly affected the banking industry
generally and is likely to have ongoing effects on First Bank and us in the
future.
As a registered bank holding company under the Bank Holding Company Act of 1956,
as amended, we are subject to regulation and supervision of the Board of
Governors of the Federal Reserve System, or Federal Reserve. We file annual
reports with the Federal Reserve and provide to the Federal Reserve additional
information as it may require.
Since First Bank is an institution chartered by the State of Missouri and a
member of the Federal Reserve, both the State of Missouri Division of Finance
and the Federal Reserve supervise, regulate and examine First Bank. First Bank
is also regulated by the Federal Deposit Insurance Corporation, or FDIC, which
provides deposit insurance of up to $100,000 for each insured depositor.
Bank Holding Company Regulation. The activities of bank holding companies are
generally limited to the business of banking, managing or controlling banks, and
other activities that the Federal Reserve has determined to be so closely
related to banking or managing or controlling banks as to the proper incident
thereto. In addition, under the Gramm-Leach-Bliley Act, or GLB Act, which was
enacted in November 1999 and is further discussed below, a bank holding company,
whose control depository institutions are "well-capitalized" and "well-managed"
(as defined in Federal Banking Regulations), and which obtains "satisfactory"
Community Reinvestment Act (discussed briefly below) ratings, may declare itself
to be a "financial holding company" and engage in a broader range of activities.
As of this date, we are not a "financial holding company."
We are also subject to capital requirements applied on a consolidated basis,
which are substantially similar to those required of First Bank (briefly
summarized below). The Bank Holding Company Act also requires a bank holding
company to obtain approval from the Federal Reserve before:
>> acquiring, directly or indirectly, ownership or control of any voting
shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares
(unless it already owns or controls a majority of such shares);
>> acquiring all or substantially all of the assets of another bank or
bank holding company; or
>> merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or consolidation
that would have a substantially anti-competitive result, unless the
anti-competitive effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to
be served. The Federal Reserve also considers capital adequacy and other
financial and managerial factors in reviewing acquisitions and mergers.
Safety and Soundness and Similar Regulations. We are subject to various
regulations and regulatory policies directed at the financial soundness of First
Bank. These include, but are not limited to, the Federal Reserve's source of
strength policy, which obligates a bank holding company such as us to provide
financial and managerial strength to its subsidiary banks; restrictions on the
nature and size of certain affiliate transactions between a bank holding company
and its subsidiary depository institutions and restrictions on extensions of
credit by its subsidiary banks to executive officers, directors, principal
stockholders and the related interests of such persons.
Regulatory Capital Standards. The federal bank regulatory agencies have adopted
substantially similar risk-based and leverage capital guidelines for banking
organizations. Risk-based capital ratios are determined by classifying assets
and specified off-balance sheet obligations and financial instruments into
weighted categories, with higher levels of capital being required for categories
deemed to represent greater risk. Federal Reserve policy also provides that
banking organizations generally, and particularly those that are experiencing
internal growth or actively making acquisitions, are expected to maintain
capital positions that are substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Under the risk-based capital standard, the minimum consolidated ratio of total
capital to risk-adjusted assets required for bank holding companies is 8% and
the minimum consolidated ratio of Tier I capital (as described below) to
risk-adjusted assets required for bank holding companies is 4%. At least
one-half of the total capital must be composed of common equity, retained
earnings, qualifying noncumulative perpetual preferred stock, a limited amount
of qualifying cumulative perpetual preferred stock and minority interests in the
equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets, which amount is referred to as
"Tier I capital." The remainder may consist of qualifying hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier I
capital and a limited amount of loan and lease loss reserves, which amount,
together with Tier I capital, is referred to as "Total Risk-Based Capital."
In addition to the risk-based standard, we are subject to minimum requirements
with respect to the ratio of our Tier I capital to our average assets less
goodwill and certain other intangible assets, or the Leverage Ratio. Applicable
requirements provide for a minimum Leverage Ratio of 3% for bank holding
companies that have the highest supervisory rating, while all other bank holding
companies must maintain a minimum Leverage Ratio of at least 4% to 5%. The
Office of the Comptroller of the Currency and the FDIC have established capital
requirements for banks under their respective jurisdictions that are consistent
with those imposed by the Federal Reserve on bank holding companies.
Information regarding our capital levels and First Bank's capital levels under
the federal capital requirements is contained in Note 21 to our Consolidated
Financial Statements appearing elsewhere in this report. As further described in
Note 21 to our Consolidated Financial Statements, on March 1, 2005, the Federal
Reserve adopted a final rule, Risk-Based Capital Standards: Trust Preferred
Securities and the Definition of Capital, which allows for the continued
inclusion, on a limited basis, of trust preferred securities in Tier I capital.
Under the final rule, trust preferred securities and other restricted core
capital elements will be subject to stricter quantitative limits. The Federal
Reserve's final rule limits restricted core capital elements to 25% of the sum
of all core capital elements, including restricted core capital elements, net of
goodwill less any associated deferred tax liability.
Prompt Corrective Action. The FDIC Improvement Act requires the federal bank
regulatory agencies to take prompt corrective action in respect to depository
institutions that do not meet minimum capital requirements. A depository
institution's status under the prompt corrective action provisions depends upon
how its capital levels compare to various relevant capital measures and other
factors as established by regulation.
The federal regulatory agencies have adopted regulations establishing relevant
capital measures and relevant capital levels. Under the regulations, a bank will
be:
>> "well capitalized" if it has a total risk-based capital ratio of 10%
or greater, a Tier I capital ratio of 6% or greater and a Leverage
Ratio of 5% or greater and is not subject to any order or written
directive by any such regulatory authority to meet and maintain a
specific capital level for any capital measure;
>> "adequately capitalized" if it has a total risk-based capital ratio of
8% or greater, a Tier I capital ratio of 4% or greater and a Leverage
Ratio of 4% or greater (3% in certain circumstances);
>> "undercapitalized" if it has a total risk-based capital ratio of less
than 8%, a Tier I capital ratio of less than 4% or a Leverage Ratio of
less than 4% (3% in certain circumstances);
>> "significantly undercapitalized" if it has a total risk-based capital
ratio of less than 6%, a Tier I capital ratio of less than 3% or a
Leverage Ratio of less than 3%; and
>> "critically undercapitalized" if its tangible equity is equal to or
less than 2% of its average quarterly tangible assets.
Under certain circumstances, a depository institution's primary federal
regulatory agency may use its authority to lower the institution's capital
category. The banking agencies are permitted to establish individual minimum
capital requirements exceeding the general requirements described above.
Generally, failing to maintain the status of "well capitalized" or "adequately
capitalized" subjects a bank to restrictions and limitations on its business
that become progressively more severe as the capital levels decrease.
A bank is prohibited from making any capital distribution (including payment of
a dividend) or paying any management fee to its holding company if the bank
would thereafter be "undercapitalized." Limitations exist for "undercapitalized"
depository institutions regarding, among other things, asset growth,
acquisitions, branching, new lines of business, acceptance of brokered deposits
and borrowings from the Federal Reserve System. These institutions are also
required to submit a capital restoration plan that includes a guarantee from the
institution's holding company. "Significantly undercapitalized" depository
institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become "adequately
capitalized," requirements to reduce total assets and cessation of receipt of
deposits from correspondent banks. The appointment of a receiver or conservator
may be required for "critically undercapitalized" institutions.
Dividends. Our primary source of funds in the future is the dividends, if any,
paid by First Bank. The ability of First Bank to pay dividends is limited by
federal laws, by regulations promulgated by the bank regulatory agencies and by
principles of prudent bank management. Under the most restrictive of these
requirements, the future payment of dividends from First Bank is limited to
approximately $114.0 million at December 31, 2007, unless prior permission of
the regulatory authorities is obtained.
Customer Protection. First Bank is also subject to consumer laws and regulations
intended to protect consumers in transactions with depository institutions, as
well as other laws or regulations affecting customers of financial institutions
generally. These laws and regulations mandate various disclosure requirements
and substantively regulate the manner in which financial institutions must deal
with their customers. First Bank must comply with numerous regulations in this
regard and is subject to periodic examinations with respect to its compliance
with the requirements.
Community Reinvestment Act. The Community Reinvestment Act of 1977 requires
that, in connection with examinations of financial institutions within their
jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those financial institutions. These factors are also
considered in evaluating mergers, acquisitions and other applications to expand.
The Gramm-Leach-Bliley Act. The GLB Act, enacted in 1999, amended and repealed
portions of the Glass-Steagall Act and other federal laws restricting the
ability of bank holding companies, securities firms and insurance companies to
affiliate with each other and to enter new lines of business. The GLB Act
established a comprehensive framework to permit financial companies to expand
their activities, including through such affiliations, and to modify the federal
regulatory structure governing some financial services activities. This
authority of financial firms to broaden the types of financial services offered
to customers and to affiliates with other types of financial services companies
may lead to further consolidation in the financial services industry. However,
it may lead to additional competition in the markets in which we operate by
allowing new entrants into various segments of those markets that are not the
traditional competitors in those segments. Furthermore, the authority granted by
the GLB Act may encourage the growth of larger competitors.
The GLB Act also adopted consumer privacy safeguards requiring financial
services providers to disclose their policies regarding the privacy of customer
information to their customers and, subject to some exceptions, allowing
customers to "opt out" of policies permitting such companies to disclose
confidential financial information to non-affiliated third parties.
The Sarbanes-Oxley Act. In July 2002, the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley, was enacted. Sarbanes-Oxley imposes a myriad of corporate
governance and accounting measures designed to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of disclosures under securities laws. All
public companies that file periodic reports with the United States Securities
and Exchange Commission, or SEC, are affected by Sarbanes-Oxley.
Sarbanes-Oxley addresses, among other matters: (i) the creation of an
independent accounting oversight board to oversee the audit of public companies
and auditors who perform such audits; (ii) auditor independence provisions which
restrict non-audit services that independent accountants may provide to their
audit clients; (iii) additional corporate governance and responsibility measures
which require the chief executive officer and chief financial officer to certify
financial statements, to forfeit salary and bonuses in certain situations, and
protect whistleblowers and informants; (iv) expansion of the audit committee's
authority and responsibility by requiring that the audit committee have direct
control of the outside auditor, be able to hire and fire the auditor, and
approve all non-audit services; (v) requirements that audit committee members be
independent; (vi) disclosure of a code of ethics; and (vii) enhanced penalties
for fraud and other violations. The provisions of Sarbanes-Oxley also require
that management assess the effectiveness of internal control over financial
reporting and that the independent auditor issue an attestation report on
management's report on internal control over financial reporting. As we are a
non-accelerated filer and the provisions of Sarbanes-Oxley became effective for
us as of December 31, 2007, management's report on internal control over
financial reporting was not subject to attestation by the Company's Independent
Registered Public Accounting Firm as of December 31, 2007 pursuant to temporary
rules of the SEC that permit the Company to provide only management's report in
this annual report, as further discussed under "Item 9A -- Controls and
Procedures."
The USA Patriot Act. The Patriot Act was enacted in October 2001 in response to
the terrorist attacks in New York, Pennsylvania and Washington, D.C. that
occurred on September 11, 2001. The Patriot Act is intended to strengthen the
ability of U.S. law enforcement agencies and the intelligence communities to
work cohesively to combat terrorism on a variety of fronts. The potential impact
of the Patriot Act on financial institutions of all kinds is significant and
wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and imposes various regulations, including standards
for verifying client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering. The Patriot Act is expected to increase the administrative costs and
burden of doing business for financial institutions; however, while we cannot
predict the full impact of such an increase, we do not expect it to differ from
that of other financial institutions.
Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System.
The Federal Reserve requires all depository institutions to maintain reserves
against their transaction accounts and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements. Institutions are authorized to borrow
from the Federal Reserve Bank discount window, but Federal Reserve regulations
require institutions to exhaust other reasonable alternative sources of funds,
including advances from Federal Home Loan Banks, before borrowing from the
Federal Reserve Bank.
First Bank is a member of the Federal Reserve System and the Federal Home Loan
Bank System. As a member, First Bank is required to hold investments in those
systems. First Bank was in compliance with these requirements at December 31,
2007, with investments of $26.3 million in stock of the Federal Reserve Bank of
St. Louis and $13.3 million in stock of the Federal Home Loan Bank of Des
Moines. First Bank also holds an investment of $794,000 in stock of the Federal
Home Loan Bank of San Francisco and $201,000 in stock of the Federal Home Loan
Bank of Dallas, as a nonmember, to collateralize certain Federal Home Loan Bank,
or FHLB, advances assumed in conjunction with certain acquisition transactions.
Monetary Policy and Economic Control. The commercial banking business is
affected by legislation, regulatory policies and general economic conditions as
well as the monetary policies of the Federal Reserve. The instruments of
monetary policy available to the Federal Reserve include the following: (i)
changes in the discount rate on member bank borrowings and the targeted federal
funds rate; (ii) the availability of credit at the discount window; (iii) open
market operations; (iv) the imposition of changes in reserve requirements
against deposits of domestic banks; (v) the imposition of changes in reserve
requirements against deposits and assets of foreign branches; and (vi) the
imposition of and changes in reserve requirements against certain borrowings by
banks and their affiliates.
These monetary policies are used in varying combinations to influence overall
growth and distributions of bank loans, investments and deposits, and this use
may affect interest rates charged on loans or paid on liabilities. The monetary
policies of the Federal Reserve have had a significant effect on the operating
results of commercial banks and are expected to do so in the future. Such
policies are influenced by various factors, including inflation, unemployment,
and short-term and long-term changes in the international trade balance and in
the fiscal policies of the U.S. Government. We cannot predict the effect that
changes in monetary policy or in the discount rate on member bank borrowings
will have on our future business and earnings or those of First Bank.
Employees
As of March 26, 2008, we employed approximately 2,525 employees. None of the
employees are subject to a collective bargaining agreement. We consider our
relationships with our employees to be good.
Item 1A. Risk Factors
Readers of our Annual Report on Form 10-K should consider the risk factors
described below in conjunction with the other information included in this
Annual Report on Form 10-K, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, our Selected Financial Data, our
Consolidated Financial Statements and the related notes thereto, and the
financial and other data contained elsewhere in this report. See also "Special
Note Regarding Forward-Looking Statements" appearing at the beginning of this
report.
Weakness in the real estate market has adversely affected us and may continue to
do so. As discussed under "Business --Lending Activities," we have experienced
deterioration within our residential real estate mortgage loan portfolio
throughout 2007, primarily in our sub-prime loan portfolio. Our residential real
estate mortgage loans were $1.60 billion at December 31, 2007 (including
approximately $54.8 million of sub-prime mortgage loans), representing 18.0% of
our loan portfolio. The effects of ongoing mortgage market challenges, as well
as the ongoing correction in residential real estate market prices and reduced
levels of home sales, could result in further price reductions in single family
home values, adversely affecting the value of collateral securing mortgage loans
held, mortgage loan originations and gains recognized on the sale of mortgage
loans. In the event the allowance for loan losses is insufficient to cover such
losses, our earnings, capital, liquidity and financial condition may be
adversely affected.
Our emphasis on commercial real estate lending and real estate construction and
development lending has increased our credit risk. Our expanded level of
commercial real estate and construction and development lending may carry with
it greater credit risk than the credit risk associated with residential real
estate lending. A substantial portion of our loans are secured by commercial
real estate. Commercial real estate and real estate construction and development
loans were $2.43 billion and $2.14 billion, respectively, at December 31, 2007,
representing 27.4% and 24.1%, respectively, of our loan portfolio. As discussed
under "Business --Lending Activities," we have experienced increasing amounts of
nonperforming loans within our real estate construction and development
portfolio and commercial real estate portfolio, reflective of declining market
conditions surrounding land acquisition and development loans, particularly in
our Northern California market, as a result of increased developer inventories,
slower lot and home sales, and declining market values. Furthermore, problem
loans acquired with our bank acquisitions have also significantly contributed to
the increasing amounts of nonperforming loans within these loan portfolios.
Adverse developments affecting real estate in one or more of our markets could
further increase the credit risk associated with our loan portfolio. The
Department of the Treasury, Federal Reserve and FDIC collectively issued
guidance entitled, "Concentrations in Commercial Real Estate Lending, Sound Risk
Management Practices," that focuses on financial institutions that have high and
increasing concentrations of commercial real estate loans on their balance
sheets that make them more vulnerable to cyclical commercial real estate
markets, and is intended to reinforce the institution's risk management
practices and appropriate capital levels associated with these concentrations.
We pursue acquisitions to supplement our internal growth. Acquisitions involve
varying degrees of inherent risk that could affect our profitability.
Acquisitions of other banks or businesses may expose us to asset quality
problems, higher than anticipated expenses, operational problems or unknown or
contingent liabilities, including litigation, of the entities we acquire. If the
quantity of these problems exceeds our estimates, our earnings and financial
condition may be adversely affected. Furthermore, acquisitions generally require
integration of the acquired entity's systems and procedures with ours in order
to make the transaction economically feasible. This integration process is
complicated and time consuming and can also be disruptive to the customers of
the acquired business. If the integration process is not conducted successfully
and with minimal effect on the business and its customers, we may not realize
the anticipated economic benefits of particular acquisitions within the expected
time frame, and we may lose higher than expected numbers of customers or
employees of the acquired business.
Competition for acquisitions in the financial services industry and our status
as a privately held company make our efforts to grow through acquisitions
difficult. We face intense competition from other financial institutions in
pursuing acquisitions, particularly related to price. Prices at which
acquisitions can be made fluctuate with market conditions. We have experienced
times during which acquisitions could not be made in specific markets at prices
our management considered acceptable, and we expect that this situation will
happen again. Because of our intention to remain a closely held company, we do
not use our common stock to make acquisitions. Our use of cash as acquisition
consideration can be a disadvantage in acquisitions relative to other
prospective acquirers in those instances in which selling stockholders desire a
tax-free exchange.
Geographic distance between our operations increases operating costs and makes
efforts to standardize operations more difficult. We operate banking offices in
California, Florida, Illinois, Missouri and Texas. The noncontiguous nature of
many of our geographic markets increases operating costs and makes it more
difficult for us to standardize our business practices and procedures. As a
result of our geographic dispersion, we face the following challenges, among
others: (a) operation of information technology and item processing functions at
remote locations including the transportation of documents and increased
communications line charges from various service providers; (b) control of
correspondent accounts, reserve balances and wire transfers in different time
zones; (c) familiarizing personnel with our business environment, banking
practices and customer requirements at geographically dispersed locations; (d)
providing administrative support, including accounting, human resources, credit
administration, loan servicing, internal audit and credit review at significant
distances; and (e) establishing and monitoring compliance with our corporate
policies and procedures in different areas.
Decreases in interest rates could have a negative impact on our profitability.
Our earnings are principally dependent on our ability to generate net interest
income. Net interest income is affected by many factors that are partly or
completely beyond our control, including competition, general economic
conditions and the policies of regulatory authorities, including the monetary
policies of the Federal Reserve. Under our current interest rate risk position,
our net interest income could be negatively affected by a decline in interest
rates, as further discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Interest Rate Risk Management."
Our interest rate risk hedging activities may not effectively reduce volatility
in earnings. To offset the risks associated with the effects of changes in
market interest rates, we periodically enter into transactions designed to hedge
our interest rate risk. The accounting for such hedging activities under U.S.
generally accepted accounting principles requires our hedging instruments to be
recorded at fair value. The effect of certain of our hedging strategies may
result in volatility in our quarterly and annual earnings as interest rates
change or as the volatility in the underlying derivatives markets increases or
decreases. The volatility in earnings is primarily a result of marking to market
certain of our hedging instruments and/or modifying our overall hedge position,
as further discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Interest Rate Risk Management."
The financial services business is highly competitive, and we face competitive
disadvantages because of our size and the nature of banking regulation. We
encounter strong direct competition for deposits, loans and other financial
services in all of our market areas. Our larger competitors, which have
significantly greater resources, may have advantages over us in providing
certain services. Our principal competitors include other commercial banks,
savings banks, savings and loan associations, mutual funds, finance companies,
trust companies, insurance companies, leasing companies, credit unions, mortgage
companies, private issuers of debt obligations and suppliers of other investment
alternatives, such as securities firms and financial holding companies. Many of
our non-bank competitors are not subject to the same degree of regulation as
that imposed on bank holding companies, federally insured banks and national or
state chartered banks. As a result, such non-bank competitors may have
advantages over us in providing certain services.
We may not be able to implement technological change as effectively as our
competitors. The financial services industry has in the past and continues to
undergo rapid technological change related to delivery and availability of
products and services and operating efficiencies. In many instances
technological improvements require significant capital expenditures, and many of
our larger competitors have significantly greater resources to absorb such
capital expenditures than we may have available.
We operate in a highly regulated environment. Recently enacted, proposed and
future legislation and regulations may increase our cost of doing business. We
and our subsidiaries are subject to extensive federal and state legislation,
regulation and supervision. Recently enacted, proposed and future legislation
and regulations have had and are expected to continue to have a significant
impact on the financial services industry. Expansion of our banking franchise
into Florida subjects us to legislation and regulations applicable to that
state, which may also increase our costs of doing business in that market. Some
of the legislative and regulatory changes, including the Sarbanes-Oxley Act and
the USA Patriot Act, have and are expected to continue to increase our costs of
doing business, particularly personnel and technology expenses necessary to
maintain compliance with the expanded regulatory requirements. Additionally, the
legislative and regulatory changes could reduce our ability to compete in
certain markets, as further discussed under "Business --Supervision and
Regulation."
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own our office building, which houses our principal place of business,
located at 135 North Meramec, Clayton, Missouri 63105. The property is in good
condition and consists of approximately 60,353 square feet, of which
approximately 1,791 square feet is currently leased to others. Of our other 216
offices and four operations and administrative facilities at December 31, 2007,
115 are located in buildings that we own and 105 are located in buildings that
we lease.
We consider the properties at which we do business to be in good condition
generally and suitable for our business conducted at each location. To the
extent our properties or those acquired in connection with our acquisition of
other entities provide space in excess of that effectively utilized in the
operations of First Bank, we seek to lease or sub-lease any excess space to
third parties. Additional information regarding the premises and equipment
utilized by First Bank appears in Note 7 to our Consolidated Financial
Statements appearing elsewhere in this report.
Item 3. Legal Proceedings
CFHI Securities Litigation. Prior to our acquisition of CFHI, CFHI and certain
of its present and former officers were named as defendants in three purported
class action complaints filed in the United States District Court for the Middle
District of Florida, Tampa Division (the Court) alleging violations of the
federal securities laws, the first of which was filed with the Court on March
20, 2007 (the Securities Actions). On June 22, 2007, the Court entered an order
pursuant to which the Court (i) consolidated the Securities Actions, with the
matter proceeding under the docket for Grand Lodge of Pennsylvania v. Brian P.
Peters, et al., Case No. 8:07-cv-429-T-26-EAJ and (ii) appointed Troy Ratcliff
and Daniel Altenburg (the Lead Plaintiffs) as lead plaintiffs pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995.
Subsequently, on or about August 24, 2007, the Lead Plaintiffs filed a
consolidated amended class action complaint (the Amended Complaint). The Amended
Complaint added as defendants (i) the then current members of CFHI's Board of
Directors, (ii) one former member of CFHI's Board of Directors, (iii) the
underwriters of CFHI's October 5, 2005 public offering of common stock, and (iv)
CFHI's external auditors.
The Amended Complaint was brought on behalf of a putative class of purchasers of
CFHI's common stock between January 21, 2005 and January 22, 2007. In general,
the Amended Complaint alleges that CFHI's SEC filings and public statements
contained misstatements and omissions regarding its residential
construction-to-permanent lending operations and, more specifically, regarding a
home builder and its affiliates and that CFHI's financial statements violated
U.S. generally accepted accounting principles. The Amended Complaint asserts
claims under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. On August 30, 2007, the Lead Plaintiffs filed a notice with the
Court voluntarily dismissing their claims against Anne V. Lee and Justin D.
Locke without prejudice.
CFHI filed a motion to dismiss the Amended Complaint on December 3, 2007. The
Lead Plaintiffs filed an omnibus opposition to CFHI's motion to dismiss on
February 1, 2008.
Other. In the ordinary course of business, we and our subsidiaries become
involved in legal proceedings other than those discussed above. Our management,
in consultation with legal counsel, believes the ultimate resolution of these
existing proceedings will not have a material adverse effect on our business,
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Information. There is no established public trading market for our common
stock. Various trusts, which were established by and are administered by and for
the benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of
his immediate family, own all of our voting stock.
Dividends. In recent years, we have paid minimal dividends on our Class A
Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible
Adjustable Rate Preferred Stock, and have paid no dividends on our Common Stock.
Our ability to pay dividends is limited by regulatory requirements and our
secured credit agreement, and by the receipt of dividend payments from First
Bank, which is also subject to regulatory requirements. The dividend limitations
are further described in Note 11 and Note 22 to our Consolidated Financial
Statements appearing elsewhere in this report.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below are derived from our
consolidated financial statements. This information is qualified by reference to
our Consolidated Financial Statements appearing elsewhere in this report. This
information should be read in conjunction with such Consolidated Financial
Statements, the related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
As of or For the Year Ended December 31, (1)
--------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(dollars expressed in thousands, except share and per share data)
Income Statement Data:
Interest income.................................... $ 699,913 646,304 493,940 394,782 391,153
Interest expense................................... 316,461 261,862 168,259 94,767 104,026
----------- ---------- ---------- ---------- ----------
Net interest income.............................. 383,452 384,442 325,681 300,015 287,127
Provision for loan losses.......................... 75,000 12,000 (4,000) 25,750 49,000
----------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses.................................... 308,452 372,442 329,681 274,265 238,127
Noninterest income................................. 103,269 112,943 96,085 87,199 87,519
Noninterest expense................................ 344,250 319,216 277,638 233,218 226,880
----------- ---------- ---------- ---------- ----------
Income before provision for income taxes
and minority interest in income (loss)
of subsidiary.................................. 67,471 166,169 148,128 128,246 98,766
Provision for income taxes......................... 10,159 55,062 52,509 45,338 35,955
----------- ---------- ---------- ---------- ----------
Income before minority interest in income
(loss) of subsidiary........................... 57,312 111,107 95,619 82,908 62,811
Minority interest in income (loss) of subsidiary... 78 (587) (1,287) -- --
----------- ---------- ---------- ---------- ----------
Net income....................................... $ 57,234 111,694 96,906 82,908 62,811
=========== ========== ========== ========== ==========
Dividends:
Preferred stock.................................... $ 786 786 786 786 786
Common stock....................................... -- -- -- -- --
Ratio of total dividends declared to net income.... 1.37% 0.70% 0.81% 0.95% 1.25%
Per Share Data:
Earnings per common share:
Basic............................................ $ 2,385.68 4,687.38 4,062.36 3,470.80 2,621.39
Diluted.......................................... 2,379.45 4,630.72 4,007.46 3,421.58 2,588.31
Weighted average shares of common stock
outstanding...................................... 23,661 23,661 23,661 23,661 23,661
Balance Sheet Data:
Investment securities.............................. $ 1,019,271 1,464,946 1,340,783 1,813,349 1,049,714
Loans, net of unearned discount.................... 8,883,254 7,666,481 7,020,771 6,137,968 5,328,075
Total assets....................................... 10,897,360 10,158,714 9,170,333 8,732,841 7,106,940
Total deposits..................................... 9,149,193 8,443,086 7,541,831 7,151,970 5,961,615
Other borrowings................................... 376,123 373,899 539,174 594,750 273,479
Notes payable...................................... 39,000 65,000 100,000 15,000 17,000
Subordinated debentures............................ 353,752 297,966 215,461 273,300 209,320
Common stockholders' equity........................ 854,425 787,372 665,875 587,830 536,752
Total stockholders' equity......................... 867,488 800,435 678,938 600,893 549,815
Earnings Ratios:
Return on average assets........................... 0.55% 1.16% 1.10% 1.10% 0.87%
Return on average stockholders' equity............. 6.83 15.26 15.11 14.44 11.68
Net interest margin (2)............................ 4.07 4.36 4.01 4.36 4.45
Efficiency ratio (3)............................... 70.73 64.18 65.83 60.23 60.56
Tangible efficiency ratio (3)...................... 68.18 62.53 64.68 59.48 59.89
Asset Quality Ratios:
Allowance for loan losses to loans................. 1.90% 1.90 1.93 2.46 2.19
Nonperforming loans to loans (4)................... 2.28 0.64 1.38 1.40 1.41
Allowance for loan losses to nonperforming
loans (4)...................................... 83.27 299.05 139.23 175.65 154.52
Nonperforming assets to loans and other
real estate (5)................................ 2.40 0.72 1.41 1.46 1.62
Net loan charge-offs to average loans.............. 0.83 0.09 0.21 0.45 0.61
Capital Ratios:
Average total stockholders' equity to average
total assets................................... 8.10 7.61 7.28 7.61 7.48
Total risk-based capital ratio..................... 10.09 10.25 10.14 10.61 10.27
Leverage ratio..................................... 8.32 8.13 8.13 7.89 7.62
- -----------------------------
(1) The comparability of the selected data presented is affected by the acquisitions of 13 banks, an insurance brokerage
agency, an insurance premium financing company, a loan origination business and five branch offices during the five-
year period ended December 31, 2007. The selected data includes the financial position and results of operations of
each acquired entity only for the periods subsequent to its respective date of acquisition.
(2) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-
earning assets.
(3) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income.
Tangible efficiency ratio is the ratio of noninterest expense (excluding amortization of intangible assets) to the
sum of net interest income and noninterest income.
(4) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms.
(5) Nonperforming assets consist of nonperforming loans and other real estate.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following presents management's discussion and analysis of our financial
condition and results of operations as of the dates and for the periods
indicated. This discussion should be read in conjunction with our "Selected
Financial Data," our Consolidated Financial Statements and the related notes
thereto, and the other financial data appearing elsewhere in this report. This
discussion set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements with
respect to our financial condition, results of operations and business. These
forward-looking statements are subject to certain risks and uncertainties, not
all of which can be predicted or anticipated. Various factors may cause our
actual results to differ materially from those contemplated by the
forward-looking statements herein. We do not have a duty to and will not update
these forward-looking statements. Readers of our Annual Report on Form 10-K
should therefore consider these risks and uncertainties in evaluating
forward-looking statements and should not place undue reliance on
forward-looking statements. See "Special Note Regarding Forward-Looking
Statements" appearing at the beginning of this report and "Item 1A - Risk
Factors," appearing elsewhere in this report.
RESULTS OF OPERATIONS
Overview
Net income was $57.2 million, $111.7 million and $96.9 million for the years
ended December 31, 2007, 2006 and 2005, respectively. Our return on average
assets and our return on average stockholders' equity were 0.55% and 6.83%,
respectively, for the year ended December 31, 2007, compared to 1.16% and
15.26%, respectively, for 2006, and 1.10% and 15.11%, respectively, for 2005.
Our earnings levels reflect the following:
>> a provision for loan losses of $75.0 million for the year ended
December 31, 2007, compared to $12.0 million in 2006 and a negative
provision for loan losses of $4.0 million in 2005;
>> net interest income of $383.5 million for the year ended December 31,
2007, compared to $384.4 million in 2006 and $325.7 million in 2005,
which contributed to a decline in our net interest margin to of 4.07%
for the year ended December 31, 2007, compared to 4.36% in 2006 and
4.01% in 2005;
>> gains on loans sold and held for sale of $14.1 million for the year
ended December 31, 2007, compared to $26.0 million in 2006 and $20.8
million in 2005;
>> noninterest expense of $344.3 million for the year ended December 31,
2007, compared to $319.2 million in 2006 and $277.6 million in 2005;
and
>> a provision for income taxes of $10.2 million for the year ended
December 31, 2007, compared to $55.1 million in 2006 and $52.5 million
in 2005.
The increase in the provision for loan losses in 2007 was primarily driven by
increased net loan charge-offs and a decline in asset quality related to our
one-to-four family residential mortgage and real estate construction and
development loan portfolios, as further discussed under "--Provision for Loan
Losses."
The declines in our net interest income and our net interest margin in 2007
primarily resulted from an increase in higher priced deposit accounts and
pressures on loan yields as a result of competitive conditions within our
markets, as further discussed under "--Net Interest Income."
The decrease in gain on loans sold and held for sale in 2007 primarily resulted
from a decrease in the volume of loans originated and sold. The decrease in
volume is primarily attributable to the discontinuation of the origination and
subsequent sale of sub-prime loans in February of 2007, as well as overall
market disruption, as further discussed under "--Noninterest Income."
The overall increase in the level of noninterest expense for 2007 reflects
increased salaries and employee benefits expense, occupancy and furniture and
equipment expenses and amortization of intangible assets, commensurate with the
significant expansion of our branch office network resulting from our
acquisitions of an insurance premium financing company and an insurance
brokerage agency in 2006, the addition of 38 branch offices associated with
acquisitions in 2006 and 2007 and the opening of eight de novo branch offices
during 2007, in addition to certain other nonrecurring expenses incurred in
2007, primarily related to profit improvement initiatives and other items, as
further discussed under "--Noninterest Expense."
Our earnings in 2006 were driven by an 18.0% increase in net interest income and
a 17.5% increase in noninterest income. Our average interest-earning assets
increased 8.7% and, coupled with higher prevailing interest rates, contributed
to a $58.8 million increase in net interest income and improvement in our net
interest margin, which increased 35 basis points to 4.36% for 2006, from 4.01%
for 2005. Noninterest income increased to $112.9 million in 2006, from $96.1
million in 2005. The increases in net interest income and noninterest income
were partially offset by an increase in our provision for loan losses and higher
levels of noninterest expense. Noninterest expense increased 15.0% to $319.2
million in 2006, from $277.6 million in 2005. The increased expenses are
commensurate with significant expansion of our branch office network and
employee base in several key markets resulting from our acquisitions of other
financial institutions in 2005 and 2006, and the acquisition of an insurance
premium financing company and an insurance brokerage agency in 2006. Our
aggressive and diligent efforts to improve asset quality resulted in a 44.4%
reduction in nonperforming assets during 2006.
Financial Condition and Average Balances
Our average total assets were $10.34 billion for the year ended December 31,
2007, compared to $9.61 billion and $8.81 billion for the years ended December
31, 2006 and 2005, respectively, reflecting increases of $727.8 million and
$797.7 million, respectively. Our total assets increased to $10.90 billion at
December 31, 2007, compared to $10.16 billion and $9.17 billion at December 31,
2006 and 2005, respectively, representing increases of $738.6 million and $988.4
million, respectively. We attribute the increase in our total assets in 2007 and
2006 to a combination of organic growth and growth through acquisitions in our
target markets completed during the past three years, including our acquisition
of CFHI in late 2007 which expanded our banking franchise to the Florida market,
and the acquisition of two financial service companies, an insurance premium
financing company and an insurance brokerage company, thereby providing our
business with new opportunities, and expanding the broad array of products and
services available to our customers. Our acquisitions completed in 2005, 2006
and 2007 provided total assets at the time of the transactions of $280.3
million, $794.3 million and $867.3 million, in aggregate, respectively, as well
as the related intangible assets associated with these transactions.
Our interest-earning assets averaged $9.47 billion for the year ended December
31, 2007, compared to $8.86 billion and $8.15 billion for the years ended
December 31, 2006 and 2005, respectively, while our interest-bearing liabilities
averaged $8.15 billion for the year ended December 31, 2007, compared to $7.50
billion and $6.82 billion for the years ended December 31, 2006 and 2005,
respectively. Funds available from increased average deposits of $648.8 million
were primarily used to fund an increase in average loans of $597.5 million in
2007. During 2006, we used funds from the growth of average deposits of $809.9
million and maturities of investment securities to fund internal loan growth and
to reinvest in higher-yielding investment securities in 2006. Our average other
borrowings declined $18.8 million and $191.2 million during 2007 and 2006,
respectively, as a result of a net reduction of certain term repurchase
agreements utilized in conjunction with our interest rate risk management
program, as further described below. We issued additional subordinated
debentures in 2006 and 2007, as further described below, which we primarily used
to fund our bank acquisitions and to refinance existing, higher-cost
subordinated debentures in December 2006 and April 2007 on their optional call
dates, as further described below.
Average loans, net of unearned discount, were $8.07 billion, $7.47 billion and
$6.44 billion for the years ended December 31, 2007, 2006 and 2005,
respectively. Our acquisitions completed during 2006 and 2007 provided total
loans, net of unearned discount, of $545.1 million and $693.5 million,
respectively. Funds available from deposit growth were used to fund loan growth.
Internal loan growth of $697.5 million for 2007 was partially offset by the
securitization and subsequent sale of certain residential mortgage loans held in
portfolio, and the sale and/or payoff of certain nonperforming and other loans
in our residential mortgage loan and commercial real estate loan portfolios, as
further discussed under "--Loans and Allowance for Loan Losses." Internal loan
growth of $584.2 million for 2006 reflects management's business strategy
decision to retain certain mortgage loan production in our residential real
estate mortgage portfolio during the first half of 2006, partially offset by the
securitization of certain residential mortgage loans in early 2006 which shifted
these assets to available-for-sale investment securities, the sale of certain
residential mortgage loans and certain nonperforming and other loans in our
commercial and commercial real estate loan portfolios, and the payoff of two
significant nonperforming loans, totaling $27.3 million in aggregate, that were
included in our held for sale portfolio, as further discussed under "--Loans and
Allowance for Loan Losses." The increase in average loans for 2007 compared to
2006 primarily reflects: an increase in average commercial, financial and
agricultural loans of $329.7 million; an increase in average real estate
construction and development loans of $211.0 million; and an increase in average
real estate mortgage loans of $152.2 million; partially offset by a decrease in
average loans held for sale of $112.4 million. The increase in average loans for
2006 compared to 2005 primarily reflects: an increase in average commercial,
financial and agricultural loans of $215.2 million; an increase in average real
estate construction and development loans of $367.2 million; an increase in
average real estate mortgage loans of $374.2 million; and an increase in average
loans held for sale of $83.6 million.
Investment securities averaged $1.27 billion for the years ended December 31,
2007 and 2006, compared to $1.64 billion for the year ended December 31, 2005.
Funds provided by maturities of investment securities in 2007 were primarily
used to fund internal loan growth. Securities provided by our bank acquisitions
completed in 2007 were $74.5 million. Furthermore, we liquidated our trading
portfolio in July 2007, reflecting a decrease from the portfolio balance of
$81.2 million at December 31, 2006. Average short-term investments increased
$13.7 million to $130.3 million for the year ended December 31, 2007, from
$116.6 million in 2006. Funds available from maturities of investment
securities, deposit growth and excess short-term investments were utilized to
fund internal loan growth during the majority of 2006, and the remaining funds
were reinvested in higher-yielding investment securities. These securities
purchases primarily occurred late in 2006 and resulted from funds available from
deposit growth in excess of loan demand. The sale of available-for-sale
investment securities associated with the termination of $200.0 million of term
repurchase agreements in the first half of 2006 was partially offset by an
increase in the securities portfolio due to the securitization of $138.9 million
of certain of our residential mortgage loans held in our loan portfolio, an
increase in our trading securities portfolio of $77.8 million, and the addition
of $37.3 million of securities obtained with our bank acquisitions completed in
2006.
Nonearning assets averaged $866.9 million, $754.7 million and $662.4 million for
the years ended December 31, 2007, 2006 and 2005, respectively. The increases in
2007 and 2006 are largely attributable to our acquisitions, which increased our
capital expenditures, thus contributing to an overall increase in bank premises
and equipment, partially offset by continued related depreciation and
amortization, and an increase in intangible assets recognized in conjunction
with the acquisitions. In addition, purchases of land, bank premises and
equipment for future de novo branch offices further contributed to the overall
increases in nonearning assets during these periods. Goodwill and other
intangible assets recorded in conjunction with our acquisitions completed in
2007 and 2006 were $38.3 million and $111.6 million in aggregate, respectively.
Average deferred income taxes were $102.9 million, $121.2 million and $127.1
million for the years ended December 31, 2007, 2006 and 2005, respectively. The
fair value of our derivative financial instruments averaged $2.2 million, ($4.0)
million and ($3.1) million for the years ended December 31, 2007, 2006 and 2005,
respectively, and reflect changes in the fair value of certain derivative
financial instruments and the maturity and/or termination of certain of our
interest rate swap agreements during 2006 and 2007, as further discussed under
"--Interest Rate Risk Management" and in Note 5 to our Consolidated Financial
Statements.
Deposits averaged $8.66 billion, $8.01 billion and $7.20 billion for the years
ended December 31, 2007, 2006 and 2005, respectively. Our year-end deposits were
$9.15 billion, $8.44 billion and $7.54 billion at December 31, 2007, 2006 and
2005, respectively, reflecting increases of $706.1 million, $901.3 million and
$389.9 million for 2007, 2006 and 2005, respectively. The increases in 2007 and
2006 were attributable to organic growth stemming from our deposit development
programs throughout the periods, including enhanced product and service
offerings coupled with marketing campaigns, in addition to our acquisitions of
banks and/or branches that were completed in 2006 and 2007, which provided
aggregate deposits of $475.6 million and $787.2 million, respectively, at the
time of their acquisition. The change in the composition of our deposit mix
during 2007 reflects organic growth in our savings, money market and time
deposits attributable to our continued focus on marketing these deposit
products, our deposit pricing strategies and our ongoing efforts to further
develop multiple account relationships. On July 19, 2007, we sold our two
banking offices located in Denton and Garland, Texas, which resulted in a
decrease in deposits of $52.0 million. The change in the composition of our
deposit mix during 2006 reflects continued efforts to expand our existing
customer relationships by increasing the number and types of products provided,
efforts to increase transactional accounts, such as savings and demand accounts
through our deposit development campaigns, coupled with trends toward increased
time deposits and higher deposit rates paid on certain products resulting from
the highly competitive rate market environment. Average time deposits were $3.86
billion, $3.63 billion and $2.91 billion for the years ended December 31, 2007,
2006 and 2005, respectively. Average demand and savings deposits were $4.80
billion, $4.38 billion and $4.30 billion for the years ended December 31, 2007,
2006 and 2005, respectively.
Other borrowings averaged $361.7 million, $380.5 million and $571.7 million for
the years ended December 31, 2007, 2006 and 2005, respectively. The decrease in
the average balances for 2007 reflects the termination of a $100.0 million term
repurchase agreement in August 2007 that was entered into in July 2006,
partially offset by an increase in daily repurchase agreements, primarily in
connection with cash management activities of our commercial deposit customers.
The decrease in the average balances for 2006 reflects the termination of $150.0
million and $50.0 million of term repurchase agreements in the first and second
quarters of 2006, respectively, partially offset by a $100.0 million term
repurchase agreement entered into in July 2006, and the termination of a $50.0
million term repurchase agreement in late 2005, as further described in Note 5
and Note 10 to our Consolidated Financial Statements. We also attribute the
decrease to the prepayment of $35.3 million of FHLB advances that were assumed
with certain bank acquisitions, and a decrease in daily repurchase agreements.
Our notes payable averaged $34.9 million, $88.8 million and $36.8 million for
the years ended December 31, 2007, 2006 and 2005, respectively. The decrease in
2007 reflects quarterly principal installment payments and additional
prepayments of $61.0 million in aggregate on our term loan facility, partially
offset by an additional borrowing on our term loan facility of $15.0 million in
November 2007 to partially fund our acquisition of CFHI, and borrowings of $20.0
million on our revolving credit facility in December 2007. The increase in 2006
was attributable to the addition of a $100.0 million term loan in conjunction
with the restructuring of our overall financing arrangement in 2005, partially
offset by the subsequent repayments of $35.0 million of the term loan during
2006, reducing the balance to $65.0 million at December 31, 2006, from $100.0
million at December 31, 2005.
Subordinated debentures issued to our affiliated statutory and business trusts
averaged $320.8 million, $281.5 million and $259.2 million for the years ended
December 31, 2007, 2006 and 2005, respectively. During 2007, we issued a total
of $77.3 million of variable rate subordinated debentures in private placements
through four newly-formed statutory trusts as follows:
>> $25.8 million issued to First Bank Statutory Trust VIII on February
23, 2007, of which a portion of the proceeds from the issuance of
these debentures were utilized to fund our acquisition of Royal Oaks
Bancshares, Inc., or Royal Oaks;
>> $15.5 million issued to First Bank Statutory Trust X on August 31,
2007;
>> $25.8 million issued to First Bank Statutory Trust IX on September 20,
2007; and
>> $10.3 million issued to First Bank Statutory Trust XI on September 28,
2007.
We also assumed $4.1 million of subordinated debentures with our acquisition of
Royal Oaks that Royal Oaks 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. On January 2, 2007, we repaid in full $56.9 million of 9.0%
fixed rate 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, as further described in Note 12 to our Consolidated
Financial Statements. During 2006, we also issued a total of $139.2 million of
variable rate subordinated debentures in private placements through four
newly-formed statutory trusts: specifically, $41.2 million issued to First Bank
Statutory Trust IV on March 1, 2006; $20.6 million issued to First Bank
Statutory Trust V on April 28, 2006; $25.8 million issued to First Bank
Statutory Trust VI on June 16, 2006; and $51.5 million issued to First Bank
Statutory Trust VII on December 14, 2006.
Stockholders' equity averaged $837.5 million, $731.9 million and $641.5 million
for the years ended December 31, 2007, 2006 and 2005, respectively. The increase
for 2007 reflects: net income of $57.2 million; 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
13 to our Consolidated Financial Statements; and an increase of $8.1 million in
accumulated other comprehensive income, which was comprised of a $9.1 million
increase associated with the change in the fair value of our derivative
financial instruments, partially offset by a $1.0 million decrease associated
with the change in our unrealized gains and losses on available-for-sale
investment securities; and dividends paid on our Class A and Class B preferred
stock. The increase for 2006 reflects: net income of $111.7 million; a $6.8
million increase in accumulated other comprehensive income, which was comprised
of $4.9 million associated with the change in our unrealized gains and losses on
available-for-sale investment securities and $1.9 million associated with the
change in the fair value of our derivative financial instruments; partially
offset by dividends paid on our Class A and Class B preferred stock.
The following table sets forth, on a tax-equivalent basis, certain information
relating to our average balance sheets, and reflects the average yield earned on
our interest-earning assets, the average cost of our interest-bearing
liabilities and the resulting net interest income for the years ended December
31, 2007, 2006 and 2005.
Years Ended December 31,
----------------------------------------------------------------------------------------------
2007 2006 2005
------------------------------ ------------------------------ ------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans: (1)(2)(3)
Taxable...................... $ 8,039,922 628,304 7.81% $7,451,016 580,448 7.79% $6,422,341 423,361 6.59%
Tax-exempt (4)............... 29,681 2,340 7.88 21,073 1,623 7.70 14,629 1,129 7.72
Investment securities:
Taxable...................... 1,233,415 61,785 5.01 1,220,785 57,017 4.67 1,599,161 65,895 4.12
Tax-exempt (4)............... 39,707 2,468 6.22 47,946 2,885 6.02 45,626 2,675 5.86
Short-term investments......... 130,283 6,699 5.14 116,630 5,909 5.07 70,251 2,211 3.15
----------- ------- ---------- ------- ---------- -------
Total interest-earning
assets................... 9,473,008 701,596 7.41 8,857,450 647,882 7.31 8,152,008 495,271 6.08
------- ------- -------
Nonearning assets................ 866,907 754,678 662,396
----------- ---------- ----------
Total assets............... $10,339,915 $9,612,128 $8,814,404
=========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand...... $ 957,454 9,183 0.96% $ 962,956 8,147 0.85% $ 905,613 4,398 0.49%
Savings and money market..... 2,613,745 79,804 3.05 2,152,419 53,297 2.48 2,135,156 29,592 1.39
Time......................... 3,859,552 183,900 4.76 3,631,516 155,252 4.28 2,906,601 93,167 3.21
----------- ------- ---------- ------- ---------- -------
Total interest-bearing
deposits................. 7,430,751 272,887 3.67 6,746,891 216,696 3.21 5,947,370 127,157 2.14
Other borrowings............... 361,721 16,634 4.60 380,546 16,803 4.42 571,717 18,240 3.19
Notes payable (5).............. 34,932 2,426 6.94 88,843 5,530 6.22 36,849 2,305 6.26
Subordinated debentures (3).... 320,840 24,514 7.64 281,500 22,833 8.11 259,214 20,557 7.93
----------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities.............. 8,148,244 316,461 3.88 7,497,780 261,862 3.49 6,815,150 168,259 2.47
------- ------- -------
Noninterest-bearing liabilities:
Demand deposits................ 1,232,650 1,267,681 1,257,277
Other liabilities.............. 121,484 114,735 100,462
----------- ---------- ----------
Total liabilities.......... 9,502,378 8,880,196 8,172,889
Stockholders' equity............. 837,537 731,932 641,515
----------- ---------- ----------
Total liabilities and
stockholders' equity..... $10,339,915 $9,612,128 $8,814,404
=========== ========== ==========
Net interest income.............. 385,135 386,020 327,012
======= ======= =======
Interest rate spread............. 3.53 3.82 3.61
Net interest margin (6).......... 4.07% 4.36% 4.01%
==== ==== ====
- ------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were approximately
$1.7 million, $1.6 million and $1.3 million for the years ended December 31, 2007, 2006 and 2005, respectively.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees. Exclusive of these fees, the interest
rates paid were 6.41%, 6.11% and 4.93% for the years ended December 31, 2007, 2006 and 2005, respectively.
(6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning
assets.
The following table indicates, on a tax-equivalent basis, the changes in
interest income and interest expense that are attributable to changes in average
volume and changes in average rates, in comparison with the preceding year. The
change in interest due to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the dollar amounts of the change in
each.
Increase (Decrease) Attributable to Change in:
---------------------------------------------------------------------
2007 Compared to 2006 2006 Compared to 2005
--------------------------------- ---------------------------------
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
(dollars expressed in thousands)
Interest earned on:
Loans: (1)(2)(3)
Taxable............................. $ 46,350 1,506 47,856 73,513 83,574 157,087
Tax-exempt (4)...................... 678 39 717 497 (3) 494
Investment securities:
Taxable............................. 593 4,175 4,768 (16,922) 8,044 (8,878)
Tax-exempt (4)...................... (510) 93 (417) 137 73 210
Short-term investments................. 707 83 790 1,923 1,775 3,698
-------- ------- ------- ------- ------- --------
Total interest income........... 47,818 5,896 53,714 59,148 93,463 152,611
-------- ------- ------- ------- ------- --------
Interest paid on:
Interest-bearing demand deposits....... (46) 1,082 1,036 297 3,452 3,749
Savings and money market deposits...... 12,791 13,716 26,507 242 23,463 23,705
Time deposits (3)...................... 10,283 18,365 28,648 26,572 35,513 62,085
Other borrowings....................... (844) 675 (169) (7,199) 5,762 (1,437)
Notes payable (5)...................... (3,681) 577 (3,104) 3,240 (15) 3,225
Subordinated debentures (3)............ 3,059 (1,378) 1,681 1,801 475 2,276
-------- ------- ------- ------- ------- --------
Total interest expense.......... 21,562 33,037 54,599 24,953 68,650 93,603
-------- ------- ------- ------- ------- --------
Net interest income............. $ 26,256 (27,141) (885) 34,195 24,813 59,008
======== ======= ======= ======= ======= ========
- ------------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effect of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees.
Net Interest Income
The primary source of our income is net interest income. Net interest income,
expressed on a tax-equivalent basis, was $385.1 million for the year ended
December 31, 2007, compared to $386.0 million and $327.0 million for the years
ended December 31, 2006 and 2005, respectively. Our net interest margin was
4.07% for the year ended December 31, 2007, compared to 4.36% and 4.01% for the
years ended December 31, 2006 and 2005, respectively. Net interest income is the
difference between the interest earned on our interest-earning assets, such as
loans and investment securities, and the interest paid on our interest-bearing
liabilities, such as deposits and borrowings. Net interest income is affected by
the level and composition of assets, liabilities and stockholders' equity, as
well as the general level of interest rates and changes in interest rates.
Interest income on a tax-equivalent basis includes the additional amount of
interest income that would have been earned if our investment in certain
tax-exempt interest-earning assets had been made in assets subject to federal,
state and local income taxes yielding the same after-tax income. Net interest
margin is determined by dividing net interest income on a tax-equivalent basis
by average interest-earning assets. The interest rate spread is the difference
between the average equivalent yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities.
We attribute the decrease in net interest margin and net interest income in 2007
to a shift in our deposit mix that reflects increased higher-costing average
time deposits and savings and money market accounts, in contrast to demand
accounts, coupled with competitive pressures on the rates paid on our loan
portfolio. The average rate paid on interest-bearing deposits increased 46 basis
points to 3.67% for the year ended December 31, 2007, compared to 3.21% in 2006,
while the average yield earned on our interest-earning assets increased 10 basis
points to 7.41% for the year ended December 31, 2007, compared to 7.31% in 2006.
The average rate paid on interest-bearing liabilities increased 39 basis points
to 3.88% for the year ended December 31, 2007, compared to 3.49% in 2006. Our
average interest-bearing assets increased $615.6 million, or 6.9% during 2007 to
$9.47 billion, from $8.86 billion 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 $867.3 million and $794.3 million, respectively. Our average
interest-bearing deposits increased $683.9 million, or 10.1% during 2007 to
$7.43 billion, from $6.75 billion in 2006. Our average interest-bearing
liabilities increased $650.5 million, or 8.7% during 2007 to $8.15 billion, from
$7.50 billion in 2006. In light of weakening economic conditions in our markets
and expected continued future rate reductions by the Federal Reserve, we expect
to experience continued downward pressure on our net interest margin and net
interest income.
We attribute the increase in net interest income in 2006 to an 8.7% increase in
our average interest-earning assets stemming from internal growth and growth
through acquisitions of banks and other financial service companies, combined
with higher yields on those assets commensurate with the prevailing interest
rates in our markets. The increase in average interest-earning assets reflects
increases in average loans and average short-term investments, and the transfer
of funding from lower-yielding investment securities to higher-yielding loans,
partially offset by increased interest expense related to increasing deposit
balances along with a continued redistribution of deposit balances toward
higher-yielding products and higher interest rates paid on those deposits, as
well as increased interest expense paid on the overall levels of our other
borrowings and subordinated debentures. Our overall borrowing levels reflect the
reduction in the use of higher cost funding sources, such as term repurchase
agreements and FHLB advances. Our average notes payable increased $52.0 million
as a result of the term loan advances we borrowed in August 2005 and November
2005. Our average subordinated debentures, which support acquisitions and are
also utilized for other corporate purposes, increased $22.3 million as a result
of our issuance of $139.2 million of variable rate subordinated debentures
through four newly-formed statutory trusts, partially offset by the repayment of
$56.9 million of 9.0% fixed rate subordinated debentures on December 31, 2006.
In addition, our net interest income was adversely affected by a decline in
earnings on our interest rate swap agreements that were entered into in
conjunction with our interest rate risk management program, as further discussed
below.
Derivative financial instruments that were entered into in conjunction with our
interest rate risk management program to mitigate the effects of decreasing
interest rates reduced our net interest income by $3.1 million and $5.0 million
for the years ended December 31, 2007 and 2006, respectively, whereas these
derivative financial instruments contributed to an increase in our net interest
income of $2.2 million for the year ended December 31, 2005. The earnings on our
interest rate swap agreements reduced our net interest margin by approximately
three and six basis points for 2007 and 2006, respectively, and increased our
net interest margin by approximately three basis points for 2005. During the
third quarter of 2006, we expanded our utilization of derivative financial
instruments to reduce our exposure to falling interest rates, as further
described in Note 5 to our Consolidated Financial Statements. The Company has
implemented various methods to reduce the effect of decreasing interest rates on
our net interest income, including the funding of investment security purchases
through the issuance of term repurchase agreements. Our interest rate swap
agreements are anticipated to partially mitigate the impact of the Federal
Reserve interest rate cuts throughout the fourth quarter of 2007 and first
quarter of 2008.
Interest income on our loan portfolio, expressed on a tax-equivalent basis, was
$630.6 million, $582.1 million and $424.5 million for the years ended December
31, 2007, 2006 and 2005, respectively. The yield on our loan portfolio was
7.82%, 7.79% and 6.59% for the years ended December 31, 2007, 2006 and 2005,
respectively, reflecting increases of three basis points and 120 basis points
during 2007 and 2006, respectively. The yield on our loan portfolio increased
during 2007 primarily as a result of increases in the prime rate throughout the
first half of 2006 from 7.25% to 8.25% and a decrease in the reduction of
interest income associated with our interest rate swap agreements from $4.2
million in 2006 to $3.1 million in 2007, partially offset by competitive
pressures on loan yields within our markets, an increase in the average amount
of nonaccrual loans during 2007 as compared to 2006, and a decline in the prime
rate from 8.25% to 7.25% from September 2007 through December 31, 2007.
The yield on our loan portfolio increased 120 basis points during 2006,
reflecting increases in prevailing interest rates that began in mid-2004 and
continued throughout 2005 and 2006 partially offset by a reduction of interest
income associated with our interest rate swap agreements of $4.2 million in 2006
compared to an increase in interest income of $2.6 million in 2005. During 2006,
the Federal Reserve increased the targeted federal funds rate, resulting in four
increases in the prime rate of interest from 7.25% at December 31, 2005 to 8.25%
at December 31, 2006, and during 2005, the Federal Reserve increased the
targeted federal funds rate, resulting in eight increases in the prime rate of
interest from 5.25% at December 31, 2004 to 7.25% at December 31, 2005. These
interest rates are reflected not only in the rate of interest earned on loans
that are indexed to the prime rate, but also in other assets and liabilities
which either have variable or adjustable rates, or which have matured or
repriced during these periods. In addition, interest income on our loan
portfolio for 2007 reflects the reversal of accrued interest of approximately
$2.6 million upon placement of significant credits on nonaccrual status.
Interest income on our loan portfolio for 2006 also includes a $2.0 million
recovery of interest and fees from the payoff of a single nonaccrual loan, as
further described under "--Loans and Allowance for Loan Losses."
Interest expense on interest-bearing deposits was $272.9 million, $216.7 million
and $127.2 million for the years ended December 31, 2007, 2006 and 2005,
respectively. For the years ended December 31, 2007, 2006 and 2005, the
aggregate weighted average rate paid on our interest-bearing deposit portfolio
was 3.67%, 3.21% and 2.14%, respectively. We attribute the increase in 2007 to
higher priced deposits driven by 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. We attribute the increase in
2006 to the rising interest rate environment and a change in the mix of our
average deposits which reflects a trend towards increased time deposits over
transactional accounts, coupled with higher interest rates paid on deposits
commensurate with the highly competitive rate market that continues to exert
pressure on our net interest margin. While deposit growth continues to provide
an adequate funding source for our loan portfolio, competitive pressures on
deposits within our markets continue to impact our deposit pricing and our net
interest margin.
Interest expense on our other borrowings was $16.6 million, $16.8 million and
$18.2 million for the years ended December 31, 2007, 2006 and 2005,
respectively. The aggregate weighted average rate paid on our other borrowings
was 4.60% for the year ended December 31, 2007, compared to 4.42% and 3.19% for
the years ended December 31, 2006 and 2005, respectively, reflecting the rise in
short-term interest rates during these periods. The increase in the aggregate
weighted average rates paid on our other borrowings also reflect: (a) the
termination of $50.0 million and $200.0 million of term repurchase agreements in
2005 and 2006, respectively, resulting in a prepayment penalty of $306,000 in
2006; (b) the modification of the pricing structure of a $100.0 million term
repurchase agreement in August 2006; (c) the entrance into a $100.0 million term
repurchase agreement during 2006 and the subsequent termination of this
agreement in August 2007, resulting in a prepayment penalty of $330,000; and (d)
the impact of the related spreads to the London Interbank Offered Rate, or
LIBOR, as further described in Note 5 and Note 10 to our Consolidated Financial
Statements.
Interest expense on our notes payable was $2.4 million, $5.5 million and $2.3
million for the years ended December 31, 2007, 2006 and 2005, respectively. The
aggregate weighted average rate paid on our notes payable was 6.94%, 6.22% and
6.26% for the years ended December 31, 2007, 2006 and 2005, respectively. The
aggregate weighted average rates paid reflect changing market interest rates
during these periods, and unused commitment, arrangement and renewal fees paid
in conjunction with this financing arrangement. Exclusive of these fees, the
aggregate weighted average rate paid on our notes payable was 6.41%, 6.11% and
4.93% for the years ended December 31, 2007, 2006 and 2005, respectively,
reflecting the rise in short-term interest rates during the periods. Our secured
credit agreement represents a relatively high-cost funding source as increased
advances have the effect of increasing the weighted average rate of our
non-deposit liabilities. We borrowed $100.0 million of term loans under the
secured credit agreement in late 2005, subsequently reduced the outstanding
balance of these term loans to $65.0 million and $19.0 million at December 31,
2006 and 2007, respectively, and taken an advance of $20.0 million on the
revolving credit sub-facility portion of our secured credit agreement in late
2007, contributing the overall level of interest expense during these periods,
as further described in Note 11 to our Consolidated Financial Statements.
Interest expense on our subordinated debentures was $24.5 million, $22.8 million
and $20.6 million for the years ended December 31, 2007, 2006 and 2005,
respectively. The aggregate weighted average rate paid on our subordinated
debentures was 7.64%, 8.11% and 7.93% for the years ended December 31, 2007,
2006 and 2005, respectively. The aggregate weighted average rates and the level
of interest expense reflect: (a) the issuance of $77.3 million of variable rate
subordinated debentures during 2007 through four newly formed statutory trusts,
partially offset by the repayment of $25.8 million of variable rate subordinated
debentures on April 22, 2007, as further described in Note 12 to our
Consolidated Financial Statements; (b) the issuance of $139.2 million of
variable rate subordinated debentures during 2006 through four newly formed
statutory trusts, partially offset by the repayment of $56.9 million of 9.0%
fixed rate subordinated debentures on December 31, 2006; and (c) the repayment
of $59.3 million of 10.24% fixed rate subordinated debentures in September 2005.
The refinancing of the outstanding subordinated debentures that carried a higher
fixed interest rate improved our net interest income and net interest margin.
However, the earnings impact of our interest rate swap agreements had a negative
impact on the reduction of interest expense associated with our subordinated
debentures. These interest rate swap agreements, which reduced interest expense
by $2.0 million during 2005, increased interest expense by $814,000 during 2006.
These swap agreements, which were designated as fair value hedges, were
terminated in May 2005 and February 2006, as further discussed under "--Interest
Rate Risk Management" and in Note 5 to our Consolidated Financial Statements.
Comparison of Results of Operations for 2007 and 2006
Net Income. Net income was $57.2 million for the year ended December 31, 2007,
compared to $111.7 million for 2006. Our return on average assets and our return
on average stockholders' equity were 0.55% and 6.83%, respectively, for the year
ended December 31, 2007, compared to 1.16% and 15.26%, respectively, for 2006.
The decrease in net income for 2007, as compared to 2006, reflects the
following:
>> a provision for loan losses of $75.0 million for the year ended
December 31, 2007, compared to $12.0 million in 2006;
>> net interest income of $383.5 million for the year ended December 31,
2007, compared to $384.4 million in 2006, which contributed to a
decline in our net interest margin to 4.07% for the year ended
December 31, 2007, compared to 4.36% in 2006;
>> gains on loans sold and held for sale of $14.1 million for the year
ended December 31, 2007, compared to $26.0 million in 2006;
>> noninterest expense of $344.3 million for the year ended December 31,
2007, compared to $319.2 million in 2006; and
>> a provision for income taxes of $10.2 million for the year ended
December 31, 2007, compared to $55.1 million in 2006.
The increase in the provision for loan losses was primarily driven by increased
net loan charge-offs and a decline in asset quality related to our one-to-four
family residential mortgage and real estate construction and development loan
portfolios, as further discussed under "--Provision for Loan Losses."
The decline in our net interest income and our net interest margin primarily
resulted from an increase in higher priced deposit accounts and pressures on
loan yields as a result of competitive conditions within our markets, as further
discussed under "--Net Interest Income."
The decrease in gain on loans sold and held for sale primarily resulted from a
decrease in the volume of loans originated and sold. The decrease in volume is
primarily attributable to the discontinuation of the origination and subsequent
sale of sub-prime loans in February of 2007, as well as overall market
disruption, as further discussed under "--Noninterest Income."
The overall increase in the level of noninterest expense for 2007 reflects
increased salaries and employee benefits expense, occupancy and furniture and
equipment expenses and amortization of intangible assets, commensurate with the
significant expansion of our branch office network resulting from our
acquisitions of an insurance premium financing company and an insurance
brokerage agency in 2006, the addition of 38 branch offices associated with
acquisitions in 2006 and 2007 and the opening of eight de novo offices during
2007, in addition to certain other nonrecurring expenses incurred in 2007,
primarily related to profit improvement initiatives and other items, as further
discussed under "--Noninterest Expense."
The decrease in the provision for income taxes primarily resulted from decreased
earnings and the reversal of a portion of our deferred tax asset valuation
allowance, as further discussed under "--Provision for Income Taxes."
Provision for Loan Losses. We recorded a provision for loan losses of $75.0
million for the year ended December 31, 2007 compared to $12.0 million for the
year ended December 31, 2006. The increase in the provision for loan losses was
primarily driven by increased net loan charge-offs and a decline in asset
quality related to our one-to-four family residential mortgage and land
acquisition, development and construction loan portfolios. Throughout 2007, we
encountered considerable distress in our one-to-four family residential loan
portfolio as a result of the unstable market conditions surrounding sub-prime
loan products. We also saw declining market conditions in our land acquisition,
development and construction loan portfolio, particularly in Northern
California, resulting in increased developer inventories, slower lot and home
sales, and declining market values, as well as further deterioration on certain
residential development and construction portfolio credits that began in the
latter part of 2006, as further discussed below. All of these factors led to
increased risk in our loan portfolio thereby contributing to a significant
increase in our provision for loan losses. We recorded a provision for loan
losses of $49.0 million for the three months ended December 31, 2007 compared to
$4.0 million for the comparable period in 2006. The increase in the three months
ended December 31, 2007 was primarily driven by increased net loan charge-offs
and rapidly declining market conditions in our one-to-four family residential
mortgage and certain sectors of our land acquisition, development and
construction loan portfolios, as discussed above.
The provision recorded during 2006 was primarily driven by significant growth
within our loan portfolio, coupled with deterioration within our one-to-four
family residential portfolio in addition to the deterioration of certain other
credits, including four large credit relationships within our residential
development and construction portfolio during the later part of 2006 that were
primarily driven by current market conditions, including slowdowns in unit
sales.
Our nonperforming loans were $202.2 million at December 31, 2007, compared to
$48.7 million at December 31, 2006. The increase in the overall level of
nonperforming loans during 2007 was primarily driven by a decline in asset
quality related to our one-to-four family residential mortgage and land
acquisition, development and construction loan portfolios, and the acquisition
of CFHI, which added $45.1 million of nonperforming loans, as further discussed
under "--Loans and Allowance for Loan Losses."
Our net loan charge-offs increased to $66.8 million for the year ended December
31, 2007, compared to $6.8 million for the year ended December 31, 2006. Our net
loan charge-offs for 2007 were 0.83% of average loans, compared to 0.09% in
2006. Loan charge-offs were $75.4 million for 2007, compared to $22.2 million in
2006, and loan recoveries were $8.7 million for 2007, compared to $15.4 million
in 2006. Net loan charge-offs were $32.3 million for the three months ended
December 31, 2007, compared to $7.6 million for the comparable period in 2006.
Net loan charge-offs for the three months and year ended December 31, 2007
include $20.5 million and $40.9 million of net charge-offs associated with our
one-to-four family residential loan portfolio, respectively, of which $14.5
million and $23.3 million, respectively, were recorded in conjunction with the
sale of approximately $59.6 million of nonperforming one-to-four family
residential mortgage loans during 2007. Net loan charge-offs also include
charge-offs of $7.6 million associated with the sale of certain commercial loans
which resulted in sales proceeds of $33.5 million. Loan charge-offs for 2006
included approximately $3.3 million of loan charge-offs associated with two
significant residential development project relationships that were placed on
nonaccrual status during 2006, in addition to $2.3 million of charge-offs
recorded in conjunction with the transfer of certain portfolio loans to our
loans held for sale portfolio prior to their sale in December 2006. Loan
recoveries for 2006 included $5.0 million recorded on the payoff of a single
loan that was transferred to our held for sale portfolio on December 31, 2005.
Under our loan policy, loans are placed on nonaccrual status once principal or
interest payments become 90 days past due. However, individual loan officers may
submit written requests for approval to continue the accrual of interest on
loans that become 90 days past due. These requests must be submitted for
approval consistent with the authority levels provided in our credit approval
policies, and they are only granted if an expected near term future event, such
as a pending renewal or expected payoff, exists at the time the loan becomes 90
days past due. If the expected near term future event does not occur as
anticipated, the loan is then placed on nonaccrual status. Management considers
the nonperforming assets trends in its overall assessment of the adequacy of the
allowance for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off and
recovery experience are presented under "--Loans and Allowance for Loan Losses."
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 2007 and 2006:
December 31, Increase (Decrease)
--------------------- -------------------
2007 2006 Amount %
---- ---- ------ -----
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees.... $ 46,834 43,310 3,524 8.1%
Gain on loans sold and held for sale............................. 14,068 26,020 (11,952) (45.9)
Net loss on investment securities................................ (1,646) (1,813) 167 9.2
Bank-owned life insurance investment income...................... 3,841 3,103 738 23.8
Investment management income..................................... 7,111 8,412 (1,301) (15.5)
Insurance fee and commission income.............................. 6,860 4,848 2,012 41.5
Other............................................................ 26,201 29,063 (2,862) (9.8)
--------- -------- -------
Total noninterest income...................................... $ 103,269 112,943 (9,674) (8.6)
========= ======== ======= =====
Noninterest expense:
Salaries and employee benefits................................... $ 172,510 166,864 5,646 3.4%
Occupancy, net of rental income.................................. 32,671 26,953 5,718 21.2
Furniture and equipment.......................................... 19,683 16,960 2,723 16.1
Postage, printing and supplies................................... 6,747 6,721 26 0.4
Information technology fees...................................... 36,305 37,099 (794) (2.1)
Legal, examination and professional fees......................... 9,893 8,783 1,110 12.6
Amortization of intangible assets................................ 12,419 8,195 4,224 51.5
Advertising and business development............................. 6,933 7,128 (195) (2.7)
Charitable contributions......................................... 5,942 6,462 (520) (8.0)
Other............................................................ 41,147 34,051 7,096 20.8
--------- -------- -------
Total noninterest expense..................................... $ 344,250 319,216 25,034 7.8
========= ======== ======= =====
Noninterest Income. Noninterest income was $103.3 million for the year ended
December 31, 2007, in comparison to $112.9 million for 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 increased to $46.8
million from $43.3 million for the years ended December 31, 2007 and 2006,
respectively. The increase in service charges and customer service fees is
primarily attributable to: (a) increased deposit account balances associated
with internal growth and our acquisitions of banks completed in 2006 and 2007,
as further discussed under "--Financial Condition and Average Balances" and in
Note 2 to our Consolidated Financial Statements; (b) increased cardholder
interchange income primarily due to an increase in debit card usage by our
customer base; (c) increased fee income from customer service charges for
non-sufficient funds and returned check fees from our commercial deposit base
primarily as a result of enhanced control of fee waivers; and (d) pricing
increases on certain service charges and customer service fees instituted to
reflect current market conditions.
Gain on loans sold and held for sale decreased to $14.1 million from $26.0
million for the years ended December 31, 2007 and 2006, respectively. The
decrease in 2007 is attributable to a decrease in the volume of mortgage loans
originated and subsequently sold in the secondary market. As further discussed
under "--Loans and Allowance for Loan Losses" and "--Mortgage Banking
Activities," we discontinued the origination and sale in the secondary market of
sub-prime loans in February 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. The decrease is also attributable to: (a) a gain of $851,000
recorded on the sale of approximately $13.4 million of certain repurchased and
other residential mortgage loans in April 2007, compared to net gains of $2.4
million recorded on the sale of $278.7 million of certain residential mortgage
loans during 2006 and a $3.7 million gain, before applicable income taxes,
recorded on the sale of $32.6 million of commercial loans in December 2006, as
further discussed under "--Loans and Allowance for Loan Losses" and "--Mortgage
Banking Activities:" and (b) the recognition of $2.1 million of income generated
from the securitization of $138.9 million in aggregate of residential mortgage
loans in March and April 2006.
We recorded a net loss on investment securities of $1.6 million and $1.8 million
for the years ended December 31, 2007 and 2006, respectively. The net loss for
2007 primarily resulted from a net decline of $1.5 million in the fair value of
securities held in our trading portfolio prior the liquidation of the trading
portfolio in July 2007. The net loss for 2006 primarily resulted the sale of
certain available-for-sale investment securities associated with the termination
of $200.0 million, in aggregate, of term repurchase agreements, as further
described in Note 3, Note 5 and Note 10 to our Consolidated Financial
Statements, partially offset by a gain of $389,000 on the redemption of common
stock held as an available-for-sale investment security.
Bank-owned life insurance investment income was $3.8 million and $3.1 million
for the years ended December 31, 2007 and 2006, respectively, reflecting an
increased return on the performance of the underlying investments surrounding
the insurance contracts which is primarily attributable to the portfolio
investments mix and overall market conditions.
Investment management income generated by MVP, our institutional money
management subsidiary, was $7.1 million for the year ended December 31, 2007, in
comparison to $8.4 million in 2006, reflecting decreased portfolio management
fee income associated with changes in the level of assets under management and
current market conditions.
Insurance fee and commission income generated by Adrian Baker, our insurance
brokerage agency acquired on March 31, 2006 was $6.9 million for the year ended
December 31, 2007, in comparison to $4.8 million in 2006, reflecting a full year
of activity in 2007 as compared to nine months in 2006 and increased customer
volumes, partially offset by reductions in premiums attributable to current
market conditions within the insurance industry.
Other income was $26.2 million and $29.1 million for the years ended December
31, 2007 and 2006, respectively. We primarily attribute the decline in other
income to:
>> a decrease of $2.2 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;
>> a decrease of $1.7 million attributable to interest due on tax refunds
associated with the filing of amended federal income tax returns for
the years from 2000 through 2004 that was recorded in the fourth
quarter of 2006;
>> a release fee of $938,000 received in the first quarter of 2006 on
funds collected from a loan previously sold in which First Bank was
entitled to 25% of any future fees collected on the loan under a
defined release fee agreement that was entered into in conjunction
with the loan sale; partially offset by
>> an increase of $1.6 million in the gain (loss) on our derivative
instruments resulting from an increase in the fair value of our
interest rate floors and caps;
>> an increase of $569,000 in gains on sales of other assets. Net pre-tax
gains on sales of other assets were $4.4 million for the year ended
December 31, 2007, and included a pre-tax gain of $2.6 million
recognized in November 2007 on the sale of a branch building and a
pre-tax gain of $1.0 million recognized in July 2007 on the sale of
our Texas Branch Offices, as further described in Note 2 to our
Consolidated Financial Statements. Net pre-tax gains on sales of other
assets were $3.8 million for the year ended December 31, 2006 and
included a pre-tax gain of $2.8 million gain recognized in September
2006 on the sale of an asset that was acquired as settlement in full
of a loan previously charged-off and a pre-tax gain of $885,000
recognized on the sale of assets that were acquired with an
acquisition completed in late 2004; and
>> income associated with continued growth and expansion of our banking
franchise, including our de novo branch offices and our acquisitions
completed during 2006 and 2007.
Noninterest Expense. Noninterest expense was $344.3 million for the year ended
December 31, 2007, in comparison to $319.2 million for 2006. Our efficiency
ratio was 70.73% for the year ended December 31, 2007, compared to 64.18% for
2006. The efficiency ratio is used by the financial services industry to measure
an organization's operating efficiency. The efficiency ratio represents the
ratio of noninterest expense to the sum of net interest income and noninterest
income. The increase in noninterest expense was primarily attributable to our
2006 and 2007 acquisitions, including salaries and employee benefits expense,
occupancy and furniture and equipment expenses, as well as increases in
amortization of intangible assets and other expense.
We record the majority of integration costs attributable to our acquisitions as
of the consummation date of our business combinations. These costs include, but
are not limited to, items such as:
>> write-downs and impairment of assets of the acquired entities that
will no longer be usable subsequent to the consummation date,
primarily data processing equipment, incompatible hardware and
software, bank signage, etc. These adjustments are generally recorded
as of the consummation date as an allocation of the purchase price
with the offsetting adjustment recorded as an increase to goodwill.
For all periods presented, these adjustments are not material to our
operations;
>> costs associated with a planned exit of an activity of the acquired
entity that is not associated with or is not expected to generate
revenues after the consummation date, such as credit card lending.
These costs are generally recorded as of the consummation date through
the establishment of an accrued liability with the offsetting
adjustment recorded as an increase to goodwill. These costs are
infrequently encountered and, for all periods presented, are not
material to our operations;
>> planned involuntary employee termination benefits, as further
discussed under "Business --Acquisitions - Acquisition and Integration
Costs" and Note 2 to our Consolidated Financial Statements; and
>> contractual obligations of the acquired entities that existed prior to
the consummation date that either have no economic benefit to the
combined entity or have a penalty that we will incur to cancel the
contractual obligation. These contractual obligations generally relate
to existing information technology and item processing contracts of
the acquired entities that include penalties for early termination.
The acquisition of specialized entities does not typically result in
costs associated with integration of information technology systems as
the existing systems remain in use. In conjunction with the merger and
integration of our acquisitions, the acquired banks are converted to
our existing information technology and item processing systems.
Consequently, the costs associated with terminating the existing
contracts of the acquired entities are generally recorded as of the
consummation date through the establishment of an accrued liability
with the offsetting adjustment recorded as an increase to goodwill as
further discussed under "Business -- Acquisitions - Acquisition and
Integration Costs" and Note 2 to our Consolidated Financial
Statements.
We make adjustments to the fair value of the acquired entities' assets and
liabilities for these items as of the consummation date and include them in the
allocation of the overall acquisition cost. We also incur costs associated with
our acquisitions that are expensed in our consolidated statements of income.
These costs relate specifically to additional costs incurred in conjunction with
the information technology and item processing conversions of the acquired
entities, as well as training of personnel on First Bank's systems, as further
described and quantified below.
Salaries and employee benefits increased $5.6 million to $172.5 million for the
year ended December 31, 2007, from $166.9 million in 2006. We attribute the
overall increase to the following:
>> increased salaries and employee benefits expenses associated with an
aggregate of 38 additional branches acquired in 2006 and 2007, eight
de novo branches opened in 2007, and the acquisitions of UPAC and
Adrian Baker in 2006;
>> generally higher salary and employee benefit costs associated with
employing and retaining qualified personnel; and
>> approximately $4.6 million of severance expenses associated with
certain profit improvement initiatives, primarily related to
reductions in mortgage banking production staff levels following the
discontinuation of the origination and sale of sub-prime loans in
February 2007; partially offset by
>> lower salaries and employee benefits expenses resulting from decreased
staffing levels within our mortgage banking division and the
completion of certain other staff reductions. Our total full-time
equivalent employees decreased to approximately 2,440 at December 31,
2007, from 2,630 at December 31, 2006; and
>> lower incentive compensation as a result of the decline in earnings.
Occupancy, net of rental income, and furniture and equipment expense was $52.4
million and $43.9 million for the years ended December 31, 2007 and 2006,
respectively. The increase reflects higher levels of expense resulting from our
de novo activities 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 depreciation expense associated with
acquisitions and capital expenditures.
Information technology and item processing fees were $36.3 million and $37.1
million for the years ended December 31, 2007 and 2006, respectively. As more
fully described in Note 19 to our Consolidated Financial Statements, First
Services, L.P., a limited partnership indirectly owned by our Chairman and
members of his immediate family, provides information technology and various
operational support services to our subsidiaries and us. Information technology
fees also include fees paid to outside servicers associated with our mortgage
lending and trust divisions, our small business lending and institutional money
management subsidiaries, and UPAC and Adrian Baker. The decrease in these fees
in 2007 reflects a reduction in the number of acquisitions completed during 2007
as compared to 2006 and the related de-conversion costs from other providers
associated with bank acquisitions, as well as 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
expense associated with the related capital expenditures necessary to support
the enhanced delivery channels. The decrease was also partially offset by higher
costs associated with the addition of de novo branch offices and offices
provided by our acquisitions, including the acquisition of CFHI; growth and
technological advancements consistent with our product and service offerings;
and continued expansion and upgrades to technological equipment, networks and
communication channels.
Legal, examination and professional fees were $9.9 million and $8.8 million for
the years ended December 31, 2007 and 2006, respectively. The continued
expansion of overall corporate activities, the ongoing professional services
utilized by certain of our acquired entities, and the levels 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 $12.4 million and $8.2 million for the
years ended December 31, 2007 and 2006, respectively. The increase is
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, as further described in Note 2 and Note 8 to our
Consolidated Financial Statements.
Charitable contributions expense was $5.9 million and $6.5 million for the years
ended December 31, 2007 and 2006, respectively, reflecting a decrease in
charitable contributions made to the Dierberg Operating Foundation, Inc., a
charitable foundation established by our Chairman and members of his immediate
family, as further described in Note 19 to our Consolidated Financial
Statements.
Other expense was $41.1 million and $34.1 million for the years ended December
31, 2007 and 2006, respectively. 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; and
>> an increase in overdraft, robbery, fraud and other losses of $6.6
million from $2.3 million in 2006 to approximately $8.9 million in
2007, including a single overdraft loss of $5.0 million and an expense
of $700,000 related to our estimated indemnification obligation, as a
member bank, to share certain litigation costs of Visa, Inc., or Visa.
This resulted from revisions in October 2007 to Visa's by-laws
affecting all member banks, as part of an overall reorganization in
which the member banks indemnified Visa on certain covered litigation.
The expense related to Visa's American Express litigation, which was
settled by Visa in November 2007, and other Visa litigation which has
not yet been settled. As part of the reorganization, Visa has planned
an initial public offering, or IPO, in 2008, and a portion of the
proceeds of the IPO representing each member bank's proportionate
share will be used to fund the litigation settlements. We anticipate
our proportional share of the proceeds of the Visa IPO will more than
offset our estimated liabilities related to the Visa litigation.
Provision for Income Taxes. The provision for income taxes was $10.2 million for
the year ended December 31, 2007, representing an effective income tax rate of
15.1%, in comparison to $55.1 million, representing an effective income tax rate
of 33.1%, for the year ended December 31, 2006. The decrease in our provision
for income taxes primarily reflects our decreased earnings, an increase in tax
exempt income and a partial reduction of our deferred tax asset valuation
allowance. In the fourth quarter of 2007, we reversed a portion of our deferred
tax asset valuation allowance which had the effect of reducing the provision for
income taxes by $10.7 million. This reversal was necessitated by a reduction in
the allowance for loan losses allocated to certain loans acquired in 2004 as a
result of final resolution of the loans through repayment, sale or other means.
In 2006, we reversed a $2.9 million federal tax reserve and $1.9 million state
tax reserve as they were no longer deemed necessary as a result of the
resolution of a potential tax liability. In addition, we recorded net tax
benefits of $1.9 million and $5.6 million relating to the utilization of certain
federal and state tax credits for the years ended December 31, 2007 and 2006,
respectively. Excluding these transactions, our effective income tax rate was
34.7% and 38.5% for the years ended December 31, 2007 and 2006, respectively, as
further described in Note 13 to our Consolidated Financial Statements.
Comparison of Results of Operations for 2006 and 2005
Net Income. Net income was $111.7 million for the year ended December 31, 2006,
compared to $96.9 million for 2005. Our return on average assets and our return
on average stockholders' equity were 1.16% and 15.26%, respectively, for the
year ended December 31, 2006, compared to 1.10% and 15.11%, respectively, for
2005. Net income for 2006 reflects increased net interest income and noninterest
income, partially offset by an increase in our provision for loan losses, higher
levels of noninterest expense and an increase in our provision for income taxes.
The increase in earnings in 2006 reflects our continuing efforts to strengthen
earnings while focusing on reducing the overall level of our nonperforming
assets. The increase in net interest income and net interest margin resulted
from (a) an increase in average interest-earning assets stemming from internal
loan growth and growth through acquisitions, and (b) higher yields earned on
those assets as a result of an increased interest rate environment; partially
offset by increased interest expense associated with an increasing deposit base
coupled with higher interest rates paid on deposits and on our short-term and
long-term borrowings, and the adverse impact of a decline in earnings on our
interest rate swap agreements associated with our interest rate risk management
program, as further discussed under "--Net Interest Income." The increase in net
income in 2006 was partially offset by a significant increase in our provision
for loan losses, which resulted from loan portfolio growth and the deterioration
of certain credit relationships despite an overall improvement in our
nonperforming loans throughout 2006, as further discussed under "--Provision for
Loan Losses." The increase in our noninterest income in 2006 was attributable to
increased gains on loans sold and held for sale associated with mortgage banking
activities and the sale of certain loans, commission fee income associated with
our insurance brokerage agency acquired in March 2006, increased service charges
on deposit accounts and customer service fees related to higher deposit balances
stemming from product development efforts and deposits associated with our 2005
and 2006 acquisitions, and gains on the sale of other assets, as further
discussed under "--Noninterest Income." The overall increase in the level of
noninterest expense for 2006 reflects increased salaries and employee benefits
expense, occupancy expenses and amortization of intangible assets, commensurate
with the significant expansion of our branch office network and employee base
resulting from our acquisitions of an insurance premium financing company and an
insurance brokerage agency in 2006, the addition of 20 branch offices associated
with acquisitions in 2005 and 2006, and an increase in the full-time equivalent
employee base during 2006, as further discussed under "--Noninterest Expense."
Provision for Loan Losses. We recorded a provision for loan losses of $12.0
million for the year ended December 31, 2006. The provision recorded during 2006
was primarily driven by significant growth within our loan portfolio, coupled
with deterioration within our one-to-four family residential portfolio in
addition to the deterioration of certain other credits, including four large
credit relationships within our residential development and construction
portfolio during the later part of 2006 that were primarily driven by current
market conditions, including slowdowns in unit sales, as further discussed under
"Business -- Lending Activities" and "--Loans and Allowance for Loan Losses." We
recorded a $4.0 million negative provision for loan losses for the year ended
December 31, 2005 to reduce our allowance for loan losses to a level
commensurate with the decreasing credit risk that existed in the loan portfolio
at that time. Our nonperforming loans decreased $48.5 million, or 49.9%, to
$48.7 million at December 31, 2006, from $97.2 million at December 31, 2005. The
decrease in the overall level of nonperforming loans during 2006 reflects our
efforts to improve asset quality through the sale of nonperforming loans and
loan payoffs, as well as the strengthening of certain credit relationships, as
further discussed under "--Loans and Allowance for Loan Losses." The overall
decrease was partially offset by several significant credit relationships that
were downgraded and placed on nonaccrual status during 2006, as previously
mentioned.
Our allowance for loan losses was $145.7 million at December 31, 2006, compared
to $135.3 million at December 31, 2005, representing 1.90% and 1.93% of loans,
net of unearned discount, respectively, and 299.05% and 139.23% of nonperforming
loans, respectively. The allowance for loan losses at December 31, 2006 includes
$5.2 million of balances acquired in conjunction with our 2006 acquisitions. Our
net loan charge-offs declined to $6.8 million from $13.4 million for the years
ended December 31, 2006 and 2005, respectively. Our net loan charge-offs for
2006 were 0.09% of average loans, representing a significant improvement over
0.21% in 2005. Loan charge-offs were $22.2 million for 2006, compared to $33.1
million in 2005, and loan recoveries were $15.4 million for 2006, compared to
$19.8 million in 2005. Loan charge-offs for 2006 included approximately $3.3
million of loan charge-offs associated with two significant residential
development project relationships that were placed on nonaccrual status during
2006, in addition to $2.3 million of charge-offs recorded in conjunction with
the transfer of certain portfolio loans to our loans held for sale portfolio
prior to their sale in December 2006. Loan recoveries for 2006 included $5.0
million recorded on the payoff of a single loan that was transferred to our held
for sale portfolio on December 31, 2005.
Tables summarizing nonperforming assets, past due loans and charge-off and
recovery experience are presented under "--Loans and Allowance for Loan Losses."
Noninterest Income and Expense. The following table summarizes noninterest
income and noninterest expense for the years ended December 31, 2006 and 2005:
December 31, Increase (Decrease)
--------------------- -------------------
2006 2005 Amount %
---- ---- ------ -----
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts and customer service fees.... $ 43,310 39,776 3,534 8.9%
Gain on loans sold and held for sale............................. 26,020 20,804 5,216 25.1
Net loss on investment securities................................ (1,813) (2,873) 1,060 36.9
Bank-owned life insurance investment income...................... 3,103 4,860 (1,757) (36.2)
Investment management income..................................... 8,412 8,573 (161) (1.9)
Insurance fee and commission income.............................. 4,848 -- 4,848 100.0
Other............................................................ 29,063 24,945 4,118 16.5
--------- -------- -------
Total noninterest income...................................... $ 112,943 96,085 16,858 17.5
========= ======== ======= =====
Noninterest expense:
Salaries and employee benefits................................... $ 166,864 139,764 27,100 19.4%
Occupancy, net of rental income.................................. 26,953 22,081 4,872 22.1
Furniture and equipment.......................................... 16,960 16,015 945 5.9
Postage, printing and supplies................................... 6,721 5,743 978 17.0
Information technology fees...................................... 37,099 35,472 1,627 4.6
Legal, examination and professional fees......................... 8,783 9,319 (536) (5.8)
Amortization of intangible assets................................ 8,195 4,850 3,345 69.0
Advertising and business development............................. 7,128 7,043 85 1.2
Charitable contributions......................................... 6,462 5,922 540 9.1
Other............................................................ 34,051 31,429 2,622 8.3
--------- -------- -------
Total noninterest expense..................................... $ 319,216 277,638 41,578 15.0
========= ======== ======= =====
Noninterest Income. Noninterest income was $112.9 million for the year ended
December 31, 2006, in comparison to $96.1 million for 2005. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, investment management income, insurance fee and
commission income and other income.
Service charges on deposit accounts and customer service fees increased to $43.3
million from $39.8 million for the years ended December 31, 2006 and 2005,
respectively. The increase in service charges and customer service fees is
primarily attributable to: (a) increased deposit account balances associated
with internal growth and our acquisitions of banks completed in 2005 and 2006,
as further discussed under "--Financial Condition and Average Balances" and in
Note 2 to our Consolidated Financial Statements; (b) additional products and
services available and utilized by our retail and commercial customer base; (c)
increased fee income from customer service charges for non-sufficient funds and
returned check fees coupled with enhanced control of fee waivers; and (d)
pricing increases on certain service charges and customer service fees
instituted to reflect current market conditions.
The gain on loans sold and held for sale increased to $26.0 million from $20.8
million for the years ended December 31, 2006 and 2005, respectively. We
primarily attribute the increase in 2006 to: (a) a $1.7 million gain, before
applicable income taxes, recorded on the sale of certain nonperforming loans in
March 2006 that were transferred to our loans held for sale portfolio on
December 31, 2005; (b) the recognition of $1.2 million and $927,000 of income in
March 2006 and April 2006, respectively, generated from the securitization and
transfer to our investment portfolio of $77.1 million and $61.8 million,
respectively, of residential mortgage loans held in our loan portfolio; (c) net
gains of $2.4 million recorded on the sale of $278.7 million of certain
residential mortgage loans; and (d) a $3.7 million gain, before applicable
income taxes, recorded on the sale, in December 2006, of 44 loans in our loans
held for sale portfolio, of which 26 were nonperforming loans. The increase in
our gain on loans sold and held for sale was partially offset by a $1.1 million
write-down of the carrying value of a nonperforming loan that was transferred to
our loans held for sale portfolio on December 31, 2005, and subsequently
transferred back into our loan portfolio at fair value in September 2006.
Noninterest income includes a net loss on investment securities of $1.8 million
and $2.9 million for the years ended December 31, 2006 and 2005, respectively.
The net loss for 2006 resulted primarily from sales of certain
available-for-sale investment securities associated with the full termination of
three $50.0 million term repurchase agreements and the partial termination of
$50.0 million of a $150.0 million term repurchase agreement, as further
described in Note 3, Note 5 and Note 10 to our Consolidated Financial
Statements, partially offset by a gain of $389,000 on the redemption of common
stock held as an available-for-sale investment security. The net loss for 2005
resulted from the sale of certain available-for-sale investment securities
associated with the termination of a $50.0 million term repurchase agreement.
Bank-owned life insurance investment income was $3.1 million for the year ended
December 31, 2006, in comparison to $4.9 million in 2005. The decrease reflects
a reduced return on the performance of the underlying investments surrounding
the insurance contracts which is primarily attributable to the portfolio mix of
investments and overall market conditions.
Investment management income generated by MVP, our institutional money
management subsidiary, was $8.4 million for the year ended December 31, 2006, in
comparison to $8.6 million in 2005, reflecting decreased portfolio management
fee income as a result of current market conditions.
Insurance fee and commission income generated by Adrian Baker, our insurance
brokerage agency acquired on March 31, 2006, was $4.8 million for the year ended
December 31, 2006.
Other income was $29.1 million and $24.9 million for the years ended December
31, 2006 and 2005, respectively. We attribute the primary components of the
increase in other income to:
>> an increase of $3.1 million in gains on sales of other assets,
including a $2.8 million gain recognized on the sale of an asset that
was acquired as settlement in full of a loan charged-off in prior
years and a gain of $885,000 recognized on the sale of assets that
were acquired with an acquisition completed in late 2004;
>> an increase of $1.7 million attributable to interest due on tax
refunds associated with the filing of amended federal income tax
returns for the years from 2000 through 2004;
>> a release fee of $938,000 received on funds collected from a loan
previously sold in March 2005, in which First Bank was entitled to 25%
of any future fees collected on the loan under a defined release fee
agreement that was entered into in conjunction with the loan sale;
>> a net increase of $839,000 in loan servicing fees, which was primarily
attributable to a decrease of $966,000 in impairment charges on SBA
servicing rights and a decrease of $1.5 million in the amortization of
servicing rights; partially offset by a decrease of $1.6 million in
fees from loans serviced for others;
>> a decrease of $680,000 in net losses on our derivative instruments;
>> an increase of $652,000 in gains on sales of other real estate. Gains
on sales of other real estate were $2.0 million for the year ended
December 31, 2006, and included a $1.5 million gain recognized on the
sale of a parcel of other real estate in January 2006. Gains on sales
of other real estate for the year ended December 31, 2005 were $1.3
million; and
>> income associated with continued growth and expansion of our banking
franchise, including our de novo branch offices and our acquisitions
completed during 2005 and 2006; partially offset by
>> a decrease of $2.5 million in recoveries of certain loan principal
balances that had been previously charged-off by the financial
institutions prior to their acquisitions by First Banks.
Noninterest Expense. Noninterest expense was $319.2 million for the year ended
December 31, 2006, in comparison to $277.6 million for 2005. Our efficiency
ratio was 64.18% for the year ended December 31, 2006, compared to 65.83% for
2005. The increase in noninterest expense was primarily attributable to our 2005
and 2006 acquisitions, including salaries and employee benefits expense,
occupancy expense and information technology fees, as well as increases in
amortization of intangible assets and other expense.
Salaries and employee benefits increased by $27.1 million to $166.9 million for
the year ended December 31, 2006, from $139.8 million in 2005. We attribute the
overall increase to increased salaries and employee benefits expenses associated
with an aggregate of 20 additional branches acquired in 2005 and 2006, one de
novo branch opened in 2005, the acquisitions of UPAC and Adrian Baker, in
addition to generally higher salary and employee benefit costs associated with
employing and retaining qualified personnel, including the implementation of
enhanced incentive compensation and employee benefit plans. Our total full-time
equivalent employees increased to approximately 2,630 at December 31, 2006 from
approximately 2,290 at December 31, 2005.
Occupancy, net of rental income, and furniture and equipment expense was $43.9
million and $38.1 million for the years ended December 31, 2006 and 2005,
respectively. The increase reflects higher levels of expense resulting from our
de novo activities and acquisitions in 2005 and 2006, as discussed above, as
well as increased technology equipment expenditures, continued expansion and
renovation of certain corporate and branch offices, and increased depreciation
expense associated with acquisitions and capital expenditures.
Information technology and item processing fees were $37.1 million and $35.5
million for the years ended December 31, 2006 and 2005, respectively. The
increased level of information technology fees was primarily attributable to the
additional branch offices provided by our acquisitions and de novo branch office
openings; certain de-conversion costs from other providers associated with our
acquisitions; growth and technological advancements consistent with our product
and service offerings; and continued expansion and upgrades to technological
equipment, networks and communication channels, including costs to maintain
security and provide compliance with the Sarbanes-Oxley Act of 2002; partially
offset by expense reductions resulting from information technology conversions
of our acquisitions completed in 2005 and 2006, as well as the achievement of
certain efficiencies associated with the implementation of various technology
projects.
Legal, examination and professional fees were $8.8 million and $9.3 million for
the years ended December 31, 2006 and 2005, respectively. The continued
expansion of overall corporate activities, the ongoing professional services
utilized by certain of our acquired entities, and the levels of legal fees
associated with certain litigation matters have all contributed to the overall
expense levels in 2005 and 2006.
Amortization of intangible assets was $8.2 million and $4.9 million for the
years ended December 31, 2006 and 2005, respectively. The increase is
attributable to core deposit intangibles associated with our acquisitions
completed in 2005 and 2006, in addition to the customer list intangibles
associated with our acquisitions of Adrian Baker and UPAC in March 2006 and May
2006, respectively, as further described in Note 2 and Note 8 to our
Consolidated Financial Statements.
Charitable contributions expense was $6.5 million and $5.9 million for the years
ended December 31, 2006 and 2005, respectively. The increase is primarily
attributable to an increase in charitable contributions made to the Dierberg
Operating Foundation, Inc. and The Dierberg Foundation, charitable foundations
established by our Chairman and members of his immediate family, as further
described in Note 19 to our Consolidated Financial Statements.
Other expense was $34.1 million and $31.4 million for the years ended December
31, 2006 and 2005, respectively. 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:
>> a $617,000 specific reserve established in March 2006 and an increase
of $746,000 to the specific reserve in June 2006 for the estimated
loss associated with a $3.1 million unfunded letter of credit acquired
with an acquisition completed in November 2004;
>> a $470,000 loss recognized on a liquidation sale of residential real
estate and personal property of an SBA guaranteed loan; and
>> expenses associated with continued growth and expansion of our banking
franchise, including our de novo branch offices and our acquisitions
completed during 2005 and 2006; partially offset by
>> a decrease of $1.5 million of expenditures on other real estate.
Expenses on other real estate were $520,000 for the year ended
December 31, 2006. Expenses on other real estate were $2.0 million for
the year ended December 31, 2005, and included expenditures of $1.1
million related to an acquired parcel of other real estate.
Provision for Income Taxes. The provision for income taxes was $55.1 million for
the year ended December 31, 2006, representing an effective income tax rate of
33.1%, in comparison to $52.5 million, representing an effective income tax rate
of 35.5%, for the year ended December 31, 2005. The increase in our provision
for income taxes primarily reflects our increased earnings. In 2006, we reversed
a $2.9 million federal tax reserve and a $1.9 million state tax reserve as they
were no longer deemed necessary as a result of the resolution of a potential tax
liability. In 2005, we reversed a $3.3 million state tax reserve as it was no
longer deemed necessary as a result of the resolution of a potential tax
liability. In addition, we recorded net tax benefits of $5.6 million and $2.1
million relating to the utilization of certain federal and state tax credits for
the years ended December 31, 2006 and 2005, respectively. Excluding these
transactions, our effective income tax rate was 38.5% and 38.4% for the years
ended December 31, 2006 and 2005, respectively.
Interest Rate Risk Management
For financial institutions, the maintenance of a satisfactory level of net
interest income is a primary factor in achieving acceptable income levels.
However, the maturity and repricing characteristics of the institution's loan
and investment portfolios may differ significantly from those within its deposit
structure. The nature of the loan and deposit markets within which a financial
institution operates and its objectives for business development within those
markets at any point in time influence these characteristics. In addition, the
ability of borrowers to repay loans and depositors to withdraw funds prior to
stated maturity dates introduces divergent option characteristics that operate
primarily as interest rates change. These factors cause various elements of the
institution's balance sheet to react in different manners and at different times
relative to changes in interest rates, potentially leading to increases or
decreases in net interest income over time. Depending upon the direction and
magnitude of interest rate movements and their effect on the specific components
of the institution's balance sheet, the effects on net interest income can be
substantial. Consequently, managing a financial institution requires
establishing effective control over the exposure of the institution to changes
in interest rates.
We strive to manage our interest rate risk by:
>> maintaining an Asset Liability Committee, or ALCO, responsible to our
Board of Directors and Executive Management, to review the overall
interest rate risk management activity and approve actions taken to
reduce risk;
>> employing a financial simulation model to determine our exposure to
changes in interest rates;
>> coordinating the lending, investing and deposit-generating functions
to control the assumption of interest rate risk; and
>> utilizing various financial instruments, including derivatives, to
offset inherent interest rate risk should it become excessive.
The objective of these procedures is to limit the adverse impact that changes in
interest rates may have on our net interest income.
The ALCO has overall responsibility for the effective management of interest
rate risk and the approval of policy guidelines. The ALCO includes our President
and Chief Executive Officer, Chief Financial Officer, Chief Investment Officer,
Executive Vice President of Corporate Banking, Executive Vice President of
Retail Banking, Director of Risk Management and Audit, and certain other senior
officers. The Asset Liability Management Group, which monitors interest rate
risk, supports the ALCO, prepares analyses for review by the ALCO and implements
actions that are either specifically directed by the ALCO or established by
policy guidelines.
In managing sensitivity, we strive to reduce the adverse impact on earnings by
managing interest rate risk within internal policy constraints. Our policy is to
manage exposure to potential risks associated with changing interest rates by
maintaining a balance sheet posture in which annual net interest income is not
significantly impacted by reasonably possible near-term changes in interest
rates. To measure the effect of interest rate changes, we project our net income
over a two-year horizon on a pro forma basis. The analysis assumes various
scenarios for increases and decreases in interest rates including both
instantaneous and gradual, and parallel and non-parallel shifts in the yield
curve, in varying amounts. For purposes of arriving at reasonably possible
near-term changes in interest rates, we include scenarios based on actual
changes in interest rates, which have occurred over a two-year period,
simulating both a declining and rising interest rate scenario.
We are "asset-sensitive," indicating that our assets would generally reprice
with changes in interest rates more rapidly than our liabilities, and our
simulation model indicates a loss of projected net interest income should
interest rates decline. While a decline in interest rates of less than 100 basis
points has a relatively minimal impact on our net interest income, an
instantaneous parallel decline in the interest yield curve of 100 basis points
indicates a pre-tax projected loss of approximately 3.9% of net interest income,
based on assets and liabilities at December 31, 2007. 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 the effect of recent cuts in interest rates in late 2007 and in early 2008,
has negatively impacted our net interest income and will continue to impact the
level of our net interest income over time.
We also prepare and review a more traditional interest rate sensitivity position
in conjunction with the results of our simulation model. The following table
presents the projected maturities and periods to repricing of our rate sensitive
assets and liabilities as of December 31, 2007, adjusted to account for
anticipated prepayments:
Over Over
Three Six Over
Three through through One Over
Months Six Twelve through Five
or Less Months Months Five Years Years Total
------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
Loans (1)....................................... $5,160,254 546,334 809,329 2,182,351 184,986 8,883,254
Investment securities........................... 209,637 68,427 141,071 420,742 179,394 1,019,271
Short-term investments.......................... 14,078 -- -- -- -- 14,078
---------- --------- ---------- ---------- --------- ---------
Total interest-earning assets............... 5,383,969 614,761 950,400 2,603,093 364,380 9,916,603
Effect of interest rate swap agreements......... (400,000) -- -- 400,000 -- --
---------- --------- ---------- ---------- --------- ---------
Total interest-earning assets after the
effect of interest rate swap
agreements................................ $4,983,969 614,761 950,400 3,003,093 364,380 9,916,603
========== ========= ========== ========== ========= =========
Interest-bearing liabilities:
Interest-bearing demand deposits................ $ 362,913 225,596 147,128 107,894 137,319 980,850
Money market deposits........................... 2,267,206 -- -- -- -- 2,267,206
Savings deposits................................ 76,419 62,933 53,942 76,418 179,808 449,520
Time deposits................................... 1,432,946 1,246,565 1,030,183 481,565 1,235 4,192,494
Other borrowings................................ 375,356 92 170 505 -- 376,123
Notes payable................................... 39,000 -- -- -- -- 39,000
Subordinated debentures......................... 282,481 -- -- -- 71,271 353,752
---------- --------- ---------- ---------- --------- ---------
Total interest-bearing liabilities.......... $4,836,321 1,535,186 1,231,423 666,382 389,633 8,658,945
========== ========= ========== ========== ========= =========
Interest-sensitivity gap:
Periodic........................................ $ 147,648 (920,425) (281,023) 2,336,711 (25,253) 1,257,658
=========
Cumulative...................................... 147,648 (772,777) (1,053,800) 1,282,911 1,257,658
========== ========= ========== ========== =========
Ratio of interest-sensitive assets
to interest-sensitive liabilities:
Periodic.................................... 1.03 0.40 0.77 4.51 0.94 1.15
=========
Cumulative.................................. 1.03 0.88 0.86 1.16 1.15
========== ========= ========== ========== =========
- -----------------------
(1) Loans are presented net of unearned discount.
Management made certain assumptions in preparing the foregoing table. These
assumptions included:
>> loans will repay at projected repayment rates;
>> mortgage-backed securities, included in investment securities, will
repay at projected repayment rates;
>> interest-bearing demand accounts and savings deposits will behave in a
projected manner with regard to their interest rate sensitivity; and
>> fixed maturity deposits will not be withdrawn prior to maturity.
A significant variance in actual results from one or more of these assumptions
could materially affect the results reflected in the foregoing table.
Our overall asset-sensitive position at December 31, 2007 was $1.26 billion, or
11.54% of our total assets, in comparison to our overall asset-sensitive
position of $1.39 billion, or 13.65% of our total assets, at December 31, 2006.
However, we were in a liability-sensitive position on a cumulative basis through
the twelve-month time horizon of $1.05 billion, or 9.67% of our total assets,
and $608.4 million, or 5.99% of our total assets, at December 31, 2007 and 2006,
respectively. We primarily attribute the liability-sensitive position on a
cumulative basis through the twelve-month time horizon in 2007 and 2006 to an
increase in money market deposits and an increase in the repricing of time
deposits within the twelve-month time horizon as a result of the interest rate
environment and economic conditions as of December 31, 2007 and 2006.
The interest-sensitivity position is one of several measurements of the impact
of interest rate changes on net interest income. Its usefulness in assessing the
effect of potential changes in net interest income varies with the constant
change in the composition of our assets and liabilities and changes in interest
rates. For this reason, we place greater emphasis on our simulation model for
monitoring our interest rate risk exposure.
As previously discussed, we utilize derivative financial instruments to assist
in our management of interest rate sensitivity by modifying the repricing,
maturity and option characteristics of certain assets and liabilities. The
derivative financial instruments we held as of December 31, 2007 and 2006 are
summarized as follows:
December 31,
--------------------------------------------------
2007 2006
------------------------ ------------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................ $400,000 5,271 600,000 4,369
Interest rate floor agreements.............. 300,000 1,699 300,000 376
Interest rate cap agreements................ 400,000 50 400,000 139
Interest rate lock commitments.............. 3,000 23 5,900 --
Forward commitments to sell
mortgage-backed securities................ 55,000 40 54,000 86
======== ====== ======== ======
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 years ended December 31, 2007 and 2006, we realized net interest expense
of $3.1 million and $5.0 million, respectively, on our derivative financial
instruments, whereas for the year ended December 31, 2005, we realized net
interest income of $2.2 million on our derivative financial instruments. The
increased net interest expense associated with our derivative financial
instruments reflects the interest rate environment during these periods as well
as a reduced level of derivative instruments due to the maturity and/or
termination of certain of these instruments. We also recorded net gains on
derivative instruments, which are included in noninterest income in the
consolidated statements of income, of $1.2 million for the year ended December
31, 2007, in comparison to net losses on derivative instruments of $390,000 and
$1.1 million for the years ended December 31, 2006 and 2005, respectively. The
net gains and losses on derivative instruments reflect changes in the value of
our interest rate floor and interest rate cap agreements. In March 2008, we
entered into four interest rate swap agreements with a notional amount of $125.0
million in aggregate. These swap agreements were designated as cash flow hedges
and effectively convert the interest payments on certain of our subordinated
debentures from variable rate to fixed rate. Information regarding our
derivative financial instruments outlined in the table above is further
described in Note 5 to our Consolidated Financial Statements appearing elsewhere
in this report.
Mortgage Banking Activities
Our mortgage banking activities consist of the origination, purchase and
servicing of residential mortgage loans. The purchase of loans to be held for
sale is primarily limited to loans that we acquire in conjunction with our
acquisition of other financial institutions. Generally, we sell our production
of residential mortgage loans in the secondary loan markets. However, in
mid-2003, as a result of continued weak loan demand in other sectors of our loan
portfolio, we made a business strategy decision to retain a portion of new
residential mortgage loan production in our real estate mortgage portfolio,
generally represented by production originated in our St. Louis production
offices with the exception of 20 and 30-year fixed rate loans which are
typically sold in the secondary loan markets. Furthermore, in the third quarter
of 2005, we revised our strategy and began retaining additional mortgage loan
production in our residential real estate mortgage portfolio, including 15-year
fixed rate, conforming conventional adjustable rate mortgages and other similar
products, and continued this strategy through the first six months of 2006, as
further discussed in "--Loans and Allowance for Loan Losses." Servicing rights
may either be retained or released with respect to conventional, FHA and VA
conforming fixed-rate and conventional adjustable rate residential mortgage
loans.
For the three years ended December 31, 2007, 2006 and 2005, we originated
residential mortgage loans held for sale and held for portfolio totaling $548.0
million, $1.28 billion and $1.60 billion, respectively, and sold residential
mortgage loans totaling $512.5 million, $1.11 billion and $1.14 billion,
respectively. The origination and purchase of residential mortgage loans and the
related sale of the loans provides us with additional sources of income
including the gain or loss realized upon sale, the interest income earned while
the loan is held awaiting sale and the ongoing loan servicing fees from the
loans sold with servicing rights retained. Mortgage loans serviced for investors
aggregated $1.10 billion, $1.04 billion and $1.01 billion at December 31, 2007,
2006 and 2005, respectively.
Gains on mortgage loans originated for resale, including loans sold and held for
sale, were $10.5 million, $18.6 million and $18.1 million for the years ended
December 31, 2007, 2006 and 2005, respectively. These gains, net of losses,
which are realized at the time of sale, are determined on a lower of cost or
market basis. The cost basis reflects both the adjustments of the carrying
values of loans held for sale to the lower of cost, adjusted to include the cost
of hedging the loans held for sale, or current market values, as well as the
adjustments for any gains or losses on loan commitments for which the interest
rate has been established, net of anticipated underwriting "fallout," adjusted
for the cost of hedging these loan commitments. Fallout represents loans not
funded due to issues discovered during the underwriting process or withdrawal of
the loan request by the customer. We primarily attribute the decrease in gains
in 2007 as compared to 2006 and the increase in gains in 2006 as compared to
2005 to: (a) a decrease in the volume of mortgage loans originated and
subsequently sold in the secondary market; (b) net gains of $2.4 million
recorded on the sale of $278.7 million of certain residential mortgage loans
during 2006 in comparison to 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 (c) the recognition of $2.1
million of income generated from the securitization of $138.9 million in
aggregate of residential mortgage loans in March and April 2006. 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 February
2007, and as such, the discontinuation of these activities has substantially
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.
Interest income on mortgage loans held for sale was $10.1 million for the year
ended December 31, 2007, in comparison to $18.2 million and $11.7 million for
the years ended December 31, 2006 and 2005, respectively. The amount of interest
income realized on loans held for sale is a function of the average balance of
loans held for sale, the period for which the loans are held and the prevailing
interest rates when the loans are made. The average balance of loans held for
sale was $140.7 million, $247.0 million and $184.1 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Our yield on the portfolio of
loans held for sale was 7.16%, 7.39% and 6.36% for the years ended December 31,
2007, 2006 and 2005, respectively. This compares with our cost of funds, as a
percentage of average interest-bearing liabilities, of 3.88%, 3.49% and 2.47%
for the years ended December 31, 2007, 2006 and 2005, respectively.
We report mortgage loan servicing fees in other noninterest income in our
consolidated statements of income, net of amortization of mortgage servicing
rights, interest shortfall and mortgage-backed security guarantee fee expense.
Interest shortfall equals the difference between the interest collected from a
loan-servicing customer upon prepayment of the loan and a full month's interest
that is required to be remitted to the security owner. Our gross mortgage loan
servicing fees were $2.8 million, $2.7 million and $3.7 million for the years
ended December 31, 2007, 2006 and 2005, respectively. Amortization of mortgage
servicing rights was $2.8 million, $4.1 million and $5.0 million for the years
ended December 31, 2007, 2006 and 2005, respectively. We attribute the decrease
in amortization of mortgage servicing rights in 2007 to lower levels of
prepayments.
Our interest rate risk management policy provides certain hedging parameters to
reduce the interest rate risk exposure arising from changes in loan prices from
the time of commitment until the sale of the security or loan. To reduce this
exposure, we use forward commitments to sell fixed-rate mortgage-backed
securities at a specified date in the future. At December 31, 2007, 2006 and
2005, we had $54.5 million, $56.0 million and $47.7 million, respectively, of
loans held for sale and related commitments, net of committed loan sales and
estimated underwriting fallout, of which $55.0 million, $54.0 million and $47.0
million, respectively, were hedged through the use of such forward commitments.
Investment Securities
We classify the securities within our investment portfolio as trading, available
for sale or held to maturity. Our investment security portfolio consists
primarily of securities designated as available for sale. The investment
security portfolio was $1.02 billion at December 31, 2007, compared to $1.46
billion and $1.34 billion at December 31, 2006 and 2005, respectively.
We attribute the decrease in the investment securities portfolio in 2007 to:
maturities and sales of investment securities of $1.05 billion and $170.7
million, respectively; the liquidation of our trading portfolio in July 2007,
reflecting a decrease from the portfolio balance of $81.2 million at December
31, 2006; partially offset by the reinvestment of funds available from
maturities and sales of investment securities of approximately $770.0 million in
higher-yielding securities; and our acquisitions completed in 2007, which
provided $74.5 million in securities. The remaining funds were primarily used to
fund loan growth.
The increase in the investment securities portfolio in 2006 was attributable to:
an increase in the available-for-sale securities portfolio due to the
securitization of $138.9 million of certain of our residential mortgage loans
held in our loan portfolio; an increase in our trading securities portfolio of
$77.8 million; reinvestment of funds available from maturities in
higher-yielding securities; and an increase of $37.3 million relating to
securities acquired through our acquisitions completed in 2006; partially offset
by the sale of the underlying available-for-sale investment securities
associated with the termination of $200.0 million of term repurchase agreements,
as further described in Note 3, Note 5 and Note 10 to our Consolidated Financial
Statements.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source of income
for First Bank. Interest and fees on loans were 90.0%, 90.0% and 85.9% of total
interest income for the years ended December 31, 2007, 2006 and 2005,
respectively. We recognize interest and fees on loans as income using the
interest method of accounting. Loan origination fees are deferred and accreted
to interest income over the estimated life of the loans using the interest
method of accounting. The accrual of interest on loans is discontinued when it
appears that interest or principal may not be paid in a timely manner in the
normal course of business. We generally record payments received on nonaccrual
and impaired loans as principal reductions, and defer the recognition of
interest income on loans until all principal has been repaid or an improvement
in the condition of the loan has occurred that would warrant the resumption of
interest accruals.
Loans, net of unearned discount, represented 81.5% of our assets as of December
31, 2007, compared to 75.5% of our assets at December 31, 2006. Loans, net of
unearned discount, increased $1.22 billion to $8.88 billion at December 31, 2007
from $7.67 billion at December 31, 2006. The overall increase in loans, net of
unearned discount, in 2007 is primarily attributable to internal loan growth of
$697.5 million, repurchases of certain residential mortgage loans, and our
acquisitions completed in 2007, which provided loans, net of unearned discount,
of $693.5 million, in aggregate. This increase was partially offset by the
securitization and sale of certain residential mortgage loans, and the sale
and/or payoff of certain nonperforming and other loans, as further discussed
below. We attribute the net increase in our loan portfolio in 2007 primarily to:
>> an increase of $447.2 million in our commercial, financial and
agricultural portfolio primarily attributable to internal loan
production growth and $53.4 million associated with our acquisitions
completed in 2007;
>> an increase of $308.7 million in our real estate construction and
development portfolio primarily attributable to an increase of $152.7
million associated with our acquisitions completed in 2007;
>> an increase of $332.4 million in our one-to-four family residential
real estate loan portfolio primarily attributable to an increase of
$341.9 million associated with our acquisitions completed in 2007, and
internal loan production growth of $131.2 million, including $31.4
million of residential mortgage loans sold with recourse that we were
required to repurchase based on the terms of the underlying sales
contracts. In addition, we transferred approximately $116.4 million of
one-to-four family residential real estate loans from our loans held
for sale portfolio, as further discussed below. These increases were
partially offset by the securitization and subsequent sale of $101.4
million of certain residential mortgage loans held in portfolio, and
the sale and/or payoff of certain nonperforming and other loans, as
further discussed below. Our one-to-four family residential real
estate loan portfolio included approximately $54.8 million of
sub-prime mortgage loans, or 3.4% of our residential real estate loan
portfolio, at December 31, 2007, of which approximately $6.6 million
of these sub-prime mortgage loans were nonperforming loans. Our
primary recourse risk attributable to early payment default on
sub-prime residential mortgage loans that we previously sold in the
secondary market expires throughout the first quarter of 2008;
>> an increase of $263.7 million in our commercial real estate loan
portfolio primarily attributable to internal loan production growth of
$146.6 million and an increase of $134.3 million associated with our
acquisitions completed in 2007; and
>> a decrease of $150.2 million in loans held for sale resulting from (a)
the timing of loan originations and subsequent sales in the secondary
mortgage market; (b) a decrease in origination volumes primarily due
to our exit from the sub-prime loan origination business during the
first quarter of 2007, which represented approximately 40% of our
mortgage banking loan origination and sale volumes; and (c) the
transfer of approximately $116.4 million of one-to-four family
residential real estate loans from our held for sale portfolio to our
loan portfolio. Such loans were originated with the intent to sell in
the secondary market; however, management elected not to sell these
loans due to unstable market conditions and reduced bid prices.
Loans, net of unearned discount, increased $645.7 million to $7.67 billion at
December 31, 2006 from $7.02 billion at December 31, 2005. The overall increase
in loans, net of unearned discount, in 2006 is primarily attributable to
internal loan growth of $584.2 million and our acquisitions completed in 2006,
which provided loans, net of unearned discount, of $545.1 million, in aggregate.
This increase was partially offset by the securitization of certain residential
mortgage loans that we transferred to our investment portfolio, and the sale
and/or payoff of certain nonperforming loans, as further discussed below. We
attribute the net increase in our loan portfolio in 2006 primarily to:
>> an increase of $315.1 million in our commercial, financial and
agricultural portfolio, primarily attributable to an increase of
$214.9 million associated with our acquisitions completed during 2006,
including $149.2 million of loans provided by our acquisition of UPAC
in May 2006, in addition to continued internal loan production growth
within this portfolio;
>> an increase of $268.2 million in our real estate construction and
development portfolio resulting from internal growth due to new loan
originations and seasonal fluctuations on existing and available
credit lines, as well as a $34.2 million increase associated with our
acquisitions completed in 2006; and
>> an increase of $145.4 million in our real estate mortgage portfolio
resulting from: (a) internal loan growth of $289.8 million, largely
attributable to the retention of certain mortgage loan production in
our residential real estate mortgage portfolio during the first six
months of 2006 following management's business strategy decision in
the third quarter of 2005 to retain certain additional mortgage loan
product production in our residential real estate mortgage portfolio;
(b) our acquisitions completed during 2006, which provided real estate
mortgage loans of $293.0 million; partially offset by (c) the
securitization of $77.1 million and $61.8 million of certain
residential mortgage loans in March 2006 and April 2006, respectively,
which resulted in a change in our asset structure from residential
mortgage loans to available-for-sale investment securities; and (d)
the sale of approximately $127.8 million of residential mortgage loans
in the third and fourth quarters of 2006; partially offset by
>> a decrease of $98.8 million in loans held for sale resulting from: (a)
the timing of loan originations and subsequent sales in the secondary
mortgage market; (b) the payoff and/or sale of approximately $44.9
million of certain acquired loans that we transferred to our held for
sale portfolio on December 31, 2005; and (c) the transfer of a $13.5
million nonperforming loan from our loans held for sale portfolio to
our commercial real estate loan portfolio after recording a $1.1
million write-down of the credit to its estimated fair value at the
time of transfer. We subsequently received a payoff on this credit for
the amount of its revised carrying value in December 2006.
In our evaluation of acquisitions, it is anticipated that as we apply our
standards for credit structuring, underwriting, documentation and approval, a
portion of the existing borrowers will elect to refinance their loans with
another financial institution, because of one or more of the following factors:
(a) there may be an aggressive effort by other financial institutions to attract
them; (b) they do not accept the changes involved; or (c) they are unable to
meet our credit requirements. In addition, another portion of the portfolio may
either enter our remedial collection process to reduce undue credit exposure or
improve problem loans, or may be charged-off. The amount of this attrition will
vary substantially among acquisitions depending on the strength and discipline
within the credit function of the acquired institution; the magnitude of
problems contained in the acquired portfolio; the aggressiveness of competing
institutions to attract business; and the significance of the acquired
institution to the overall banking market. Typically, in acquisitions of
institutions that have strong credit cultures prior to their acquisitions and
operate in moderately large markets, there is relatively little attrition that
occurs after the acquisition. However, in those acquisitions in which the credit
discipline has been weak, and particularly those in small metropolitan or rural
areas, we can experience substantially greater attrition. Generally, this
process occurs within approximately six to 12 months after completion of the
acquisition.
During the five years ended December 31, 2007, loans, net of unearned discount,
increased from $5.43 billion at December 31, 2002 to $8.88 billion at December
31, 2007, an increase of $3.45 billion, or 63.5%. Throughout this period, we
have achieved significant growth through implementation of our acquisition
strategy and we have also enhanced our capabilities for achieving and managing
internal growth. A key element of this process has been the expansion of our
corporate business development staff, which is responsible for the internal
development and management of both loan and deposit relationships with
commercial customers.
Our acquisitions have contributed to an increase in the portfolios of new loans
during the five years ended December 31, 2007. In certain cases, these acquired
portfolios contained significant loan problems, which we had anticipated and
considered in our acquisition pricing. As we resolved the asset quality issues,
the portfolios of the acquired entities tended to decline due to the elimination
of problem loans and because many of the resources that would otherwise be
directed toward generating new loans were concentrated on improving or
eliminating existing problem relationships.
The following table summarizes the components of changes in our loan portfolio,
net of unearned discount, for the five years ended December 31, 2007:
Increase (Decrease) For the Year Ended December 31,
-----------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(dollars expressed in thousands)
Internal loan volume increase (decrease):
Commercial lending.............................. $ 716,168 160,642 204,494 91,760 (22,211)
Residential real estate lending (1)............. (23,421) 410,181 481,642 32,348 (103,573)
Consumer lending, net of unearned discount...... 4,733 13,412 1,383 (11,900) (22,429)
Loans and leases sold................................ (72,166) (344,687) (14,337) (83,216) --
Loans provided by acquisitions....................... 693,495 545,106 209,621 780,901 43,700
Securitization of loans.............................. (102,036) (138,944) -- -- --
---------- -------- -------- -------- --------
Total increase (decrease)....................... $1,216,773 645,710 882,803 809,893 (104,513)
========== ======== ======== ======== ========
- -----------------------
(1) Includes loans held for sale.
We seek to maintain a lending strategy that emphasizes quality, growth and
diversification. Throughout our organization, we employ a common credit
underwriting policy. Our commercial lenders focus principally on small to
middle-market companies. Consumer lenders focus principally on residential
loans, including home equity loans and other consumer financing opportunities
arising out of our branch banking network.
Commercial, financial and agricultural loans include loans that are made
primarily based on the borrowers' general credit strength and ability to
generate cash flows for repayment from income sources even though such loans may
also be secured by real estate or other assets. Real estate construction and
development loans, primarily relating to residential properties and commercial
properties, represent financing secured by real estate under construction. Real
estate mortgage loans consist primarily of loans secured by single-family,
owner-occupied properties and various types of commercial properties on which
the income from the property is the intended source of repayment. Consumer and
installment loans are loans to individuals and consist of a mix of secured and
unsecured loans, including preferred credit and loans secured by automobiles.
Loans held for sale are primarily fixed and adjustable rate residential mortgage
loans pending sale in the secondary mortgage market in the form of a
mortgage-backed security, or to various private third-party investors.
The following table summarizes the composition of our loan portfolio by major
category and the percent of each category to the total portfolio as of the dates
presented:
December 31,
--------------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
------------------ ------------------ ------------------ ------------------ ------------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
(dollars expressed in thousands)
Commercial, financial
and agricultural.......... $2,382,067 27.0% $1,934,908 26.0% $1,616,841 24.1% $1,569,321 26.1% $1,407,626 27.1%
Real estate construction
and development........... 2,141,234 24.3 1,832,504 24.6 1,564,255 23.3 1,318,413 22.0 1,063,889 20.5
Real estate mortgage:
One-to-four-family
residential loans....... 1,602,575 18.2 1,270,158 17.0 1,214,121 18.1 870,889 14.5 811,650 15.7
Multi-family residential
loans................... 177,246 2.0 141,341 1.9 143,663 2.2 102,447 1.7 108,163 2.1
Commercial real estate
loans................... 2,431,464 27.6 2,203,649 29.6 2,112,004 31.5 2,088,245 34.8 1,662,451 32.1
Lease financing............. -- -- 4 -- 2,981 -- 5,911 0.1 67,282 1.3
Consumer and installment,
net of unearned discount.. 82,589 0.9 67,590 0.9 51,772 0.8 49,677 0.8 61,268 1.2
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, excluding
loans held for sale... 8,817,175 100.0% 7,450,154 100.0% 6,705,637 100.0% 6,004,903 100.0% 5,182,329 100.0%
===== ===== ===== ===== =====
Loans held for sale......... 66,079 216,327 315,134 133,065 145,746
---------- ---------- ---------- ---------- ----------
Total loans............. $8,883,254 $7,666,481 $7,020,771 $6,137,968 $5,328,075
========== ========== ========== ========== ==========
Loans at December 31, 2007 mature as follows:
Over One Year
Through Five
Years Over Five Years
----------------------- -----------------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
Commercial, financial and agricultural..... $1,397,934 290,189 466,899 104,596 122,449 2,382,067
Real estate construction and development... 1,354,171 145,495 565,572 26,208 49,788 2,141,234
Real estate mortgage:
One-to-four family residential loans... 136,488 203,405 33,852 189,577 1,039,253 1,602,575
Multi-family residential loans......... 65,187 70,064 26,958 6,676 8,361 177,246
Commercial real estate loans........... 563,716 825,672 237,222 447,528 357,326 2,431,464
Consumer and installment, net of
unearned discount........................ 21,034 42,566 3,847 12,959 2,183 82,589
Loans held for sale........................ 66,079 -- -- -- -- 66,079
---------- --------- --------- --------- --------- ---------
Total loans.......................... $3,604,609 1,577,391 1,334,350 787,544 1,579,360 8,883,254
========== ========= ========= ========= ========= =========
Nonperforming assets include nonaccrual loans, restructured loans and other real
estate. The following table presents the categories of nonperforming assets and
certain ratios as of the dates presented:
December 31,
---------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual..................................... $ 5,916 9,879 4,937 10,147 26,876
Restructured terms............................. -- -- -- 4 --
Real estate construction and development:
Nonaccrual..................................... 151,812 13,344 11,137 13,435 6,402
Real estate mortgage:
One-to-four family residential loans:
Nonaccrual................................... 32,931 18,885 9,576 9,881 21,611
Restructured terms........................... 7 9 10 11 13
Multi-family residential loans:
Nonaccrual................................... -- 272 740 434 804
Commercial real estate loans:
Nonaccrual................................... 11,294 6,260 70,625 50,671 13,994
Lease financing:
Nonaccrual..................................... -- -- 11 907 5,328
Consumer and installment:
Nonaccrual..................................... 263 81 160 310 336
---------- --------- --------- --------- ---------
Total nonperforming loans............... 202,223 48,730 97,196 85,800 75,364
Other real estate................................. 11,225 6,433 2,025 4,030 11,130
---------- --------- --------- --------- ---------
Total nonperforming assets.............. $ 213,448 55,163 99,221 89,830 86,494
========== ========= ========= ========= =========
Loans, net of unearned discount................... $8,883,254 7,666,481 7,020,771 6,137,968 5,328,075
========== ========= ========= ========= =========
Loans past due 90 days or more and still accruing. $ 26,753 5,653 5,576 28,689 2,776
========== ========= ========= ========= =========
Ratio of:
Allowance for loan losses to loans............. 1.90% 1.90% 1.93% 2.46% 2.19%
Nonperforming loans to loans................... 2.28 0.64 1.38 1.40 1.41
Allowance for loan losses to nonperforming
loans........................................ 83.27 299.05 139.23 175.65 154.52
Nonperforming assets to loans and other
real estate.................................. 2.40 0.72 1.41 1.46 1.62
========== ========= ========= ========= =========
<
Nonperforming loans, consisting of loans on nonaccrual status and certain
restructured loans, were $202.2 million at December 31, 2007, in comparison to
$48.7 million and $97.2 million at December 31, 2006 and 2005, respectively.
Other real estate owned was $11.2 million, $6.4 million and $2.0 million at
December 31, 2007, 2006 and 2005, respectively. Our nonperforming assets,
consisting of nonperforming loans and other real estate owned, were $213.4
million, $55.2 million and $99.2 million at December 31, 2007, 2006 and 2005,
respectively.
We attribute the $158.3 million net increase in our nonperforming assets during
the year ended December 31, 2007 to the following:
>> an increase in nonaccrual loans of $138.5 million in our real estate
construction and development loan portfolio primarily as a result of
the increase in nonaccrual loans in our Northern California real
estate portfolio to $99.2 million at December 31, 2007 from $7.9
million at December 31, 2006. We experienced declining market
conditions throughout 2007 in this portfolio, particularly in Northern
California, resulting in increased developer inventories, slower lot
and home sales, and declining market values. The acquisition of CFHI
also added $35.5 million of nonaccrual loans to our real estate
construction and development loan portfolio;
>> an increase in nonaccrual loans of $14.0 million in our one-to-four
family residential real estate loan portfolio primarily 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;
>> during the year ended December 31, 2007, we placed approximately $87.7
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
$40.9 million, loan sales resulting in a decrease in nonperforming
loans of approximately $59.6 million, and other payment activity. Of
the $87.7 million placed on nonaccrual status, approximately $31.4
million represented residential mortgage loans sold with recourse that
we were required to repurchase based on the terms of the underlying
sales contracts. Repurchases of mortgage loans sold with recourse
declined to $3.5 million for the fourth quarter of 2007, compared to a
high of $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, is expected to be lower in 2008 and expires throughout the
first quarter of 2008; and
>> in addition, the acquisition of CFHI also added $7.4 million of
nonaccrual loans to our one-to-four family residential real estate
loan portfolio.
We took measures throughout 2007 to reduce the level of our nonperforming loans
through sales of certain loans. The sales resulted in a reduction in
nonperforming loans of approximately $67.3 million during the year ended
December 31, 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, 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 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.
>> During the third quarter of 2007, we entered into a commitment to sell
certain commercial, commercial real estate and real estate
construction and development 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, 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. In December 2007, we transferred the remaining $3.3
million of these loans back to portfolio.
>> During 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, 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.
>> During the fourth 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, we transferred approximately $21.2 million of certain
repurchased and other residential mortgage loans to our held for sale
loan portfolio. In December 2007, we completed the sale of
approximately $12.0 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 $10.7 million, in
aggregate.
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 and provision for loan losses.
We attribute the $44.1 million net decrease in our nonperforming assets during
the year ended December 31, 2006 to the following:
>> the payoff of two significant nonperforming loans totaling $27.3
million, in aggregate;
>> following the transfer of 11 nonperforming loans totaling
approximately $59.7 million to our held for sale portfolio on December
31, 2005, as further discussed below, in January 2006, we received a
payoff on one of the loans held for sale that had a carrying value of
$12.4 million at December 31, 2005. In conjunction with this payoff,
we recognized a loan recovery of $5.0 million and interest and late
fees of $2.0 million on the payoff of the loan. In March 2006, we
completed the sale of the majority of the remaining loans held for
sale that had a carrying value of approximately $32.5 million, in
aggregate, at December 31, 2005, and recorded a pre-tax gain of
approximately $1.7 million on the sale of these loans. Additionally,
in September 2006, we recorded a $1.1 million write-down on the single
remaining nonperforming loan held for sale and transferred the loan at
its estimated fair value of $13.5 million back into our loan
portfolio. We subsequently received a payoff on this nonperforming
loan in December 2006 in the amount of the loan's adjusted carrying
value;
>> in December 2006, we completed the sale of $32.6 million of loans,
which included approximately $14.8 million of acquired nonperforming
loans, and recorded a pre-tax gain of approximately $3.7 million on
the sale of these loans. In addition, we recognized loan charge-offs
of $2.3 million in conjunction with the transfer of these commercial
loans to our loans held for sale portfolio prior to their sale; and
>> overall improvement in the level of nonperforming assets resulting
from our continued focus on improving asset quality through an ongoing
process of problem loan work-outs, exclusive of the deterioration of
certain credit relationships discussed below; the sale of certain
acquired nonperforming loans; the strengthening of certain loans; and
loan payoffs and/or external refinancing of various credits, as
further discussed below.
The overall reduction in our nonperforming assets in 2006 was partially offset
by deterioration within our one-to-four family residential loan portfolio as a
result of current market conditions, and the deterioration of several credit
relationships, primarily within our residential development and construction
portfolio, during the later part of 2006 that were driven by current market
conditions, including slowdowns in unit sales.
Loans past due 90 days or more and still accruing interest were $26.8 million
and $5.7 million at December 31, 2007 and 2006, respectively. The increase in
2007 was primarily due to the timing of resolution of loans past due as to
maturity pending renewal and other matters, as well as our acquisition of CFHI.
Our allowance for loan losses as a percentage of loans, net of unearned
discount, was 1.90%, 1.90% and 1.93% at December 31, 2007, 2006 and 2005,
respectively. Our allowance for loan losses as a percentage of nonperforming
loans was 83.27%, 299.05% and 139.23% at December 31, 2007, 2006 and 2005,
respectively. The decrease in the ratio during 2007 is primarily due to the
significant increase in nonperforming loans, as previously discussed. Our
allowance for loan losses was $168.4 million at December 31, 2007, compared to
$145.7 million and $135.3 million at December 31, 2006 and 2005, respectively.
As further described in the table below and under "--Business - Lending
Activities," the allowance for loan losses also reflects an increase of $14.4
million, $5.2 million and $2.0 million in 2007, 2006 and 2005, respectively, of
balances acquired in conjunction with our acquisitions.
Our net loan charge-offs were $66.8 million, $6.8 million and $13.4 million for
the years ended December 31, 2007, 2006 and 2005, respectively. Our net loan
charge-offs as a percentage of average loans were 0.83%, 0.09% and 0.21% for the
years ended December 31, 2007, 2006 and 2005, respectively. Net loan charge-offs
for the year ended December 31, 2007 include $40.9 million of net charge-offs
associated with our one-to-four family residential loan portfolio. We sold
approximately $59.6 million of nonperforming one-to-four family residential
mortgage loans during 2007, resulting in total charge-offs of $23.3 million. Net
loan charge-offs also include charge-offs of $7.6 million associated with the
sale of certain commercial loans that resulted in sales proceeds of $33.5
million. Loan charge-offs for 2006 included approximately $3.3 million of loan
charge-offs associated with two significant residential development project
relationships that were placed on nonaccrual status during 2006, in addition to
$2.3 million of charge-offs recorded in conjunction with the transfer of certain
portfolio loans to our loans held for sale portfolio prior to their sale in
December 2006. Loan recoveries for 2006 included a $5.0 million recovery
recorded on the payoff of a single loan that was transferred to our held for
sale portfolio on December 31, 2005.
We continue to closely monitor our loan portfolio and address the ongoing
challenges posed by the economic environment, including reduced loan demand and
highly competitive markets within certain sectors of our loan portfolio. We
consider this in our overall assessment of the adequacy of the allowance for
loan losses.
As of December 31, 2007, 2006, 2005, 2004 and 2003, $157.1 million, $67.1
million, $124.3 million, $161.8 million and $109.4 million, respectively, of
loans not included in the nonperforming assets table above were identified by
management as having potential credit problems, or problem loans. The increase
in the level of problem loans during 2007 reflects economic conditions within
certain sectors of our markets as previously discussed. The decline in the level
of problem loans during 2006 and 2005 primarily reflects improvement in the
management of these loans and success in resolving certain of the problem loans
associated with our 2004 and 2005 acquisitions. The significant increase in the
level of problem loans for the year ended December 31, 2004 was primarily
attributable to our acquisition of CIB Bank, in addition to internal portfolio
growth and economic conditions within certain sectors of the markets in which we
operate. Certain acquired loan portfolios exhibited varying degrees of distress
prior to their acquisition. While these problems had been identified and
considered in our acquisition pricing, the acquisitions led to an increase in
nonperforming assets and problem loans. Management continues its efforts to
reduce nonperforming and problem loans and re-define overall strategy and
business plans with respect to our loan portfolio as deemed necessary in light
of ongoing and dramatic changes in market conditions in the markets in which we
operate.
Our credit management policies and procedures focus on identifying, measuring
and controlling credit exposure. These procedures employ a lender-initiated
system of rating credits, which is ratified in the loan approval process and
subsequently tested in internal credit reviews, external audits and regulatory
bank examinations. The system requires the rating of all loans at the time they
are originated or acquired, except for homogeneous categories of loans, such as
residential real estate mortgage loans and consumer loans. These homogeneous
loans are assigned an initial rating based on our experience with each type of
loan. We adjust the ratings of the homogeneous loans based on payment experience
subsequent to their origination.
We include adversely rated credits, including loans requiring close monitoring
that would not normally be considered classified credits by regulators, on our
monthly loan watch list. Loans may be added to our watch list for reasons that
are temporary and correctable, such as the absence of current financial
statements of the borrower or a deficiency in loan documentation. Loans may also
be added to our watch list whenever any adverse circumstance is detected which
might affect the borrower's ability to comply with the contractual terms of the
loan. The delinquency of a scheduled loan payment, deterioration in the
borrower's financial condition identified in a review of periodic financial
statements, a decrease in the value of the collateral securing the loan, or a
change in the economic environment within which the borrower operates could
initiate the addition of a loan to our watch list. Loans on our watch list
require periodic detailed loan status reports prepared by the responsible
officer which are discussed in formal meetings with credit review and credit
administration staff members. Upgrades and downgrades of loan risk ratings may
be initiated by the responsible loan officer. However, upgrades of risk ratings
associated with significant credit relationships and/or problem credit
relationships may only be made with the concurrence of appropriate regional or
senior regional credit officers.
Each month, the credit administration department provides management with
detailed lists of loans on the watch list and summaries of the entire loan
portfolio by risk rating. These are coupled with analyses of changes in the risk
profile of the portfolio, changes in past-due and nonperforming loans and
changes in watch list and classified loans over time. In this manner, we
continually monitor the overall increases or decreases in the level of risk in
our loan portfolio. Factors are applied to the loan portfolio for each category
of loan risk to determine acceptable levels of allowance for loan losses. In
addition, periodic evaluations of each lending unit are performed based on
certain factors, such as lending personnel experience, recent credit reviews,
loan concentrations and other factors. Based on these evaluations, which are
completed at least quarterly, changes to the allowance for loan losses may be
required due to the perceived risk of particular portfolios. The calculated
allowance required for the portfolio is then compared to the actual allowance
balance to determine the adjustments necessary to maintain the allowance at an
appropriate level. In addition, management exercises a certain degree of
judgment in its analysis of the overall adequacy of the allowance for losses. In
its analysis, management considers the changes in the portfolio, including
growth, composition, the ratio of net loans to total assets, and the economic
conditions of the regions in which we operate. Based on this quantitative and
qualitative analysis, adjustments are made to the allowance for loan losses.
Such adjustments are reflected in our consolidated statements of income.
The allocation of the allowance for loan losses by loan category is a result of
the application of our risk rating system augmented by qualitative analysis. The
same procedures we employ to determine the overall risk in our loan portfolio
and our requirements for the allowance for loan losses determine the
distribution of the allowance by loan category. Consequently, the distribution
of the allowance will change from period to period due to (a) changes in the
aggregate loan balances by loan category; (b) changes in the identified risk in
each loan in the portfolio over time, excluding those homogeneous categories of
loans such as consumer and installment loans and residential real estate
mortgage loans for which risk ratings are changed based on payment performance;
and (c) changes in loan concentrations by borrower.
Since the methods of calculating the allowance requirements have not
significantly changed over time, the reallocations among different categories of
loans that appear between periods are the result of changes in the balances of
the individual loans that comprise the aggregate portfolio due to the factors
listed above. However, the perception of risk with respect to particular loans
within the portfolio will change over time as a result of the characteristics
and performance of those loans, as well as the overall economic trends and
market trends, including our actual and expected trends in nonperforming loans.
Consequently, while there are no specific allocations of the allowance resulting
from economic or market conditions or actual or expected trends in nonperforming
loans, these factors are considered in the initial assignment of risk ratings to
loans and in subsequent changes to those risk ratings.
The following table is a summary of the allocation of the allowance for loan
losses for the five years ended December 31, 2007:
2007 2006 2005 2004 2003
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
of of of of of
Category Category Category Category Category
of of of of of
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(dollars expressed in thousands)
Commercial, financial and
agricultural................... $ 41,319 26.82% $ 47,973 25.24% $ 39,245 23.03% $ 46,195 25.57% $ 37,142 26.42%
Real estate construction
and development................ 67,034 24.10 40,410 23.90 32,638 22.28 38,525 21.48 26,782 19.97
Real estate mortgage:
One-to-four family residential
loans........................ 16,312 18.04 13,308 16.57 10,526 17.29 8,466 14.19 9,684 15.23
Multi-family residential
loans........................ -- 2.00 95 1.84 67 2.05 20 1.67 186 2.03
Commercial real estate loans... 42,617 27.37 41,833 28.75 51,199 30.08 55,922 34.01 36,632 31.20
Lease financing.................. 194 -- 87 -- 315 0.04 628 0.10 4,830 1.26
Consumer and installment......... 835 0.93 1,035 0.88 757 0.74 617 0.81 668 1.15
Loans held for sale.............. 80 0.74 988 2.82 583 4.49 334 2.17 527 2.74
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total...................... $168,391 100.00% $145,729 100.00% $135,330 100.00% $150,707 100.00% $116,451 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
The following table is a summary of our loan loss experience for the five years
ended December 31, 2007:
As of or For the Years Ended December 31,
---------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of year......... $ 145,729 135,330 150,707 116,451 99,439
Acquired allowances for loan losses.................. 14,425 5,208 1,989 33,752 757
Other adjustments (1)................................ -- -- -- (479) --
---------- --------- --------- --------- ---------
160,154 140,538 152,696 149,724 100,196
---------- --------- --------- --------- ---------
Loans charged-off:
Commercial, financial and agricultural........... (13,212) (6,905) (10,500) (26,550) (23,476)
Real estate construction and development......... (15,203) (6,202) (7,838) (3,481) (5,825)
Real estate mortgage:
One-to-four family residential loans.......... (41,793) (3,779) (3,399) (4,891) (4,167)
Multi-family residential loans................ (76) (241) -- (139) (87)
Commercial real estate loans.................. (3,764) (3,635) (9,699) (9,995) (1,708)
Lease financing.................................. -- (607) (491) (4,536) (19,160)
Consumer and installment......................... (1,390) (834) (1,196) (1,051) (1,350)
---------- --------- --------- --------- ---------
Total...................................... (75,438) (22,203) (33,123) (50,643) (55,773)
---------- --------- --------- --------- ---------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural........... 4,739 5,237 10,802 14,983 10,147
Real estate construction and development......... 307 1,661 1,963 748 1,659
Real estate mortgage:
One-to-four family residential loans.......... 864 1,066 1,953 1,597 781
Multi-family residential loans................ 9 -- -- 27 99
Commercial real estate loans.................. 1,588 6,048 2,901 2,659 4,174
Lease financing.................................. 437 731 1,501 4,878 4,805
Consumer and installment......................... 731 651 637 984 1,363
---------- --------- --------- --------- ---------
Total...................................... 8,675 15,394 19,757 25,876 23,028
---------- --------- --------- --------- ---------
Net loans charged-off...................... (66,763) (6,809) (13,366) (24,767) (32,745)
---------- --------- --------- --------- ---------
Provision for loan losses............................ 75,000 12,000 (4,000) 25,750 49,000
---------- --------- --------- --------- ---------
Allowance for loan losses, end of year............... $ 168,391 145,729 135,330 150,707 116,451
========== ========= ========= ========= =========
Loans outstanding, net of unearned discount:
Average.......................................... $8,069,603 7,472,089 6,436,970 5,509,054 5,385,363
End of year...................................... 8,883,254 7,666,481 7,020,771 6,137,968 5,328,075
End of year, excluding loans held for sale....... 8,817,175 7,450,154 6,705,637 6,004,903 5,182,329
========== ========= ========= ========= =========
Ratio of allowance for loan losses to loans
outstanding:
Average.......................................... 2.09% 1.95% 2.10% 2.74% 2.16%
End of year...................................... 1.90 1.90 1.93 2.46 2.19
End of year, excluding loans held for sale....... 1.91 1.96 2.02 2.51 2.25
Ratio of net charge-offs to average loans
outstanding...................................... 0.83 0.09 0.21 0.45 0.61
Ratio of current year recoveries to
preceding year's charge-offs..................... 39.07 46.48 39.01 46.40 32.65
========== ========= ========= ========= =========
- ---------------------
(1) In December 2003, we established a $1.0 million specific reserve for estimated losses on a $5.3 million letter of
credit that was recorded in accrued and other liabilities in our consolidated balance sheets. In January 2004, the
letter of credit was fully funded as a loan and the related $1.0 million specific reserve was reclassified from
accrued and other liabilities to the allowance for loan losses. In June 2004, we reclassified $1.5 million from
the allowance for loan losses to accrued and other liabilities to establish a specific reserve associated with our
commercial leasing portfolio sale and related recourse obligations for certain leases sold.
Deposits
Deposits are the primary source of funds for First Bank. Our deposits consist
principally of core deposits from our local market areas, including individual
and corporate customers.
The following table sets forth the distribution of our average deposit accounts
for the years ended December 31, 2007, 2006 and 2005, and the weighted average
interest rates on each category of deposits:
Year Ended December 31,
----------------------------------------------------------------------------------------
2007 2006 2005
---------------------------- ---------------------------- ----------------------------
Percent Percent Percent
of of of
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(dollars expressed in thousands)
Noninterest-bearing demand deposits... $1,232,650 14.23% --% $1,267,681 15.82% --% $1,257,277 17.45% --%
Interest-bearing demand deposits...... 957,454 11.05 0.96 962,956 12.01 0.85 905,613 12.57 0.49
Savings and money market deposits..... 2,613,745 30.17 3.05 2,152,419 26.86 2.48 2,135,156 29.64 1.39
Time deposits......................... 3,859,552 44.55 4.76 3,631,516 45.31 4.28 2,906,601 40.34 3.21
---------- ------ ==== ---------- ------ ==== ---------- ------ ====
Total average deposits............. $8,663,401 100.00% $8,014,572 100.00% $7,204,647 100.00%
========== ====== ========== ====== ========== ======
Capital and Dividends
Historically, we have accumulated capital to support our acquisitions by
retaining most of our earnings. We pay relatively small dividends on our Class A
convertible, adjustable rate preferred stock and our Class B adjustable rate
preferred stock, totaling $786,000 for each of the years ended December 31,
2007, 2006 and 2005.
Management believes as of December 31, 2007 and 2006, First Bank and we were
"well capitalized," as defined in regulations adopted pursuant to the FDIC
Improvement Act of 1991. First Bank's and our actual and required capital ratios
are further described in Note 21 to our Consolidated Financial Statements.
As of December 31, 2007, we had 13 affiliated Delaware or Connecticut statutory
and business trusts that were created for the sole purpose of issuing trust
preferred securities. As further described in Note 12 to our Consolidated
Financial Statements, the sole assets of the statutory and business trusts are
our subordinated debentures.
A summary of the outstanding trust preferred securities issued by our affiliated
statutory and business trusts, and our related subordinated debentures issued to
the respective trusts in conjunction with the trust preferred securities
offerings as of December 31, 2007, is as follows:
Date of Trust Interest Preferred Subordinated
Name of Trust Formation Type of Offering Rate Securities Debentures
------------- --------- ---------------- ---- ---------- ----------
First Preferred Capital Trust IV January 2003 Publicly Underwritten 8.15% $46,000,000 $47,422,700
First Bank Statutory Trust March 2003 Private Placement 8.10% 25,000,000 25,774,000
First Bank Statutory Trust II September 2004 Private Placement Variable 20,000,000 20,619,000
Royal Oaks Capital Trust I October 2004 Private Placement Variable 4,000,000 4,124,000
First Bank Statutory Trust III November 2004 Private Placement Variable 40,000,000 41,238,000
First Bank Statutory Trust IV February 2006 Private Placement Variable 40,000,000 41,238,000
First Bank Statutory Trust V April 2006 Private Placement Variable 20,000,000 20,619,000
First Bank Statutory Trust VI June 2006 Private Placement Variable 25,000,000 25,774,000
First Bank Statutory Trust VII December 2006 Private Placement Variable 50,000,000 51,547,000
First Bank Statutory Trust VIII February 2007 Private Placement Variable 25,000,000 25,774,000
First Bank Statutory Trust X August 2007 Private Placement Variable 15,000,000 15,464,000
First Bank Statutory Trust IX September 2007 Private Placement Variable 25,000,000 25,774,000
First Bank Statutory Trust XI September 2007 Private Placement Variable 10,000,000 10,310,000
For regulatory reporting purposes, the trust preferred securities are eligible
for inclusion, subject to certain limitations, in our Tier 1 capital. Because of
these limitations, as of December 31, 2007, $59.7 million of the trust preferred
securities was not eligible for inclusion in our Tier 1 capital; however, this
amount was eligible for inclusion in our total risk-based capital.
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
$1.96 billion and $1.86 billion at December 31, 2007 and 2006, respectively.
The following table presents the maturity structure of these other sources of
funds, which consist of certificates of deposit of $100,000 or more and other
borrowings, including our notes payable, at December 31, 2007:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less.................................... $ 619,373 281,266 900,639
Over three months through six months.................... 428,756 1,000 429,756
Over six months through twelve months................... 354,482 21,080 375,562
Over twelve months...................................... 144,246 111,777 256,023
---------- -------- ---------
Total............................................... $1,546,857 415,123 1,961,980
========== ======== =========
In addition to these sources of funds, First Bank has established a borrowing
relationship with the Federal Reserve Bank of St. Louis. This borrowing
relationship, which is secured by commercial loans, provides an additional
liquidity facility that may be utilized for contingency purposes. At December
31, 2007 and 2006, First Bank's borrowing capacity under the agreement was
approximately $523.3 million and $639.1 million, respectively. In addition,
First Bank's borrowing capacity through its relationship with the FHLB was
approximately $672.3 million and $666.0 million at December 31, 2007 and 2006,
respectively. We had FHLB advances outstanding of $857,000 and $4.0 million at
December 31, 2007 and 2006, respectively, all of which represent advances
assumed in conjunction with various acquisitions. On January 18, 2008, First
Bank entered into two $100.0 million FHLB advances that mature in January 2009
and July 2009, respectively, to increase our liquidity in light of uncertain
market conditions and increased loan funding needs.
In addition to our owned banking facilities, we have entered into long-term
leasing arrangements to support our ongoing activities. The required payments
under such commitments and other obligations at December 31, 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....................... $ 17,193 29,001 21,372 53,074 120,640
Certificates of deposit (2)............ 3,696,359 413,266 81,635 1,234 4,192,494
Other borrowings (2)................... 275,346 100,777 -- -- 376,123
Notes payable (2)...................... 28,000 11,000 -- -- 39,000
Subordinated debentures (2)............ -- -- -- 353,752 353,752
Other contractual obligations.......... 2,067 (3) 250 136 77 2,530
---------- ------- ------- ------- ---------
Total.............................. $4,018,965 554,294 103,143 408,137 5,084,539
========== ======= ======= ======= =========
-------------------------
(1) Amounts exclude FIN 48 unrecognized tax liabilities of $11.2 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
December 31, 2007.
(2) Amounts exclude the related interest expense accrued on these obligations as of December 31, 2007.
(3) Includes an accrued expense related to our estimated indemnification obligation, as member bank, to share
certain litigation costs of Visa, as further described under "--Noninterest Expense."
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.
Critical Accounting Policies
Our financial condition and results of operations presented in our Consolidated
Financial Statements, accompanying notes to our Consolidated Financial
Statements, selected consolidated and other financial data appearing elsewhere
in this report, and management's discussion and analysis of financial condition
and results of operations are, to a large degree, dependent upon our accounting
policies. The selection and application of our accounting policies involve
judgments, estimates and uncertainties that are susceptible to change.
We have identified the following accounting policies that we believe are the
most critical to the understanding of our financial condition and results of
operations. These critical accounting policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of a
materially different financial condition and/or results of operations could be a
reasonable likelihood. The impact and any associated risks related to our
critical accounting policies on our business operations is discussed throughout
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations," where such policies affect our reported and expected financial
results. A detailed discussion on the application of these and other accounting
policies is summarized in Note 1 to our Consolidated Financial Statements
appearing elsewhere in this report.
Loans and Allowance for Loan Losses. We maintain an allowance for loan losses at
a level we consider adequate to provide for probable losses in our loan
portfolio. The determination of our allowance for loan losses requires
management to make significant judgments and estimates based upon a periodic
analysis of our loans held for portfolio and held for sale considering, among
other factors, current economic conditions, loan portfolio composition, past
loan loss experience, independent appraisals, the fair value of underlying loan
collateral, our customers' ability to repay their loans and selected key
financial ratios. If actual events prove the estimates and assumptions we used
in determining our allowance for loan losses were incorrect, we may need to make
additional provisions for loan losses. For further discussion, refer to "--Loans
and Allowance for Loan Losses" and Note 4 to our Consolidated Financial
Statements appearing elsewhere in this report.
Derivative Financial Instruments. We utilize derivative financial instruments to
assist in our management of interest rate sensitivity by modifying the
repricing, maturity and option characteristics of certain assets and
liabilities. The judgments and assumptions that are most critical to the
application of this critical accounting policy are those affecting the
estimation of fair value and hedge effectiveness. Fair value is based on quoted
market prices where available. If quoted market prices are unavailable, fair
value is based on quoted market prices of comparable derivative instruments.
Factors that affect hedge effectiveness include the initial selection of the
derivative that will be used as a hedge and how well changes in its cash flow or
fair value have correlated and are expected to correlate with changes in the
cash flow or fair value of the underlying hedged asset or liability. Past
correlation is easy to demonstrate, but expected correlation depends upon
projections and trends that may not always hold true within acceptable limits.
Changes in assumptions and conditions could result in greater than expected
inefficiencies that, if large enough, could reduce or eliminate the economic
benefits anticipated when the hedges were established and/or invalidate
continuation of hedge accounting. Greater inefficiency and/or discontinuation of
hedge accounting are likely to result in increased volatility in our reported
earnings. For cash flow hedges, this would result as more or all of the change
in the fair value of the affected derivative being reported in noninterest
income. For fair value hedges, there may be some impact on our reported earnings
as the change in the fair value of the affected derivative may not be offset by
changes in the fair value of the underlying hedged asset or liability. For
further discussion, refer to "--Effects of New Accounting Standards,"
"--Interest Rate Risk Management" and Note 5 to our Consolidated Financial
Statements appearing elsewhere in this report.
Deferred Tax Assets. We recognize deferred tax assets for the estimated future
tax effects of temporary differences, net operating loss carryforwards and tax
credits. We recognize deferred tax assets subject to management's judgment based
upon available evidence that realization is more likely than not. Our deferred
tax assets are reduced, if necessary, by a deferred tax asset valuation
allowance. In the event that we determine we would not be able to realize all or
part of our deferred tax assets in the future, we would need to adjust the
recorded value of our deferred tax assets, which would result in a direct charge
to our provision for income taxes in the period in which such determination is
made. For further discussion, refer to "--Effects of New Accounting Standards,"
"--Comparison of Results of Operations for 2007 and 2006 - Provision for Income
Taxes," "--Comparison of Results of Operations for 2006 and 2005 - Provision for
Income Taxes," and Note 1 and Note 13 to our Consolidated Financial Statements
appearing elsewhere in this report.
Business Combinations. We emphasize acquiring other financial institutions as
one means of achieving our growth objectives. The determination of the fair
value of the assets and liabilities acquired in these transactions, as well as
the returns on investment that may be achieved, requires management to make
significant judgments and estimates based upon detailed analyses of the existing
and future economic value of such assets and liabilities and/or the related
income streams, including the resulting intangible assets. If actual events
prove the estimates and assumptions we used in determining the fair values of
the acquired assets and liabilities or the projected income streams were
incorrect, we may need to make additional adjustments to the recorded values of
such assets and liabilities, which could result in increased volatility in our
reported earnings. In addition, we may need to make additional adjustments to
the recorded value of our intangible assets, which may impact our reported
earnings and directly impacts our regulatory capital levels. For further
discussion, refer to "--Effects of New Accounting Standards," "--Acquisitions"
and Note 2, Note 8 and Note 21 to our Consolidated Financial Statements
appearing elsewhere in this report.
Effects of New Accounting Standards
In 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. On January 1, 2008,
we opted to measure servicing rights at fair value. The election of this option
resulted in the recognition of a cumulative effect of a change in accounting
principle of $5.8 million, which was recorded as an increase to beginning
retained earnings as further described in Note 1 to our Consolidated Financial
Statements.
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 13 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, 2008, 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 implemented SFAS No. 159 on January 1, 2008, which did not have a
material impact on our financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141(R) -- Business Combinations. SFAS
No. 141(R) will significantly change how entities apply the acquisition method
to business combinations. The most significant changes affecting how entities
will account for business combinations under SFAS No. 141(R) include: (a) the
acquisition date will be the date the acquirer obtains control; (b) all (and
only) identifiable assets acquired, liabilities assumed, and noncontrolling
interests in the acquiree will be stated at fair value on the acquisition date;
(c) assets or liabilities arising from noncontractual contingencies will be
measured at their acquisition date fair value only if it is more likely than not
that they meet the definition of an asset or liability on the acquisition date;
(d) adjustments subsequently made to the provisional amounts recorded on the
acquisition date will be made retroactively during a measurement period not to
exceed one year; (e) acquisition-related restructuring costs that do not meet
the criteria in SFAS No. 146 -- Accounting for Costs Associated with Exit or
Disposal Activities, will be expensed as incurred; (f) transaction costs will be
expensed as incurred; (g) reversals of deferred income tax valuation allowances
and income tax contingencies will be recognized in earnings subsequent to the
measurement period; and (h) the allowance for loan losses of an acquiree will
not be permitted to be recognized by the acquirer. Additionally, SFAS No. 141(R)
will require new and modified disclosures surrounding subsequent changes to
acquisition-related contingencies, contingent consideration, noncontrolling
interests, acquisition-related transaction costs, fair values and cash flows not
expected to be collected for acquired loans, and an enhanced goodwill
rollforward. SFAS No. 141(R) is effective for all business combinations
completed on or after January 1, 2009. Early adoption is not permitted. For
business combinations in which the acquisition date was before the effective
date, the provisions of SFAS No. 141(R) will apply to the subsequent accounting
for deferred income tax valuation allowances and income tax contingencies and
will require any changes in those amounts to be recorded in earnings. We are
currently evaluating the impact that SFAS No. 141(R) will have on our financial
condition, results of operations and the disclosures that will be presented in
our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160 -- Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51. SFAS No. 160
establishes new accounting and reporting standards for noncontrolling interests
in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 will
require entities to classify noncontrolling interests as a component of
stockholders' equity and will require subsequent changes in ownership interests
in a subsidiary to be accounted for as an equity transaction. Additionally, SFAS
No. 160 will require entities to recognize a gain or loss upon the loss of
control of a subsidiary and to remeasure any ownership interest retained at fair
value on that date. SFAS No. 160 also requires expanded disclosures that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS No. 160 is effective on a prospective basis
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, except for the presentation and disclosure
requirements, which are required to be applied retrospectively. Early adoption
is not permitted. We are currently evaluating the requirements of SFAS No. 160
to determine their impact on our financial condition, results of operations and
the disclosures that will be presented in our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The quantitative and qualitative disclosures about market risk are included
under "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Interest Rate Risk Management" appearing on pages 34
through 36 of this report.
Effects of Inflation
Inflation affects financial institutions less than other types of companies.
Financial institutions make relatively few significant asset acquisitions that
are directly affected by changing prices. Instead, the assets and liabilities
are primarily monetary in nature. Consequently, interest rates are more
significant to the performance of financial institutions than the effect of
general inflation levels. While a relationship exists between the inflation rate
and interest rates, we believe this is generally manageable through our
asset-liability management program.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data appear on pages 67 through 112
of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, including our President and Chief Executive Officer
and our Chief Financial Officer have evaluated the effectiveness of our
"disclosure controls and procedures" (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act), as of the end of the period covered by this
report. Based on such evaluation, our President and 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 were effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act. There have not been any changes in the Company's internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fourth quarter of 2007 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Management's Annual Report on Internal Control Over Financial Reporting
Management's report on internal control over financial reporting appears on page
66 of this report and is incorporated herein by this reference. Management,
under the supervision of the Company's President and Chief Executive Officer and
Chief Financial Officer, has excluded internal control over financial reporting
associated with CFHI from its assessment of the effectiveness of internal
control over financial reporting as of December 31, 2007. Management's report on
internal control over financial reporting was not subject to attestation by the
Company's Independent Registered Public Accounting Firm as of December 31, 2007
pursuant to temporary rules of the SEC that permit the Company to provide only
management's report in this annual report.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Board of Directors and Committees of the Board
Our Board of Directors consists of six members. The Board determined that
Messrs. Gundaker, Steward and Yaeger are independent. Each of our directors
identified in the following table was elected or appointed to serve a one-year
term and until his successor has been duly qualified for office.
Director Principal Occupation(s) During Last Five Years
Name Age Since and Directorships of Public Companies
---- --- ----- -------------------------------------
James F. Dierberg (1) 70 1979 Chairman of the Board of Directors of First Banks, Inc. since
1988; Chief Executive Officer of First Banks, Inc. from 1988 to
April 2003; President of First Banks, Inc. from 1979 to 1992 and
from 1994 to October 1999; Chairman of the Board of Directors,
President and Chief Executive Officer of First Banks America, Inc.
from 1994 until its merger with First Banks, Inc. in December 2002.
Terrance M. McCarthy 53 2003 President and Chief Executive Officer of First Banks, Inc. since
April 1, 2007; Senior Executive Vice President and Chief Operating
Officer of First Banks, Inc. from August 2002 to March 31, 2007;
Director of First Banks, Inc. since April 2003; Director of First
Banks America, Inc. from July 2001 until its merger with First
Banks, Inc. in December 2002; Executive Vice President of First
Banks America, Inc. from 1999 to December 2002; Chairman of the
Board of Directors of First Bank since January 2003; Executive
Vice President of First Bank since June 25, 2007; President and
Chief Executive Officer of First Bank from August 2002 to June 25,
2007; Chairman of the Board of Directors, President and Chief
Executive Officer of First Bank and Trust from April 2000 until
its merger with and into First Bank in March 2003.
Steven F. Schepman (1) 35 2004 Director of First Banks, Inc. since July 2004; Executive Vice
President and Director of Corporate Development and Business
Segments of First Banks, Inc. since April 2, 2007; Senior Vice
President and Chief Financial Officer of First Banks, Inc. from
August 2005 to April 1, 2007; Director of First Bank from April
2001 to October 2004; Senior Vice President - Private Banking,
Wealth Management and Trust Services of First Bank from November
2000 to August 31, 2005; From May 1999 to November 2000, Mr.
Schepman was employed in various other senior management
capacities with First Banks, Inc.
Gordon A. Gundaker (2) 74 2001 Chairman of the Board of Directors of Gundaker Commercial Group,
Inc., a full-service commercial real estate firm providing
brokerage, development, construction and asset management
services, in St. Louis, Missouri, since July 2007; President and
Chief Executive Officer of Coldwell Banker Gundaker from September
2001 to July 2007.
David L. Steward (2) 56 2000 Chairman of the Board of Directors of World Wide Technology
Holding Co., Inc., an electronic procurement and logistics company
in the information technology industry, in St. Louis, Missouri;
Director of Centene Corporation, Civic Progress of St.
Louis, the St. Louis Regional Commerce and Growth Association,
the Regional Business Council, Webster University, Barnes Jewish
Hospital, the United Way of Greater St. Louis and Greater St.
Louis Area Council - Boy Scouts of America.
Douglas H. Yaeger (2)(3) 59 2000 Chairman of the Board of Directors, President and Chief Executive
Officer of The Laclede Group, Inc., an exempt public utility
holding company in St. Louis, Missouri since 2001; Chairman of the
Board of Directors, President and Chief Executive Officer of
Laclede Gas Company since 1999; President of Laclede Gas Company
since 1997; Director and Chief Operating Officer of Laclede Gas
Company from 1997 to 1999; Executive Vice President - Operations
and Marketing of Laclede Gas Company from 1995 to 1997; Director
and past Chairman of the Board of Directors of the St. Louis
Regional Commerce and Growth Association; Director and past
Chairman of Southern Gas Association; Director of American Gas
Association; Director and Chairman of the Missouri Energy
Development Association; Commissioner of the St. Louis Science
Center; Director of Barnes-Jewish Hospital, Greater St. Louis Area
Council - Boy Scouts of America, The Municipal Theatre Association
of St. Louis, the United Way of Greater St. Louis and Webster
University; Chairman of Civic Progress.
- ----------------------------------
(1) Mr. Steven F. Schepman is the son-in-law of Mr. James F. Dierberg.
(2) Member of the Audit Committee.
(3) Mr. Douglas H. Yaeger serves as Chairman of the Audit Committee and the Audit Committee financial expert.
Committees and Meetings of the Board of Directors
Three members of our Board of Directors currently serve on the Audit Committee,
all of whom the Board of Directors determined to be independent; there are no
other committees of the Board of Directors. The Audit Committee assists the
Board of Directors in fulfilling the Board's oversight responsibilities with
respect to the quality and integrity of the consolidated financial statements,
financial reporting process and systems of internal controls. The Audit
Committee also assists the Board of Directors in monitoring the independence and
performance of the independent auditors, the internal audit department and the
operation of ethics programs. The Audit Committee operates under a written
charter adopted by the Board of Directors.
The members of the Audit Committee as of March 26, 2008 were Mr. Gordon A.
Gundaker, Mr. David L. Steward and Mr. Douglas H. Yaeger, who serves as the
Chairman of the Audit Committee and the Audit Committee financial expert.
Audit Committee Report
The Audit Committee is responsible for oversight of our financial reporting
process on behalf of the Board of Directors. Management has primary
responsibility for our financial statements and financial reporting, including
internal controls, subject to the oversight of the Audit Committee and the Board
of Directors. In fulfilling its responsibilities, the Audit Committee reviewed
the audited consolidated financial statements with management and discussed the
acceptability of the accounting principles used, the reasonableness of
significant judgments made and the clarity of the disclosures.
The Audit Committee reviewed with the Independent Registered Public Accounting
Firm, who is responsible for planning and carrying out a proper audit and
expressing an opinion on the conformity of our audited consolidated financial
statements with U.S. generally accepted accounting principles, their judgments
as to the acceptability of the accounting principles we use, and such other
matters as are required to be discussed with the Audit Committee by Statement on
Auditing Standards No. 114, The Auditor's Communication With Those Charged with
Governance. In addition, the Audit Committee discussed with the Independent
Registered Public Accounting Firm its independence from management and the
Company, including the matters required by Standard No. 1 of the Independence
Standards Board, and the Audit Committee considered the compatibility of
non-audit services provided by the Independent Registered Public Accounting Firm
with the firm's independence. KPMG LLP has provided the Audit Committee with the
written disclosures and letter required by Standard No. 1 of the Independence
Standards Board.
The Audit Committee discussed with our Internal Audit Department and Independent
Registered Public Accounting Firm the overall scope and plans for their
respective audits. The Audit Committee met with the Internal Audit Department
and Independent Registered Public Accounting Firm with and without management
present to discuss the results of their examinations, their evaluations of our
internal controls and the overall quality of our financial reporting.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited consolidated
financial statements be included in the Annual Report on Form 10-K as of and for
the year ended December 31, 2007 for filing with the SEC.
Audit Committee
---------------
Douglas H. Yaeger, Chairman of the Audit Committee
Gordon A. Gundaker
David L. Steward
Code of Ethics for Principal Executive Officer and Financial Professionals
The Board of Directors has approved a Code of Ethics for Principal Executive
Officer and Financial Professionals that covers the Principal Executive Officer,
the Chief Financial Officer, the Chief Credit Officer, the Chief Investment
Officer, the Senior Vice President - Special Projects, the Senior Vice President
- - Director of Taxes, and all professionals serving in a Corporate Finance,
Accounting, Treasury, Tax or Investor Relations role. These individuals are also
subject to the policies and procedures adopted by First Banks that govern the
conduct of all of its employees. The Code of Ethics for Principal Executive
Officer and Financial Professionals is included as an exhibit to this Annual
Report on Form 10-K.
Code of Conduct for Employees, Officers and Directors
The Board of Directors has approved a Code of Conduct applicable to all
employees, officers and directors of First Banks that addresses conflicts of
interest, honesty and fair dealing, accounting and auditing matters, political
activities and application and enforcement of the Code of Conduct. The Code of
Conduct is available on First Banks' website, www.firstbanks.com, under "About
------------------
us."
Executive Officers
Our executive officers, each of whom was elected to the office(s) indicated by
the Board of Directors, as of March 26, 2008, were as follows:
Current First Banks Principal Occupation(s)
Name Age Office(s) Held During Last Five Years
---- --- -------------- ----------------------
James F. Dierberg 70 Chairman of the Board of Directors. See "Item 10 - Directors, Executive
Officers and Corporate Governance -
Board of Directors."
Terrance M. McCarthy 53 President, Chief Executive Officer See "Item 10 - Directors, Executive
and Director; Chairman of the Board Officers and Corporate Governance -
of Directors of First Bank. Board of Directors."
Steven F. Schepman 35 Executive Vice President, Director See "Item 10 - Directors, Executive
of Corporate Development and Officers and Corporate Governance -
Business Segments, and Director. Board of Directors."
Russell L. Goldammer 51 Executive Vice President and Chief Executive Vice President and Chief
Information Officer. Information Officer since November
2004; Chief Information Officer of
Outsourcing Solutions, Inc., St. Louis,
Missouri, from April 2001 to October
2004.
Robert S. Holmes, Jr. 44 Executive Vice President - Executive Vice President of First
Commercial Banking; President, Banks, Inc. since July 1, 2007;
Chief Executive Officer and President and Chief Executive Officer
Director of First Bank. of First Bank since June 25, 2007;
Director of First Bank since July 2007;
Group Senior Vice President - Regional
Commercial Banking Group of LaSalle Bank
N.A. in Chicago, Illinois from March
2007 to June 2007; Senior Vice President
and Chief Administrative Officer -
Commercial Banking Division of LaSalle
Bank N.A. in Chicago, Illinois from
March 2006 to March 2007; Senior Vice
President and Region Head of LaSalle
Bank N.A. in St. Louis, Missouri from
September 1996 to March 2006.
Daniel W. Jasper 62 Executive Vice President and Chief Executive Vice President and Chief
Credit Officer; Executive Vice Credit Officer of First Banks, Inc.
President, Chief Credit Officer and since October 2003; Senior Vice
Director of First Bank. President and Acting Chief Credit
Officer of First Banks, Inc. from May
2003 to October 2003; Senior Vice
President - Credit Administration of
First Banks, Inc. from 1995 to May 2003.
F. Christopher McLaughlin 54 Executive Vice President, Director Executive Vice President and Director
of Retail Banking and Director of of Retail Banking since April 2, 2007;
Sales, Marketing and Products; Executive Vice President and Director of
Director of First Bank. Sales, Marketing and Products of First
Banks, Inc. since September 2003;
Director of First Bank since October
2004; Executive Vice President -
Personal Banking Division, HSBC Bank of
USA in Buffalo, New York from 1998 to
June 2002; Independent Consultant from
July 2002 to August 2003.
Mary P. Sherrill 53 Executive Vice President and Executive Vice President and Director
Director of Operations; Director of of Operations of First Banks, Inc.
First Bank. since April 2003; Director of First
Bank since April 2003; Director, Vice
Chairman and Chief of Bank Operations,
Southwest Bank in St. Louis, Missouri
from April 1999 to March 2003.
Lisa K. Vansickle 40 Senior Vice President and Chief Senior Vice President and Chief
Financial Officer; Senior Vice Financial Officer of First Banks, Inc.
President, Secretary and Director since April 2, 2007; Senior Vice
of First Bank. President and Controller of First
Banks, Inc. from January 2001 to April
1, 2007; Vice President and Controller
of First Banks, Inc. from April 1999 to
January 2001; Vice President and
Director of Internal Audit from
December 1997 to March 1999; Senior
Vice President, Secretary and Director
of First Bank since July 2001.
Item 11. Executive Compensation
Compensation Discussion and Analysis. As outlined in the stock ownership table
included in "Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters," all of our voting stock is owned by
various trusts, established by and administered by and for the benefit of Mr.
James F. Dierberg, our Chairman of the Board, and members of his immediate
family. Therefore, we do not use equity awards in our compensation program.
The objective of our executive compensation policies and practices is to attract
and retain talented key executives that will contribute to the achievement of
strategic goals and the growth and success of the Company in order to enhance
the long-term value of our Company. Compensation is based upon the achievement
of corporate goals and objectives, as established by key corporate executives
and reported to the Board of Directors. Rewards for performance are designed to
motivate the continued strong performance of key executives on a long-term
basis.
Our executive compensation programs are designed to reward the achievement of
financial results in accordance with our corporate goals and objectives. The
elements of our executive compensation programs include base salary, annual
bonus compensation and the ability to participate in a nonqualified deferred
compensation plan. Our executive compensation programs are cash-based and do not
include any other forms of non-cash compensation. We do not provide the named
executive officers with employment contracts or severance agreements, and
consequently, we are under no obligation to make additional payments to any of
the named executive officers in the event of severance, change in control,
retirement or resignation. The individual components of compensation to
executive officers are periodically evaluated using various factors, as further
discussed below.
Salary. Base salaries of executive officers are dependent upon the evaluation of
certain factors and are based, in part, on non-quantifiable considerations, at
the discretion of the Chairman and/or certain executive officers. The level of
base salaries of executive officers is designed to reward the officer's
performance based upon an evaluation of the following factors: (i) the
performance of the Company and the achievement of corporate goals and
objectives, considering general business and industry conditions, among other
factors, and the contributions of specific executives towards the overall
performance; (ii) each executive officer's areas of responsibility and the
Company's performance in those areas; and (iii) the level of compensation paid
to comparable executives by other financial institutions of comparable size in
the market areas in which we operate to ensure we maintain a competitive
compensation package. Our corporate goals and objectives provide particular
measurements to which the Board of Directors and executive management assign
significance, such as net income, organic and external growth in target market
areas, expense control, net interest margin, credit quality, and regulatory
examination results. These factors are taken into consideration by the Chairman
of the Board, who evaluates the appropriate base salary and related annual
salary increases of the President and Chief Executive Officer, and by the
Chairman of the Board and certain senior executive officers, who evaluate the
appropriate base salary and related annual salary increases of executive
officers and other employees. Base salaries of executive officers are reviewed
on an ongoing basis and are generally adjusted on an annual basis, and may be
further adjusted periodically as a result of significant changes in
responsibility, employment market conditions, and other factors.
Bonus. We offer our key executive officers additional compensation through an
Executive Incentive Compensation Plan, or the Plan. The objectives of the Plan
are to promote superior short-term and long-term financial performance of the
Company through its key executives; to reward those key executive officers who
deliver solid results with market-competitive incentives; and to attract,
motivate and retain skilled and experienced individuals who can increase the
size and profitability of the Company. Our Chairman of the Board has full
discretion to determine on an annual basis those executives who are eligible to
participate in the Plan. Each of the named executive officers is a participant
in the Plan, along with certain other executive officers, with the exception of
Ms. Vansickle and Mr. Schepman. Mr. Schepman is the son-in-law of Mr. James F.
Dierberg and lineal descendants of Mr. Dierberg and their spouses are not
eligible to participate in the Plan. Ms. Vansickle received a discretionary
bonus in 2007. Mr. Schepman received a discretionary bonus in 2007 and 2006.
The bonus award amounts under the Plan are determined by a mathematical formula
that is based primarily on our weighted average return on equity multiplied by a
weighting component and the named executive officer's annual salary. Payments
under the Plan are made annually based upon the results of the above-referenced
formulas, unless determined otherwise by the Board of Directors for the Chief
Executive Officer or by the Chief Executive Officer for the other participants.
In considering any adjustment to payments to other executive officers, the Chief
Executive Officer will evaluate each executive officer's contribution to
improving our return on equity during the plan year.
Deferred Compensation. We offer a deferred compensation plan to the executive
officers and other key employees to promote retention by providing a long-term
savings opportunity on a tax-effective basis.
The Board of Directors and President and Chief Executive Officer periodically
review the various components of our executive compensation programs. Salaries
paid, annual bonuses awarded and deferred compensation balances for the named
executives are further described in the "Summary Compensation Table" and
"Nonqualified Deferred Compensation Table" below.
Executive Compensation. The following table sets forth certain information
regarding compensation earned by the named executive officers for the years
ended December 31, 2007 and 2006:
SUMMARY COMPENSATION TABLE
All Other
Name and Principal Position(s) Year Salary (1) Bonus (1) Compensation (2) Total (1)
- ------------------------------ ---- ------ ----- ------------ -----
James F. Dierberg 2007 $610,000 -- 9,000 619,000
Chairman of the Board of Directors 2006 610,000 -- 8,800 618,800
Terrance M. McCarthy (3) 2007 478,000 374,800 9,000 861,800
President and 2006 409,000 345,000 8,800 762,800
Chief Executive Officer
Lisa K. Vansickle (4) 2007 174,000 24,000 18,300 (5) 216,300
Senior Vice President
and Chief Financial Officer
Russell L. Goldammer 2007 237,200 222,400 9,000 468,600
Executive Vice President and
Chief Information Officer
Daniel W. Jasper 2007 264,800 239,000 9,000 512,800
Executive Vice President 2006 245,600 215,000 8,800 469,400
and Chief Credit Officer
Allen H. Blake (6) 2007 118,800 573,600 234,500 (7) 926,900
(Former President and 2006 470,000 413,800 8,800 892,600
Chief Executive Officer)
Steven F. Schepman (4) 2007 194,300 35,000 9,000 238,300
Executive Vice President and 2006 175,400 20,000 8,300 203,700
Director of Corporate Development and
Business Segments
(Former Chief Financial Officer)
- --------------------------------------
(1) Salary and bonus reported for Messrs. McCarthy, Blake and Jasper include amounts deferred in our NQDC Plan,
as further described below and in Note 17 to our Consolidated Financial Statements, of $47,800, $310,500
and $26,500, respectively, or an aggregate of $384,800. Salary reported for Messrs. Dierberg, Goldammer,
Schepman, and Ms. Vansickle did not include any amounts deferred in our NQDC Plan. Earnings by the named
executives on their NQDC Plan balances did not include any above-market or preferential earnings.
(2) All other compensation reported reflects contributions to our 401(k) Plan, as further described in Note 17
to our Consolidated Financial Statements, with the exception of the amounts reported for Ms. Vansickle and
Mr. Blake, as further described below.
(3) Mr. McCarthy became President and Chief Executive Officer of First Banks, Inc. on April 1, 2007.
(4) Ms. Vansickle served as Senior Vice President and Controller of First Banks, Inc. until April 2, 2007 at
which time she assumed the role of Senior Vice President and Chief Financial Officer of First Banks, Inc.
Mr. Schepman served as Senior Vice President and Chief Financial Officer of First Banks, Inc. until April
2, 2007 at which time he assumed the role of Executive Vice President and Director of Corporate Development
and Business Segments of First Banks, Inc.
(5) All other compensation reported for Ms. Vansickle reflects a contribution to our 401(k) Plan of $8,300 and
the payout of a $10,000 award previously granted under an incentive plan that Ms. Vansickle participated in
prior to the time she became a named executive officer on April 2, 2007. Ms. Vansickle's participation in
that incentive plan terminated at the time she became a named executive officer.
(6) Mr. Blake retired from the Company on March 31, 2007.
(7) All other compensation reported for Mr. Blake for 2007 reflects a contribution to our 401(k) Plan of
$9,000, an NQDC Plan distribution of $144,000, an automobile valued at $55,100 awarded upon his retirement
on March 31, 2007 and taxes of $26,400 related to the receipt of the automobile.
Nonqualified Deferred Compensation. Officers that meet certain position and base
salary criteria and non-employee directors are eligible to participate in our
Nonqualified Deferred Compensation Plan, or NQDC Plan. Participants are allowed
to defer, on an annual basis, up to 25% of their salary and up to 100% of their
bonus payments, and hypothetically invest in various investment options
available in the NQDC Plan that are selected by the participant and may be
changed by the participant at any time. These investment options mirror the
investment options that we offer through our 401(k) plan and include various
investment funds such as equity funds, international stock funds, capital
appreciation funds, money market funds, bond funds, mid-cap value funds and
growth funds.
The NQDC Plan allows for us to credit the deferred compensation accounts of any
participant with discretionary contributions, however, we have not made any such
discretionary contributions under the NQDC Plan since its inception. Any such
contributions, if made, would vest over a five-year period. Earnings or losses
on participant account balances resulting from the participant's investment
choices are credited or charged to the participant accounts on a monthly basis.
We recognize these earnings or losses in our consolidated statements of income
on a monthly basis. In the event of retirement, payment of the vested portion of
the participant's deferred compensation account balance is either made through a
single lump sum payment or annual payments over five or ten years, subject to
election by the participant. Payment of the vested portion of the participant's
deferred compensation account balance is made through a single lump sum payment
in the event the participant terminates his or her employment for reasons other
than retirement. We did not make any withdrawals or distributions to the named
executive officers, except Mr. Blake, or the non-employee directors from our
NQDC Plan for the year ended December 31, 2007.
The following table sets forth certain information regarding nonqualified
deferred compensation earned by the named executive officers for the year ended
December 31, 2007:
NONQUALIFIED DEFERRED COMPENSATION TABLE
----------------------------------------
Executive Aggregate Aggegrate Aggregate
Contributions in Earnings in Distributions in Balance at
Name and Principal Position(s) Last Fiscal Year (1) Last Fiscal Year Last Fiscal Year December 31, 2007
- ------------------------------ ---------------- ---------------- ---------------- -----------------
James F. Dierberg $ -- 18,000 -- 410,700 (2)
Chairman of the Board of Directors
Terrance M. McCarthy 47,800 31,000 -- 581,200 (3)
President and
Chief Executive Officer
Lisa K. Vansickle -- 2,200 -- 45,000 (4)
Senior Vice President
and Chief Financial Officer
Daniel W. Jasper 26,500 8,400 -- 222,000 (5)
Executive Vice President
and Chief Credit Officer
Allen H. Blake 310,500 85,800 (144,000) (6) 1,363,400 (7)
(Former President and
Chief Executive Officer)
Steven F. Schepman -- 300 -- 5,400 (8)
Executive Vice President and
Director of Corporate Development and
Business Segments
(Former Chief Financial Officer)
- ----------------------
(1) All executive contributions represent the deferral of base salary and/or bonus payments reflected in the "Summary
Compensation Table." We did not make any discretionary contributions under the NQDC Plan as of and for the year
ended December 31, 2007.
(2) Of this amount, $305,500 represents deferrals of cash consideration from prior years that were reflected in the
"Summary Compensation Table" in our Annual Report on Form 10-K for the relevant years. The remaining balance
represents the cumulative earnings on the original deferred amounts and the participant's 2007 activity.
(3) Of this amount, $403,300 represents deferrals of cash consideration from prior years. The remaining balance
represents the cumulative earnings on the original deferred amounts and the participant's 2007 activity.
(4) Of this amount, $33,200 represents deferrals of cash consideration from prior years. The remaining balance
represents the cumulative earnings on the original deferred amounts and the participant's 2007 activity.
(5) Of this amount, $160,000 represents deferrals of cash consideration from prior years that were reflected in the
"Summary Compensation Table" in our Annual Report on Form 10-K for the relevant years. The remaining balance
represents the cumulative earnings on the original deferred amounts and the participant's 2007 activity.
(6) Following his retirement effective on March 31, 2007, Mr. Allen H. Blake received the first of ten annual
distributions of his NQDC Plan participant account balance, which is fully vested.
(7) Of this amount, $906,700 represents deferrals of cash consideration from prior years that were reflected in the
"Summary Compensation Table" in our Annual Report on Form 10-K for the relevant years. The remaining balance
represents the cumulative earnings on the original deferred amounts and the participant's 2007 activity, including
a distribution of $144,000 paid in 2007.
(8) Of this amount, $5,000 represents deferrals of cash consideration from prior years tha t were reflected in the
"Summary Compensation Table" in our Annual Report on Form 10-K for the relevant years. The remaining balance
represents the cumulative earnings on the original deferred amounts and the participant's 2007 activity.
Potential Payments Upon Termination. Upon termination of employment, the
executive officers will receive payments of their vested portion of the
executive's deferred compensation account balance under our NQDC Plan as
described above.
Compensation of Directors. The following table sets forth compensation earned by
the named non-employee directors for the year ended December 31, 2007:
DIRECTOR COMPENSATION TABLE
---------------------------
Fees Earned or
Name Paid in Cash Total
---- ------------ -----
Gordon A. Gundaker $ 29,750 29,750
David L. Steward (1) 29,750 29,750
Douglas H. Yaeger (1)(2) 34,000 34,000
-------------------------
(1) Fees paid for Messrs. Steward and Yaeger include payments deferred
in our NQDC Plan of $29,750 and $34,000, respectively, or an
aggregate of $63,750. Earnings by the directors on their NQDC Plan
balances did not include any above-market or preferential
earnings.
(2) Mr. Yaeger serves as Chairman of the Audit Committee and the Audit
Committee Financial Expert.
Our executive officers that are also directors do not receive remuneration other
than salaries and bonuses for serving on our Board of Directors. Only those
directors who are neither our employees nor employees of any of our subsidiaries
receive cash remuneration for their services as directors. Effective with the
October 2007 Board and Audit Committee meetings, such non-employee directors
received a fee of $3,000 for each Board meeting attended and $1,000 for each
Audit Committee meeting attended. Mr. Yaeger also received a fee of $1,250 per
calendar quarter for his service as Chairman of the Audit Committee. Messrs.
Yaeger, Gundaker and Steward also received a fee of $3,750 per calendar quarter
as a retainer for their service as members of the Board of Directors. Prior to
the October 2007 meetings, such non-employee directors received a fee of $3,000
for each Board meeting attended and $1,000 for each Audit Committee meeting
attended. Mr. Yaeger also received a fee of $4,000 per calendar quarter for his
service as Chairman of the Audit Committee, and Messrs. Gundaker and Steward
also received a fee of $3,000 per calendar quarter for their service as members
of the Audit Committee. Our non-employee directors are also eligible to
participate in our NQDC Plan. Our directors do not receive any other
compensation, and there are no arrangements for amounts to be paid to directors
upon resignation or any other termination of such director or a change in
control of the Company. The Audit Committee is currently the only committee of
our Board of Directors.
Compensation Committee Interlocks and Insider Participation. We do not have a
compensation committee, therefore, our Board of Directors performs the functions
of such a committee. Messrs. Dierberg, McCarthy and Schepman serve or have
served as executive officers and/or members of our Board of Directors. Except
for the foregoing, none of our executive officers served during 2007 as a member
of our compensation committee, or any other committee performing similar
functions, or as a director of another entity, any of whose executive officers
or directors served on our Board of Directors.
See further information regarding transactions with related parties in Note 19
to our Consolidated Financial Statements appearing on pages 104 through 106 of
this report.
Compensation Committee Report.
Our Board of Directors, which performs the functions of our compensation
committee, has reviewed the Compensation Discussion and Analysis and discussed
such with management. Based on such review and discussions, the Board of
Directors recommended the Compensation Discussion and Analysis be included in
the Company's Annual Report on Form 10-K as of and for the year ended December
31, 2007.
Board of Directors
------------------
James F. Dierberg, Chairman of the Board of Directors
Gordon A. Gundaker
Terrance M. McCarthy
Steven F. Schepman
David L. Steward
Douglas H. Yaeger
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth, as of March 26, 2008, certain information with
respect to the beneficial ownership of all classes of our voting capital stock
by each person known to us to be the beneficial owner of more than five percent
of the outstanding shares of the respective classes of our stock:
Percent of
Number of Total
Title of Class Shares Percent Voting
and Name of Owner Owned of Class Power
----------------- ----- -------- -----
Common Stock ($250.00 par value)
- --------------------------------
James F. Dierberg II Family Trust (1)........................ 7,714.677 (2) 32.605% *
Ellen C. Dierberg Family Trust (1)........................... 7,714.676 (2) 32.605 *
Michael J. Dierberg Family Trust (1)......................... 4,255.319 (2) 17.985 *
Michael J. Dierberg Irrevocable Trust (1).................... 3,459.358 (2) 14.621 *
First Trust (Mary W. Dierberg and First Bank, Trustees) (1).. 516.830 (3) 2.184 *
Class A Convertible Adjustable Rate Preferred Stock
- ---------------------------------------------------
($20.00 par value)
- ------------------
James F. Dierberg, Trustee of the James F. Dierberg
Living Trust (1)......................................... 641,082 (4)(5) 100% 77.7%
Class B Non-Convertible Adjustable Rate Preferred Stock
- -------------------------------------------------------
($1.50 par value)
- -----------------
James F. Dierberg, Trustee of the James F. Dierberg
Living Trust (1)......................................... 160,505 (5) 100% 19.4%
All executive officers and directors
other than Mr. James F. Dierberg
and members of his immediate family.......................... 0 0% 0.0%
- --------------------
* Represents less than 1.0%.
(1) Each of the above-named trustees and beneficial owners are United States citizens, and the business address
for each such individual is 135 North Meramec, Clayton, Missouri 63105. Mr. James F. Dierberg, our Chairman
of the Board, and Mrs. Mary W. Dierberg, are husband and wife, and Messrs. James F. Dierberg II and Michael
J. Dierberg and Mrs. Ellen D. Schepman,formerly Ms. Ellen C. Dierberg, are their adult children.
(2) Due to the relationship between Mr. James F. Dierberg, his wife and their children, Mr. Dierberg is deemed
to share voting and investment power over these shares.
(3) Due to the relationship between Mr. James F. Dierberg, his wife and First Bank, Mr. Dierberg is deemed to
share voting and investment power over these shares.
(4) Convertible into common stock, based on the appraised value of the common stock at the date of conversion.
Assuming an appraised value of the common stock equal to the book value, the number of shares of common
stock into which the Class A Preferred Stock is convertible at December 31, 2007 is 355, which shares are
not included in the above table.
(5) Sole voting and investment power.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
Review and Approval of Related Person Transactions. We review all relationships
and transactions in which we and our directors and executive officers and their
immediate family members and entities in which such persons have a significant
interest are participants to determine whether such persons have a direct or
indirect material interest. Our management collects information from the
executive officers and the directors regarding the related person transactions
and determines whether we or a related person has a direct or indirect material
interest in the transaction. If we determine that a transaction is directly or
indirectly material to us or a related person, then the transaction is disclosed
in accordance with applicable requirements. In addition, the Audit Committee of
our Board of Directors reviews and approves or ratifies any related person
transaction that is required to be so disclosed. In the event that a member of
the Audit Committee is a related person to such a transaction, such member may
not participate in the discussion or vote regarding approval or ratification of
the transaction.
Related Person Transactions. Outside of normal customer relationships, no
directors, executive officers or shareholders holding over 5% of our voting
securities, and no corporations or firms with which such persons or entities are
associated, currently maintain or have maintained since the beginning of the
last full fiscal year, any significant business or personal relationship with
our subsidiaries or us, other than that which arises by virtue of such position
or ownership interest in our subsidiaries or us, except as set forth in "Item 11
- - Executive Compensation - Compensation of Directors," or as described in the
following paragraphs.
First Bank has had in the past, and may have in the future, loan transactions
and related banking services in the ordinary course of business with our
directors and/or their affiliates. These loan transactions have been made on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unaffiliated persons and did not involve
more than the normal risk of collectibility or present other unfavorable
features. First Bank does not extend credit to our officers or to officers of
First Bank, except extensions of credit secured by mortgages on personal
residences, loans to purchase automobiles and personal credit card accounts.
Certain of our shareholders, directors and officers and their respective
affiliates have deposit accounts and related banking services with First Bank.
It is First Bank's policy not to permit any of its officers or directors or
their affiliates to overdraw their respective deposit accounts. Deposit account
overdraft protection may be approved for persons or entities under a plan
whereby a credit limit has been established in accordance with First Bank's
standard credit criteria.
Transactions with related parties, including transactions with affiliated
persons and entities, are described in Note 19 to our Consolidated Financial
Statements on pages 104 through 106 of this report.
Director Independence. Our Board of Directors has determined that Messrs. Gordon
A. Gundaker, David L. Steward and Douglas H. Yaeger have no material
relationship with us and each is independent. Our Audit Committee of the Board
of Directors is composed only of independent directors. In order to be
considered independent, our Board of Directors must determine that a director
does not have any direct or indirect material relationship with us as provided
under the rules of the NYSE. In making such a determination, the Board of
Directors considers all relationships between us, or any of our subsidiaries,
and the director, or any of his immediate family members, or any entity with
which the director or any of his immediate family members is affiliated by
reason of being a partner, officer or significant shareholder thereof. In
assessing the independence of our directors, the Board of Directors considered
all relationships between us and our directors based primarily upon responses of
the directors to questions posed through a directors' and officers'
questionnaire. The Board of Directors considered each of the related person
transaction discussed above in making its independence determination.
First Banks has only preferred securities listed on the NYSE and, pursuant to
the General Application section of NYSE Rule 303A, is not subject to NYSE Rule
303A.01 requiring a majority of independent directors. Messrs. Dierberg,
McCarthy and Schepman are not independent because they are each current or
former executive officers of the company.
Item 14. Principal Accounting Fees and Services
Fees of Independent Registered Public Accounting Firm
During 2007 and 2006, KPMG LLP served as our Independent Registered Public
Accounting Firm and provided services to our affiliates and us. The following
table sets forth fees for professional audit services rendered by KPMG LLP for
the audit of our consolidated financial statements and other audit services in
2007 and 2006:
2007 2006
---- ----
Audit fees (1)....................................................... $ 610,500 601,500
Audit related fees................................................... -- --
Tax fees (2)......................................................... -- 82,637
All other fees....................................................... -- --
--------- --------
Total......................................................... $ 610,500 684,137
========= ========
------------------------
(1) For 2007 and 2006, audit fees include the audits of the consolidated financial statements of
First Banks and SBLS LLC, as well as services provided for reporting requirements under FDICIA and
mortgage banking activities, which are included in the audit fees of First Banks, as these
services are closely related to the audit of First Banks' consolidated financial statements.
Audit fees also include other accounting and reporting consultations.
(2) For 2006, tax services include tax compliance and general tax planning and advice.
Policy Regarding the Approval of Independent Auditor Provision of Audit and
Non-Audit Services
Consistent with the Securities and Exchange Commission requirements regarding
auditor independence, the Audit Committee recognizes the importance of
maintaining the independence, in fact and appearance, of our independent
auditors. As such, the Audit Committee has adopted a policy for pre-approval of
all audit and permissible non-audit services provided by our independent
auditors. Under the policy, the Audit Committee, or its designated member, must
pre-approve services prior to commencement of the specified service. The
requests for pre-approval are submitted to the Audit Committee or its designated
member by the Director of Audit with a statement as to whether in his/her view
the request is consistent with the Securities and Exchange Commission's rules on
auditor independence. The Audit Committee reviews the pre-approval requests and
the fees paid for such services at their regularly scheduled quarterly meetings
or at special meetings.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements and Supplementary Data - The financial
statements and supplementary data filed as part of this Report
are included in Item 8.
2. Financial Statement Schedules - These schedules are omitted
for the reason they are not required or are not applicable.
3. Exhibits - The exhibits are listed in the index of exhibits
required by Item 601 of Regulation S-K at Item (b) below and
are incorporated herein by reference.
(b) The index of required exhibits is included beginning on page 116
of this Report.
(c) Not Applicable.
Management's Report on Internal Control over Financial Reporting
- ----------------------------------------------------------------
Management of First Banks, Inc. (the Company) is responsible for establishing
and maintaining adequate internal control over financial reporting. The
Company's internal control over financial reporting is a process designed under
the supervision of the President and Chief Executive Officer and the Chief
Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in circumstances or that the degree of compliance
with the policies and procedures may deteriorate.
On November 30, 2007, the Company completed its acquisition of Coast Financial
Holdings, Inc. and its wholly owned banking subsidiary, Coast Bank of Florida
(collectively, CFHI). Coast Bank of Florida was merged with and into First Bank,
the Company's indirect wholly owned subsidiary, on November 30, 2007. Management
has excluded internal control over financial reporting associated with CFHI from
its assessment of the effectiveness of internal control over financial reporting
as of December 31, 2007. As of December 31, 2007, the assets associated with
CFHI represented approximately 6.1% of the total assets of the Company. Total
revenue, defined as net interest income and noninterest income, associated with
CFHI included in the Company's total revenue for the year ended December 31,
2007 was limited to the period from December 1, 2007 to December 31, 2007, and
represented 0.1% of the Company's total revenue for the year ended December 31,
2007.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2007, based on the framework set forth by
the Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control - Integrated Framework. Based on that assessment, management concluded
that, as of December 31, 2007, the Company's internal control over financial
reporting is effective based on the criteria established in Internal Control -
Integrated Framework.
This annual report does not include an attestation report of the Company's
Independent Registered Public Accounting Firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's Independent Registered Public Accounting Firm pursuant to temporary
rules of the United States Securities and Exchange Commission that permit the
Company to provide only management's report in this annual report.
FIRST BANKS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders
First Banks, Inc.:
We have audited the accompanying consolidated balance sheets of First Banks,
Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2007. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Banks, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48 -- Accounting for Uncertainty in Income Taxes, an
Interpretation of Statement of Financial Accounting Standards No. 109 --
Accounting for Income Taxes.
/s/ KPMG LLP
------------
St. Louis, Missouri
March 26, 2008
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands, except share and per share data)
December 31,
----------------------------
2007 2006
---- ----
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................ $ 217,597 215,974
Short-term investments......................................................... 14,078 153,583
----------- ----------
Total cash and cash equivalents........................................... 231,675 369,557
----------- ----------
Investment securities:
Trading........................................................................ -- 81,168
Available for sale............................................................. 1,000,392 1,359,729
Held to maturity (fair value of $19,078 and $23,971, respectively)............. 18,879 24,049
----------- ----------
Total investment securities............................................... 1,019,271 1,464,946
----------- ----------
Loans:
Commercial, financial and agricultural......................................... 2,382,067 1,934,912
Real estate construction and development....................................... 2,141,234 1,832,504
Real estate mortgage........................................................... 4,211,285 3,615,148
Consumer and installment....................................................... 97,117 83,008
Loans held for sale............................................................ 66,079 216,327
----------- ----------
Total loans............................................................... 8,897,782 7,681,899
Unearned discount.............................................................. (14,528) (15,418)
Allowance for loan losses...................................................... (168,391) (145,729)
----------- ----------
Net loans................................................................. 8,714,863 7,520,752
----------- ----------
Bank premises and equipment, net.................................................... 238,331 178,417
Goodwill and other intangible assets................................................ 315,651 295,382
Bank-owned life insurance........................................................... 116,619 113,778
Deferred income taxes............................................................... 138,618 100,175
Other assets........................................................................ 122,332 115,707
----------- ----------
Total assets.............................................................. $10,897,360 10,158,714
=========== ==========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand..................................................... $ 1,259,123 1,281,108
Interest-bearing demand........................................................ 980,850 981,939
Savings and money market....................................................... 2,716,726 2,352,575
Time deposits of $100 or more.................................................. 1,546,857 1,419,579
Other time deposits............................................................ 2,645,637 2,407,885
----------- ----------
Total deposits............................................................ 9,149,193 8,443,086
Other borrowings.................................................................... 376,123 373,899
Notes payable....................................................................... 39,000 65,000
Subordinated debentures............................................................. 353,752 297,966
Deferred income taxes............................................................... 46,834 42,826
Accrued expenses and other liabilities.............................................. 59,426 130,033
Minority interest in subsidiary..................................................... 5,544 5,469
----------- ----------
Total liabilities......................................................... 10,029,872 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................................................................... 843,782 784,864
Accumulated other comprehensive loss................................................ (4,957) (13,092)
----------- ----------
Total stockholders' equity................................................ 867,488 800,435
----------- ----------
Total liabilities and stockholders' equity................................ $10,897,360 10,158,714
=========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands, except share and per share data)
Years Ended December 31,
----------------------------------
2007 2006 2005
---- ---- ----
Interest income:
Interest and fees on loans............................................... $ 629,825 581,503 424,095
Investment securities:
Taxable................................................................ 61,785 57,017 65,895
Nontaxable............................................................. 1,604 1,875 1,739
Short-term investments................................................... 6,699 5,909 2,211
--------- -------- --------
Total interest income................................................ 699,913 646,304 493,940
--------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand................................................ 9,183 8,147 4,398
Savings and money market............................................... 79,804 53,297 29,592
Time deposits of $100 or more.......................................... 71,480 59,114 28,010
Other time deposits.................................................... 112,420 96,138 65,157
Other borrowings......................................................... 16,634 16,803 18,240
Notes payable............................................................ 2,426 5,530 2,305
Subordinated debentures.................................................. 24,514 22,833 20,557
--------- -------- --------
Total interest expense............................................... 316,461 261,862 168,259
--------- -------- --------
Net interest income.................................................. 383,452 384,442 325,681
Provision for loan losses................................................... 75,000 12,000 (4,000)
--------- -------- --------
Net interest income after provision for loan losses.................. 308,452 372,442 329,681
--------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees............ 46,834 43,310 39,776
Gain on loans sold and held for sale..................................... 14,068 26,020 20,804
Net loss on investment securities........................................ (1,646) (1,813) (2,873)
Bank-owned life insurance investment income.............................. 3,841 3,103 4,860
Investment management income............................................. 7,111 8,412 8,573
Insurance fee and commission income...................................... 6,860 4,848 --
Other.................................................................... 26,201 29,063 24,945
--------- -------- --------
Total noninterest income............................................. 103,269 112,943 96,085
--------- -------- --------
Noninterest expense:
Salaries and employee benefits........................................... 172,510 166,864 139,764
Occupancy, net of rental income.......................................... 32,671 26,953 22,081
Furniture and equipment.................................................. 19,683 16,960 16,015
Postage, printing and supplies........................................... 6,747 6,721 5,743
Information technology fees.............................................. 36,305 37,099 35,472
Legal, examination and professional fees................................. 9,893 8,783 9,319
Amortization of intangible assets........................................ 12,419 8,195 4,850
Advertising and business development..................................... 6,933 7,128 7,043
Charitable contributions................................................. 5,942 6,462 5,922
Other.................................................................... 41,147 34,051 31,429
--------- -------- --------
Total noninterest expense............................................ 344,250 319,216 277,638
--------- -------- --------
Income before provision for income taxes and minority interest in
income (loss) of subsidiary....................................... 67,471 166,169 148,128
Provision for income taxes.................................................. 10,159 55,062 52,509
--------- -------- --------
Income before minority interest in income (loss) of subsidiary....... 57,312 111,107 95,619
Minority interest in income (loss) of subsidiary............................ 78 (587) (1,287)
--------- -------- --------
Net income........................................................... 57,234 111,694 96,906
Preferred stock dividends................................................... 786 786 786
--------- -------- --------
Net income available to common stockholders.......................... $ 56,448 110,908 96,120
========= ======== ========
Basic earnings per common share............................................. $2,385.68 4,687.38 4,062.36
========= ======== ========
Diluted earnings per common share........................................... $2,379.45 4,630.72 4,007.46
========= ======== ========
Weighted average shares of common stock outstanding......................... 23,661 23,661 23,661
========= ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Three Years Ended December 31, 2007
- ------------------------------------------------------------------------------------------------------------------------------------
(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, January 1, 2005............................... $12,822 241 5,915 5,910 577,836 (1,831) 600,893
--------
Year ended December 31, 2005:
Comprehensive income:
Net income........................................ -- -- -- -- 96,906 -- 96,906
Other comprehensive loss, net of tax:
Unrealized losses on investment securities...... -- -- -- -- -- (15,659) (15,659)
Reclassification adjustment for investment
securities losses included in net income..... -- -- -- -- -- 1,867 1,867
Derivative instruments:
Current period transactions.................. -- -- -- -- -- (4,283) (4,283)
--------
Total comprehensive income.......................... 78,831
Class A preferred stock dividends, $1.20 per share.. -- -- -- -- (769) -- (769)
Class B preferred stock dividends, $0.11 per share.. -- -- -- -- (17) -- (17)
------- ---- ------ ------ -------- -------- --------
Balances, December 31, 2005............................. 12,822 241 5,915 5,910 673,956 (19,906) 678,938
--------
Year ended December 31, 2006:
Comprehensive income:
Net income........................................ -- -- -- -- 111,694 -- 111,694
Other comprehensive income, net of tax:
Unrealized gains on investment securities....... -- -- -- -- -- 3,666 3,666
Reclassification adjustment for investment
securities losses included in net income..... -- -- -- -- -- 1,242 1,242
Derivative instruments:
Current period transactions.................. -- -- -- -- -- 1,906 1,906
--------
Total comprehensive income.......................... 118,508
Adjustment for the utilization of net operating
losses associated with prior acquisitions....... -- -- -- 3,775 -- -- 3,775
Class A preferred stock dividends, $1.20 per share.. -- -- -- -- (769) -- (769)
Class B preferred stock dividends, $0.11 per share.. -- -- -- -- (17) -- (17)
------- ---- ------ ------ -------- -------- --------
Balances, December 31, 2006............................. 12,822 241 5,915 9,685 784,864 (13,092) 800,435
--------
Year ended December 31, 2007:
Comprehensive income:
Net income........................................ -- -- -- -- 57,234 -- 57,234
Other comprehensive income, net of tax:
Unrealized losses on investment securities...... -- -- -- -- -- (1,135) (1,135)
Reclassification adjustment for investment
securities losses included in net income..... -- -- -- -- -- 122 122
Derivative instruments:
Current period transactions.................. -- -- -- -- -- 9,148 9,148
--------
Total comprehensive income.......................... 65,369
Cumulative effect of change in accounting principle. -- -- -- -- 2,470 -- 2,470
Class A preferred stock dividends, $1.20 per share.. -- -- -- -- (769) -- (769)
Class B preferred stock dividends, $0.11 per share.. -- -- -- -- (17) -- (17)
------- ---- ------ ------ -------- -------- --------
Balances, December 31, 2007............................. $12,822 241 5,915 9,685 843,782 (4,957) 867,488
======= ==== ====== ====== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands)
Years ended December 31,
--------------------------------------
2007 2006 2005
---- ---- ----
Cash flows from operating activities:
Net income.............................................................. $ 57,234 111,694 96,906
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of bank premises and equipment.......... 21,610 18,912 17,381
Amortization of intangible assets..................................... 12,419 8,195 4,850
Other amortization, net of accretion.................................. 3,941 5,668 11,261
Originations of loans held for sale................................... (508,391) (1,000,765) (1,327,890)
Proceeds from sales of loans held for sale............................ 669,571 1,161,224 1,187,671
Payments received on loans held for sale.............................. 16,038 30,312 17,070
Provision for loan losses............................................. 75,000 12,000 (4,000)
Provision for current income taxes.................................... 15,731 44,854 53,725
Provision for deferred income taxes................................... (5,572) 10,208 (1,216)
Decrease (increase) in accrued interest receivable.................... 5,542 (9,781) (2,280)
(Decrease) increase in accrued interest payable....................... (12,854) 6,230 6,115
Proceeds from sales of trading securities............................. 81,038 9,947 --
Maturities of trading securities...................................... 16,651 989 --
Purchases of trading securities....................................... (17,939) (88,494) (3,389)
Gain on loans sold and held for sale.................................. (14,068) (26,020) (20,804)
Net loss on investment securities..................................... 1,646 1,813 2,873
Gain on sales of branches, net of expenses............................ (1,018) -- --
Other operating activities, net....................................... (24,253) (33,182) (50,472)
Minority interest in income (loss) of subsidiary...................... 78 (587) (1,287)
---------- ---------- ----------
Net cash provided by (used in) operating activities........... 392,404 263,217 (13,486)
---------- ---------- ----------
Cash flows from investing activities:
Cash received (paid) for acquired entities, net of cash and
cash equivalents (paid) received...................................... 545 (204,690) (11,579)
Cash paid for sale of branches, net of cash and cash equivalents sold... (48,926) -- --
Proceeds from sales of investment securities available for sale......... 170,699 198,061 147,120
Maturities of investment securities available for sale.................. 1,040,690 1,003,970 658,803
Maturities of investment securities held to maturity.................... 5,271 2,887 5,635
Purchases of investment securities available for sale................... (769,845) (1,065,738) (325,642)
Purchases of investment securities held to maturity..................... (133) (865) (6,509)
Proceeds from sales of commercial loans held for sale................... 33,471 68,350 14,024
Net increase in loans................................................... (826,731) (510,054) (569,255)
Recoveries of loans previously charged-off.............................. 8,675 15,394 19,757
Purchases of bank premises and equipment................................ (52,788) (37,904) (17,128)
Sale of minority interest in subsidiary................................. -- -- 7,350
Other investing activities, net......................................... 10,108 12 1,834
---------- ---------- ----------
Net cash used in investing activities......................... (428,964) (530,577) (75,590)
---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in demand, savings and money market deposits........ 204,038 10,185 (50,119)
(Decrease) increase in time deposits.................................... (232,870) 415,562 199,255
Decrease in Federal Home Loan Bank advances............................. (36,368) (43,410) (6,144)
Increase (decrease) in federal funds purchased.......................... 76,500 -- (78)
Decrease in securities sold under agreements to repurchase.............. (80,477) (135,464) (59,232)
Advances drawn on notes payable......................................... 35,000 -- 100,000
Repayments of notes payable............................................. (61,000) (35,000) (15,000)
Proceeds from issuance of subordinated debentures....................... 77,322 139,178 --
Repayments of subordinated debentures................................... (82,681) -- (59,278)
Payment of preferred stock dividends.................................... (786) (786) (786)
---------- ---------- ----------
Net cash (used in) provided by financing activities........... (101,322) 350,265 108,618
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents.......... (137,882) 82,905 19,542
Cash and cash equivalents, beginning of year................................. 369,557 286,652 267,110
---------- ---------- ----------
Cash and cash equivalents, end of year....................................... $ 231,675 369,557 286,652
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on liabilities............................................... $ 329,315 255,632 162,144
Income taxes.......................................................... 8,961 45,497 56,591
========== ========== ==========
Noncash investing and financing activities:
Securitization and transfer of loans to investment securities......... $ 101,869 138,944 --
Loans held for sale transferred to loan portfolio..................... 116,391 -- --
Loans transferred to other real estate................................ 16,269 7,542 3,737
========== ========== ==========
Business Combinations:
Fair value of tangible assets acquired (noncash)...................... $ 810,847 608,123 239,988
Goodwill and other intangible assets recorded with
net assets acquired................................................ 33,304 111,676 28,243
Liabilities assumed................................................... (844,696) (515,109) (256,652)
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
First Banks, Inc. and subsidiaries (First Banks or the Company):
Basis of Presentation. The accompanying consolidated financial statements of
First Banks have been prepared in accordance with U.S. generally accepted
accounting principles and conform to predominant practices within the banking
industry. Management of First Banks has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the consolidated
financial statements in conformity with U.S. generally accepted accounting
principles. Actual results could differ from those estimates.
Principles of Consolidation. The consolidated financial statements include the
accounts of the parent company and its subsidiaries, giving effect to minority
interest, as more fully described below, and in Note 19 to the Consolidated
Financial Statements. All significant intercompany accounts and transactions
have been eliminated. Certain reclassifications of 2006 and 2005 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), headquartered in St. Louis, Missouri, and its
wholly owned subsidiary holding company, Coast Financial Holdings, Inc. (CFHI),
headquartered in Bradenton, Florida.
Prior to First Banks' acquisition of CFHI on November 30, 2007, First Bank,
headquartered in St. Louis, Missouri, was a wholly owned banking subsidiary of
SFC. On November 30, 2007, First Banks completed its acquisition of CFHI, and
its wholly owned banking subsidiary, Coast Bank of Florida (Coast Bank). The
issued and outstanding shares of common stock of Coast Bank were exchanged for
the newly issued and outstanding shares of non-voting Series B common stock of
First Bank, and Coast Bank was subsequently merged with and into First Bank. As
a result, SFC was owner of 100% of the voting Series A outstanding shares of
common stock of First Bank and CFHI was owner of 100% of the non-voting Series B
outstanding shares of common stock of First Bank. Thus, First Bank was 96.89%
owned by SFC and 3.11% owned by CFHI as of December 31, 2007.
First Bank operates through its branch banking offices and subsidiaries: First
Bank Business Capital, Inc.; Missouri Valley Partners, Inc. (MVP); Adrian N.
Baker & Company (Adrian Baker); Universal Premium Acceptance Corporation and its
wholly owned subsidiary, UPAC of California, Inc.; and Small Business Loan
Source LLC (SBLS LLC). All of the subsidiaries are wholly owned, except for SBLS
LLC, which is 76.0% owned by First Bank and 24.0% owned by First Capital
America, Inc. (FCA) as of December 31, 2007, as further described in Note 19 to
the Consolidated Financial Statements.
Cash and Cash Equivalents. Cash, due from banks and short-term investments,
which include federal funds sold and interest-bearing deposits, are considered
to be cash and cash equivalents for purposes of the consolidated statements of
cash flows. Federal funds sold were $152.2 million at December 31, 2006, and
interest-bearing deposits were $14.1 million and $1.4 million at December 31,
2007 and 2006, respectively.
First Bank is required to maintain certain daily reserve balances on hand in
accordance with regulatory requirements. These reserve balances maintained in
accordance with such requirements were $26.5 million and $24.7 million at
December 31, 2007 and 2006, respectively.
Investment Securities. The classification of investment securities as trading,
available for sale or held to maturity is determined at the date of purchase.
Investment securities designated as trading, which represent any security held
for near term sale, are stated at fair value. Realized and unrealized gains and
losses are included in noninterest income.
Investment securities designated as available for sale, which represent any
security that First Banks has no immediate plan to sell but which may be sold in
the future under different circumstances, are stated at fair value. Realized
gains and losses are included in noninterest income, based on the amortized cost
of the individual security sold. Unrealized gains and losses, net of related
income tax effects, are recorded in accumulated other comprehensive income
(loss). All previous fair value adjustments included in the separate component
of accumulated other comprehensive income (loss) are reversed upon sale.
Premiums and discounts incurred relative to the par value of securities
purchased are amortized or accreted, respectively, on the level-yield method
taking into consideration the level of current and anticipated prepayments.
Investment securities designated as held to maturity, which represent any
security that First Banks has the positive intent and ability to hold to
maturity, are stated at cost, net of amortization of premiums and accretion of
discounts computed on the level-yield method taking into consideration the level
of current and anticipated prepayments.
A decline in the fair value of any available-for-sale or held-to-maturity
investment security below its carrying value that is deemed to be other than
temporary results in a reduction in the cost basis of the carrying value to fair
value. The other-than-temporary impairment is charged to noninterest income and
a new cost basis is established. When determining other-than-temporary
impairment, consideration is given as to whether First Banks has the ability and
intent to hold the investment security until a market price recovery and whether
evidence indicating the carrying value of the investment security is recoverable
outweighs evidence to the contrary.
Loans Held for Portfolio. Loans held for portfolio are carried at cost, adjusted
for amortization of premiums and accretion of discounts using the interest
method. Interest and fees on loans are recognized as income using the interest
method. Loan origination fees and costs are deferred and accreted to interest
income over the estimated life of the loans using the interest method. Loans
held for portfolio are stated at cost as First Banks has the ability and it is
management's intention to hold them to maturity.
The accrual of interest on loans is discontinued when it appears that interest
or principal may not be paid in a timely manner in the normal course of business
or once principal or interest payments become 90 days past due under the
contractual terms of the loan agreement. Generally, payments received on
nonaccrual and impaired loans are recorded as principal reductions. Interest
income is recognized after all delinquent principal has been repaid or an
improvement in the condition of the loan has occurred that warrants resumption
of interest accruals.
A loan is considered impaired when it is probable that First Banks will be
unable to collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. Loans on nonaccrual status are
considered to be impaired loans. When measuring impairment, the expected future
cash flows of an impaired loan are discounted at the loan's effective interest
rate. Alternatively, impairment is measured by reference to an observable market
price, if one exists, or the fair value of the collateral for a
collateral-dependent loan. Regardless of the historical measurement method used,
First Banks measures impairment based on the fair value of the collateral when
foreclosure is probable. Additionally, impairment of a restructured loan is
measured by discounting the total expected future cash flows at the loan's
effective rate of interest as stated in the original loan agreement.
In accordance with Statement of Position 03-3, Accounting for Certain Loans or
Debt Securities Acquired in a Transfer (SOP 03-3), acquired impaired loans are
classified as nonaccrual loans and are initially measured at fair value with no
allocated allowance for loan losses. An allowance for loan losses is recorded to
the extent there is further credit deterioration subsequent to the acquisition
date.
Loans Held for Sale. Loans held for sale are comprised of residential mortgage
loans held for sale in the secondary mortgage market, frequently in the form of
a mortgage-backed security, U.S. Small Business Administration (SBA) loans
awaiting sale of the guaranteed portion to the SBA, and commercial real estate
loans which may be identified for sale to specific buyers to achieve credit or
loan concentration objectives. Loans held for sale are carried at the lower of
cost or market value, which is determined on an individual loan basis.
Additionally, the carrying value of the residential mortgage loans held for sale
also includes the cost of hedging the loans held for sale. The amount by which
cost exceeds market value is recorded in a valuation allowance as a reduction of
loans held for sale. Changes in the valuation allowance are reflected as part of
the gain on loans sold and held for sale in the consolidated statements of
income in the periods in which the changes occur. Gains or losses on the sale of
loans held for sale are determined on a specific identification basis and
reflect the difference between the value received upon sale and the carrying
value of the loans held for sale, including the cost of hedging the residential
mortgage loans held for sale. Loans held for sale transferred to loans held for
portfolio or available-for-sale investment securities are transferred at fair
value.
Loan Servicing Income. Loan servicing income is included in noninterest income
and represents fees earned for servicing real estate mortgage loans owned by
investors and originated by First Bank's mortgage banking operation, as well as
SBA loans to small business concerns that are originated by SBLS LLC, First
Bank's majority-owned subsidiary that originates, sells and services SBA loans.
These fees are net of federal agency guarantee fees, interest shortfall,
amortization of loan servicing rights and impairment valuation allowances. Such
fees are generally calculated on the outstanding principal balance of the loans
serviced and are recorded as income when earned.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level considered adequate to provide for probable losses. The provision for loan
losses is based on a monthly analysis of the loans held for portfolio,
considering, among other factors, current economic conditions, loan portfolio
composition, past loan loss experience, independent appraisals, loan collateral,
payment experience and selected key financial ratios. Adjustments are reflected
in the consolidated statements of income in the periods in which they become
known. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. Such
agencies may require First Banks to modify its allowance for loan losses based
on their judgment about information available to them at the time of their
examination.
Derivative Instruments and Hedging Activities. First Banks utilizes derivative
instruments and hedging strategies to assist in the management of interest rate
sensitivity and to modify the repricing, maturity and option characteristics of
certain assets and liabilities. First Banks uses such derivative instruments
solely to reduce its interest rate risk exposure. Derivative instruments are
recorded in the consolidated balance sheets and measured at fair value. At
inception of a derivative transaction, First Banks designates the derivative
instrument as either a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment (fair value hedges) or a hedge
of a forecasted transaction or the variability of cash flows to be received or
paid related to a recognized asset or liability (cash flow hedges). For all
hedging relationships, First Banks documents the hedging relationship and its
risk-management objectives and strategy for entering into the hedging
relationship including the hedging instrument, the hedged item(s), the nature of
the risk being hedged, how the hedging instrument's effectiveness in offsetting
the hedged risk will be assessed and a description of the method the Company
will utilize to measure hedge ineffectiveness. This process also includes
linking all derivative instruments that are designated as fair value hedges or
cash flow hedges to the underlying assets and liabilities or to specific firm
commitments or forecasted transactions. First Banks also assesses, both at the
hedge's inception and on an ongoing basis, whether the derivative instruments
that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of the hedged item(s). First Banks discontinues
hedge accounting prospectively when it is determined that the derivative
instrument is no longer effective in offsetting changes in the fair value or
cash flows of the hedged item(s), the derivative instrument expires or is sold,
terminated, or exercised, the derivative instrument is de-designated as a
hedging instrument because it is unlikely that a forecasted transaction will
occur, a hedged firm commitment no longer meets the definition of a firm
commitment, or management determines that designation of the derivative
instrument as a hedging transaction is no longer appropriate.
A summary of First Banks' accounting policies for its derivative instruments and
hedging activities is as follows:
>> Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate swap
agreements designated as cash flow hedges are accounted for at fair
value. The effective portion of the change in the cash flow hedge's
gain or loss is initially reported as a component of other
comprehensive income (loss) and subsequently reclassified into
noninterest income when the underlying transaction affects earnings.
The ineffective portion of the change in the cash flow hedge's gain or
loss is recorded in noninterest income on each monthly measurement
date. The net interest differential is recognized as an adjustment to
interest income or interest expense of the related asset or liability
being hedged. In the event of early termination, the net proceeds
received or paid on the interest rate swap agreements are recognized
immediately in noninterest income.
>> Interest Rate Swap Agreements - Fair Value Hedges. Interest rate swap
agreements designated as fair value hedges are accounted for at fair
value. Changes in the fair value of the swap agreements are recognized
currently in noninterest income. The change in the fair value of the
underlying hedged item is recognized as an adjustment to the carrying
amount of the underlying hedged item and is also reflected currently
in noninterest income. All changes in fair value are measured on a
monthly basis. The net interest differential is recognized as an
adjustment to interest income or interest expense of the related asset
or liability being hedged. In the event of early termination or
ineffectiveness, the net proceeds received or paid on the interest
rate swap agreements are recognized immediately in noninterest income
and the future net interest differential, if any, is recognized
prospectively in noninterest income. The cumulative change in the fair
value of the underlying hedged item is deferred and amortized or
accreted to interest income or interest expense over the weighted
average life of the related asset or liability. If, however, the
underlying hedged item is repaid, the cumulative change in the fair
value of the underlying hedged item is recognized immediately in
noninterest income.
>> Interest Rate Cap and Floor Agreements. Interest rate cap and floor
agreements are accounted for at fair value. Changes in the fair value
of interest rate cap and floor agreements are recognized in
noninterest income on each monthly measurement date.
>> Interest Rate Lock Commitments. Commitments to originate loans for
subsequent sale in the secondary market (interest rate lock
commitments), which primarily consist of commitments to originate
fixed rate residential mortgage loans, are recorded at fair value.
Changes in the fair value are recognized in noninterest income on a
monthly basis.
>> Forward Commitments to Sell Mortgage-Backed Securities. Forward
commitments to sell mortgage-backed securities are recorded at fair
value. Changes in the fair value of forward commitments to sell
mortgage-backed securities are recognized in noninterest income on a
monthly basis.
Bank Premises and Equipment, Net. Bank premises and equipment are carried at
cost less accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the useful life of the related asset or
the term of the lease. Bank premises and improvements are depreciated over five
to 40 years and equipment is depreciated over three to seven years.
Goodwill and Other Intangible Assets. Goodwill and other intangible assets
primarily consist of goodwill, core deposit intangibles and customer list
intangibles. Goodwill and intangible assets with indefinite useful lives are not
amortized, but instead tested for impairment at least annually. Intangible
assets with definite useful lives are amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144.
First Banks amortizes, on a straight-line basis, its core deposit intangibles,
customer list intangibles and other intangibles. Core deposit intangibles and
customer list intangibles are amortized over the estimated periods to be
benefited, which have been estimated at five to seven years, and seven to 16
years, respectively. Goodwill is not amortized, but instead, is tested annually
for impairment in accordance with First Banks' existing methods of measuring and
recording impairment losses, as described below.
Intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate the carrying value of an underlying asset may not be
recoverable. Recoverability is measured based upon the future cash flows
expected to result from the use of the underlying asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying value of the underlying
asset, First Banks recognizes an impairment loss. The impairment loss recognized
represents the amount by which the carrying value of the underlying asset
exceeds the fair value of the underlying asset. If an asset being tested for
recoverability was acquired in a business combination accounted for using the
purchase method, goodwill that arose in the transaction is included as part of
the asset grouping in determining recoverability. If some, but not all, of the
assets acquired in that transaction are being tested, goodwill is allocated to
the assets being tested for recoverability on a pro rata basis using the
relative fair values of the long-lived assets and identifiable intangibles
acquired at the acquisition dates. In instances where goodwill is identified
with assets that are subject to an impairment loss, the carrying amount of the
identified goodwill is eliminated before reducing the carrying amounts of
impaired long-lived assets and identifiable intangibles. As such adjustments
become necessary, they are reflected in the consolidated statements of income in
the periods in which they become known.
Servicing Rights. First Banks has mortgage servicing rights and SBA servicing
rights. Mortgage servicing rights are capitalized by allocating the total cost
of the mortgage loans to mortgage servicing rights and the loans (without
mortgage servicing rights) based on the relative fair values of the two
components. Upon capitalizing the mortgage servicing rights, they are amortized,
in proportion to the related estimated net servicing income on a basis that
approximates the disaggregated, discounted basis, over the expected lives of the
related loans, which is approximately five to seven years. The weighted average
amortization period of mortgage servicing rights is approximately five years.
The value of mortgage servicing rights is adversely affected when mortgage
interest rates decline which normally causes mortgage loan prepayments to
increase. When loans are prepaid or refinanced, the related unamortized balance
of the mortgage servicing rights is charged to amortization expense. The
determination of the fair value of the mortgage servicing rights is performed
quarterly based upon an independent third party valuation. Based on these
analyses, a comparison of the fair value of the mortgage servicing rights with
the carrying value of the mortgage servicing rights is made, with impairment, if
any, recognized at that time. The impairment analyses are prepared using
stratifications of the mortgage servicing rights based on the predominant risk
characteristics of the underlying mortgage loans, including size, interest rate,
weighted average original term, weighted average remaining term and estimated
prepayment speeds. As part of these analyses, the fair value of the mortgage
servicing rights for each stratum is compared to the carrying value of the
mortgage servicing rights for each stratum. To the extent the carrying value of
the mortgage servicing rights exceeds the fair value of the mortgage servicing
rights for a stratum, First Banks recognizes impairment equal to the amount by
which the carrying value of the mortgage servicing rights for a stratum exceeds
the fair value. Impairment is recognized through a valuation allowance that is
recorded as a reduction of mortgage servicing rights. The valuation allowance
may be reversed based upon subsequent improvement in the fair value of a
stratum; however, First Banks does not recognize fair value of the mortgage
servicing rights in excess of the carrying value of mortgage servicing rights
for any stratum. Changes in the valuation allowance are reflected in the
consolidated statements of income in the periods in which the change occurs.
SBA servicing rights are capitalized by allocating the total cost of the SBA
loans to servicing rights and the loans (without servicing rights) based on the
relative fair values of the two components. The fair value of servicing rights
is computed using the present value of the estimated future servicing income in
excess of such income estimated at a normal servicing fee rate. The servicing
rights, net of the valuation allowance, are amortized in proportion to, and over
the period of, the estimated net servicing revenue of the underlying SBA loans,
which range from six to 25 years. The weighted average amortization period of
the SBA servicing rights is approximately 16 years. The determination of the
fair value of the SBA servicing rights is performed monthly based upon quarterly
independent third party valuation analyses. Based on these analyses, a
comparison of the fair value of the SBA servicing rights with the carrying value
of the SBA servicing rights is made, with impairment, if any, recognized at that
time. The predominant risk characteristics of the underlying SBA loans used to
stratify SBA servicing rights for purposes of measuring impairment include size,
interest rate, weighted average original term, weighted average remaining term
and estimated prepayment speeds. To the extent the carrying value of the SBA
servicing rights exceeds the fair value of the SBA servicing rights, First Banks
recognizes impairment equal to the amount by which the carrying value of the SBA
servicing rights exceeds the fair value. Impairment is recognized through a
valuation allowance that is recorded as a reduction of SBA servicing rights.
Changes in the valuation allowance are reflected in the consolidated statements
of income in the periods in which the change occurs. First Banks does not
recognize fair value of the SBA servicing rights in excess of the carrying value
of SBA servicing rights for any stratum.
On January 1, 2008, First Banks opted to measure servicing rights at fair value
as permitted by SFAS No. 156 - Accounting for Servicing of Financial Assets. The
election of this option resulted in the recognition of a cumulative effect of
change in accounting principle of $5.8 million, which was recorded as an
increase to beginning retained earnings. As such, effective January 1, 2008,
changes in the fair value of mortgage and SBA servicing rights will be
recognized in earnings in the period in which the change occurs.
Other Real Estate. Other real estate, consisting of real estate acquired through
foreclosure or deed in lieu of foreclosure, is stated at the lower of cost or
fair value less applicable selling costs. The excess of cost over fair value of
the property at the date of acquisition is charged to the allowance for loan
losses. Subsequent reductions in carrying value, to reflect current fair value
or costs incurred in maintaining the properties, are charged to noninterest
expense as incurred. Other real estate was $11.2 million and $6.4 million at
December 31, 2007 and 2006, respectively.
Income Taxes. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in the
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. First Banks, Inc. and its eligible
subsidiaries file a consolidated federal income tax return and unitary or
consolidated state income tax returns in all applicable states.
First Banks implemented Financial Accounting Standards Board (FASB)
Interpretation No. 48 -- Accounting for Uncertainty in Income Taxes, an
Interpretation of SFAS No. 109 -- Accounting for Income Taxes, on January 1,
2007 (FIN 48). The implementation of FIN 48 resulted in the recognition of a
cumulative effect of change in accounting principle of $2.5 million, which was
recorded as an increase to beginning retained earnings, as further described in
Note 13 to the Consolidated Financial Statements.
In accordance with FIN 48, First Banks' policy is 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. There were no penalties related to tax matters accrued at
January 1, 2007, nor did the Company recognize any penalties during the year
ended December 31, 2007.
First Banks and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states. Management of First Banks believes the accrual
for tax liabilities is adequate for all open audit years based on its assessment
of many factors, including past experience and interpretations of tax law
applied to the facts of each matter. This assessment relies on estimates and
assumptions. First Banks is no longer subject to U.S. federal, state or local
income tax examination by tax authorities for the years prior to 2003, 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 2002. At December 31, 2007, there were no state income tax
examinations in process. First Banks was notified in December 2007 of a
scheduled federal tax examination for the 2004 tax year. However, it was
subsequently closed during 2008 with a no change letter issued.
Financial Instruments With Off-Balance Sheet Risk. A financial instrument is
defined as cash, evidence of an ownership interest in an entity, or a contract
that conveys or imposes on an entity the contractual right or obligation to
either receive or deliver cash or another financial instrument. First Banks
utilizes financial instruments to reduce the interest rate risk arising from its
financial assets and liabilities. These instruments involve, in varying degrees,
elements of interest rate risk and credit risk in excess of the amount
recognized in the consolidated balance sheets. "Interest rate risk" is defined
as the possibility that interest rates may move unfavorably from the perspective
of First Banks due to maturity and/or interest rate adjustment timing
differences between interest-earning assets and interest-bearing liabilities.
The risk that a counterparty to an agreement entered into by First Banks may
default is defined as "credit risk."
First Banks is a party to commitments to extend credit and commercial and
standby letters of credit in the normal course of business to meet the financing
needs of its customers. These commitments involve, in varying degrees, elements
of interest rate risk and credit risk in excess of the amount reflected in the
consolidated balance sheets.
Earnings Per Common Share. Basic earnings per common share (EPS) are computed by
dividing the income available to common stockholders (the numerator) by the
weighted average number of shares of common stock outstanding (the denominator)
during the year. The computation of dilutive EPS is similar except the
denominator is increased to include the number of additional shares of common
stock that would have been outstanding if the dilutive potential shares had been
issued. In addition, in computing the dilutive effect of convertible securities,
the numerator is adjusted to add back any convertible preferred dividends.
(2) ACQUISITIONS, INTEGRATION COSTS AND OTHER CORPORATE TRANSACTIONS
Completed Acquisitions. During the three years ended December 31, 2007, First
Banks completed the following acquisitions:
Goodwill
Total Purchase and Other
Entity Date Assets Price Intangibles
------ ---- ------ ----- -----------
(dollars expressed in thousands)
2007
----
Coast Financial Holdings, Inc.
Bradenton, Florida November 30, 2007 $ 660,400 12,100 10,600
Royal Oaks Bancshares, Inc.
Houston, Texas February 28, 2007 206,900 38,600 27,700
---------- -------- --------
$ 867,300 50,700 38,300
========== ======== ========
2006
----
MidAmerica National Bank
Peoria and Bloomington, Illinois
Branch Offices (1) November 10, 2006 $ 158,300 -- 2,400
First Bank of Beverly Hills
Beverly Hills, California
Branch Office (1) November 3, 2006 157,500 -- 8,700
TeamCo, Inc.
Oak Lawn, Illinois August 31, 2006 67,900 13,900 9,600
San Diego Community Bank
Chula Vista, California August 15, 2006 91,700 25,500 11,200
Universal Premium Acceptance
Corporation (2)
Lenexa, Kansas May 31, 2006 152,800 52,700 44,700
First Independent National Bank
Plano, Texas May 1, 2006 68,200 19,200 11,800
Pittsfield Community Bancorp, Inc.
Pittsfield, Illinois April 28, 2006 17,600 5,100 1,300
Adrian N. Baker & Company
Clayton, Missouri March 31, 2006 3,000 7,400 9,500
Dallas National Bank
Richardson, Texas
Branch Office (1) January 20, 2006 1,100 -- --
First National Bank of Sachse
Sachse, Texas January 3, 2006 76,200 20,800 12,400
---------- -------- --------
$ 794,300 144,600 111,600
========== ======== ========
2005
----
Northway State Bank
Grayslake, Illinois October 31, 2005 $ 50,400 10,300 5,400
International Bank of California
Los Angeles, California September 30, 2005 151,600 33,700 15,800
Bank and Trust Company
Roodhouse, Illinois
Branch Office (1) September 23, 2005 5,000 -- 100
FBA Bancorp, Inc.
Chicago, Illinois April 29, 2005 73,300 10,500 4,500
---------- -------- --------
$ 280,300 54,500 25,800
========== ======== ========
----------------
(1) First Bank acquired the branch offices through a purchase of certain assets and assumption of certain
liabilities of the branch offices. Total assets consisted of cash received upon assumption of the deposit
liabilities and loans.
(2) In conjunction with the acquisition of UPAC, First Bank repaid in full the outstanding senior and
subordinated notes of UPAC, including accumulated accrued and unpaid interest, totaling $125.9 million.
Goodwill and other intangible assets associated with the acquisitions included
in the table above are not deductible for tax purposes. For 2007, 2006 and 2005
acquisitions, goodwill and other intangible assets in the amounts of $38.3
million, $111.6 million and $25.8 million, respectively, were assigned to First
Bank.
The consolidated financial statements include the financial position and results
of operations of the aforementioned transactions for the periods subsequent to
the respective acquisition dates, and the assets acquired and liabilities
assumed were recorded at their estimated fair value on the acquisition dates.
These fair value adjustments for the acquisitions completed in 2007 represent
current estimates and are subject to further adjustments as the valuation data
is finalized. The aforementioned acquisitions were funded from available cash
reserves, borrowings under First Banks' term loan and revolving credit
agreements, and/or proceeds from the issuance of subordinated debentures.
On April 29, 2005, First Banks completed its acquisition of FBA Bancorp, Inc.
(FBA) and its wholly owned subsidiary, First Bank of the Americas, S.S.B.
(FBOTA), for $10.5 million in cash. The acquisition served to expand First
Banks' banking franchise in Chicago, Illinois. The transaction was funded
through internally generated funds. FBA was headquartered in Chicago, Illinois,
and through FBOTA, operated three banking offices in the southwestern Chicago
metropolitan communities of Back of the Yards, Little Village and Cicero. At the
time of the acquisition, FBA had assets of $73.3 million, loans, net of unearned
discount, of $54.3 million and deposits of $55.7 million. Goodwill was $2.8
million, and the core deposit intangibles, which are being amortized over seven
years utilizing the straight-line method, were $1.7 million. FBA was merged with
and into SFC, and FBOTA was merged with and into First Bank at the time of the
acquisition.
On September 23, 2005, First Bank completed its acquisition of certain assets
and assumption of the deposit liabilities of the Roodhouse, Illinois branch
office of Bank and Trust Company, an Illinois commercial bank (Roodhouse
Branch). At the time of the transaction, the Roodhouse Branch had deposit
liabilities of $5.1 million. Total assets consisted primarily of cash received
upon assumption of the deposit liabilities. The core deposit intangibles, which
are being amortized over seven years utilizing the straight-line method, were
$100,000.
On September 30, 2005, First Banks completed its acquisition of International
Bank of California (IBOC) for $33.7 million in cash. The acquisition served to
further expand First Banks' banking franchise in Southern California, providing
five additional banking offices in Los Angeles, California, including one branch
in downtown Los Angeles and four branches in eastern Los Angeles County, in
Alhambra, Arcadia, Artesia and Rowland Heights. The transaction was funded with
a portion of the proceeds of term loans under First Banks' revolving credit
facility. At the time of the acquisition, IBOC had assets of $151.6 million,
loans, net of unearned discount, of $113.5 million and deposits of $132.1
million. Goodwill was $12.0 million, and the core deposit intangibles, which are
being amortized over seven years utilizing the straight-line method, were $3.8
million. IBOC was merged with and into First Bank at the time of the
acquisition.
On October 31, 2005, First Banks completed its acquisition of Northway State
Bank (NSB) for $10.3 million in cash. The acquisition served to expand First
Banks' banking franchise in Chicago, Illinois. The transaction was funded
through internally generated funds. NSB was headquartered in Grayslake,
Illinois, and operated one banking office in Lake County in the northern Chicago
metropolitan area. At the time of the acquisition, NSB had assets of $50.4
million, loans, net of unearned discount, of $41.8 million and deposits of $45.2
million. Preliminary goodwill of $3.8 million was subsequently adjusted to $4.5
million during the third quarter of 2006, and the core deposit intangibles,
which are being amortized over seven years utilizing the straight-line method,
were $909,000. NSB was merged with and into First Bank at the time of the
acquisition.
On January 3, 2006, First Banks acquired the majority of the outstanding common
stock of First National Bank of Sachse (FNBS), and subsequently acquired the
remaining outstanding common stock of FNBS in January 2006, for $20.8 million in
cash, in aggregate. FNBS was headquartered and operated one banking office in
Sachse, Texas, located in the northeast Dallas metropolitan area. The
acquisition served to expand First Banks' banking franchise in Texas. The
transaction was funded through internally generated funds. At the time of the
acquisition, FNBS had assets of $76.2 million, loans, net of unearned discount,
of $49.3 million, deposits of $66.2 million and stockholders' equity of $9.9
million. Goodwill was $8.8 million, and the core deposit intangibles, which are
being amortized over five years utilizing the straight-line method, were $3.6
million. FNBS was merged with and into First Bank on January 24, 2006.
On January 20, 2006, First Bank completed its acquisition of the branch office
of Dallas National Bank in Richardson, Texas (Richardson Branch). At the time of
the acquisition, the Richardson Branch had assets of $1.1 million, including
loans, net of unearned discount, of $144,000, and deposits of $1.1 million.
Total assets consisted primarily of loans, fixed assets and cash received upon
assumption of deposit liabilities and certain assets.
On March 31, 2006, First Bank completed its acquisition of Adrian Baker for $7.4
million in cash and certain payments contingent on the future earnings of Adrian
Baker for each of the years in the three-year period following the closing date
of the transaction. Adrian Baker is an insurance brokerage agency based in
Clayton, Missouri that provides a comprehensive range of employee benefit and
commercial and personal insurance services on a nationwide basis. The
acquisition served to diversify First Banks' products and services in this
specialized industry. The transaction was funded through internally generated
funds. At the time of the acquisition, Adrian Baker had assets of $3.0 million
and stockholders' equity of $810,000. Goodwill was $5.8 million, and the
customer list intangibles, which are being amortized over 15 years utilizing the
straight-line method, were $3.7 million. Adrian Baker operates as a wholly owned
subsidiary of First Bank.
On April 28, 2006, First Banks completed its acquisition of Pittsfield Community
Bancorp, Inc. and its wholly owned banking subsidiary, Community Bank of
Pittsfield (collectively, Community Bank) for $5.1 million in cash. Community
Bank was headquartered in Pittsfield, Illinois and operated two banking offices,
one in Pittsfield, Illinois, and one in Mount Sterling, Illinois. On June 16,
2006, First Bank completed its sale of the Mount Sterling office to Beardstown
Savings, s.b. The acquisition served to expand First Banks' banking franchise in
Pittsfield, Illinois. The transaction was funded through internally generated
funds. At the time of the acquisition, after giving effect to the sale of the
Mount Sterling office, Community Bank had assets of $17.6 million, loans, net of
unearned discount, of $11.1 million, deposits of $12.3 million and stockholder's
equity of $3.9 million. Goodwill was $807,000, and the core deposit intangibles,
which are being amortized over five years utilizing the straight-line method,
were $517,000. Community Bank was merged with and into First Bank at the time of
the acquisition.
On May 1, 2006, First Banks acquired the majority of the outstanding common
stock of First Independent National Bank (FINB), and subsequently acquired the
remaining outstanding common stock in May 2006, for $19.2 million in cash, in
aggregate. FINB was headquartered in Plano, Texas and operated two banking
offices in Plano, Texas, located in Collin County. In addition, at the time of
the acquisition, FINB was in the process of opening a de novo branch banking
office located in the Preston Forest Shopping Center in Dallas County, which
subsequently opened on June 26, 2006. The acquisition served to expand First
Banks' banking franchise in Texas. The transaction was funded through internally
generated funds and the issuance of subordinated debentures associated with a
private placement of $40.0 million of trust preferred securities through a newly
formed affiliated statutory trust, as further described in Note 12 to the
Consolidated Financial Statements. At the time of the acquisition, FINB had
assets of $68.2 million, loans, net of unearned discount, of $59.6 million,
deposits of $55.5 million and stockholders' equity of $7.3 million. Goodwill was
$9.3 million, and the core deposit intangibles, which are being amortized over
five years utilizing the straight-line method, were $2.5 million. FINB was
merged with and into First Bank on May 16, 2006.
On May 31, 2006, First Bank completed its acquisition of KIF, Inc., an Iowa
corporation, and its wholly owned subsidiaries, Universal Premium Acceptance
Corporation, a Missouri corporation, and UPAC of California, Inc., a California
corporation (collectively, UPAC), for $52.7 million in cash. In conjunction with
the acquisition of UPAC, First Banks repaid in full the outstanding senior and
subordinated notes of UPAC, which totaled $125.9 million at the time of the
acquisition. UPAC is an insurance premium financing company headquartered in the
Kansas City suburb of Lenexa, Kansas and operates in 49 states. The acquisition
served to diversify First Banks' products and services in this
highly-specialized industry. The transaction was funded through internally
generated funds and a $52.0 million short-term Federal Home Loan Bank (FHLB)
advance. At the time of the acquisition, UPAC had assets of $152.8 million,
loans, net of unearned discount, of $149.2 million and stockholders' equity of
$18.3 million. Goodwill was $25.4 million, and the customer list intangibles,
which are being amortized over 16 years utilizing the straight-line method, were
$19.3 million. KIF, Inc. was merged with and into Universal Premium Acceptance
Corporation on June 30, 2006. UPAC of California, Inc. operates as a wholly
owned subsidiary of Universal Premium Acceptance Corporation, which operates as
a wholly owned subsidiary of First Bank.
On August 15, 2006, First Banks completed its acquisition of San Diego Community
Bank (SDCB) for $25.5 million in cash. SDCB was headquartered in Chula Vista,
California, which is located approximately ten miles south of downtown San
Diego, and operated two other banking offices in Kearney Mesa and Otay Mesa. The
acquisition served to expand First Banks' banking franchise in southern
California. The transaction was funded through internally generated funds and
the issuance of subordinated debentures associated with the private placement of
$20.0 million of trust preferred securities through a newly formed affiliated
statutory trust, as further described in Note 12 to the Consolidated Financial
Statements. At the time of the acquisition, SDCB had assets of $91.7 million,
loans, net of unearned discount, of $78.6 million, deposits of $76.1 million and
stockholders' equity of $12.3 million. Preliminary goodwill of $7.5 million was
subsequently adjusted to $6.9 million, and the core deposit intangibles, which
are being amortized over five years utilizing the straight-line method, were
$4.3 million. SDCB was merged with and into First Bank at the time of the
acquisition.
On August 31, 2006, First Banks completed its acquisition of TeamCo, Inc. and
its wholly owned banking subsidiary, Oak Lawn Bank (collectively, Oak Lawn) for
$13.9 million in cash. Oak Lawn was headquartered in Oak Lawn, Illinois, which
is located approximately 15 miles southwest of the Chicago Loop in Chicago
Southland, and operated a second banking office in Orland Park, Illinois, which
is located approximately 39 miles southwest of downtown Chicago. The acquisition
served to expand First Banks' banking franchise in Chicago, Illinois. The
transaction was funded through internally generated funds and the issuance of
subordinated debentures associated with the private placement of $25.0 million
of trust preferred securities through a newly formed affiliated statutory trust,
as further described in Note 12 to the Consolidated Financial Statements. At the
time of the acquisition, Oak Lawn had assets of $67.9 million, loans, net of
unearned discount, of $43.1 million, deposits of $60.1 million and stockholders'
equity of $5.5 million. Goodwill was $7.3 million, and the core deposit
intangibles, which are being amortized over five years utilizing the
straight-line method, were $2.3 million. Oak Lawn was merged with and into First
Bank at the time of the acquisition.
On November 3, 2006, First Bank completed its acquisition of the First Bank of
Beverly Hills' banking office located in Beverly Hills, California (Beverly
Drive Office). At the time of the acquisition, the Beverly Drive Office had
assets of $157.5 million and deposits of $156.1 million. Total assets consisted
primarily of cash received upon assumption of deposit liabilities and certain
assets. The core deposit intangibles, which are being amortized over five years
utilizing the straight-line method, were $8.7 million.
On November 10, 2006, First Bank completed its acquisition of MidAmerica
National Bank's three banking offices located in Peoria and Bloomington,
Illinois (collectively, MidAmerica Offices). At the time of the acquisition, the
MidAmerica Offices had, on a combined basis, assets of $158.3 million including
loans, net of unearned discount, of $154.1 million, and deposits of $48.2
million. The core deposit intangibles, which are being amortized over five years
utilizing the straight-line method, were $2.4 million.
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 12 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. Goodwill was $23.0 million and the core
deposit intangibles, which are being amortized over five years utilizing the
straight-line method, were $4.7 million. 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.
On November 30, 2007, First Banks completed its acquisition of CFHI and its
wholly owned banking subsidiary, Coast Bank (collectively, Coast) for $12.1
million in cash. Coast was headquartered in Bradenton, Florida and operated 20
banking offices in Florida's Manatee, Pinellas, Hillsborough and Pasco counties.
In addition, at the time of the acquisition, Coast had two planned de novo
branch banking offices, one located in the Pinellas County community of
Clearwater, and the other located in Sarasota County. The acquisition served to
establish First Banks' banking franchise in the state of Florida. The
transaction was funded through internally generated funds and the issuance of
subordinated debentures associated with the private placement of $15.0 million
of trust preferred securities through a newly formed affiliated statutory trust,
as further described in Note 12 to the Consolidated Financial Statements. At the
time of the acquisition, Coast had assets of $660.4 million, loans, net of
unearned discount, of $518.0 million, deposits of $628.1 million and
stockholders' equity of $14.2 million. Preliminary goodwill was $10.1 million,
the core deposit intangibles, which are being amortized over five years
utilizing the straight-line method, were $327,000 and other intangibles
associated with non-compete agreements, which are being amortized over two years
utilizing the straight-line method, were $176,000. CFHI operates as a wholly
owned subsidiary of First Banks and owns 100% of the newly issued non-voting
Class B common stock of First Bank. Coast Bank was merged with and into First
Bank at the time of the acquisition, and accordingly, CFHI became the owner of
3.11% of First Bank, as further described in Note 1 to the Consolidated
Financial Statements.
Acquisition and Integration Costs. First Banks accrues certain costs associated
with its acquisitions as of the respective consummation dates. The accrued costs
relate to adjustments to the staffing levels of the acquired entities or to the
anticipated termination of information technology or item processing contracts
of the acquired entities prior to their stated contractual expiration dates. The
most significant costs that First Banks incurs relate to salary continuation
agreements, or other similar agreements, of executive management and certain
other employees of the acquired entities that were in place prior to the
acquisition dates. These agreements provide for payments that 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 $1.1 million as of December 31, 2007, as summarized in the following
table, is comprised of contractual obligations under salary continuation
agreements to seven individuals with remaining terms ranging from approximately
one month to nine years. As the obligation to make payments under these
agreements is accrued at the consummation date, such payments do not have any
impact on the consolidated statements of income. First Banks also incurs
integration costs associated with acquisitions that are expensed in the
consolidated statements of income. These costs relate principally to additional
costs incurred in conjunction with the information technology conversions of the
respective entities. The following table summarizes the cumulative acquisition
and integration costs attributable to the Company's acquisitions, which were
accrued as of the consummation dates of the respective acquisition and are
reflected in accrued expenses and other liabilities in the consolidated balance
sheets:
Information
Severance Technology Fees Total
--------- --------------- -----
dollars expressed in thousands)
Balance at December 31, 2004......................... $ 761 -- 761
Year Ended December 31, 2005:
Amounts accrued during the year.................... 785 1,265 2,050
Payments........................................... (1,004) (1,131) (2,135)
------- ------- -------
Balance at December 31, 2005......................... 542 134 676
------- ------- -------
Year Ended December 31, 2006:
Amounts accrued during the year.................... 1,702 1,949 3,651
Payments........................................... (1,858) (2,083) (3,941)
------- ------- -------
Balance at December 31, 2006......................... 386 -- 386
------- ------- -------
Year Ended December 31, 2007:
Amounts accrued during the year.................... 1,492 2,061 3,553
Payments........................................... (807) (2,061) (2,868)
------- ------- -------
Balance at December 31, 2007......................... $ 1,071 -- 1,071
======= ======= =======
Other Corporate Transactions. On July 19, 2007, First Bank completed the sale of
two banking offices located in Denton and Garland, Texas (collectively, Texas
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
Texas Branch Offices had loans, net of unearned discount, of $911,000 and
deposits of $52.0 million.
During the three years ended December 31, 2007, First Bank opened the following
de novo branch offices:
Branch Office Location Date Opened
---------------------- -----------
Farmington, Missouri January 18, 2005
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
Shadow Creek Ranch (Houston), Texas October 15, 2007
Valencia (Los Angeles), California October 29, 2007
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities Available for Sale. The amortized cost, contractual maturity, gross
unrealized gains and losses and fair value of investment securities available
for sale at December 31, 2007 and 2006 were as follows:
Maturity
------------------------------------- Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized ------------------ Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2007:
Carrying value:
U.S. Treasury.................. $ 75,116 -- -- -- 75,116 19 -- 75,135 2.49%
U.S. Government sponsored
agencies..................... 25,212 19,334 -- 968 45,514 600 -- 46,114 5.30
Mortgage-backed securities..... 3,401 12,706 46,211 736,611 798,929 1,785 (16,755) 783,959 4.81
State and political
subdivisions................. 7,337 11,191 10,242 1,357 30,127 315 (8) 30,434 4.06
Equity investments............. -- -- -- 29,747 29,747 5 (5,597) 24,155 4.05
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)......... 40,595 -- -- -- 40,595 -- -- 40,595 5.49
--------- ------- ------- -------- --------- ------ -------- ---------
Total..................... $ 151,661 43,231 56,453 768,683 1,020,028 2,724 (22,360) 1,000,392 4.64
========= ======= ======= ======== ========= ====== ======== ========= ====
Fair value:
Debt securities................ $ 111,211 43,811 56,436 724,184
Equity securities.............. 40,595 -- -- 24,155
--------- ------- ------- --------
Total..................... $ 151,806 43,811 56,436 748,339
========= ======= ======= ========
Weighted average yield........... 3.85% 4.87% 4.47% 4.80%
========= ======= ======= ========
December 31, 2006:
Carrying value:
U.S. Government sponsored
agencies..................... $ 344,636 29,737 4,032 966 379,371 81 (742) 378,710 4.99%
Mortgage-backed securities..... 438 11,477 50,670 839,172 901,757 610 (19,514) 882,853 4.76
State and political
subdivisions................ 4,102 16,294 11,493 2,122 34,011 260 (56) 34,215 3.90
Equity investments ............ -- -- -- 26,608 26,608 1,527 (234) 27,901 4.06
Federal Home Loan Bank and
Federal Reserve Bank stock
(no stated maturity)......... 36,050 -- -- -- 36,050 -- -- 36,050 5.49
--------- ------- ------- -------- --------- ------ -------- ---------
Total..................... $ 385,226 57,508 66,195 868,868 1,377,797 2,478 (20,546) 1,359,729 4.81
========= ======= ======= ======== ========= ====== ======== ========= ====
Fair value:
Debt securities................ $ 348,448 57,480 65,580 824,270
Equity securities.............. 36,050 -- -- 27,901
--------- ------- ------- --------
Total..................... $ 384,498 57,480 65,580 852,171
========= ======= ======= ========
Weighted average yield........... 5.01% 4.69% 4.57% 4.75%
========= ======= ======= ========
Securities Held to Maturity. The amortized cost, contractual maturity, gross
unrealized gains and losses and fair value of investment securities held to
maturity at December 31, 2007 and 2006 were as follows:
Maturity
------------------------------------ Total Gross
After Amor- Unrealized Weighted
1 Year 1-5 5-10 10 tized ------------------ Fair Average
or Less Years Years Years Cost Gains Losses Value Yield
------- ----- ----- ----- ---- ----- ------ ----- -----
(dollars expressed in thousands)
December 31, 2007
Carrying value:
Mortgage-backed securities.. $ -- -- 6,775 6,052 12,827 174 (52) 12,949 5.15%
State and political
subdivisions............. 1,081 3,889 821 261 6,052 82 (5) 6,129 4.29
-------- ------ ------ ------ ------- ---- ---- -------
Total.................. $ 1,081 3,889 7,596 6,313 18,879 256 (57) 19,078 4.87
======== ====== ====== ====== ======= ==== ==== ======= ====
Fair value:
Debt securities............. $ 1,083 3,910 7,801 6,284
======== ====== ====== ======
Weighted average yield........ 3.71% 4.32% 5.13% 5.10%
======== ====== ====== ======
December 31, 2006:
Carrying value:
Mortgage-backed securities.. $ -- -- 6,875 7,213 14,088 7 (132) 13,963 5.13%
State and political
subdivisions............. 1,482 6,861 1,355 263 9,961 97 (50) 10,008 4.18
-------- ------ ------ ------ ------- ---- ---- -------
Total.................. $ 1,482 6,861 8,230 7,476 24,049 104 (182) 23,971 4.74
======== ====== ====== ====== ======= ==== ==== ======= ====
Fair value:
Debt securities............. $ 1,479 6,848 8,278 7,366
======== ====== ====== ======
Weighted average yield........ 3.84% 4.21% 5.02% 5.07%
======== ====== ====== ======
Proceeds from sales of available-for-sale investment securities were $170.7
million, $198.0 million and $147.1 million for the years ended December 31,
2007, 2006 and 2005, respectively. Gross gains of $115,000 and $389,300 were
realized on sales of available-for-sale investment securities for the years
ended December 31, 2007 and 2006, respectively. There were no gross gains
recognized on the sale of these securities for the year ended December 31, 2005.
Gross gains of $147,000 and $121,000 were realized on the contribution of
certain available-for-sale investment securities for the years ended December
31, 2007 and 2006, respectively, as further described in Note 19 to the
Consolidated Financial Statements. Gross losses of $459,000, $2.7 million and
$2.9 million were realized on sales of available-for-sale investment securities
for the years ended December 31, 2007, 2006 and 2005, respectively. The gross
losses for the year ended December 31, 2006 included a loss of $2.7 million that
resulted from the sale of $197.0 million of available-for-sale investment
securities for liquidity purposes, including the related termination of $200.0
million in aggregate of term repurchase agreements, as further described in Note
5 and Note 10 to the Consolidated Financial Statements. The gross loss of $2.9
million for the year ended December 31, 2005 resulted from the sale of $150.0
million of available-for-sale investment securities for liquidity purposes,
including the related termination of a $50.0 million term repurchase agreement,
as further described in Note 5 to the Consolidated Financial Statements.
Proceeds from calls of investment securities were $7.3 million, $27.5 million
and $16.6 million for the years ended December 31, 2007, 2006 and 2005,
respectively. Gross gains realized on called securities were $11,700 for the
year ended December 31, 2007. There were no gross gains realized on called
securities in 2006 and 2005. Gross losses of $500, $2,100 and $3,800 were
realized on called securities during the years ended December 31, 2007, 2006 and
2005, respectively. Net losses on trading securities were $1.5 million for the
year ended December 31, 2007 and net gains on trading securities were $97,000
for the year ended December 31, 2006. The trading portfolio was liquidated in
July 2007.
First Bank is a member of the FHLB system and the Federal Reserve Bank (FRB)
system and maintains investments in FHLB and FRB stock. These investments are
recorded at cost, which represents redemption value. The investment in FRB stock
is maintained at a minimum of 6% of First Bank's capital stock and capital
surplus. The investment in FHLB of Des Moines stock is maintained at an amount
equal to 0.12% of First Bank's total assets as of December 31, 2004, up to a
maximum of $10.0 million, plus 4.45% of advances and 0.15% of outstanding
standby letters of credit. First Bank also holds an investment in stock of the
FHLB of Dallas and the FHLB of San Francisco, as a nonmember. The investment in
FHLB of Dallas stock is maintained at a minimum of 4.10% of advances to
collateralize certain FHLB advances assumed in conjunction with certain
acquisition transactions.
Investment securities with a carrying value of approximately $561.2 million and
$586.4 million at December 31, 2007 and 2006, respectively, were pledged in
connection with deposits of public and trust funds, securities sold under
agreements to repurchase and for other purposes as required by law.
Gross unrealized losses on investment securities and the fair value of the
related securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2007 and 2006, were as follows:
December 31, 2007
---------------------------------------------------------------------------
Less than 12 months 12 months or more Total
----------------------- ----------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ---------- --------- ---------- --------- ----------
(dollars expressed in thousands)
Available for sale:
Mortgage-backed securities....... $ 59,902 (178) 511,820 (16,577) 571,722 (16,755)
State and political subdivisions. 999 (1) 2,519 (7) 3,518 (8)
Equity investments............... 8,581 (4,166) 3,391 (1,431) 11,972 (5,597)
--------- ------- -------- -------- --------- --------
Total....................... $ 69,482 (4,345) 517,730 (18,015) 587,212 (22,360)
========= ======= ======== ======== ========= ========
Held to maturity:
Mortgage-backed securities....... $ -- -- 4,703 (52) 4,703 (52)
State and political subdivisions. -- -- 975 (5) 975 (5)
--------- ------- -------- -------- --------- --------
Total....................... $ -- -- 5,678 (57) 5,678 (57)
========= ======= ======== ======== ========= ========
December 31, 2006
---------------------------------------------------------------------------
Less than 12 months 12 months or more Total
----------------------- ----------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ---------- --------- ---------- --------- ----------
(dollars expressed in thousands)
Available for sale:
U.S. Government sponsored
agencies....................... $ 202,459 (304) 64,799 (438) 267,258 (742)
Mortgage-backed securities....... 197,214 (3,912) 597,394 (15,602) 794,608 (19,514)
State and political subdivisions. 3,088 (7) 5,656 (49) 8,744 (56)
Equity investments............... 5,602 (234) -- -- 5,602 (234)
--------- ------- -------- -------- --------- --------
Total....................... $ 408,363 (4,457) 667,849 (16,089) 1,076,212 (20,546)
========= ======= ======== ======== ========= ========
Held to maturity:
Mortgage-backed securities....... $ -- -- 13,682 (132) 13,682 (132)
State and political subdivisions. 199 (1) 4,630 (49) 4,829 (50)
--------- ------- -------- -------- --------- --------
Total....................... $ 199 (1) 18,312 (181) 18,511 (182)
========= ======= ======== ======== ========= ========
U.S. Government sponsored agencies and mortgage-backed securities - The
unrealized losses on investments in mortgage-backed securities and other agency
securities were caused by fluctuations in interest rates. The contractual terms
of these securities are guaranteed by government-sponsored enterprises. It is
expected that the securities would not be settled at a price less than the
amortized cost. Because First Banks has the ability and intent to hold these
investments until a market price recovery or maturity, these investments are not
considered other-than-temporarily impaired. At December 31, 2007, the unrealized
losses for mortgage-backed securities for 12 months or more included 111
securities. At December 31, 2006, the unrealized losses for U.S. government
sponsored agencies for 12 months or more included 19 securities, and the
unrealized losses for mortgage-backed securities for 12 months or more included
138 securities.
State and political subdivisions - The unrealized losses on investments in state
and political subdivisions were caused by fluctuations in interest rates. It is
expected that the securities would not be settled at a price less than the
amortized cost. Because the decline in fair value is attributable to changes in
interest rates and not credit quality, and because First Banks has the ability
and intent to hold these investments until a market price recovery or maturity,
these investments are not considered other-than-temporarily impaired. At
December 31, 2007 and 2006, the unrealized losses for state and political
subdivisions for 12 months or more included 17 and 53 securities, respectively.
Equity investments - The unrealized losses on investments in equity investments
primarily consist of unrealized losses on investments in the common stock of two
companies in the financial services industry caused by economic events affecting
the financial services industry as a whole. First Banks evaluated the near-term
prospects of the individual companies in relation to the severity and duration
of the impairment. Based on that evaluation and First Banks' ability and intent
to hold these investments for a reasonable period of time sufficient for a
forecasted recovery of fair value, these investments are not considered
other-than-temporarily impaired. At December 31, 2007, the unrealized losses for
equity investments for 12 months or more included a single company in the
financial services industry.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 2007,
2006 and 2005 were as follows:
2007 2006 2005
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year........................................ $ 145,729 135,330 150,707
Acquired allowances for loan losses............................... 14,425 5,208 1,989
--------- -------- --------
160,154 140,538 152,696
--------- -------- --------
Loans charged-off................................................. (75,438) (22,203) (33,123)
Recoveries of loans previously charged-off........................ 8,675 15,394 19,757
--------- -------- --------
Net loans charged-off........................................ (66,763) (6,809) (13,366)
--------- -------- --------
Provision for loan losses......................................... 75,000 12,000 (4,000)
--------- -------- --------
Balance, end of year.............................................. $ 168,391 145,729 135,330
========= ======== ========
First Banks had $202.2 million and $48.7 million of impaired loans, consisting
of loans on nonaccrual status, at December 31, 2007 and 2006, respectively.
Interest on nonaccrual loans that would have been recorded under the original
terms of the loans was $16.2 million, $3.7 million and $9.9 million for the
years ended December 31, 2007, 2006 and 2005, respectively. Of these amounts,
$8.0 million, $1.3 million and $3.4 million was recorded as interest income on
such loans in 2007, 2006 and 2005, respectively. The allowance for loan losses
includes an allocation for each impaired loan, with the exception of acquired
impaired loans classified as nonaccrual loans, which are initially measured at
fair value with no allocated allowance for loan losses, in accordance with SOP
03-3, as further discussed below. The aggregate allocation of the allowance for
loan losses related to impaired loans was approximately $31.3 million and $9.7
million at December 31, 2007 and 2006, respectively. The average recorded
investment in impaired loans was $88.9 million, $73.6 million and $79.9 million
for the years ended December 31, 2007, 2006 and 2005, respectively. The amount
of interest income recognized using a cash basis method of accounting during the
time these loans were impaired was $2.5 million, $3.7 million and $3.6 million
in 2007, 2006 and 2005, respectively. At December 31, 2007 and 2006, First Banks
had $26.8 million and $5.7 million, respectively, of loans past due 90 days or
more and still accruing interest.
First Banks recorded impaired loans acquired in acquisitions during the year
ended December 31, 2007 of $45.7 million at the time of acquisition. The
outstanding balance and carrying amount of impaired loans acquired in
acquisitions was $84.9 million and $46.0 million, respectively, at December 31,
2007, and $838,000 and $820,000, respectively, at December 31, 2006. There was
no allowance for loan losses related to these loans at December 31, 2007 and
2006. As these loans were classified as nonaccrual loans, there was no
accretable yield related to these loans at December 31, 2007 and 2006.
First Banks' primary market areas are the states of California, Florida,
Illinois, Missouri and Texas. At December 31, 2007 and 2006, approximately 92%
and 90% of the total loan portfolio, respectively, and 83% and 77% of the
commercial, financial and agricultural loan portfolio, respectively, were made
to borrowers within these states.
Real estate lending constituted the only significant concentration of credit
risk. Real estate loans comprised approximately 72% and 74% of the loan
portfolio at December 31, 2007 and 2006, respectively, of which 26% were made to
consumers in the form of residential real estate mortgages and home equity lines
of credit. First Bank also offers residential real estate mortgage loans with
terms that require interest only payments. At December 31, 2007, the balance of
such loans was approximately $219.0 million, of which $212.0 million were held
for portfolio and $7.0 million were held for sale. At December 31, 2006, the
balance of such loans was $332.6 million, of which $276.5 million were held for
portfolio and $56.1 million were held for sale.
In general, First Banks is a secured lender. At December 31, 2007 and 2006, 98%
and 99% of the loan portfolio was collateralized, respectively. Collateral is
required in accordance with the normal credit evaluation process based upon the
creditworthiness of the customer and the credit risk associated with the
particular transaction.
First Bank originates certain one-to-four family residential mortgage loans for
sale in the secondary market. First Bank has a repurchase obligation on these
loans in the event of fraud or early payment default. The early payment default
provisions generally range from four months to one year after sale of the loan
in the secondary market.
Loans to directors, their affiliates and executive officers of First Banks, Inc.
were approximately $57.7 million and $55.9 million at December 31, 2007 and
2006, respectively, as further described in Note 19 to the Consolidated
Financial Statements.
(5) DERIVATIVE INSTRUMENTS
First Banks utilizes derivative financial instruments to assist in the
management of interest rate sensitivity by modifying the repricing, maturity and
option characteristics of certain assets and liabilities. Derivative financial
instruments held by First Banks at December 31, 2007 and 2006 are summarized as
follows:
December 31,
--------------------------------------------------
2007 2006
------------------------ ------------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges............................... $400,000 5,271 600,000 4,369
Interest rate floor agreements................. 300,000 1,699 300,000 376
Interest rate cap agreements................... 400,000 50 400,000 139
Interest rate lock commitments................. 3,000 23 5,900 --
Forward commitments to sell
mortgage-backed securities................. 55,000 40 54,000 86
======== ===== ======== =====
The notional amounts of derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a measure of First
Banks' credit exposure through its use of these instruments. The credit exposure
represents the loss First Banks would incur in the event the counterparties
failed completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value.
For the years ended December 31, 2007 and 2006, First Banks realized net
interest expense of $3.1 million and $5.0 million, respectively, on its
derivative financial instruments, whereas for the year ended December 31, 2005,
First Banks realized net interest income of $2.2 million on its derivative
financial instruments. First Banks recorded net gains on derivative instruments,
which are included in noninterest income in the consolidated statements of
income, of $1.2 million for the year ended December 31, 2007, in comparison to
net losses on derivative instruments of $390,000 and $1.1 million for the years
ended December 31, 2006 and 2005, respectively. The net gains and losses on
derivative instruments reflect changes in the value of First Banks' interest
rate floor and interest rate cap agreements.
Cash Flow Hedges. First Banks entered into the following interest rate swap
agreements, which have been designated as cash flow hedges, to effectively
lengthen the repricing characteristics of certain interest-earning assets to
correspond more closely with their funding source with the objective of
stabilizing cash flow, and accordingly, net interest income over time:
>> During March 2001, April 2001 and July 2003, First Banks entered into
interest rate swap agreements of $200.0 million, $175.0 million and
$200.0 million notional amount, respectively. The underlying hedged
assets were certain variable rate loans within First Banks' commercial
loan portfolio. The swap agreements provided for First Banks to
receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the weighted average prime lending rate minus
2.82%, 2.82% and 2.85%, respectively. The terms of the swap agreements
provided for First Banks to pay and receive interest on a quarterly
basis. In March 2005, the $200.0 million notional amount swap
agreement that was entered into in March 2001 matured. In November
2001, First Banks terminated $75.0 million notional amount of the swap
agreements originally entered into in April 2001 in order to
appropriately modify its overall hedge position in accordance with its
interest rate risk management program, and in April 2006, the
remaining $100.0 million notional amount of these swap agreements
matured. On July 31, 2007, the $200.0 million notional amount swap
agreement that was entered into in July 2003 matured.
>> In September 2006, First Banks entered into a $200.0 million notional
amount three-year interest rate swap agreement and a $200.0 million
notional amount four-year interest rate swap agreement. The underlying
hedged assets are certain variable rate loans within First Banks'
commercial loan portfolio. The swap agreements provide for First Banks
to receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the weighted average prime lending rate minus
2.86%. The terms of the swap agreements provide for First Banks to pay
and receive interest on a quarterly basis.
The amount receivable by First Banks under the swap agreements was $6.0 million
and $7.0 million at December 31, 2007 and 2006, respectively, and the amount
payable by First Banks under the swap agreements was $683,000 and $2.7 million
at December 31, 2007 and 2006, respectively.
The maturity dates, notional amounts, interest rates paid and received and fair
value of First Banks' interest rate swap agreements designated as cash flow
hedges as of December 31, 2007 and 2006 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
December 31, 2007:
September 18, 2009....................... $ 200,000 4.39% 5.20% $ 4,585
September 20, 2010....................... 200,000 4.39 5.20 7,331
--------- --------
$ 400,000 4.39 5.20 $ 11,916
========= ===== ===== ========
December 31, 2006:
July 31, 2007............................ $ 200,000 5.40% 3.08% $ (2,705)
September 18, 2009....................... 200,000 5.39 5.20 98
September 20, 2010....................... 200,000 5.39 5.20 449
--------- --------
$ 600,000 5.39 4.49 $ (2,158)
========= ===== ===== ========
Fair Value Hedges. First Banks entered into the following interest rate swap
agreements, which were designated as fair value hedges, to effectively shorten
the repricing characteristics of certain interest-bearing liabilities to
correspond more closely with their funding source with the objective of
stabilizing net interest income over time:
>> During January 2001, First Banks entered into $150.0 million notional
amount of five-year interest rate swap agreements that provided for
First Banks to receive a fixed rate of interest and pay an adjustable
rate of interest equivalent to the three-month London Interbank
Offered Rate (LIBOR). The underlying hedged liabilities were a portion
of First Banks' other time deposits. The terms of the swap agreements
provided for First Banks to pay interest on a quarterly basis and
receive interest on a semiannual basis. In February 2005, First Banks
terminated the swap agreements. The termination of the swap agreements
resulted from an increasing level of ineffectiveness associated with
the correlation of the hedge positions between the swap agreements and
the underlying hedged liabilities that had been anticipated as the
swap agreements neared their originally scheduled maturity dates in
January 2006. The resulting $3.1 million basis adjustment of the
underlying hedged liabilities was recorded as interest expense over
the remaining weighted average maturity of the underlying hedged
liabilities of approximately ten months. At December 31, 2005, the
basis adjustments associated with these swap agreements were fully
amortized.
>> During May 2002, March 2003 and April 2003, First Banks entered into
$55.2 million, $25.0 million and $46.0 million notional amount,
respectively, of interest rate swap agreements that provided for First
Banks to receive a fixed rate of interest and pay an adjustable rate
of interest equivalent to the three-month LIBOR plus 2.30%, 2.55% and
2.58%, respectively. The underlying hedged liabilities were a portion
of First Banks' subordinated debentures. The terms of the swap
agreements provided for First Banks to pay and receive interest on a
quarterly basis. In May 2005, First Banks terminated the $55.2 million
and $46.0 million notional amount swap agreements in order to
appropriately modify future hedge positions in accordance with First
Banks' interest rate risk management program. The resulting $854,000
basis adjustment of the underlying hedged liabilities, in aggregate,
was being recorded as a reduction of interest expense over the
remaining maturities of the underlying hedged liabilities, which
ranged from 26 to 28 years at the time of the termination. Effective
February 2006, First Banks terminated the remaining $25.0 million
notional swap agreement. In conjunction with this transaction, First
Banks recorded the resulting $1.7 million basis adjustment of the
underlying hedged liabilities and the remaining balance of the basis
adjustments associated with the swap agreements that were terminated
in May 2005, totaling $834,000, in the consolidated statements of
income. The recognition of the net basis adjustments on all of the
terminated fair value interest rate swap agreements resulted in a
pre-tax loss of $849,000 that was recorded in February 2006.
Interest Rate Floor Agreements. In September 2005, First Bank entered into a
$100.0 million notional amount three-year interest rate floor agreement in
conjunction with its interest rate risk management program. The interest rate
floor agreement provides for First Bank to receive a quarterly fixed rate of
interest of 5.00% should the three-month LIBOR equal or fall below the strike
price of 2.00%. In August 2006, First Bank entered into a $200.0 million
notional amount three-year interest rate floor agreement in conjunction with the
restructuring of one of First Bank's $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 First Bank to receive a quarterly adjustable rate of interest equivalent to
the differential between the strike price of 4.00% and the three-month LIBOR
should the three-month LIBOR equal or fall below the strike price. The fair
value of the interest rate floor agreements, which is included in other assets
in the consolidated balance sheets, was $1.7 million and $376,000 at December
31, 2007 and 2006, respectively.
Interest Rate Floor Agreements Embedded in Term Repurchase Agreements. First
Bank has term repurchase agreements under master repurchase agreements with
unaffiliated third parties, as further described in Note 10 to the Consolidated
Financial Statements. The underlying securities associated with the term
repurchase agreements are mortgage-backed securities and callable U.S.
Government agency securities and are held by other financial institutions under
safekeeping agreements. The term repurchase agreements were entered into with
the objective of stabilizing net interest income over time, further protecting
net interest margin against changes in interest rates and providing funding for
security purchases. The interest rate floor agreements included within the term
repurchase agreements represent embedded derivative instruments which, in
accordance with existing accounting literature governing derivative instruments,
are not required to be separated from the term repurchase agreements and
accounted for separately as a derivative financial instrument. As such, the term
repurchase agreements are reflected in other borrowings in the consolidated
balance sheets and the related interest expense is reflected as interest expense
on other borrowings in the consolidated statements of income.
In the fourth quarter of 2005, First Bank terminated its $50.0 million term
repurchase agreement with a maturity date of August 15, 2006, and simultaneously
recognized a loss of $2.9 million on the sale of available-for-sale investment
securities associated with the termination of the term repurchase agreement. In
the first and second quarters of 2006, First Bank 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 First Bank's 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, First Bank restructured the remaining $100.0
million term repurchase agreement to extend the maturity date to October 12,
2010 and to modify the pricing structure, including the interest rate floor
strike price. First Bank did not incur any costs associated with the
restructuring of the agreement.
In July 2006, First Bank 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, First Bank 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 10 to the Consolidated
Financial Statements.
Interest Rate Cap Agreements. In September 2006, First Bank entered into a
$200.0 million notional amount three-year interest rate cap agreement and a
$200.0 million notional amount four-year interest rate cap agreement in
conjunction with the interest rate swap agreements designated as cash flow
hedges that First Banks entered into in September 2006, as previously described,
to limit the net interest expense associated with First Banks' interest rate
swap agreements in the event of a rising rate scenario. The $200.0 million
notional amount three-year interest rate cap agreement provides for First Bank
to receive a quarterly adjustable rate of interest equivalent to the
differential between the three-month LIBOR and the strike price of 7.00% should
the three-month LIBOR exceed the strike price. The $200.0 million notional
amount four-year interest rate cap agreement provides for First Bank to receive
a quarterly adjustable rate of interest equivalent to the differential between
the three-month LIBOR and the strike price of 7.50% should the three-month LIBOR
exceed the strike price. The fair value of the interest rate cap agreements,
which is included in other assets in the consolidated balance sheets, was
$50,000 and $139,000 at December 31, 2007 and 2006, respectively.
Pledged Collateral. At December 31, 2007 and 2006, First Banks had accepted cash
of $21.4 million and $4.2 million, respectively, as collateral in connection
with its interest rate swap agreements.
Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed
Securities. Derivative financial instruments issued by First Banks consist of
interest rate lock commitments to originate fixed-rate loans to be sold.
Commitments to originate fixed-rate loans consist primarily of residential real
estate loans. These net loan commitments and loans held for sale are hedged with
forward contracts to sell mortgage-backed securities, which expire in February
2008. The fair value of the interest rate lock commitments, which is included in
other assets in the consolidated balance sheets, was $23,000 and ($17,000) at
December 31, 2007 and 2006, respectively. The fair value of the forward
contracts to sell mortgage-backed securities, which is included in loans held
for sale in the consolidated balance sheets, was $40,000 and $86,000 at December
31, 2007 and 2006, respectively.
(6) SERVICING RIGHTS
Mortgage Banking Activities. At December 31, 2007 and 2006, First Banks serviced
mortgage loans for others totaling $1.10 billion and $1.04 billion,
respectively. Borrowers' escrow balances held by First Banks on such loans were
$6.2 million and $5.7 million at December 31, 2007 and 2006, respectively.
Changes in mortgage servicing rights, net of amortization, for the years ended
December 31, 2007 and 2006 were as follows:
2007 2006
---- ----
(dollars expressed in thousands)
Balance, beginning of year............................................... $ 5,867 6,623
Originated mortgage servicing rights..................................... 2,219 3,298
Amortization............................................................. (2,796) (4,054)
-------- -------
Balance, end of year..................................................... $ 5,290 5,867
======== =======
The fair value of mortgage rights was approximately $14.8 million and $14.7
million at December 31, 2007 and 2006, respectively. First Banks did not incur
any impairment of mortgage servicing rights during the years ended December 31,
2007, 2006 and 2005.
Amortization of mortgage servicing rights at December 31, 2007 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2008...................................................................... $ 1,393
2009...................................................................... 990
2010...................................................................... 822
2011...................................................................... 712
2012...................................................................... 712
Thereafter................................................................ 661
-------
Total................................................................. $ 5,290
=======
Other Servicing Activities. At December 31, 2007 and 2006, First Banks serviced
SBA loans for others totaling $149.9 million and $143.4 million, respectively.
The carrying value of SBA servicing rights approximates fair value. Changes in
SBA servicing rights, net of amortization and impairment, for the years ended
December 31, 2007 and 2006 were as follows:
2007 2006
---- ----
(dollars expressed in thousands)
Balance, beginning of year............................................... $ 8,064 9,489
Originated SBA servicing rights.......................................... 2,053 1,630
Amortization............................................................. (1,830) (1,662)
Impairment............................................................... (819) (1,393)
-------- -------
Balance, end of year..................................................... $ 7,468 8,064
======== =======
Amortization of SBA servicing rights at December 31, 2007 has been estimated in
the following table:
(dollars expressed in thousands)
Year ending December 31:
2008...................................................................... $ 1,523
2009...................................................................... 1,239
2010...................................................................... 1,004
2011...................................................................... 812
2012...................................................................... 654
Thereafter................................................................ 2,236
-------
Total................................................................. $ 7,468
=======
(7) BANK PREMISES AND EQUIPMENT, NET
Bank premises and equipment, net of accumulated depreciation and amortization,
were comprised of the following at December 31, 2007 and 2006:
2007 2006
---- ----
(dollars expressed in thousands)
Land................................................................... $ 52,187 42,386
Buildings and improvements............................................. 168,135 126,903
Furniture, fixtures and equipment...................................... 144,999 124,980
Leasehold improvements................................................. 30,825 25,250
Construction in progress............................................... 25,617 18,066
--------- ---------
Total............................................................. 421,763 337,585
Less: Accumulated depreciation and amortization........................ (183,432) (159,168)
--------- ---------
Bank premises and equipment, net.................................. $ 238,331 178,417
========= =========
Depreciation and amortization expense for the years ended December 31, 2007,
2006 and 2005 was $21.6 million, $18.9 million and $17.4 million, respectively.
First Banks leases land, office properties and equipment under operating leases.
Certain of the leases contain renewal options and escalation clauses. Total rent
expense was $21.8 million, $18.0 million and $15.5 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Future minimum lease payments
under noncancellable operating leases extend through 2084 as follows:
(dollars expressed in thousands)
Year ending December 31:
2008.................................................................... $ 17,193
2009.................................................................... 15,503
2010.................................................................... 13,498
2011.................................................................... 11,599
2012.................................................................... 9,773
Thereafter.............................................................. 53,074
---------
Total future minimum lease payments................................. $ 120,640
=========
First Banks also leases to unrelated parties a portion of its banking
facilities. Rental income associated with these leases was $6.4 million, $5.9
million and $6.4 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of amortization, were comprised of the
following at December 31, 2007 and 2006:
2007 2006
-------------------------- --------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles (1)........ $ 53,916 (23,873) 60,867 (18,850)
Customer list intangibles........... 23,320 (2,408) 23,320 (913)
Other intangibles................... 2,386 (1,437) 2,210 (1,288)
--------- -------- -------- --------
Total........................... $ 79,622 (27,718) 86,397 (21,051)
========= ======== ======== ========
Unamortized intangible assets:
Goodwill associated with
stock purchases................... $ 263,747 230,036
========= ========
--------------------
(1) The core deposit intangibles' gross carrying amount and accumulated amortization were reduced
by $10.6 million and $4.7 million, respectively, during the fourth quarter of 2007, as further
described in Note 13 to the Consolidated Financial Statements. The core deposit intangibles'
gross carrying amount and accumulated amortization were also reduced by $1.4 million and $1.0
million, respectively, during the third quarter of 2007 in conjunction with the sale of the
Texas Branch Offices on July 19, 2007, as further described in Note 2 to the Consolidated
Financial Statements.
Amortization of intangible assets was $12.4 million, $8.2 million and $4.9
million for the years ended December 31, 2007, 2006 and 2005, respectively. As
of December 31, 2007, the remaining estimated life of the amortization periods
for core deposit intangibles, customer list intangibles and other intangibles
was five years, 15 years and seven years, respectively. Amortization of
intangible assets, including amortization of core deposit intangibles, customer
list intangibles and other intangibles 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:
2008..................................................................... $11,103
2009..................................................................... 9,309
2010..................................................................... 8,852
2011..................................................................... 6,674
2012..................................................................... 2,459
Thereafter............................................................... 13,507
-------
Total................................................................ $51,904
=======
Changes in the carrying amount of goodwill for the years ended December 31, 2007
and 2006 were as follows:
2007 2006
---- ----
(dollars expressed in thousands)
Balance, beginning of year............................................. $ 230,036 165,992
Goodwill acquired during the year...................................... 34,586 63,378
Acquisition-related adjustments (1).................................... (625) 666
Other adjustments (2).................................................. (250) --
--------- ---------
Balance, end of year................................................... $ 263,747 230,036
========= =========
-----------------------
(1) 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 SDCB in August 2006 and acquisition-related adjustments
recorded in 2006 primarily pertain to the acquisition of NSB in October 2005, as further
described in Note 2 to the Consolidated Financial Statements.
(2) Other adjustments recorded in 2007 pertain to the sale of the Texas Branch Offices on July 19,
2007, as further described in Note 2 to the Consolidated Financial Statements.
(9) MATURITIES OF TIME DEPOSITS
A summary of maturities of time deposits of $100,000 or more and other time
deposits as of December 31, 2007 is as follows:
Time deposits of Other time
$100,000 or more deposits Total
---------------- -------- -----
(dollars expressed in thousands)
Year ending December 31:
2008............................................ $ 1,402,611 2,293,748 3,696,359
2009............................................ 85,143 231,486 316,629
2010............................................ 22,189 74,448 96,637
2011............................................ 20,752 28,265 49,017
2012............................................ 15,525 17,092 32,617
Thereafter...................................... 637 598 1,235
----------- ---------- ----------
Total....................................... $ 1,546,857 2,645,637 4,192,494
=========== ========== ==========
(10) OTHER BORROWINGS
Other borrowings were comprised of the following at December 31, 2007 and 2006:
2007 2006
---- ----
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily............................................................... $ 198,766 169,874
Term................................................................ 100,000 200,000
Federal funds purchased.................................................. 76,500 --
FHLB advances............................................................ 857 4,025
--------- --------
Total........................................................... $ 376,123 373,899
========= ========
The average balance of other borrowings was $361.7 million and $380.5 million
and the maximum month-end balance of other borrowings was $432.0 million and
$535.7 million for the years ended December 31, 2007 and 2006, respectively. The
average rates paid on other borrowings during the years ended December 31, 2007,
2006 and 2005 were 4.60%, 4.42% and 3.19%, respectively. Interest expense on
securities sold under agreements to repurchase was $15.6 million, $16.1 million
and $16.5 million for the years ended December 31, 2007, 2006 and 2005,
respectively. Interest expense on FHLB advances was $348,000, $689,000 and $1.6
million for the years ended December 31, 2007, 2006 and 2005, respectively.
Interest expense on federal funds purchased was $130,000, $63,000 and $143,000
for the years ended December 31, 2007, 2006 and 2005, respectively. The assets
underlying the daily securities sold under agreements to repurchase and the FHLB
advances are held by First Banks. The underlying securities associated with the
term repurchase agreements are mortgage-backed securities and callable U.S.
Government agency securities and are held by other financial institutions under
safekeeping agreements. As further described in Note 5 to the Consolidated
Financial Statements, the interest rate floor agreements included within the
term repurchase agreements represent embedded derivative instruments.
The maturity dates, par amounts, interest rate spreads and interest rate floor
strike prices on First Bank's term repurchase agreements as of December 31, 2007
and 2006 were as follows:
Par Interest Rate Interest Rate Floor
Maturity Date Amount Spread (1) Strike Price (1)
------------- ------ ------ ------------
(dollars expressed
in thousands)
December 31, 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.
(11) 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, reduces 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 could
initially be borrowed under the revolving credit facility until August 7, 2008,
at which time the principal and interest was due and payable, excluding the term
loans. The maturity date was subsequently extended to September 1, 2008, as
further discussed below. First Banks' Existing Term Loan, which had a balance of
$5.0 million at December 31, 2007, 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.
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. Subsequent to December 31, 2007, First
Banks entered into First and Second Amendments to the Secured Credit Agreement,
as further described in Note 25 to the Consolidated Financial Statements. These
amendments include modifications to certain financial covenants, the collateral
pledge agreement and the maturity date of the revolving credit facility. First
Banks and First Bank were in compliance with all restrictions and requirements
of the respective credit agreements at December 31, 2007 and 2006.
Notes payable were comprised of the following at December 31, 2007 and 2006:
2007 2006
---- ----
(dollars expressed in thousands)
Term loans................................................................. $ 19,000 65,000
Revolving credit........................................................... 20,000 --
-------- -------
Total............................................................. $ 39,000 65,000
======== =======
During the year ended December 31, 2007, First Banks had drawn advances of $15.0
million and made payments of $61.0 million on the outstanding principal balances
of the term loans, reducing the balance from $65.0 million at December 31, 2006
to $19.0 million at December 31, 2007. During the year ended December 31, 2007,
First Banks had drawn advances of $20.0 million on the revolving credit
sub-facility portion of the Secured Credit Agreement. First Banks had not drawn
any revolving credit advances on the Predecessor Agreement as of December 31,
2006. Letters of credit issued to unaffiliated third parties on behalf of First
Banks under the standby letter of credit sub-facility portion of the Secured
Credit Agreement and Predecessor Agreement were $200,000 and $450,000 at
December 31, 2007 and 2006, respectively, and had not been drawn on by the
counterparties.
The average balance and maximum month-end balance of borrowings outstanding
under the Secured Credit Agreement and the Predecessor Agreement during the
years ended December 31, 2007 and 2006, respectively, were as follows:
2007 2006
---- ----
(dollars expressed in thousands)
Average balance............................................................ $ 34,932 88,843
Maximum month-end balance.................................................. 55,000 100,000
======== ========
The average rates paid on the outstanding borrowings during the years ended
December 31, 2007, 2006 and 2005 were 6.94%, 6.22% and 6.26%, respectively.
Interest expense recognized on borrowings under the secured credit agreements
includes commitment, arrangement and renewal fees. Exclusive of these fees, the
average rates paid on the outstanding borrowings during the years ended December
31, 2007, 2006 and 2005 were 6.41%, 6.11% and 4.93%, respectively.
(12) SUBORDINATED DEBENTURES
First Banks has formed various affiliated Delaware or Connecticut statutory and
business trusts (collectively, the Trusts) that were created for the sole
purpose of issuing trust preferred securities. The trust preferred securities
were issued in private placements, with the exception of First Preferred Capital
Trust II, First Preferred Capital Trust III and First Preferred Capital Trust
IV, which were issued in underwritten public offerings. First Banks owns all of
the common securities of the Trusts. The gross proceeds of the offerings were
used by the Trusts to purchase variable rate or fixed 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 $24.4 million, $22.4 million and
$20.9 million for the years ended December 31, 2007, 2006 and 2005,
respectively, and are included in interest expense in the consolidated
statements of income. Deferred issuance costs associated with First Banks'
subordinated debentures are included as a reduction of subordinated debentures
in the consolidated balance sheets and are amortized on a straight-line basis.
The structure of the trust preferred securities currently satisfies the
regulatory requirements for inclusion, subject to certain limitations, in First
Banks' capital base.
A summary of the subordinated debentures issued to the Trusts in conjunction
with the trust preferred securities offerings at December 31, 2007 and 2006 were
as follows:
Subordinated
Trust Debentures
Maturity Call Interest Preferred ----------------
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, beginning on March 30, 2007.
(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.
(13) INCOME TAXES
Provision for income taxes for the years ended December 31, 2007, 2006 and 2005
consists of:
2007 2006 2005
---- ---- ----
(dollars expressed in thousands)
Current provision for taxes:
Federal........................................................ $ 23,264 41,582 48,306
State.......................................................... 3,213 3,272 5,419
-------- ------- -------
26,477 44,854 53,725
-------- ------- -------
Deferred provision for taxes:
Federal........................................................ (3,167) 10,062 116
State.......................................................... (2,405) 146 (1,332)
-------- ------- -------
(5,572) 10,208 (1,216)
-------- ------- -------
Reduction in deferred tax asset valuation allowance................. (10,746) -- --
-------- ------- -------
Total...................................................... $ 10,159 55,062 52,509
======== ======= =======
The effective rates of federal income taxes for the years ended December 31,
2007, 2006 and 2005 differ from the federal statutory rates of taxation as
follows:
Years Ended December 31,
----------------------------------------------------------
2007 2006 2005
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Income before provision for income taxes
and minority interest in income (loss)
of subsidiary.............................. $ 67,471 $ 166,169 $ 148,128
========= ========= =========
Provision for income taxes calculated
at federal statutory income tax rates...... $ 23,615 35.0% $ 58,159 35.0% $ 51,845 35.0%
Effects of differences in tax reporting:
Tax-exempt interest income, net of
tax preference adjustment.............. (962) (1.4) (908) (0.5) (814) (0.5)
State income taxes......................... 488 0.7 3,487 2.0 4,773 3.2
Reduction in prior year contingency
reserve................................ -- -- (4,154) (2.5) (2,116) (1.4)
Bank owned life insurance, net of premium.. (1,283) (1.9) (1,039) (0.6) (1,602) (1.1)
Reduction in deferred tax asset
valuation allowance.................... (10,746) (15.9) -- -- -- --
Other, net................................. (953) (1.4) (483) (0.3) 423 0.3
--------- ----- --------- ----- --------- -----
Provision for income taxes........... $ 10,159 15.1% $ 55,062 33.1% $ 52,509 35.5%
========= ===== ========= ===== ========= =====
The $4.2 million and $2.1 million reductions in the prior year contingency
reserve, reflected in 2006 and 2005, respectively, resulted from reversals of
federal and state tax reserves no longer deemed necessary.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2007 and
2006 were as follows:
December 31,
------------
2007 2006
---- ----
(dollars expressed in thousands)
Deferred tax assets:
Net operating loss carryforwards................................ $ 23,143 26,267
Deferred built-in loss carryforward............................. 3,105 3,345
Allowance for loan losses....................................... 88,835 60,052
Loans held for sale............................................. 1,558 572
Alternative minimum and general business tax credits............ 3,489 3,510
Interest on nonaccrual loans.................................... 6,001 2,286
Deferred compensation........................................... 7,842 7,732
Net fair value adjustment for available-for-sale
investment securities......................................... 6,857 6,312
Net fair value adjustment for derivative instruments............ -- 755
Partnership investments......................................... 7,865 7,079
Overdraft, robbery and other fraud losses....................... 5,612 --
Accrued contingent liabilities.................................. 2,030 533
Other........................................................... 5,559 3,133
--------- --------
Gross deferred tax assets................................... 161,896 121,576
--------- --------
Valuation allowance............................................. (23,278) (21,401)
--------- --------
Deferred tax assets, net of valuation allowance............. 138,618 100,175
--------- --------
Deferred tax liabilities:
Depreciation on bank premises and equipment..................... 6,534 8,445
Servicing rights................................................ 1,909 919
Net fair value adjustment for derivative instruments............ 4,171 --
Core deposit intangibles........................................ 5,252 8,887
Customer list intangibles....................................... 8,695 9,307
Discount on loans............................................... 5,246 5,446
Equity investments.............................................. 5,707 6,103
State taxes..................................................... 6,826 2,594
Other .......................................................... 2,494 1,125
--------- --------
Deferred tax liabilities.................................... 46,834 42,826
--------- --------
Net deferred tax assets..................................... $ 91,784 57,349
========= ========
The realization of First Banks' net deferred tax assets is based on the
availability of carrybacks to prior taxable periods, the expectation of future
taxable income and the utilization of tax planning strategies. Based on these
factors, management believes it is more likely than not that First Banks will
realize the recognized net deferred tax assets of $91.8 million at December 31,
2007.
Changes in the deferred tax asset valuation allowance for the years ended
December 31, 2007, 2006 and 2005 were as follows:
2007 2006 2005
---- ---- ----
(dollars expressed in thousands)
Balance, beginning of year........................................... $21,401 17,754 17,767
Purchase acquisitions................................................ 20,177 -- --
Reversal of deferred tax asset valuation allowance
to income tax expense........................................... (10,746) -- --
Reversal of deferred tax asset valuation allowance
to goodwill and other intangible assets......................... (7,554) -- --
Adjustment to purchase acquisitions completed in prior periods....... -- 3,647 (13)
------- ------ ------
Balance, end of year................................................. $23,278 21,401 17,754
======= ====== ======
Upon completion of the 2004 acquisition of CIB Bank and the 2007 acquisition of
CFHI, the net deferred tax assets associated with the respective acquisitions
were evaluated to determine whether it is more likely than not that the net
deferred tax assets will be recognized in the future. The ability to utilize the
net deferred tax assets recorded in connection with the acquisitions is subject
to a number of limitations. Among these limitations is the restriction that any
built-in loss (the fair value of the entity was less than the tax basis) that
existed at the date of acquisition, if realized within the first five years
subsequent to the date of acquisition, will be deferred and must be carried
forward and subjected to rules similar to the rules for carrying forward net
operating losses. Based upon these factors, management established a valuation
allowance for CIB Bank in 2004 and CFHI in 2007 in the amount of $21.4 million
and $20.2 million, respectively. Until the implementation of SFAS No. 141(R) --
Business Combinations, at which time the current guidance is expected to change,
subsequent reductions in the $20.2 million valuation allowance associated with
the acquisition of CFHI will be credited to goodwill and other intangible
assets. Subsequent reductions in the $3.1 million valuation allowance associated
with the acquisition of CIB Bank will be credited to the provision for income
taxes.
At December 31, 2007, the deferred tax assets associated with the acquisition of
CIB Bank were evaluated and management concluded that $18.3 million of the
valuation allowance was no longer required as the corresponding net deferred tax
assets no longer existed due to the recognition of temporary differences. First
Banks did not have any goodwill related to the CIB Bank acquisition at December
31, 2007. In accordance with SFAS No. 141, Business Combinations, First Banks
reduced the carrying values of certain acquired assets to zero, which included a
reduction of core deposit intangibles of $5.9 million and bank premises and
equipment of $6.6 million. In addition, net deferred tax assets were increased
by $4.9 million to reflect the impact of the reductions of the carrying values
of the core deposit intangibles and bank premises and equipment. The remaining
amount of $10.7 million was recorded as a reduction of income tax expense.
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.
At December 31, 2007 and January 1, 2007, First Banks had a liability for
uncertain tax positions, excluding interest and penalties, of $12.2 million and
$2.6 million, respectively. A reconciliation of the beginning and ending balance
of the unrecognized tax benefits is as follows:
2007
----
(dollars expressed in thousands)
Balance, beginning of year...................................... $ 2,559
Additions:
Tax positions taken during the current year................. 2,352
Tax positions taken during the prior year................... 9,134
Reductions:
Tax positions taken during the prior year................... (6)
Lapse of statute of limitations............................. (1,795)
--------
Balance, end of year............................................ $ 12,244
========
At December 31, 2007 and January 1, 2007, the total amount of unrecognized tax
benefits that would affect the effective tax rate were $1.2 million and $1.4
million, respectively.
During the year ended December 31, 2007, First Banks recorded interest expense
of $527,000 related to unrecognized tax benefits. At December 31, 2007 and
January 1, 2007, interest accrued for unrecognized tax positions was $1.4
million and $944,000, respectively. There were no penalties for unrecognized tax
positions accrued at December 31, 2007 or January 1, 2007, nor did First Banks
recognize any expense for penalties during 2007.
The Company continually evaluates the unrecognized tax benefits associated with
its uncertain tax positions. It is reasonably possible that the total
unrecognized tax benefits as of December 31, 2007 could decrease by
approximately $1.4 million by December 31, 2008, as a result of the lapse of
statutes of limitations and potential settlements with the federal and state
taxing authorities, of which the impact to the effective tax rate is estimated
to be approximately $367,000. It is also reasonably possible that this decrease
could be substantially offset by new matters arising during the same period.
The Company files consolidated and separate income tax returns in the U.S.
federal jurisdiction and in various state jurisdictions. The Company's federal
returns through 2004 have been examined by the Internal Revenue Service (IRS)
with the examination of the 2004 tax year being closed in February 2008. The
Company's current estimate of the resolution of various state examinations, none
of which are in process, is reflected in accrued income taxes; however, final
settlement of the examinations or changes in the Company's estimate may result
in future income tax expense or benefit.
At December 31, 2007 and 2006, the accumulation of prior years' earnings
representing tax bad debt deductions was approximately $29.8 million. If these
tax bad debt reserves were charged for losses other than bad debt losses, First
Banks would be required to recognize taxable income in the amount of the charge.
It is not contemplated that such tax-restricted retained earnings will be used
in a manner that would create federal income tax liabilities.
At December 31, 2007 and 2006, for federal income taxes purposes, First Banks
had net operating loss carryforwards relating to pre-acquisition tax losses of
acquired entities of approximately $66.1 million and $75.0 million,
respectively. At December 31, 2007, the net operating loss carryforwards for
First Banks expire as follows:
(dollars expressed in thousands)
Year ending December 31:
2008.................................................................. $ 6,297
2009.................................................................. 5,740
2010.................................................................. 7
2011 - 2025........................................................... 54,080
---------
Total............................................................. $ 66,124
=========
During 2007 and 2004, First Banks recognized built-in losses associated with the
acquisitions of CFHI and CIB Bank, respectively. A portion of the realized
built-in losses was deferred in the year of acquisition and is required to be
carried forward subject to rules similar to the rules for carrying forward net
operating losses. Utilization of the realized built-in losses is allowed
subsequent to the utilization of any net operating loss carryforwards associated
with the acquisitions of CFHI and CIB Bank. Consequently, at December 31, 2007,
First Banks had deferred built-in loss carryforwards, in aggregate, of
approximately $7.4 million. Utilization of the deferred built-in loss
carryforwards is allowed beginning in the year 2020, and such losses will expire
in the year 2024.
(14) EARNINGS PER COMMON SHARE
The following is a reconciliation of basic and diluted EPS for the years ended
December 31, 2007, 2006 and 2005:
Per Share
Income Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Year ended December 31, 2007:
Basic EPS - income available to common stockholders... $ 56,448 23,661 $ 2,385.68
Effect of dilutive securities:
Class A convertible preferred stock................ 769 385 (6.23)
-------- -------- ----------
Diluted EPS - income available to common stockholders. $ 57,217 24,046 $ 2,379.45
======== ======== ==========
Year ended December 31, 2006:
Basic EPS - income available to common stockholders... $110,908 23,661 $ 4,687.38
Effect of dilutive securities:
Class A convertible preferred stock................ 769 456 (56.66)
-------- -------- ----------
Diluted EPS - income available to common stockholders. $111,677 24,117 $ 4,630.72
======== ======== ==========
Year ended December 31, 2005:
Basic EPS - income available to common stockholders... $ 96,120 23,661 $ 4,062.36
Effect of dilutive securities:
Class A convertible preferred stock................ 769 516 (54.90)
-------- -------- ----------
Diluted EPS - income available to common stockholders. $ 96,889 24,177 $ 4,007.46
======== ======== ==========
(15) CREDIT COMMITMENTS
First Banks is a party to commitments to extend credit and commercial and
standby letters of credit in the normal course of business to meet the financing
needs of its customers. These instruments involve, in varying degrees, elements
of credit risk and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The interest rate risk associated with these credit
commitments relates primarily to the commitments to originate fixed-rate loans.
As more fully described in Note 5 to the Consolidated Financial Statements, the
interest rate risk of the commitments to originate fixed-rate loans has been
hedged with forward commitments to sell mortgage-backed securities. The credit
risk amounts are equal to the contractual amounts, assuming the amounts are
fully advanced and the collateral or other security is of no value. First Banks
uses the same credit policies in granting commitments and conditional
obligations as it does for on-balance sheet items.
Commitments to extend fixed and variable rate credit, and commercial and standby
letters of credit at December 31, 2007 and 2006 were as follows:
December 31,
-------------------------
2007 2006
---- ----
(dollars expressed
in thousands)
Commitments to extend credit............................................... $ 3,057,404 3,092,804
Commercial and standby letters of credit................................... 201,436 171,097
----------- ----------
$ 3,258,840 3,263,901
=========== ==========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, income-producing commercial properties or
single family residential properties. In the event of nonperformance, First
Banks may obtain and liquidate the collateral to recover amounts paid under its
guarantees on these financial instruments.
Commercial and standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The letters of credit
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. Most
letters of credit extend for less than one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Upon issuance of the commitments, First Banks
typically holds marketable securities, certificates of deposit, inventory, real
property or other assets as collateral supporting those commitments for which
collateral is deemed necessary. The standby letters of credit at December 31,
2007 expire, at various dates, within nine years.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is management's estimate of the values
at which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, other significant
assets are not considered financial assets including servicing assets, deferred
income tax assets, bank premises and equipment and goodwill and other intangible
assets. Furthermore, the income taxes that would be incurred if First Banks were
to realize any of the unrealized gains or unrealized losses indicated between
the estimated fair values and corresponding carrying values could have a
significant effect on the fair value estimates and have not been considered in
any of the estimates.
The estimated fair value of First Banks' financial instruments at December 31,
2007 and 2006 were as follows:
2007 2006
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(dollars expressed in thousands)
Financial Assets:
Cash and cash equivalents................... $ 231,675 231,675 369,557 369,557
Investment securities:
Trading................................. -- -- 81,168 81,168
Available for sale...................... 1,000,392 1,000,392 1,359,729 1,359,729
Held to maturity........................ 18,879 19,078 24,049 23,971
Net loans................................... 8,714,863 8,633,525 7,520,752 7,325,521
Derivative instruments...................... 13,728 13,728 (1,573) (1,573)
Bank-owned life insurance................... 116,619 116,619 113,778 113,778
Accrued interest receivable................. 55,193 55,193 55,464 55,464
Financial Liabilities:
Deposits:
Noninterest-bearing demand.............. $1,259,123 1,259,123 1,281,108 1,281,108
Interest-bearing demand................. 980,850 980,850 981,939 981,939
Savings and money market................ 2,716,726 2,716,726 2,352,575 2,352,575
Time deposits........................... 4,192,494 4,227,747 3,827,464 3,827,464
Other borrowings............................ 376,123 376,123 373,899 373,899
Notes payable............................... 39,000 39,000 65,000 65,000
Accrued interest payable.................... 18,639 18,639 28,176 28,176
Subordinated debentures..................... 353,752 353,200 297,966 303,302
Off-Balance Sheet Financial Instruments:
Commitments to extend credit, standby
letters of credit and financial
guarantees.............................. $ 1,582 1,582 1,363 1,363
The following methods and assumptions were used in estimating the fair value of
financial instruments:
Cash and cash equivalents and accrued interest receivable: The carrying values
reported in the consolidated balance sheets approximate fair value.
Investment securities: The fair value of trading and available-for-sale
investment securities is the amount reported in the consolidated balance sheets.
The fair value of held-to-maturity investment securities is based on quoted
market prices where available. If quoted market prices were not available, the
fair value was based on quoted market prices of comparable instruments.
Net loans: The fair value of most loans held for portfolio was estimated
utilizing discounted cash flow calculations that applied interest rates
currently being offered for similar loans to borrowers with similar risk
profiles. The fair value of loans held for sale, which is the amount reported in
the consolidated balance sheets, is based on quoted market prices where
available. If quoted market prices were not available, the fair value was based
on quoted market prices of comparable instruments. The carrying value of loans
is net of the allowance for loan losses and unearned discount.
Derivative instruments: The fair value of derivative instruments, including cash
flow hedges, fair value hedges, interest rate floor and cap agreements, interest
rate lock commitments and forward commitments to sell mortgage-backed securities
is based on quoted market prices where available. If quoted market prices were
not available, the fair value was based on quoted market prices of comparable
instruments.
Bank-owned life insurance: The fair value of bank-owned life insurance is based
on quoted market prices where available. If quoted market prices were not
available, the fair value was based on quoted market prices of comparable
instruments.
Deposits: The fair value of deposits generally payable on demand (i.e.,
noninterest-bearing and interest-bearing demand, and savings and money market
accounts) is considered equal to their respective carrying amounts as reported
in the consolidated balance sheets. The fair value of demand deposits does not
include the benefit that results from the low-cost funding provided by deposit
liabilities compared to the cost of borrowing funds in the market. The fair
value disclosed for time deposits was estimated utilizing a discounted cash flow
calculation that applied interest rates currently being offered on similar
deposits to a schedule of aggregated monthly maturities of time deposits. If the
estimated fair value is lower than the carrying value, the carrying value is
reported as the fair value of time deposits.
Other borrowings, notes payable and accrued interest payable: The carrying
values reported in the consolidated balance sheets approximate fair value.
Subordinated debentures: The fair value of fixed rate subordinated debentures is
based on quoted market prices where available. If quoted market prices were not
available, the fair value was based on quoted market prices of comparable
instruments. The carrying values of variable rate subordinated debentures
approximate fair value.
Off-Balance Sheet Financial Instruments: The fair value of commitments to extend
credit, standby letters of credit and financial guarantees were based on
estimated probable credit losses.
(17) EMPLOYEE BENEFITS
First Banks' 401(k) plan is a self-administered savings and incentive plan
covering substantially all employees. Employer match contributions are
determined annually under the plan by First Banks' Board of Directors. Employee
contributions were limited to $15,500 of gross compensation for 2007. Total
employer contributions under the plan were $4.4 million, $3.9 million and $2.4
million for the years ended December 31, 2007, 2006 and 2005, respectively. The
plan assets are held and managed under a trust agreement with First Bank's trust
department.
First Banks' nonqualified deferred compensation plan, which covers a select
group of employees, is administered by an independent third party. The plan is
exempt from the participation, vesting, funding and fiduciary requirements of
the Employee Retirement Income Security Act of 1974. Participants may contribute
from 1% to 25% of their salary and up to 100% of their bonuses on a pre-tax
basis. Balances outstanding under the plan, which are reflected in accrued and
other liabilities in the consolidated balance sheets, were $9.2 million and $8.1
million at December 31, 2007 and 2006, respectively. Plan expense recorded under
the plan, which is reflected in salaries and employee benefits expense in the
consolidated statements of income, was $682,000, $845,000 and $592,000 for the
years ended December 31, 2007, 2006 and 2005, respectively.
(18) STOCKHOLDERS' EQUITY
First Banks has two classes of preferred stock outstanding. The Class A
preferred stock is convertible into shares of common stock at a rate based on
the ratio of the par value of the preferred stock to the current market value of
the common stock at the date of conversion, to be determined by independent
appraisal at the time of conversion. Shares of Class A preferred stock may be
redeemed by First Banks at any time at 105.0% of par value. The Class B
preferred stock may not be redeemed or converted. The redemption of any issue of
preferred stock requires the prior approval of the Board of Governors of the
Federal Reserve System (Federal Reserve). The holders of the Class A and Class B
preferred stock have full voting rights. Dividends on the Class A and Class B
preferred stock are adjustable quarterly based on the highest of the Treasury
Bill Rate or the Ten Year Constant Maturity Rate for the two-week period
immediately preceding the beginning of the quarter. This rate shall not be less
than 6.0% nor more than 12.0% on the Class A preferred stock, or less than 7.0%
nor more than 15.0% on the Class B preferred stock. The annual dividend rate was
6.0% for the Class A preferred stock and 7.0% for the Class B preferred stock
for the years ended December 31, 2007, 2006 and 2005, respectively.
Other comprehensive income (loss) of $8.1 million, $6.8 million and ($18.1)
million, as presented in the accompanying Consolidated Statements of Changes in
Stockholders' Equity and Comprehensive Income, is reflected net of income tax
expense (benefit) of $4.4 million, $3.7 million and ($9.7) million for the years
ended December 31, 2007, 2006 and 2005, respectively.
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, as further described in Note 1 and Note 13 to the
Consolidated Financial Statements.
In December 2006, First Banks recorded an increase in additional paid-in capital
of $3.8 million which related to the utilization of net operating losses that
were acquired with the acquisition of First Banks America, Inc. (FBA) and its
wholly-owned subsidiary, BankTEXAS N.A., in 1994. Effective December 1994, the
FBA Board of Directors approved the implementation of a quasi-reorganization. In
accordance with the provisions of SFAS No. 109 and under the requirements for
completing the quasi-reorganization, tax benefits for deductible temporary
differences and net operating loss carryforwards that existed at the date of the
quasi-reorganization and are subsequently recognized are generally reported as a
direct addition to contributed capital.
(19) TRANSACTIONS WITH RELATED PARTIES
Outside of normal customer relationships, no directors or officers of First
Banks, no shareholders holding over 5% of First Banks' voting securities and no
corporations or firms with which such persons or entities are associated
currently maintain or have maintained, since the beginning of the last full
fiscal year, any significant business or personal relationships with First Banks
or its subsidiaries, other than that which arises by virtue of such position or
ownership interest in First Banks or its subsidiaries, except as described in
the following paragraphs.
First Services, L.P. (First Services), 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 were $34.1
million, $34.8 million and $33.9 million for the years ended December 31, 2007,
2006 and 2005, respectively. First Services leases information technology and
other equipment from First Bank. During 2007, 2006 and 2005, First Services paid
First Bank $3.7 million, $4.2 million and $4.3 million, respectively, in rental
fees for the use of that equipment. In addition, First Services paid
approximately $1.8 million, $1.6 million and $1.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively, in rental payments for occupancy
of certain First Bank premises from which business is conducted.
First Brokerage America, L.L.C. (First Brokerage), a limited liability company
indirectly owned by First Banks' Chairman and members of his immediate family,
received approximately $4.8 million, $3.0 million and $2.6 million for the years
ended December 31, 2007, 2006 and 2005, respectively, in gross commissions paid
by unaffiliated third-party companies. The commissions received were primarily
in connection with the sales of annuities, securities and other insurance
products to customers of First Bank. First Brokerage paid approximately
$183,000, $114,000 and $113,000 for the years ended December 31, 2007, 2006 and
2005, respectively, in rental payments for occupancy of certain First Bank
premises from which brokerage business is conducted.
First Title Guaranty LLC D/B/A First Banc Insurors (First Title), a limited
liability company owned by First Banks' Chairman and members of his immediate
family prior to its merger with and into First Brokerage, effective April 2,
2007, received approximately $35,000, $221,000 and $379,000 for the years ended
December 31, 2007, 2006 and 2005, respectively, in commissions for insurance
policies purchased by First Banks or customers of First Bank from unaffiliated
third-party insurers. The insurance premiums on which these commissions were
earned were competitively bid, and First Banks deemed the commissions First
Title earned from unaffiliated third-party companies to be comparable to those
that would have been earned by an unaffiliated third-party agent. In May 2006,
Adrian Baker, a subsidiary of First Bank, purchased the personal and commercial
insurance book of business from First Title. First Bank engaged an independent
third party to perform a business valuation of the personal and commercial
insurance book of business of First Title, which was determined to be
approximately $270,000 and is being amortized over seven years utilizing the
straight-line method.
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. (Operating Foundation),
a charitable foundation established by First Banks' Chairman and members of his
immediate family. In conjunction with this transaction, First Banks recorded
charitable contribution 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.
Furthermore, First Bank contributed $3.5 million in cash to the Operating
Foundation, thereby bringing the total value of charitable contributions to the
Operating Foundation to $5.3 million for the year ended December 31, 2007.
During 2006, First Bank contributed $5.0 million in cash to the Operating
Foundation. In addition, in November 2006, First Banks contributed 26,962 shares
of common stock held in its available-for-sale investment securities portfolio
with a fair value of $1.0 million to the Operating Foundation. In conjunction
with this transaction, First Banks recorded charitable contribution expense of
$1.0 million, which was partially offset by a gain on the contribution of these
available-for-sale investment securities of $121,000. In addition, First Banks
recognized a tax benefit of $522,000 associated with this transaction. During
2005, First Bank contributed $2.5 million in cash to The Dierberg Foundation, a
charitable foundation established by First Banks' Chairman and members of his
immediate family, and $1.5 million in cash to the Operating Foundation.
First Banks periodically purchases various products from Hermannhof, Inc. and
Dierberg Star Lane Vineyards, entities that are owned by First Banks' Chairman
and members of his immediate family. First Banks utilizes these products
primarily for customer and employee events and promotions, and business
development functions. During the years ended December 31, 2007, 2006 and 2005,
First Banks purchased products aggregating approximately $333,000, $376,000 and
$320,000, respectively, from these entities.
First Bank leases certain of its in-store branch offices and ATM sites from
Dierbergs Markets, Inc., a grocery store chain headquartered in St. Louis,
Missouri that is owned and operated by the brother of First Banks' Chairman and
members of his immediate family. Total rent expense incurred by First Bank under
the lease obligation contracts was $395,000, $385,000 and $335,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.
In June 2005, FCA, a corporation owned by First Banks' Chairman and members of
his immediate family, became a 49.0% owner of SBLS LLC in exchange for $7.4
million pursuant to a written option agreement with First Bank. On January 2,
2007, First Bank contributed $4.0 million to SBLS LLC in the form of a capital
contribution, which increased First Bank's ownership of SBLS LLC to 63.9% and
decreased FCA's ownership to 36.1%. 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 loan balances at a current 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 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 would be in effect at any
given time and no interest period would 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 $52.3 million
at December 31, 2007. The balance of advances outstanding under the Agreement
was $47.5 million and $31.4 million at December 31, 2006 and 2005, respectively.
Interest expense recorded by SBLS LLC under the Promissory Note and Agreement
was $3.4 million, $3.0 million and $1.9 million for the years ended December 31,
2007, 2006 and 2005, respectively. The balance of the advances under the
Promissory Note and the related interest expense recognized by SBLS LLC are
eliminated for purposes of the Consolidated Financial Statements.
First Bank has had in the past, and may have in the future, loan transactions in
the ordinary course of business with its directors and/or their affiliates.
These loan transactions have been made on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and did not involve more than the normal
risk of collectibility or present other unfavorable features. Loans to
directors, their affiliates and executive officers of First Banks, Inc. were
approximately $57.7 million and $55.9 million at December 31, 2007 and 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 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 2006 and an additional $12,000 in payments were made
during 2007.
(20) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business segment is
consistent with the management structure of First Banks, First Bank and the
internal reporting system that monitors performance. First Bank provides similar
products and services in its defined geographic areas through its branch
network. The products and services offered include a broad range of commercial
and personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, First Bank markets combined basic services for
various customer groups, including packaged accounts for more affluent
customers, and sweep accounts, lock-box deposits and cash management products
for commercial customers. First Bank also offers 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 geographic areas, which include eastern Missouri,
Illinois, including the Chicago metropolitan area, southern and northern
California, Houston and Dallas, Texas, and Florida's Manatee, Pinellas,
Hillsborough and Pasco counties. 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. Such principles
and practices are summarized in Note 1 to the Consolidated Financial Statements.
The business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
----------------------------------- ------------------------------ ---------------------------------
2007 2006 2005 2007 2006 2005 2007 2006 2005
---- ---- ---- ---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities...... $ 997,486 1,439,118 1,324,219 21,785 25,828 16,564 1,019,271 1,464,946 1,340,783
Loans, net of unearned
discount............... 8,883,254 7,666,481 7,020,771 -- -- -- 8,883,254 7,666,481 7,020,771
Goodwill and other
intangible assets...... 315,651 295,382 191,901 -- -- -- 315,651 295,382 191,901
Total assets............... 10,867,592 10,116,246 9,148,931 29,768 42,468 21,402 10,897,360 10,158,714 9,170,333
Deposits................... 9,164,868 8,550,062 7,601,162 (15,675) (106,976) (59,331) 9,149,193 8,443,086 7,541,831
Other borrowings........... 376,123 373,899 539,174 -- -- -- 376,123 373,899 539,174
Notes payable.............. -- -- -- 39,000 65,000 100,000 39,000 65,000 100,000
Subordinated debentures.... -- -- -- 353,752 297,966 215,461 353,752 297,966 215,461
Stockholders' equity....... 1,228,419 1,086,876 931,192 (360,931) (286,441) (252,254) 867,488 800,435 678,938
=========== ========== ========== ======== ======== ======== ========== ========== =========
Income statement information:
Interest income............ $ 698,744 645,100 493,182 1,169 1,204 758 699,913 646,304 493,940
Interest expense........... 289,702 233,982 145,608 26,759 27,880 22,651 316,461 261,862 168,259
----------- ---------- ---------- -------- -------- -------- ---------- ---------- ---------
Net interest income...... 409,042 411,118 347,574 (25,590) (26,676) (21,893) 383,452 384,442 325,681
Provision for loan losses.. 75,000 12,000 (4,000) -- -- -- 75,000 12,000 (4,000)
----------- ---------- ---------- -------- -------- -------- ---------- ---------- ---------
Net interest income
after provision
for loan losses........ 334,042 399,118 351,574 (25,590) (26,676) (21,893) 308,452 372,442 329,681
Noninterest income......... 103,631 112,549 96,871 (362) 394 (786) 103,269 112,943 96,085
Amortization of
intangible assets...... 12,419 8,195 4,850 -- -- -- 12,419 8,195 4,850
Other noninterest expense.. 328,122 307,468 269,634 3,709 3,553 3,154 331,831 311,021 272,788
----------- ---------- ---------- -------- -------- -------- ---------- ---------- ---------
Income before provision
for income taxes and
minority interest in
income (loss) of
subsidiary............. 97,132 196,004 173,961 (29,661) (29,835) (25,833) 67,471 166,169 148,128
Provision for income taxes. 20,958 65,752 61,517 (10,799) (10,690) (9,008) 10,159 55,062 52,509
----------- ---------- --------- -------- -------- -------- ---------- ---------- ---------
Income before minority
interest in income
(loss) of subsidiary... 76,174 130,252 112,444 (18,862) (19,145) (16,825) 57,312 111,107 95,619
Minority interest in
income (loss) of
subsidiary............. 78 (587) (1,287) -- -- -- 78 (587) (1,287)
----------- ---------- ---------- -------- -------- -------- ---------- ---------- ---------
Net income............... $ 76,096 130,839 113,731 (18,862) (19,145) (16,825) 57,234 111,694 96,906
=========== ========== ========== ======== ======== ======== ========== ========== =========
(21) REGULATORY CAPITAL
First Banks and First Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
First Banks and First Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require First Banks and First Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
December 31, 2007 and 2006, First Banks and First Bank were each well
capitalized. As of December 31, 2007, the most recent notification from First
Banks' primary regulator categorized First Banks and First Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, First Banks and First Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the following table.
At December 31, 2007 and 2006, First Banks' and First Bank's required and actual
capital ratios were as follows:
Actual
------------------------------------------ For To be Well
2007 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......................... $1,032,607 10.09% $ 929,688 10.25% 8.0% 10.0%
First Bank.......................... 1,048,345 10.26 925,013 10.23 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks......................... 844,421 8.25 789,967 8.71 4.0 6.0
First Bank.......................... 920,080 9.00 811,530 8.97 4.0 6.0
Tier 1 capital (to average assets):
First Banks......................... 844,421 8.32 789,967 8.13 3.0 5.0
First Bank.......................... 920,080 9.09 811,530 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 December 31, 2007, would reduce First Banks'
Tier 1 capital (to risk-weighted assets) and Tier 1 capital (to average assets)
to 7.39% and 7.45%, respectively, and would not have an impact on total capital
(to risk-weighted assets).
(22) DISTRIBUTION OF EARNINGS OF FIRST BANK
First Bank is restricted by various state and federal regulations as to the
amount of dividends that are available for payment to First Banks, Inc. Under
the most restrictive of these requirements, the future payment of dividends from
First Bank is limited to approximately $114.0 million at December 31, 2007,
unless prior permission of the regulatory authorities is obtained.
(23) PARENT COMPANY ONLY FINANCIAL INFORMATION
Following are condensed balance sheets of First Banks, Inc. as of December 31,
2007 and 2006, and condensed statements of income and cash flows for the years
ended December 31, 2007, 2006 and 2005:
CONDENSED BALANCE SHEETS
December 31,
------------------------
2007 2006
---- ----
(dollars expressed in thousands)
Assets
------
Cash deposited in First Bank............................................ $ 14,791 16,688
Cash deposited in unaffiliated financial institutions................... -- 26
---------- ---------
Total cash ........................................................ 14,791 16,714
Investment securities................................................... 21,785 25,828
Investment in subsidiaries.............................................. 1,228,266 1,087,356
Advances due from CFHI.................................................. 1,401 --
Advances due from SFC................................................... -- 90,000
Other assets............................................................ 8,116 17,014
---------- ---------
Total assets....................................................... $1,274,359 1,236,912
========== =========
Liabilities and Stockholders' Equity
------------------------------------
Notes payable........................................................... $ 39,000 65,000
Subordinated debentures................................................. 353,752 297,966
Accrued expenses and other liabilities.................................. 14,119 73,511
---------- ---------
Total liabilities.................................................. 406,871 436,477
Stockholders' equity.................................................... 867,488 800,435
---------- ---------
Total liabilities and stockholders' equity......................... $1,274,359 1,236,912
========== =========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------
2007 2006 2005
---- ---- ----
(dollars expressed in thousands)
Income:
Dividends from subsidiaries................................... $ 45,000 70,000 94,050
Management fees from subsidiaries............................. 34,386 35,525 31,975
Gain on sale of available-for-sale investment securities...... 145 767 --
Other......................................................... 1,424 2,284 1,049
--------- -------- --------
Total income............................................... 80,955 108,576 127,074
--------- -------- --------
Expense:
Interest...................................................... 26,940 28,356 22,860
Salaries and employee benefits................................ 23,829 25,530 23,238
Legal, examination and professional fees...................... 2,979 3,796 3,959
Charitable contributions...................................... 1,905 1,068 100
Other......................................................... 10,037 9,660 8,687
--------- -------- --------
Total expense.............................................. 65,690 68,410 58,844
--------- -------- --------
Income before benefit for income taxes and equity
in undistributed earnings of subsidiaries................ 15,265 40,166 68,230
Benefit for income taxes........................................ (10,825) (10,690) (9,004)
--------- -------- --------
Income before equity in undistributed earnings
of subsidiaries.......................................... 26,090 50,856 77,234
Equity in undistributed earnings of subsidiaries................ 31,144 60,838 19,672
--------- -------- --------
Net income................................................. $ 57,234 111,694 96,906
========= ======== ========
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------
2007 2006 2005
---- ---- ----
(dollars expressed in thousands)
Cash flows from operating activities:
Net income.................................................... $ 57,234 111,694 96,906
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Net income of subsidiaries............................... (76,144) (130,838) (113,722)
Dividends from subsidiaries.............................. 45,000 70,000 94,050
Decrease (increase) in advances due from SFC............. 90,000 (90,000) --
Other, net............................................... 8,739 (10,610) 4,882
--------- -------- --------
Net cash provided by (used in) operating activities.... 124,829 (49,754) 82,116
--------- -------- --------
Cash flows from investing activities:
Increase in investment securities............................. (2,616) (6,375) (5,304)
Investment in common securities of affiliated business
and statutory trusts....................................... (2,322) (4,178) --
Payments from redemption of investment in common securities
of affiliated business and statutory trusts................ 2,481 -- 1,778
Acquisitions of subsidiaries.................................. (50,749) (85,514) (52,400)
Capital contributions to subsidiaries......................... (40,000) -- --
Other, net.................................................... (1,401) (1,682) 1,340
--------- -------- --------
Net cash used in investing activities.................. (94,607) (97,749) (54,586)
--------- -------- --------
Cash flows from financing activities:
Advances drawn on notes payable............................... 35,000 -- 100,000
Repayments of notes payable................................... (61,000) (35,000) (15,000)
Proceeds from issuance of subordinated debentures............. 77,322 139,178 --
Repayments of subordinated debentures......................... (82,681) -- (59,278)
Payment of preferred stock dividends.......................... (786) (786) (786)
--------- -------- --------
Net cash (used in) provided by financing activities.... (32,145) 103,392 24,936
--------- -------- --------
Net (decrease) increase in cash........................ (1,923) (44,111) 52,466
Cash, beginning of year......................................... 16,714 60,825 8,359
--------- -------- --------
Cash, end of year............................................... $ 14,791 16,714 60,825
========= ======== ========
Noncash investing activities:
Cash paid for interest........................................ $ 28,685 28,843 18,690
========= ======== ========
(24) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty contracts. For
value received, and for the purpose of inducing a pension fund and its trustees
and a welfare fund and its trustees (the Funds) to conduct business with MVP,
First Bank's institutional investment management subsidiary, First Banks
irrevocably and unconditionally guaranteed payment of and promised to pay to
each of the Funds any amounts up to the sum of $5.0 million to the extent MVP is
liable to the Funds for a breach of the Investment Management Agreements
(including the Investment Policy Statement and Investment Guidelines), by and
between MVP and the Funds and/or any violation of the Employee Retirement Income
Security Act by MVP resulting in liability to the Funds. The guaranties are
continuing guaranties of all obligations that may arise for transactions
occurring prior to termination of the Investment Management Agreements and are
coexistent with the term of the Investment Management Agreements. The Investment
Management Agreements have no specified term but may be terminated at any time
upon written notice by the Trustees or, at First Banks' option, upon thirty days
written notice to the Trustees. In the event of termination of the Investment
Management Agreements, such termination shall have no effect on the liability of
First Banks with respect to obligations incurred before such termination. The
obligations of First Banks are joint and several with those of MVP. First Banks
does not have any recourse provisions that would enable it to recover from third
parties any amounts paid under the contracts nor does First Banks hold any
assets as collateral that, upon occurrence of a required payment under the
contract, could be liquidated to recover all or a portion of the amount(s) paid.
At December 31, 2007 and 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.
CFHI Securities Litigation. Prior to acquisition by First Banks, CFHI and
certain of its present and former officers were named as defendants in three
purported class action complaints filed in the United States District Court for
the Middle District of Florida, Tampa Division (the "Court") alleging violations
of the federal securities laws, the first of which was filed with the Court on
March 20, 2007 (the "Securities Actions"). On June 22, 2007, the Court entered
an order pursuant to which the Court (i) consolidated the Securities Actions,
with the matter proceeding under the docket for Grand Lodge of Pennsylvania v.
Brian P. Peters, et al., Case No. 8:07-cv-429-T-26-EAJ and (ii) appointed Troy
Ratcliff and Daniel Altenburg (the "Lead Plaintiffs") as lead plaintiffs
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995.
Subsequently, on or about August 24, 2007, the Lead Plaintiffs filed a
consolidated amended class action complaint (the "Amended Complaint"). The
Amended Complaint added as defendants (i) the then current members of CFHI's
Board of Directors, (ii) one former member of CFHI's Board of Directors, (iii)
the underwriters of CFHI's October 5, 2005 public offering of common stock, and
(iv) CFHI's external auditors.
The Amended Complaint was brought on behalf of a putative class of purchasers of
CFHI's common stock between January 21, 2005 and January 22, 2007. In general,
the Amended Complaint alleges that CFHI's United States Securities and Exchange
Commission (SEC) filings and public statements contained misstatements and
omissions regarding its residential construction-to-permanent lending operations
and, more specifically, regarding a home builder and its affiliates and that
CFHI's financial statements violated U.S. generally accepted accounting
principles. The Amended Complaint asserts claims under Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. On August 30, 2007, the Lead
Plaintiffs filed a notice with the Court voluntarily dismissing their claims
against Anne V. Lee and Justin D. Locke without prejudice.
CFHI filed a motion to dismiss the Amended Complaint on December 3, 2007. The
Lead Plaintiffs filed an omnibus opposition to CFHI's motion to dismiss on
February 1, 2008.
Other. In the ordinary course of business, First Banks and its subsidiaries
become involved in legal proceedings other than those discussed above.
Management, in consultation with legal counsel, believes the ultimate resolution
of these proceedings will not have a material adverse effect on the financial
condition or results of operations of First Banks and/or its subsidiaries.
(25) SUBSEQUENT EVENTS (UNAUDITED)
On February 12, 2008, First Banks entered into First and Second Amendments to
its existing $125.0 million Secured Credit Agreement (Amended Secured Credit
Agreement). The primary modifications, as reflected in the Amended Secured
Credit Agreement, include changes to the borrower pledge agreement, the
termination date of the revolving credit facility, and certain financial
covenants. The Amended Secured Credit Agreement is secured by First Banks'
ownership interest in the capital stock of both SFC and CFHI, which was acquired
by First Banks on November 30, 2007, and all of the capital stock of First Bank
owned by SFC and CFHI. The termination date of the revolving credit facility was
extended from August 7, 2008 to September 1, 2008. The financial covenants of
the Amended Secured Credit Agreement include modifications applicable to certain
quarterly periods for the minimum return on assets ratio, the maximum
nonperforming asset ratio and the minimum allowance for loan and lease loss
ratio, as well as an additional covenant regarding minimum net income for First
Banks.
FIRST BANKS, INC.
QUARTERLY CONDENSED FINANCIAL DATA -- UNAUDITED
- ---------------------------------------------------------------------------------------------------------------------
2007 Quarter Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands, except per share data)
Interest income............................................ $ 171,827 177,319 178,105 172,662
Interest expense........................................... 76,966 80,548 80,259 78,688
--------- -------- -------- --------
Net interest income..................................... 94,861 96,771 97,846 93,974
Provision for loan losses.................................. 3,500 5,500 17,000 49,000
--------- -------- -------- --------
Net interest income after provision for loan losses..... 91,361 91,271 80,846 44,974
Noninterest income......................................... 24,583 24,037 26,840 27,809
Noninterest expense........................................ 85,701 84,435 84,529 89,585
--------- -------- -------- --------
Income (loss) before provision (benefit) for income
taxes and minority interest in income (loss)
of subsidiary......................................... 30,243 30,873 23,157 (16,802)
Provision (benefit) for income taxes....................... 10,950 11,092 8,087 (19,970)
--------- -------- -------- --------
Income before minority interest in income (loss)
of subsidiary......................................... 19,293 19,781 15,070 3,168
Minority interest in income (loss) of subsidiary........... 70 31 74 (97)
--------- -------- -------- --------
Net income.............................................. $ 19,223 19,750 14,996 3,265
========= ======== ======== ========
Earnings per common share:
Basic................................................... $ 804.12 829.17 625.48 126.91
========= ======== ======== ========
Diluted................................................. $ 799.23 821.63 623.84 126.91
========= ======== ======== ========
2006 Quarter Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars expressed in thousands, except per share data)
Interest income............................................ $ 147,234 157,731 168,293 173,046
Interest expense........................................... 56,368 62,051 69,109 74,334
--------- -------- -------- --------
Net interest income..................................... 90,866 95,680 99,184 98,712
Provision for loan losses.................................. 1,000 5,000 2,000 4,000
--------- -------- -------- --------
Net interest income after provision for loan losses..... 89,866 90,680 97,184 94,712
Noninterest income......................................... 25,497 25,879 29,994 31,573
Noninterest expense........................................ 74,815 81,051 80,473 82,877
--------- -------- -------- --------
Income before provision for income taxes and minority
interest in loss of subsidiary........................ 40,548 35,508 46,705 43,408
Provision for income taxes................................. 11,703 13,500 17,249 12,610
--------- -------- -------- --------
Income before minority interest in loss of subsidiary... 28,845 22,008 29,456 30,798
Minority interest in loss of subsidiary.................... (158) (78) (204) (147)
--------- -------- -------- --------
Net income.............................................. $ 29,003 22,086 29,660 30,945
========= ======== ======== ========
Earnings per common share:
Basic................................................... $1,217.49 927.86 1,245.28 1,296.75
========= ======== ======== ========
Diluted................................................. $1,202.46 916.31 1,231.06 1,285.63
========= ======== ======== ========
FIRST BANKS, INC.
INVESTOR INFORMATION
- -------------------------------------------------------------------------------------------------------------------
FIRST BANKS, INC. PREFERRED SECURITIES
- --------------------------------------
The preferred securities of First Preferred Capital Trust IV are traded on the
New York Stock Exchange with the ticker symbol "FBSPrA." The preferred
securities of First Preferred Capital Trust IV are represented by a global
security that has been deposited with and registered in the name of The
Depository Trust Company, New York, New York (DTC). The beneficial ownership
interests of these preferred securities are recorded through the DTC book-entry
system. The high and low preferred securities prices and the dividends declared
for 2007 and 2006 are summarized as follows:
FIRST PREFERRED CAPITAL TRUST IV (ISSUE DATE - APRIL 2003) - FBSPrA
2007 2006
------------------ ------------------ Dividend
High Low High Low Declared
---- --- ---- --- --------
First quarter........................................ $28.00 25.65 28.00 25.76 $ 0.509375
Second quarter....................................... 26.75 25.17 27.65 26.38 0.509375
Third quarter........................................ 25.96 24.30 28.05 26.70 0.509375
Fourth quarter....................................... 25.37 24.29 29.20 26.75 0.509375
----------
$ 2.037500
==========
FOR INFORMATION CONCERNING FIRST BANKS, PLEASE CONTACT:
- ------------------------------------------------------
Terrance M. McCarthy Steven F. Schepman Lisa K. Vansickle
President and Executive Vice President and Senior Vice President
Chief Executive Officer Director of Corporate Development and Chief Financial Officer
600 James S. McDonnell Blvd. and Business Segments 600 James S. McDonnell Blvd.
Mail Code - M1-199-071 600 James S. McDonnell Blvd. Mail Code - M1-199-014
Hazelwood, Missouri 63042 Mail Code - M1-199-071 Hazelwood, Missouri 63042
Telephone - (314) 592-5000 Hazelwood, Missouri 63042 Telephone - (314) 592-5000
www.firstbanks.com Telephone - (314) 592-5000 www.firstbanks.com
- ------------------ www.firstbanks.com ------------------
------------------
TRANSFER AGENT:
- --------------
Computershare Investor Services, LLC
2 North LaSalle Street
Chicago, Illinois 60602
Telephone - (312) 588-4990
www.computershare.com
- ---------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANKS, INC.
By: /s/ 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)
Date: March 26, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
Signatures Title Date
- -------------------------------------------------------------------------------------------------------------------
/s/ James F. Dierberg Director March 26, 2008
-----------------------------------------
James F. Dierberg
/s/ Terrance M. McCarthy Director March 26, 2008
-----------------------------------------
Terrance M. McCarthy
/s/ Steven F. Schepman Director March 26, 2008
-----------------------------------------
Steven F. Schepman
/s/ Gordon A. Gundaker Director March 26, 2008
-----------------------------------------
Gordon A. Gundaker
/s/ David L. Steward Director March 26, 2008
-----------------------------------------
David L. Steward
/s/ Douglas H. Yaeger Director March 26, 2008
-----------------------------------------
Douglas H. Yaeger
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated herein by reference to Exhibit 3(i) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993).
3.2 By-Laws of the Company (incorporated herein by reference to Exhibit
3.2 to Amendment No. 2 to the Company's Registration Statement on Form
S-1, File No. 33-50576, dated September 15, 1992).
4.1 Agreement as to Expenses and Liabilities between First Banks, Inc. and
First Preferred Capital Trust IV, dated April 1, 2003 (relating to
First Preferred Capital Trust IV ("First Preferred IV")) (incorporated
herein by reference to Exhibit 10.20 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003).
4.2 Preferred Securities Guarantee Agreement by and between First Banks,
Inc. and Fifth Third Bank, dated April 1, 2003 (relating to First
Preferred IV) (incorporated herein by reference to Exhibit 10.21 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2003).
4.3 Indenture between First Banks, Inc. and Fifth Third Bank, as Trustee,
dated April 1, 2003 (relating to First Preferred IV) (incorporated
herein by reference to Exhibit 10.22 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003).
4.4 Amended and Restated Trust Agreement among First Banks, Inc., as
Depositor, Fifth Third Bank, as Property Trustee, Wilmington Trust
Company, as Delaware Trustee, and the Administrative Trustees, dated
April 1, 2003 (relating to First Preferred IV) (incorporated herein by
reference to Exhibit 10.23 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).
4.5 Indenture between First Banks, Inc., as Issuer, and U.S. Bank National
Association, as Trustee, dated as of March 20, 2003 (incorporated
herein by reference to Exhibit 10.6 to Amendment No. 4 to the
Company's Registration Statement on Form S-2, File No. 333-102549,
dated March 24, 2003).
4.6 Amended and Restated Declaration of Trust by and among U.S. Bank
National Association, as Institutional Trustee, First Banks, Inc., as
Sponsor, and Allen H. Blake, Terrance M. McCarthy and Lisa K.
Vansickle, as Administrators, dated as of March 20, 2003 (incorporated
herein by reference to Exhibit 10.7 to Amendment No. 4 to the
Company's Registration Statement on Form S-2, File No. 333-102549,
dated March 24, 2003).
4.7 Guarantee Agreement by and between First Banks, Inc. and U.S. Bank
National Association, dated as of March 20, 2003 (incorporated herein
by reference to Exhibit 10.8 to Amendment No. 4 to the Company's
Registration Statement on Form S-2, File No. 333-102549, dated March
24, 2003).
4.8 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust and SunTrust Capital Markets, Inc., dated as of March
20, 2003 (incorporated herein by reference to Exhibit 10.9 to
Amendment No. 4 to the Company's Registration Statement on Form S-2,
File No. 333-102549, dated March 24, 2003).
4.9 Junior Subordinated Debenture of First Banks, Inc., dated as of March
20, 2003 (incorporated herein by reference to Exhibit 10.10 to
Amendment No. 4 to the Company's Registration Statement on Form S-2,
File No. 333-102549, dated March 24, 2003).
4.10 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust, First Banks, Inc. and STI Investment Management,
Inc., dated as of March 20, 2003 (incorporated herein by reference to
Exhibit 10.11 to Amendment No. 4 to the Company's Registration
Statement on Form S-2, File No. 333-102549, dated March 24, 2003).
4.11 Common Securities Subscription Agreement by and between First Bank
Statutory Trust and First Banks, Inc., dated as of March 20, 2003
(incorporated herein by reference to Exhibit 10.12 to Amendment No. 4
to the Company's Registration Statement on Form S-2, File No.
333-102549, dated March 24, 2003).
4.12 Debenture Subscription Agreement by and between First Banks, Inc. and
First Bank Statutory Trust, dated as of March 20, 2003 (incorporated
herein by reference to Exhibit 10.13 to Amendment No. 4 to the
Company's Registration Statement on Form S-2, File No. 333-102549,
dated March 24, 2003).
4.13 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust
Company, as Trustee, dated as of September 20, 2004 (incorporated
herein by reference to Exhibit 4.26 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
4.14 Amended and Restated Declaration of Trust by and among Wilmington
Trust Company, as Delaware Trustee and the Institutional Trustee,
First Banks, Inc., as Sponsor, and Allen H. Blake, Terrance M.
McCarthy and Lisa K. Vansickle, as Administrators, dated as of
September 20, 2004 (incorporated herein by reference to Exhibit 4.27
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
4.15 Guarantee Agreement by and between First Banks, Inc. and Wilmington
Trust Company, dated as of September 20, 2004 (incorporated herein by
reference to Exhibit 4.28 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004).
4.16 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust II and FTN Financial Capital Markets and Keefe,
Bruyette & Woods, as Placement Agents, dated as of September 10, 2004
(incorporated herein by reference to Exhibit 4.29 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004).
4.17 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of September 20, 2004 (incorporated herein
by reference to Exhibit 4.30 to the Company's Annual Report on Form
10-K for the year ended December 31, 2004).
4.18 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust II, First Banks, Inc. and First Tennessee Bank
National Association, dated as of September 20, 2004 (incorporated
herein by reference to Exhibit 4.31 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
4.19 Capital Securities Subscription Agreement by and between First Bank
Statutory Trust II, First Banks, Inc. and Preferred Term Securities
XV, Ltd., dated as of September 20, 2004 (incorporated herein by
reference to Exhibit 4.32 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004).
4.20 Capital Securities Certificate P-1 of First Bank Statutory Trust II,
dated September 20, 2004 (incorporated herein by reference to Exhibit
4.33 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
4.21 Capital Securities Certificate P-2 of First Bank Statutory Trust II,
dated September 20, 2004 (incorporated herein by reference to Exhibit
4.34 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
4.22 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust
Company, as Trustee, dated as of November 23, 2004 (incorporated
herein by reference to Exhibit 4.35 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
4.23 Amended and Restated Declaration of Trust by and among Wilmington
Trust Company, as Delaware Trustee and the Institutional Trustee,
First Banks, Inc., as Sponsor, and Terrance M. McCarthy, Peter D.
Wimmer and Lisa K. Vansickle, as Administrators, dated as of November
23, 2004 (incorporated herein by reference to Exhibit 4.36 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2004).
4.24 Guarantee Agreement by and between First Banks, Inc. and Wilmington
Trust Company, dated as of November 23, 2004 (incorporated herein by
reference to Exhibit 4.37 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004).
4.25 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust III and FTN Financial Capital Markets and Keefe,
Bruyette & Woods, as Placement Agents, dated as of November 22, 2004
(incorporated herein by reference to Exhibit 4.38 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004).
4.26 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of November 23, 2004 (incorporated herein
by reference to Exhibit 4.39 to the Company's Annual Report on Form
10-K for the year ended December 31, 2004).
4.27 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust III, First Banks, Inc. and First Tennessee Bank
National Association, dated as of November 23, 2004 (incorporated
herein by reference to Exhibit 4.40 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
4.28 Capital Securities Certificate P-1 of First Bank Statutory Trust III,
dated November 23, 2004 (incorporated herein by reference to Exhibit
4.41 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
4.29 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust
Company, as Trustee, dated as of March 1, 2006 (incorporated herein by
reference to Exhibit 4.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2006).
4.30 Amended and Restated Declaration of Trust by and among Wilmington
Trust Company, as Delaware Trustee and the Institutional Trustee,
First Banks, Inc., as Sponsor, and Allen H. Blake, Peter D. Wimmer and
Lisa K. Vansickle, as Administrators, dated as of March 1, 2006
(incorporated herein by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).
4.31 Guarantee Agreement by and between First Banks, Inc. and Wilmington
Trust Company, dated as of March 1, 2006 (incorporated herein by
reference to Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2006).
4.32 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust IV and FTN Financial Capital Markets and Keefe,
Bruyette & Woods, as Placement Agents, dated as of February 16, 2006
(incorporated herein by reference to Exhibit 4.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).
4.33 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of March 1, 2006 (incorporated herein by
reference to Exhibit 4.5 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2006).
4.34 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust IV, First Banks, Inc. and First Tennessee Bank
National Association, dated as of March 1, 2006 (incorporated herein
by reference to Exhibit 4.6 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2006).
4.35 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust IV, First Banks, Inc. and Preferred Term Securities
XXI, Ltd., dated as of March 1, 2006 (incorporated herein by reference
to Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006).
4.36 Capital Securities Certificate P-1 of First Bank Statutory Trust IV,
dated March 1, 2006 (incorporated herein by reference to Exhibit 4.8
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006).
4.37 Capital Securities Certificate P-2 of First Bank Statutory Trust IV,
dated March 1, 2006 (incorporated herein by reference to Exhibit 4.9
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006).
4.38 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust
Company, as Trustee, dated as of April 28, 2006 (incorporated herein
by reference to Exhibit 4.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2006).
4.39 Amended and Restated Declaration of Trust of First Bank Statutory
Trust V by and among Wilmington Trust Company, as Delaware Trustee and
the Institutional Trustee, First Banks, Inc., as Sponsor, and Allen H.
Blake, Peter D. Wimmer and Lisa K. Vansickle, as Administrators, dated
as of April 28, 2006 (incorporated herein by reference to Exhibit 4.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006).
4.40 Guarantee Agreement by and between First Banks, Inc. and Wilmington
Trust Company, dated as of April 28, 2006 (incorporated herein by
reference to Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2006).
4.41 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust V and FTN Financial Capital Markets and Keefe,
Bruyette & Woods, as Placement Agents, dated as of April 27, 2006
(incorporated herein by reference to Exhibit 4.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
4.42 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of April 28, 2006 (incorporated herein by
reference to Exhibit 4.5 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2006).
4.43 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust V, First Banks, Inc. and First Tennessee Bank National
Association, dated as of April 28, 2006 (incorporated herein by
reference to Exhibit 4.6 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2006).
4.44 Capital Securities Certificate P-1 of First Bank Statutory Trust V,
dated as of April 28, 2006 (incorporated herein by reference to
Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2006).
4.45 Indenture between First Banks, Inc., as Issuer, and Wells Fargo Bank,
National Association, as Trustee, dated as of June 16, 2006
(incorporated herein by reference to Exhibit 4.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
4.46 Amended and Restated Declaration of Trust of First Bank Statutory
Trust VI by and among Wells Fargo Delaware Trust Company, as Delaware
Trustee, Wells Fargo Bank, National Association, as Institutional
Trustee, First Banks, Inc., as Sponsor, and Allen H. Blake and Lisa K.
Vansickle, as Administrators, dated as of June 16, 2006 (incorporated
herein by reference to Exhibit 4.9 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2006).
4.47 Guarantee Agreement by and between First Banks, Inc. and Wells Fargo
Bank, National Association, dated as of June 16, 2006 (incorporated
herein by reference to Exhibit 4.10 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2006).
4.48 Purchase Agreement among First Bank Statutory Trust VI, Issuer, First
Banks, Inc., Sponsor, and Bear, Stearns & Co. Inc., Initial Purchaser,
dated as of June 14, 2006 (incorporated herein by reference to Exhibit
4.11 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2006).
4.49 Junior Subordinated Debt Security due 2036 of First Banks, Inc., dated
as of June 16, 2006 (incorporated herein by reference to Exhibit 4.12
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006).
4.50 Debenture Subscription Agreement by and between First Banks, Inc. and
First Bank Statutory Trust VI, dated as of June 16, 2006 (incorporated
herein by reference to Exhibit 4.13 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2006).
4.51 Capital Securities Certificate P-001 of First Bank Statutory Trust VI,
dated as of June 16, 2006 (incorporated herein by reference to Exhibit
4.14 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2006).
4.52 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust
Company, as Trustee, dated as of December 14, 2006 (incorporated
herein by reference to Exhibit 4.57 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2006).
4.53 Amended and Restated Declaration of Trust of First Bank Statutory
Trust VII by and among Wilmington Trust Company, as Delaware Trustee
and the Institutional Trustee, First Banks, Inc., as Sponsor, and
Terrance M. McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as
Administrators, dated as of December 14, 2006 (incorporated herein by
reference to Exhibit 4.58 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2006).
4.54 Guarantee Agreement by and between First Banks, Inc. and Wilmington
Trust Company, dated as of December 14, 2006 (incorporated herein by
reference to Exhibit 4.59 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2006).
4.55 Placement Agreement by and among First Banks, Inc., First Bank
Statutory Trust VII and FTN Financial Capital Markets and Keefe,
Bruyette & Woods, as Placement Agents, dated as of December 6, 2006
(incorporated herein by reference to Exhibit 4.60 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2006).
4.56 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of December 14, 2006 (incorporated herein
by reference to Exhibit 4.61 to the Company's Annual Report on Form
10-K for the year ended December 31, 2006).
4.57 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust VII, First Banks, Inc. and First Tennessee Bank
National Association, dated as of December 14, 2006 (incorporated
herein by reference to Exhibit 4.62 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2006).
4.58 Capital Securities Subscription Agreement by and among First Bank
Statutory Trust VII, First Banks, Inc. and Preferred Term Securities
XXIV, Ltd., dated as of December 14, 2006 (incorporated herein by
reference to Exhibit 4.63 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2006).
4.59 Capital Securities Certificate P-1 of First Bank Statutory Trust VII,
dated as of December 14, 2006 (incorporated herein by reference to
Exhibit 4.64 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2006).
4.60 Capital Securities Certificate P-2 of First Bank Statutory Trust VII,
dated as of December 14, 2006 (incorporated herein by reference to
Exhibit 4.65 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2006).
4.61 Junior Subordinated Indenture between First Banks, Inc. and Wilmington
Trust Company, as Trustee, dated as of February 23, 2007 (incorporated
herein by reference to Exhibit 4.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2007).
4.62 Amended and Restated Trust Agreement of First Bank Statutory Trust
VIII among First Banks, Inc., as Depositor, Wilmington Trust Company,
as Property Trustee and as Delaware Trustee, and Terrance M. McCarthy,
Peter D. Wimmer and Lisa K. Vansickle, as Administrative Trustees,
dated as of February 23, 2007 (incorporated herein by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2007).
4.63 Guarantee Agreement of First Bank Statutory Trust VIII between First
Banks, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee
Trustee, dated as of February 23, 2007 (incorporated herein by
reference to Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2007).
4.64 Purchase Agreement among First Banks, Inc., First Bank Statutory Trust
VIII and TWE, Ltd., and Credit Suisse, acting through its Cayman
Islands branch, as Purchasers, dated as of February 23, 2007
(incorporated herein by reference to Exhibit 4.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).
4.65 Floating Rate Junior Subordinated Note due 2037 of First Banks, Inc.,
dated as of February 23, 2007 (incorporated herein by reference to
Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2007).
4.66 Junior Subordinated Note Subscription Agreement between First Banks,
Inc. and First Bank Statutory Trust VIII, dated as of February 23,
2007 (incorporated herein by reference to Exhibit 4.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).
4.67 Preferred Securities Certificate P-1 of First Bank Statutory Trust
VIII, dated as of February 23, 2007 (incorporated herein by reference
to Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2007).
4.68 Indenture between First Banks, Inc., as Issuer, and LaSalle Bank
National Association, as Trustee, dated as of August 31, 2007
(incorporated herein by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2007).
4.69 Amended and Restated Declaration of Trust of First Bank Statutory
Trust X by and among LaSalle Bank 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
(incorporated herein by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2007).
4.70 Guarantee Agreement by and between First Banks, Inc. and LaSalle Bank
National Association, dated as of August 31, 2007 (incorporated herein
by reference to Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2007).
4.71 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 (incorporated herein by
reference to Exhibit 4.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2007).
4.72 Junior Subordinated Debt Security due 2037 of First Banks, Inc., dated
as of August 31, 2007 (incorporated herein by reference to Exhibit 4.5
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007).
4.73 Debenture Subscription Agreement by and between First Banks, Inc. and
First Bank Statutory Trust X, dated as of August 31, 2007
(incorporated herein by reference to Exhibit 4.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2007).
4.74 Capital Securities Certificate P-001 of First Bank Statutory Trust X,
dated as of August 31, 2007 (incorporated herein by reference to
Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2007).
4.75 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust
Company, as Trustee, dated as of September 20, 2007 (incorporated
herein by reference to Exhibit 4.8 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2007).
4.76 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 (incorporated herein by reference to
Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2007).
4.77 Guarantee Agreement by and between First Banks, Inc. and Wilmington
Trust Company, dated as of September 20, 2007 (incorporated herein by
reference to Exhibit 4.10 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2007).
4.78 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 (incorporated herein by reference to Exhibit 4.11 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007).
4.79 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of September 20, 2007 (incorporated herein
by reference to Exhibit 4.12 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2007).
4.80 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 (incorporated herein by
reference to Exhibit 4.13 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2007).
4.81 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 (incorporated
herein by reference to Exhibit 4.14 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2007).
4.82 Capital Securities Certificate P-1 of First Bank Statutory Trust IX,
dated as of September 20, 2007 (incorporated herein by reference to
Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2007).
4.83 Capital Securities Certificate P-2 of First Bank Statutory Trust IX,
dated as of September 20, 2007 (incorporated herein by reference to
Exhibit 4.16 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2007).
4.84 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust
Company, as Trustee, dated as of September 28, 2007 (incorporated
herein by reference to Exhibit 4.17 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2007).
4.85 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 (incorporated herein by reference to
Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2007).
4.86 Guarantee Agreement by and between First Banks, Inc. and Wilmington
Trust Company, dated as of September 28, 2007 (incorporated herein by
reference to Exhibit 4.19 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2007).
4.87 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 (incorporated herein by reference to Exhibit 4.20 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007).
4.88 Floating Rate Junior Subordinated Deferrable Interest Debenture of
First Banks, Inc., dated as of September 28, 2007 (incorporated herein
by reference to Exhibit 4.21 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2007).
4.89 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 (incorporated
herein by reference to Exhibit 4.22 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2007).
4.90 Capital Securities Certificate P-1 of First Bank Statutory Trust XI,
dated as of September 28, 2007 (incorporated herein by reference to
Exhibit 4.23 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2007).
10.1 Shareholders' Agreement by and among James F. Dierberg II and Mary W.
Dierberg, Trustees under the Living Trust of James F. Dierberg II,
dated July 24, 1989, Michael James Dierberg and Mary W. Dierberg,
Trustees under the Living Trust of Michael James Dierberg, dated July
24, 1989; Ellen C. Dierberg and Mary W. Dierberg, Trustees under the
Living Trust of Ellen C. Dierberg dated July 17, 1992, and First
Banks, Inc. (incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, File No 33-50576, dated
August 6, 1992).
10.2 Comprehensive Banking System License and Service Agreement dated as of
July 24, 1991, by and between the Company and FiServ CIR, Inc.
(incorporated herein by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1, File No. 33-50576, dated August 6,
1992).
10.3 AFS Customer Agreement by and between First Banks, Inc. and Advanced
Financial Solutions, Inc., dated January 29, 2004 (incorporated herein
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2004).
10.4 Management Services Agreement by and between First Banks, Inc. and
First Bank, dated February 28, 2004 (incorporated herein by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004).
10.5 Service Agreement by and between First Services, L.P. and First Banks,
Inc., dated May 1, 2004 (incorporated herein by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004).
10.6 Service Agreement by and between First Services, L.P. and First Bank,
dated May 1, 2004 (incorporated herein by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2004).
10.7 Service Agreement by and between First Banks, Inc. and First Services,
L.P., dated May 1, 2004 (incorporated herein by reference to Exhibit
10.5 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004).
10.8* First Banks, Inc. Executive Incentive Compensation Plan (incorporated
herein by reference to Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
10.9* First Banks, Inc. Nonqualified Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004).
10.10* First Amendment to First Banks, Inc. Nonqualified Deferred
Compensation Plan (incorporated herein by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
10.11 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 (incorporated
herein by reference to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2007).
10.12 First Amendment to the Secured Credit Agreement, dated as of February
12, 2008, by and among First Banks, Inc. and Wells Fargo Bank,
National Association, as Agent, and JP Morgan Chase Bank, N.A.,
LaSalle Bank National Association, The Northern Trust Company, Union
Bank of California, N.A. and Fifth Third Bank (Chicago) (incorporated
herein by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated February 19, 2008).
10.13 Second Amendment to the Secured Credit Agreement, dated as of
February 12, 2008, by and among First Banks, Inc. and Wells Fargo
Bank, National Association, as Agent, and JP Morgan Chase Bank, N.A.,
LaSalle Bank National Association, The Northern Trust Company, Union
Bank of California, N.A., Fifth Third Bank (Chicago) and U.S. Bank
National Association (incorporated herein by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K dated February 19, 2008).
14.1 Code of Ethics for Principal Executive Officer and Financial
Professionals, as amended - filed herewith.
21.1 Subsidiaries of the Company - filed herewith.
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive Officer -
filed herewith.
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial Officer -
filed herewith.
32.1 Section 1350 Certifications of Chief Executive Officer - filed
herewith.
32.2 Section 1350 Certifications of Chief Financial Officer - filed
herewith.
* Exhibits designated by an asterisk in the Index to Exhibits relate to
management contracts and/or compensatory plans or arrangements.