UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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 Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares Outstanding
Class at April 30, 2008
----- -----------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
SPECIAL NOTE.............................................................................................. i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS............................................................... 1
CONSOLIDATED STATEMENTS OF OPERATIONS..................................................... 2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME.............................................................. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................ 5
ITEM 1A. RISK FACTORS.............................................................................. 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................. 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 38
ITEM 4. CONTROLS AND PROCEDURES................................................................... 38
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.................................................................................. 40
SIGNATURES................................................................................................ 41
SPECIAL NOTE
In conjunction with this Quarterly Report on Form 10-Q, First Banks, Inc. (the
Company) is filing Amendment No. 1 to our Annual Report on Form 10-K for the
year ended December 31, 2007. This Quarterly Report on Form 10-Q was delayed
pending completion of an investigation commissioned by the Audit Committee of
our Board of Directors (the Audit Committee), with the assistance of legal
counsel and other third parties, regarding the identification of certain
fraudulent transactions in our mortgage banking division that were improperly
recorded in our consolidated financial statements (the Transactions) due to the
circumvention of established internal controls. The investigation was completed
on July 29, 2008.
On May 16, 2008, management and the Audit Committee determined that we needed to
restate our previously issued consolidated financial statements as of December
31, 2007 and 2006, and for the years ended December 31, 2007, 2006 and 2005 and
restate certain financial information as of December 31, 2005, 2004, and 2003
and for the years ended December 31, 2004 and 2003 and each of the quarters in
2007 and 2006, and that these previously issued consolidated financial
statements should no longer be relied upon. Accordingly, we have restated our
previously issued consolidated financial statements in Amendment No. 1 to our
Annual Report on Form 10-K for the year ended December 31, 2007. We have not
amended our previously filed Annual Reports on Form 10-K or Quarterly Reports on
Form 10-Q for the periods affected by this restatement.
The adjustments made as a result of the restatement are discussed in Note 1 to
the accompanying consolidated interim financial statements included in Part I -
Item 1 - Financial Statements. For additional discussion of the investigation
and the restatement adjustments, see Part I - Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations and Note 1 to the
accompanying consolidated interim financial statements. For a description of the
material weaknesses identified by management in internal control over financial
reporting, see Part I - Item 4 - Controls and Procedures of this Quarterly
Report on Form 10-Q.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
March 31, December 31,
2008 2007
---- ----
(unaudited) (Restated)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks........................................................ $ 219,124 217,597
Short-term investments......................................................... 21,245 14,078
----------- ----------
Total cash and cash equivalents........................................... 240,369 231,675
----------- ----------
Investment securities:
Available for sale............................................................. 817,362 1,000,392
Held to maturity (fair value of $18,859 and $19,078, respectively)............. 18,418 18,879
----------- ----------
Total investment securities............................................... 835,780 1,019,271
----------- ----------
Loans:
Commercial, financial and agricultural......................................... 2,501,363 2,382,067
Real estate construction and development....................................... 2,103,765 2,141,234
Real estate mortgage........................................................... 4,252,907 4,211,285
Consumer and installment....................................................... 98,226 97,117
Loans held for sale............................................................ 67,821 66,079
----------- ----------
Total loans............................................................... 9,024,082 8,897,782
Unearned discount.............................................................. (11,653) (11,598)
Allowance for loan losses...................................................... (185,184) (168,391)
----------- ----------
Net loans................................................................. 8,827,245 8,717,793
----------- ----------
Bank premises and equipment, net.................................................... 240,966 240,456
Goodwill and other intangible assets................................................ 313,506 315,651
Bank-owned life insurance........................................................... 117,557 116,619
Deferred income taxes............................................................... 125,270 139,277
Other assets........................................................................ 134,533 121,728
----------- ----------
Total assets.............................................................. $10,835,226 10,902,470
=========== ==========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand..................................................... $ 1,263,447 1,259,123
Interest-bearing demand........................................................ 996,785 980,850
Savings and money market....................................................... 2,789,580 2,716,726
Time deposits of $100 or more.................................................. 1,408,717 1,546,857
Other time deposits............................................................ 2,452,047 2,645,637
----------- ----------
Total deposits............................................................ 8,910,576 9,149,193
Other borrowings.................................................................... 544,964 409,616
Notes payable....................................................................... 58,000 39,000
Subordinated debentures............................................................. 353,771 353,752
Deferred income taxes............................................................... 42,776 48,209
Accrued expenses and other liabilities.............................................. 58,516 55,079
Minority interest in subsidiary..................................................... 5,687 5,544
----------- ----------
Total liabilities......................................................... 9,974,290 10,060,393
----------- ----------
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................................................................... 819,586 818,343
Accumulated other comprehensive income (loss)....................................... 12,687 (4,929)
----------- ----------
Total stockholders' equity................................................ 860,936 842,077
----------- ----------
Total liabilities and stockholders' equity................................ $10,835,226 10,902,470
=========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
Three Months Ended
March 31,
--------------------------
2008 2007
---- ----
(Restated)
Interest income:
Interest and fees on loans....................................................... $ 152,722 153,010
Investment securities............................................................ 11,420 16,192
Short-term investments........................................................... 162 1,878
--------- --------
Total interest income....................................................... 164,304 171,080
--------- --------
Interest expense:
Deposits:
Interest-bearing demand........................................................ 2,032 2,616
Savings and money market....................................................... 17,527 18,337
Time deposits of $100 or more.................................................. 16,769 17,030
Other time deposits............................................................ 27,787 27,790
Other borrowings................................................................. 3,928 4,418
Notes payable.................................................................... 569 908
Subordinated debentures.......................................................... 6,165 5,903
--------- --------
Total interest expense...................................................... 74,777 77,002
--------- --------
Net interest income......................................................... 89,527 94,078
Provision for loan losses............................................................. 45,947 3,500
--------- --------
Net interest income after provision for loan losses......................... 43,580 90,578
--------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees.................... 12,102 10,608
Gain on loans sold and held for sale............................................. 1,680 1,952
Net gain on investment securities................................................ 1,161 293
Bank-owned life insurance investment income...................................... 973 713
Investment management income..................................................... 1,356 1,510
Insurance fee and commission income.............................................. 1,974 1,695
Net gain on derivative instruments............................................... 3,432 2
Gain on extinguishment of term repurchase agreement.............................. 5,000 --
Other............................................................................ 5,433 5,836
--------- --------
Total noninterest income.................................................... 33,111 22,609
--------- --------
Noninterest expense:
Salaries and employee benefits................................................... 40,570 45,228
Occupancy, net of rental income.................................................. 9,945 7,708
Furniture and equipment.......................................................... 5,429 4,551
Postage, printing and supplies................................................... 1,646 1,782
Information technology fees...................................................... 9,339 9,331
Legal, examination and professional fees......................................... 2,814 1,733
Amortization of intangible assets................................................ 2,776 2,926
Advertising and business development............................................. 1,464 1,900
Charitable contributions......................................................... 97 1,916
Other............................................................................ 9,344 8,913
--------- --------
Total noninterest expense................................................... 83,424 85,988
--------- --------
(Loss) income before (benefit) provision for income taxes and
minority interest in income of subsidiary................................ (6,733) 27,199
(Benefit) provision for income taxes.................................................. (2,005) 9,746
--------- --------
(Loss) income before minority interest in income of subsidiary.............. (4,728) 17,453
Minority interest in income of subsidiary............................................. 145 70
--------- --------
Net (loss) income........................................................... (4,873) 17,383
Preferred stock dividends............................................................. 196 196
--------- --------
Net (loss) income available to common stockholders.......................... $ (5,069) 17,187
========= ========
Basic (loss) earnings per common share................................................ $ (214.26) 726.34
========= ========
Diluted (loss) earnings per common share.............................................. $ (214.26) 722.43
========= ========
Weighted average shares of common stock outstanding................................... 23,661 23,661
========= ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Three Months Ended March 31, 2008 and 2007 and Nine Months 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
----- ------- ----- ------- -------- ------ ------
(Restated) (Restated) (Restated)
Balances, December 31, 2006............................. $12,822 241 5,915 9,685 767,199 (13,092) 782,770
-------
Three months ended March 31, 2007:
Comprehensive income:
Net income......................................... -- -- -- -- 17,383 -- 17,383
Other comprehensive income, net of tax:
Unrealized gains on investment securities........ -- -- -- -- -- 2,620 2,620
Reclassification adjustment for investment
securities gains included in net income........ -- -- -- -- -- (94) (94)
Derivative instruments:
Current period transactions.................... -- -- -- -- -- 1,722 1,722
-------
Total comprehensive income........................... 21,631
Cumulative effect of change in accounting principle.. -- -- -- -- 2,470 -- 2,470
Class A preferred stock dividends, $0.30 per share... -- -- -- -- (192) -- (192)
Class B preferred stock dividends, $0.03 per share... -- -- -- -- (4) -- (4)
------- --- ----- ----- ------- ------ -------
Balances, March 31, 2007................................ 12,822 241 5,915 9,685 786,856 (8,844) 806,675
-------
Nine months ended December 31, 2007:
Comprehensive income:
Net income......................................... -- -- -- -- 32,077 -- 32,077
Other comprehensive income, net of tax:
Unrealized losses on investment securities....... -- -- -- -- -- (2,825) (2,825)
Reclassification adjustment for investment
securities losses included in net income....... -- -- -- -- -- 216 216
Derivative instruments:
Current period transactions.................... -- -- -- -- -- 7,426 7,426
-------
Total comprehensive income........................... 36,894
Impact of adoption of SFAS No. 158................... -- -- -- -- -- (902) (902)
Class A preferred stock dividends, $0.90 per share... -- -- -- -- (577) -- (577)
Class B preferred stock dividends, $0.08 per share... -- -- -- -- (13) -- (13)
------- --- ----- ----- ------- ------ -------
Balances, December 31, 2007............................. 12,822 241 5,915 9,685 818,343 (4,929) 842,077
-------
Three months ended March 31, 2008:
Comprehensive income:
Net loss........................................... -- -- -- -- (4,873) -- (4,873)
Other comprehensive income, net of tax:
Unrealized gains on investment securities........ -- -- -- -- -- 13,050 13,050
Reclassification adjustment for investment
securities gains included in net loss.......... -- -- -- -- -- (754) (754)
Derivative instruments:
Current period transactions.................... -- -- -- -- -- 5,320 5,320
-------
Total comprehensive income........................... 12,743
Cumulative effect of change in accounting principle.. -- -- -- -- 6,312 -- 6,312
Class A preferred stock dividends, $0.30 per share... -- -- -- -- (192) -- (192)
Class B preferred stock dividends, $0.03 per share... -- -- -- -- (4) -- (4)
------- --- ----- ----- ------- ------ -------
Balances, March 31, 2008................................ $12,822 241 5,915 9,685 819,586 12,687 860,936
======= === ===== ===== ======= ====== =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Three Months Ended
March 31,
------------------------
2008 2007
---- ----
(Restated)
Cash flows from operating activities:
Net (loss) income........................................................................ $ (4,873) 17,383
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment........................... 6,145 4,888
Amortization of intangible assets...................................................... 2,776 2,926
Originations of loans held for sale.................................................... (58,190) (246,173)
Proceeds from sales of loans held for sale............................................. 55,233 250,533
Payments received on loans held for sale............................................... 9,326 6,425
Provision for loan losses.............................................................. 45,947 3,500
Provision for current income taxes..................................................... 3,876 9,243
(Benefit) provision for deferred income taxes.......................................... (5,881) 503
Decrease in accrued interest receivable................................................ 11,935 6,287
Decrease in accrued interest payable................................................... (3,499) (4,283)
Proceeds from sales of trading securities.............................................. -- 11,323
Maturities of trading securities....................................................... -- 595
Purchases of trading securities........................................................ -- (13,822)
Gain on loans sold and held for sale................................................... (1,680) (1,952)
Net gain on investment securities...................................................... (1,161) (293)
Net gain on derivative instruments..................................................... (3,432) (2)
Changes in the fair value of servicing rights.......................................... 1,759 --
Gain on extinguishment of term repurchase agreement.................................... (5,000) --
Other operating activities, net........................................................ 5,471 8,317
Minority interest in income of subsidiary.............................................. 145 70
--------- --------
Net cash provided by operating activities........................................... 58,897 55,468
--------- --------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received............... -- (14,719)
Proceeds from sales of investment securities available for sale.......................... 82,377 487
Maturities of investment securities available for sale................................... 138,190 242,548
Maturities of investment securities held to maturity..................................... 453 524
Purchases of investment securities available for sale.................................... (14,362) (34,219)
Net increase in loans.................................................................... (173,896) (112,534)
Recoveries of loans previously charged-off............................................... 2,185 1,709
Purchases of bank premises and equipment................................................. (7,106) (9,568)
Other investing activities, net.......................................................... 1,124 946
--------- --------
Net cash provided by investing activities........................................... 28,965 75,174
--------- --------
Cash flows from financing activities:
Increase in demand, savings and money market deposits.................................... 93,113 165,830
Decrease in time deposits................................................................ (330,440) (67,644)
Increase (decrease) in Federal Home Loan Bank advances................................... 199,957 (33,241)
Decrease in federal funds purchased...................................................... (69,500) --
Increase in securities sold under agreements to repurchase............................... 8,898 2,722
Advances drawn on notes payable.......................................................... 25,000 --
Repayments of notes payable.............................................................. (6,000) (25,000)
Proceeds from issuance of subordinated debentures........................................ -- 25,774
Repayments of subordinated debentures.................................................... -- (56,907)
Payment of preferred stock dividends..................................................... (196) (196)
--------- --------
Net cash (used in) provided by financing activities................................. (79,168) 11,338
--------- --------
Net increase in cash and cash equivalents........................................... 8,694 141,980
Cash and cash equivalents, beginning of period................................................ 231,675 369,557
--------- --------
Cash and cash equivalents, end of period...................................................... $ 240,369 511,537
========= ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest on liabilities............................................................... $ 79,469 81,596
Income taxes.......................................................................... (4,013) (14,572)
========= ========
Noncash investing and financing activities:
Cumulative effect of change in accounting principle................................... $ 6,312 2,470
Loans held for sale transferred to loan portfolio..................................... -- 2,434
Loans transferred to other real estate................................................ 4,733 3,067
========= ========
Business combinations:
Fair value of tangible assets acquired (noncash)...................................... $ -- 189,300
Goodwill and other intangible assets recorded with net assets acquired................ -- 27,081
Liabilities assumed................................................................... -- (201,662)
========= ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of First Banks, Inc. and subsidiaries
(First Banks or the Company) are unaudited and should be read in conjunction
with the consolidated financial statements contained in Amendment No. 1 to the
2007 Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles and
conform to predominant practices within the banking industry. Management of
First Banks has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare the consolidated financial statements in conformity with
U.S. generally accepted accounting principles. Actual results could differ from
those estimates. In the opinion of management, all adjustments, consisting of
normal recurring accruals considered necessary for a fair presentation of the
results of operations for the interim periods presented herein, have been
included. Operating results for the three months ended March 31, 2008 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008.
The consolidated financial statements include the accounts of the parent company
and its subsidiaries, giving effect to the minority interest, as more fully
described below, and in Note 5 to the consolidated financial statements. All
significant intercompany accounts and transactions have been eliminated. Certain
reclassifications of 2007 amounts have been made to conform to the 2008
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, 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 newly
issued and outstanding shares of non-voting Series B common stock of First Bank,
and Coast Bank was merged with and into First Bank. As a result, SFC is the
owner of 100% of the voting Series A outstanding shares of common stock of First
Bank and CFHI is the owner of 100% of the non-voting Series B outstanding shares
of common stock of First Bank. Thus, First Bank is 96.82% owned by SFC and 3.18%
owned by CFHI.
First Bank operates through its branch banking offices and subsidiaries: First
Bank Business Capital, Inc.; Missouri Valley Partners, Inc. (MVP); Adrian N.
Baker & Company; Universal Premium Acceptance Corporation and its wholly owned
subsidiary, UPAC of California, Inc. (collectively, UPAC); and Small Business
Loan Source LLC (SBLS LLC). All of the subsidiaries are wholly owned, except for
SBLS LLC, which is 76.0% owned by First Bank and 24.0% owned by First Capital
America, Inc. (FCA), as further described in Note 5 to the consolidated
financial statements.
Restatement of Previously Issued Consolidated Interim Financial Statements.
As discussed in Amendment No. 1 to our 2007 Annual Report on Form 10-K, the
Audit Committee of the Board of Directors (the Audit Committee), with the
assistance of legal counsel and other third parties, commissioned an
investigation into the circumstances and possible irregularities that led to
certain fraudulent transactions in the Company's mortgage banking division being
improperly recorded in the Company's consolidated financial statements (the
Transactions) due to the circumvention of established internal controls. The
investigation was completed on July 29, 2008.
On May 16, 2008, management and the Audit Committee determined that the Company
needed to restate its previously issued consolidated financial statements as of
December 31, 2007 and 2006, and for the years ended December 31, 2007, 2006 and
2005 and each of the quarters in 2007 and 2006, and that these previously issued
consolidated financial statements should no longer be relied upon. Accordingly,
the Company has restated its previously issued consolidated financial statements
in Amendment No. 1 to its Annual Report on Form 10-K for the year ended December
31, 2007. The Company has not amended its previously filed Annual Reports on
Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this
restatement.
The following tables present the effects of the adjustments made to First Banks'
previously reported consolidated statements of operations for the three months
ended March 31, 2007:
As Previously
Reported Adjustments As Restated
-------- ----------- -----------
(dollars in thousands, except share and per share data)
Interest and fees on loans............................... $ 153,757 (747) $153,010
Total interest income.................................... 171,827 (747) 171,080
Interest expense on other borrowings..................... 4,351 67 4,418
Interest expense on subordinated debentures.............. 5,934 (31) 5,903
Total interest expense................................... 76,966 36 77,002
Net interest income...................................... 94,861 (783) 94,078
Net interest income after provision for loan losses...... 91,361 (783) 90,578
Gain on loans sold and held for sale..................... 3,926 (1,974) 1,952
Total noninterest income................................. 24,583 (1,974) 22,609
Occupancy expense, net of rental income.................. 7,421 287 7,708
Total noninterest expense................................ 85,701 287 85,988
Income before provision for income taxes and
minority interest in income of subsidiary............ 30,243 (3,044) 27,199
Provision for income taxes............................... 10,950 (1,204) 9,746
Income before minority interest in income of subsidiary.. 19,293 (1,840) 17,453
Net income............................................... 19,223 (1,840) 17,383
Net income available to common stockholders.............. 19,027 (1,840) 17,187
Basic earnings per common share.......................... 804.12 (77.78) 726.34
Diluted earnings per common share........................ 799.23 (76.80) 722.43
Significant Accounting Policies. On January 1, 2008, First Banks opted to
measure servicing rights at fair value as permitted by Statement of Financial
Accounting Standards (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 $6.3 million, which was recorded as
an increase to beginning retained earnings, as further described in Note 3 to
the consolidated financial statements. As such, effective January 1, 2008,
changes in the fair value of mortgage and SBA servicing rights are recognized in
earnings in the period in which the change occurs.
On January 1, 2008, First Banks implemented SFAS No. 157 - Fair Value
Measurements for financial and nonfinancial assets and liabilities recognized or
disclosed at fair value in the financial statements on a recurring basis and
financial assets recognized on a nonrecurring basis, which did not have a
material impact on First Banks' financial condition or results of operations
other than certain additional disclosure requirements. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in U.S. generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 applies under other accounting pronouncements that
require or permit fair value measurements, and does not require any new fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, for financial
assets and liabilities and nonfinancial assets and nonfinancial liabilities that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). Implementation is deferred for all
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis to
fiscal years beginning after November 15, 2008. For additional information on
the fair value of financial assets, see Note 12 to the consolidated financial
statements.
(2) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of amortization, were comprised of the
following at March 31, 2008 and December 31, 2007:
March 31, 2008 December 31, 2007
------------------------ -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles................ $ 53,916 (26,217) 53,916 (23,873)
Customer list intangibles............... 23,320 (2,782) 23,320 (2,408)
Other intangibles....................... 2,385 (1,495) 2,386 (1,437)
--------- -------- -------- --------
Total............................... $ 79,621 (30,494) 79,622 (27,718)
========= ======== ======== ========
Unamortized intangible assets:
Goodwill associated with
stock purchases..................... $ 264,379 263,747
========= ========
Amortization of intangible assets was $2.8 million and $2.9 million for the
three months ended March 31, 2008 and 2007, 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 remaining......................................................... $ 8,355
2009................................................................... 9,280
2010................................................................... 8,852
2011................................................................... 6,674
2012................................................................... 2,459
2013................................................................... 1,524
Thereafter............................................................. 11,983
--------
Total.............................................................. $ 49,127
========
Changes in the carrying amount of goodwill for the three months ended March 31,
2008 and 2007 were as follows:
Three Months Ended
March 31,
----------------------
2008 2007
---- ----
(dollars expressed in thousands)
Balance, beginning of period........................................ $ 263,747 230,036
Goodwill acquired during the period................................. -- 23,183
Acquisition-related adjustments (1)................................. 632 (602)
--------- --------
Balance, end of period.............................................. $ 264,379 252,617
========= ========
---------------------
(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 2008 pertain to the
acquisition of CFHI in November 2007; and acquisition-related adjustments recorded in 2007 pertain
to the acquisition of San Diego Community Bank in August 2006.
(3) SERVICING RIGHTS
On January 1, 2008, First Banks opted to measure servicing rights at fair value
as permitted by SFAS No. 156. The election of this option resulted in the
recognition of a cumulative effect of change in accounting principle of $6.3
million, net of tax, which was recorded as an increase to beginning retained
earnings, as further described in Note 1 to the consolidated financial
statements.
Mortgage Banking Activities. At March 31, 2008 and December 31, 2007, First
Banks serviced mortgage loans for others totaling $1.05 billion and $1.10
billion, respectively. Changes in mortgage servicing rights for the three months
ended March 31, 2008 and 2007 were as follows:
Three Months Ended
March 31,
----------------------
2008 2007
---- ----
(dollars expressed in thousands)
Balance, beginning of period........................................ $ 5,290 5,867
Re-measurement to fair value upon election to measure servicing
rights at fair value under SFAS No. 156......................... 9,538 --
Originated mortgage servicing rights................................ 675 333
Change in fair value resulting from changes in valuation inputs or
assumptions used in valuation model (1)......................... (684) --
Other changes in fair value (2)..................................... (650) --
Amortization........................................................ -- (793)
------- ------
Balance, end of period.............................................. $14,169 5,407
======= ======
--------------------
(1) The change in fair value resulting from changes in valuation inputs or assumptions used in valuation
model primarily reflects the change in discount rates and prepayment speed assumptions, primarily
due to changes in interest rates.
(2) Other changes in fair value reflect changes due to the collection/realization of expected cash flows
over time.
First Banks did not incur any impairment of mortgage servicing rights during the
three months ended March 31, 2007.
Other Servicing Activities. At March 31, 2008 and December 31, 2007, First Banks
serviced United States Small Business Administration (SBA) loans for others
totaling $202.2 million and $149.9 million, respectively. Changes in SBA
servicing rights for the three months ended March 31, 2008 and 2007 were as
follows:
Three Months Ended
March 31,
----------------------
2008 2007
---- ----
(dollars expressed in thousands)
Balance, beginning of period........................................ $7,468 8,064
Re-measurement to fair value upon election to measure servicing
rights at fair value under SFAS No. 156......................... 905 --
Originated SBA servicing rights..................................... 1,362 467
Change in fair value resulting from changes in valuation inputs or
assumptions used in valuation model (1)......................... (119) --
Other changes in fair value (2)..................................... (306) --
Amortization........................................................ -- (413)
Impairment.......................................................... -- (323)
------ ------
Balance, end of period.............................................. $9,310 7,795
====== ======
-------------------
(1) The change in fair value resulting from changes in valuation inputs or assumptions used in valuation
model primarily reflects the change in discount rates and prepayment speed assumptions, primarily
due to changes in interest rates.
(2) Other changes in fair value reflect changes due to the collection/realization of expected cash flows
over time.
(4) EARNINGS (LOSS) PER COMMON SHARE
The following is a reconciliation of basic and diluted earnings (loss) per share
(EPS) for the three months ended March 31, 2008 and 2007:
Income Per Share
(Loss) Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Three months ended March 31, 2008:
Basic EPS - loss to common stockholders.................. $(5,069) 23,661 $ (214.26)
Effect of dilutive securities:
Class A convertible preferred stock.................... -- -- --
------- ------- ---------
Diluted EPS - loss to common stockholders................ $(5,069) 23,661 $ (214.26)
======= ======= =========
(Restated) (Restated) (Restated)
Three months ended March 31, 2007:
Basic EPS - income available to common stockholders...... $17,187 23,661 $ 726.34
Effect of dilutive securities:
Class A convertible preferred stock.................... 192 394 (3.91)
------- ------- ---------
Diluted EPS - income available to common stockholders.... $17,379 24,055 $ 722.43
======= ======= =========
(5) TRANSACTIONS WITH RELATED PARTIES
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 $8.6
million and $8.9 million for the three months ended March 31, 2008 and 2007,
respectively. First Services leases information technology and other equipment
from First Bank. During the three months ended March 31, 2008 and 2007, First
Services paid First Bank $1.1 million in rental fees for the use of that
equipment. In addition, First Services paid approximately $464,000 and $441,000
for the three months ended March 31, 2008 and 2007, 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 $1.7 million and $913,000 for the three months ended
March 31, 2008 and 2007, 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 $45,000 and $33,000
for the three months ended March 31, 2008 and 2007, respectively, in rental
payments for occupancy of certain First Bank premises from which brokerage
business is conducted.
In January 2007, First Banks contributed 48,796 shares of common stock held in
its available-for-sale investment securities portfolio with a fair value of $1.7
million to the Dierberg Operating Foundation, Inc., a charitable foundation
established by First Banks' Chairman and members of his immediate family. In
conjunction with this transaction, First Banks recorded charitable 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. There
were no charitable contributions made to this organization during the three
months ended March 31, 2008.
First Bank leases certain of its in-store branch offices and automated teller
machine (ATM) sites from Dierbergs Markets, Inc., a grocery store chain
headquartered in St. Louis, Missouri that is owned and operated by the brother
of First Banks' Chairman and members of his immediate family. Total rent expense
incurred by First Bank under the lease obligation contracts was $99,000 for the
three months ended March 31, 2008 and 2007.
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. In January 2007,
First Bank contributed $4.0 million to SBLS LLC in the form of a capital
contribution, which increased First Bank's ownership of SBLS LLC to 63.9% and
decreased FCA's ownership to 36.1%. In June 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 warehouse line of credit
for loan funding purposes. During the first and third quarters of 2007, SBLS LLC
modified the structure of the Agreement with First Bank. In September 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 London Interbank Offered Rate, or LIBOR, plus 40 basis
points. The balance of advances outstanding under the Promissory Note was $52.7
million and $52.3 million at March 31, 2008 and December 31, 2007, respectively.
Interest expense recorded by SBLS LLC under the Promissory Note and Agreement
was $561,000 and $934,000 for the three months ended March 31, 2008 and 2007,
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 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
collectability or present other unfavorable features. Loans to directors, their
affiliates and executive officers of First Banks, Inc. were approximately $41.1
million and $57.7 million at March 31, 2008 and December 31, 2007, 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.
(6) REGULATORY CAPITAL
First Banks and First Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
First Banks and First Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require First Banks and First Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
March 31, 2008, First Bank was well capitalized and First Banks was adequately
capitalized. As of March 31, 2008, the most recent notification from First
Banks' primary regulator categorized First Bank as well capitalized and First
Banks as adequately capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized and adequately
capitalized, First Banks and First Bank must maintain minimum total risk-based,
Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following
table.
At March 31, 2008 and December 31, 2007, First Banks' and First Bank's required
and actual capital ratios were as follows:
Actual
------------------------------------------ For To be Well
March 31, 2008 December 31, 2007 Capital Capitalized Under
-------------------- --------------------- Adequacy Prompt Corrective
Amount Ratio Amount Ratio Purposes Action Provisions
------ ----- ------ ----- -------- -----------------
(Restated) (Restated)
(dollars expressed in thousands)
Total capital (to risk-weighted assets):
First Banks.......................... $1,011,491 9.89% $1,008,253 9.84% 8.0% 10.0%
First Bank........................... 1,026,513 10.06 1,023,990 10.01 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks.......................... 815,028 7.97 811,432 7.92 4.0 6.0
First Bank........................... 898,222 8.80 895,571 8.75 4.0 6.0
Tier 1 capital (to average assets):
First Banks.......................... 815,028 7.74 811,432 7.99 3.0 5.0
First Bank........................... 898,222 8.55 895,571 8.85 3.0 5.0
In March 2005, the Board of Governors of the Federal Reserve System (Federal
Reserve) adopted a final rule, Risk-Based Capital Standards: Trust Preferred
Securities and the Definition of Capital, which allows for the continued limited
inclusion of trust preferred securities in Tier 1 capital. The Federal Reserve's
final rule limits restricted core capital elements to 25% of the sum of all core
capital elements, including restricted core capital elements, net of goodwill
less any associated deferred tax liability. Amounts of restricted core capital
elements in excess of these limits may generally be included in Tier 2 capital.
Specifically, amounts of qualifying trust preferred securities and cumulative
perpetual preferred stock in excess of the 25% limit may be included in Tier 2
capital, but will be limited, together with subordinated debt and limited-life
preferred stock, to 50% of Tier 1 capital. In addition, the final rule provides
that in the last five years before the maturity of the underlying subordinated
note, the outstanding amount of the associated trust preferred securities is to
be excluded from Tier 1 capital and included in Tier 2 capital, subject to
one-fifth amortization per year. The final rule provides for a five-year
transition period, ending March 31, 2009, for the application of the
quantitative limits. Until March 31, 2009, the aggregate amount of qualifying
cumulative perpetual preferred stock and qualifying trust preferred securities
that may be included in Tier 1 capital is limited to 25% of the sum of the
following core capital elements: qualifying common stockholders' equity,
qualifying noncumulative and cumulative perpetual preferred stock, qualifying
minority interest in the equity accounts of consolidated subsidiaries and
qualifying trust preferred securities. First Banks has determined that the
Federal Reserve's final rules that will be effective in March 2009, if
implemented as of March 31, 2008, would have reduced First Banks' Tier 1 capital
(to risk-weighted assets) and Tier 1 capital (to average assets) to 7.11% and
6.90%, respectively, and would not have an impact on total capital (to
risk-weighted assets).
(7) 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, 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 the loan and investment
security portfolios, service charges and fees generated from deposit products
and services, and fees generated by First Banks' mortgage banking, insurance,
and trust, private banking and institutional money management business units.
First Banks' products and services are offered to customers primarily within its
respective geographic areas, which include eastern Missouri, Illinois, including
the Chicago metropolitan area, southern and northern California, 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. The business
segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
---------------------------- ----------------------------- -----------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2008 2007 2008 2007 2008 2007
---- ---- ---- ---- ---- ----
(Restated) (Restated) (Restated)
(dollars expressed in thousands)
Balance sheet information:
Investment securities.................. $ 813,920 997,486 21,860 21,785 835,780 1,019,271
Loans, net of unearned discount........ 9,012,429 8,886,184 -- -- 9,012,429 8,886,184
Goodwill and other intangible assets... 313,506 315,651 -- -- 313,506 315,651
Total assets........................... 10,806,329 10,872,602 28,897 29,868 10,835,226 10,902,470
Deposits............................... 8,941,626 9,164,868 (31,050) (15,675) 8,910,576 9,149,193
Other borrowings....................... 544,964 409,616 -- -- 544,964 409,616
Notes payable.......................... -- -- 58,000 39,000 58,000 39,000
Subordinated debentures................ -- -- 353,771 353,752 353,771 353,752
Stockholders' equity................... 1,223,118 1,203,008 (362,182) (360,931) 860,936 842,077
=========== ========== ========= ========= ========== ==========
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
---------------------------- ----------------------------- -----------------------------
Three Months Ended Three Months Ended Three Months Ended
March 31, March 31, March 31,
---------------------------- ----------------------------- -----------------------------
2008 2007 2008 2007 2008 2007
---- ---- ---- ---- ---- ----
(Restated) (Restated) (Restated)
(dollars expressed in thousands)
Income statement information:
Interest income........................ $ 164,048 170,822 256 258 164,304 171,080
Interest expense....................... 68,060 70,268 6,717 6,734 74,777 77,002
----------- ---------- --------- --------- ---------- ----------
Net interest income................. 95,988 100,554 (6,461) (6,476) 89,527 94,078
Provision for loan losses.............. 45,947 3,500 -- -- 45,947 3,500
----------- ---------- --------- --------- ---------- ----------
Net interest income after provision
for loan losses.................. 50,041 97,054 (6,461) (6,476) 43,580 90,578
----------- ---------- --------- --------- ---------- ----------
Noninterest income..................... 33,297 22,642 (186) (33) 33,111 22,609
Amortization of intangible assets...... 2,776 2,926 -- -- 2,776 2,926
Other noninterest expense.............. 78,491 80,177 2,157 2,885 80,648 83,062
----------- ---------- --------- --------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes
and minority interest in
income of subsidiary............. 2,071 36,593 (8,804) (9,394) (6,733) 27,199
Provision (benefit) for income taxes... 1,087 13,411 (3,092) (3,665) (2,005) 9,746
----------- ---------- --------- --------- ---------- ----------
Income (loss) before minority
interest in income of
subsidiary....................... 984 23,182 (5,712) (5,729) (4,728) 17,453
Minority interest in income
of subsidiary.................... 145 70 -- -- 145 70
----------- ---------- --------- --------- ---------- ----------
Net income (loss)................... $ 839 23,112 (5,712) (5,729) (4,873) 17,383
=========== ========== ========= ========= ========== ==========
(8) OTHER BORROWINGS
Other borrowings were comprised of the following at March 31, 2008 and December
31, 2007:
March 31, December 31,
2008 2007
---- ----
(Restated)
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily......................................................... $ 182,490 198,766
Monthly....................................................... 34,660 33,493
Term.......................................................... 120,000 100,000
Federal funds purchased............................................ 7,000 76,500
Federal Home Loan Bank (FHLB) advances (1)......................... 200,814 857
--------- ---------
Total..................................................... $ 544,964 409,616
========= =========
---------------------
(1) In January 2008, First Bank entered into two $100.0 million FHLB advances that mature in January 2009
and July 2009 at fixed interest rates of 3.16% and 2.53%, respectively.
The maturity dates, par amounts, interest rate and interest rate floor strike
prices on First Bank's term repurchase agreements as of March 31, 2008 and
December 31, 2007 were as follows:
Interest Interest Rate Floor
Maturity Date Par Amount Rate Strike Price
------------- ---------- ---- ------------
(dollars expressed
in thousands)
March 31, 2008:
April 12, 2012 (1)........................... $ 120,000 3.36% --
=========
December 31, 2007:
October 12, 2010 (1)......................... $ 100,000 LIBOR - 0.5100%(2) 4.50%(2)
=========
----------------------
(1) On March 31, 2008, First Bank restructured its $100.0 million term repurchase agreement. The primary
modifications were to: (a) increase the borrowing amount to $120.0 million; (b) extend the maturity
date from October 12, 2010 to April 12, 2012; (c) convert the interest rate from a variable rate to a
fixed rate of 3.36%, with interest to be paid quarterly beginning on April 12, 2008; and (d) terminate
the embedded interest rate floor agreements contained within the term repurchase agreement. These
modifications resulted in a pre-tax gain of $5.0 million, which was recorded as noninterest income in
the consolidated statements of operations.
(2) The interest rate paid on the term repurchase agreement was based on the three-month LIBOR plus the
spread amount shown minus a floating rate, subject to a 0% floor, equal to two times the differential
between the three-month LIBOR and the strike price shown, if the three-month LIBOR fell below the
strike price associated with the interest rate floor agreement.
(9) NOTES PAYABLE
On February 12, 2008, First Banks entered into First and Second Amendments to
its existing $125.0 million Secured Credit Agreement with a group of
unaffiliated financial institutions dated August 8, 2007 (Amended Secured Credit
Agreement). The primary modifications 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. The Amended Secured Credit Agreement also requires maintenance
of certain minimum capital ratios for First Banks and First Bank and contains
additional covenants, including a limitation on the amount of dividends on First
Banks' common stock that may be paid to stockholders.
First Banks was not in compliance with all restrictions and requirements of the
Amended Secured Credit Agreement at March 31, 2008 and December 31, 2007 as a
result of the restatement described in Note 1 to the consolidated financial
statements. However, First Banks subsequently terminated the Amended Secured
Credit Agreement on May 19, 2008, as further discussed in Note 14 to the
consolidated financial statements.
Notes payable were comprised of the following at March 31, 2008 and December 31,
2007:
March 31, December 31,
2008 2007
---- ----
(dollars expressed in thousands)
Term loans............................................................... $ 13,000 19,000
Revolving credit......................................................... 45,000 20,000
-------- --------
Total........................................................... $ 58,000 39,000
======== ========
During the three months ended March 31, 2008, First Banks made payments of $6.0
million on the outstanding principal balance of the term loans and had drawn
advances of $25.0 million on the revolving credit sub-facility portion of the
Amended Secured Credit Agreement. Letters of credit issued to unaffiliated third
parties on behalf of First Banks under the standby letter of credit sub-facility
portion of the Amended Secured Credit Agreement were $200,000 at March 31, 2008
and December 31, 2007, and had not been drawn on by the counterparties.
(10) SUBORDINATED DEBENTURES
First Banks has formed or assumed various affiliated Delaware or Connecticut
statutory and business trusts (collectively, the Trusts) that were created for
the sole purpose of issuing trust preferred securities. The trust preferred
securities were issued in private placements, with the exception of First
Preferred Capital Trust IV, which was issued in an underwritten public offering.
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 $6.1 million and $5.9
million for the three months ended March 31, 2008 and 2007, respectively, and
are included in interest expense in the consolidated statements of operations.
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 March 31, 2008 and December 31,
2007 were as follows:
Subordinated
Debentures
--------------------
Trust March December
Maturity Call Interest Preferred 31, 31,
Name of Trust Issuance Date Date Date(1) Rate(2) Securities 2008 2007
------------- ------------- ---- ---- ---- ---------- ---- ----
Variable Rate
- -------------
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 October 2004 January 7, 2035 January 7, 2010 + 240.0 bp 4,000 4,124 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 (3a) June 2006 July 7, 2036 July 7, 2011 + 165.0 bp 25,000 25,774 25,774
First Bank Statutory
Trust VII (3b) December 2006 December 15, 2036 December 15, 2011 + 185.0 bp 50,000 51,547 51,547
First Bank Statutory
Trust VIII (3c) February 2007 March 30, 2037 March 30, 2012 + 161.0 bp 25,000 25,774 25,774
First Bank Statutory
Trust X August 2007 September 15, 2037 September 15, 2012 + 230.0 bp 15,000 15,464 15,464
First Bank Statutory
Trust IX (3d) September 2007 December 15, 2037 December 15, 2012 + 225.0 bp 25,000 25,774 25,774
First Bank Statutory
Trust XI September 2007 December 15, 2037 December 15, 2012 + 285.0 bp 10,000 10,310 10,310
Fixed Rate
- ----------
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 variable rate or a fixed rate. The variable
rate for the outstanding subordinated debentures is based on the three-month LIBOR plus the basis point spread shown.
(3) In March 2008, First Banks executed four interest rate swap agreements, which have been designated as cash flow hedges, to
effectively convert the interest payments on these subordinated debentures from variable rate to fixed rate to the respective
call dates as follows:
(a) $25.0 million notional amount with a maturity date of July 7, 2011 that converts the interest rate from a variable rate of
LIBOR plus 165 basis points to a fixed rate of 4.40%;
(b) $50.0 million notional amount with a maturity date of December 15, 2011 that converts the interest rate from a variable
rate of LIBOR plus 185 basis points to a fixed rate of 4.905%;
(c) $25.0 million notional amount with a maturity date of March 30, 2012 that converts the interest rate from a variable rate
of LIBOR plus 161 basis points to a fixed rate of 4.71%; and
(d) $25.0 million notional amount with a maturity date of December 15, 2012 that converts the interest rate from a variable
rate of LIBOR plus 225 basis points to a fixed rate of 5.565%.
(11) INCOME TAXES
On January 1, 2007, First Banks implemented Financial Accounting Standards Board
Interpretation No. 48 -- Accounting for Uncertainty in Income Taxes, an
Interpretation of SFAS No. 109 -- Accounting for Income Taxes (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 March 31, 2008 and December 31, 2007, First Banks' liability for uncertain
tax positions, excluding interest and penalties, was $12.5 million and $12.2
million, respectively. The total amount of unrecognized tax benefits that would
affect the effective tax rate were $1.8 million and $1.7 million at March 31,
2008 and December 31, 2007, respectively. During the three months ended March
31, 2008, First Banks recorded additional liabilities for unrecognized tax
benefits of $554,000 that, if recognized, would decrease the provision for
income taxes by $61,000, net of the federal tax benefit. During the three months
ended March 31, 2008, First Banks reduced its liability for unrecognized tax
benefits by $346,000 as a result of the receipt of a no change letter following
the close of an examination of the 2004 federal return.
In accordance with FIN 48, it is First Banks' policy to separately disclose any
interest or penalties arising from the application of federal or state income
taxes. Interest related to unrecognized tax benefits is included in interest
expense and penalties related to unrecognized tax benefits are included in
noninterest expense. At March 31, 2008 and December 31, 2007, interest accrued
for unrecognized tax positions was $1.6 million and $1.4 million, respectively.
The amount of interest expense recognized during the three months ended March
31, 2008 and 2007 was $151,000 and $189,000, respectively. There were no
penalties for unrecognized tax positions accrued at March 31, 2008 and December
31, 2007, nor did First Banks recognize any expense for penalties during the
three months ended March 31, 2008 and 2007.
First Banks continually evaluates the unrecognized tax benefits associated with
its uncertain tax positions. It is reasonably possible that the total
unrecognized tax benefits as of March 31, 2008 could decrease by approximately
$1.7 million during the remainder of the year, 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 provision for income taxes is
estimated to be approximately $537,000. It is also reasonably possible that this
decrease could be substantially offset by new matters arising during the same
period.
First Banks files consolidated and separate income tax returns in the U.S.
federal jurisdiction and in various state jurisdictions. 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' federal returns through 2004
have been examined by the Internal Revenue Service. First Banks' current
estimate of the resolution of various state examinations is reflected in accrued
income taxes; however, final settlement of the examinations or changes in First
Banks' estimate may result in future income tax expense or benefit.
(12) FAIR VALUE DISCLOSURES
On January 1, 2008, First Banks implemented SFAS No. 157 for financial and
nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the consolidated financial statements on a recurring basis (at least
annually). Implementation was deferred for all nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
consolidated financial statements on a nonrecurring basis to fiscal years
beginning after November 15, 2008. First Banks applied the deferral to goodwill
and other intangible assets and other real estate owned.
In accordance with SFAS No. 157, financial assets and financial liabilities that
are measured at fair value subsequent to initial recognition are grouped into
three levels of inputs or assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk and the
reliability of assumptions used to determine fair value. The three input levels
are as follows:
Level 1 Inputs - Valuation is based on quoted prices in active markets for
identical instruments in active markets.
Level 2 Inputs - Valuation is based on quoted prices for similar
instruments in active markets; quoted prices for identical
or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or
whose significant value drivers are observable.
Level 3 Inputs - Valuation is generated from model-based techniques that
use at least one significant assumption not observable in
the market. These unobservable assumptions reflect
estimates of assumptions that market participants would
use in pricing the asset or liability. Valuation
techniques include use of option pricing models,
discounted cash flow models and similar techniques.
The following describes valuation methodologies used to measure different assets
and liabilities at fair value.
Available-for-sale investment securities. Available-for-sale investment
securities are recorded at fair value on a recurring basis. Available-for-sale
investment securities included in Level 1 are valued using quoted market prices.
Where quoted market prices are unavailable, the fair value included in Level 2
is based on quoted market prices of comparable instruments obtained from
independent pricing vendors based on recent trading activity and other relevant
information.
Loans held for sale. Loans held for sale are carried at the lower of cost or
market value, which is determined on an individual loan basis. The fair value is
based on the prices secondary markets are offering for portfolios with similar
characteristics. The Company classifies loans held for sale subjected to
nonrecurring fair value adjustments as nonrecurring Level 2.
Loans. The Company does not record loans at fair value on a recurring basis.
However, from time to time, a loan is considered impaired and an allowance for
loan losses is established. A loan is considered impaired when it is probable
that payment of principal and interest will not be made in accordance with the
contractual terms of the loan agreement. Once a loan is identified as impaired,
management measures impairment in accordance with SFAS No. 114 - Accounting by
Creditors for Impairment of a Loan. When measuring impairment, the expected
future cash flows of an impaired loan are discounted at the loan's effective
interest rate. Additionally, 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, 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 acquisition date. In
accordance with SFAS No. 157, impaired loans where an allowance is established
based on the fair value of collateral require classification in the fair value
hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company classifies the impaired
loan as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below
the appraised value and there is no observable market price, the Company
classifies the impaired loan as nonrecurring Level 3.
Derivative instruments. Substantially all derivative instruments utilized by the
Company are traded in over-the-counter markets where quoted market prices are
not readily available. Derivative instruments utilized by the Company include
interest rate swap agreements, interest rate floor and cap agreements, interest
rate lock commitments and forward commitments to sell mortgage-backed
securities. For these derivative instruments, fair value is based on market
observable inputs utilizing pricing systems and valuation models, and where
applicable, the values are compared to the market values calculated
independently by the respective counterparties. The Company classifies its
derivative instruments as Level 2.
Servicing rights. Servicing rights are valued based on valuation models that
utilize assumptions based on the predominant risk characteristics of the
underlying loans, including principal balance, interest rate, weighted average
life, cost to service and estimated prepayment speeds. The valuation models
estimate the present value of estimated future net servicing income. The Company
classifies its servicing rights as Level 3.
Nonqualified Deferred Compensation Plan. The Company's nonqualified deferred
compensation plan is recorded at fair value on a recurring basis. The unfunded
plan allows participants to hypothetically invest in various specified
investment options such as equity funds, international stock funds, capital
appreciation funds, money market funds, bond funds, mid-cap value funds and
growth funds. The nonqualified deferred compensation plan liability is valued
based on quoted market prices of the underlying investments. The Company
classifies its nonqualified deferred compensation plan liability as Level 1.
Assets and liabilities measured at fair value on a recurring basis as of March
31, 2008 are reflected in the following table:
Fair Value Measurements
-------------------------------------------------------
March 31, 2008
-------------------------------------------------------
Level 1 Level 2 Level 3 Fair Value
------- ------- ------- ----------
(dollars expressed in thousands)
Assets:
Available-for-sale investment securities... $ 13,359 804,003 -- 817,362
Derivative instruments..................... -- 25,282 -- 25,282
Servicing rights........................... -- -- 23,479 23,479
--------- --------- --------- ---------
Total................................... $ 13,359 829,285 23,479 866,123
========= ========= ========= =========
Liabilities:
Nonqualified deferred compensation plan.... $ 8,765 -- -- 8,765
========= ========= ========= =========
The following table presents the changes in Level 3 assets measured on a
recurring basis for the three months ended March 31, 2008:
Servicing Rights
----------------
(dollars expressed in thousands)
Balance, beginning of period............................ $ 12,758
Impact of election to measure servicing
rights at fair value under SFAS No. 156........ 10,443
Total gains or losses (realized/unrealized):
Included in earnings (1)....................... (1,759)
Included in other comprehensive income......... --
Purchases, issuances and settlements............... 2,037
Transfers in and/or out of level 3................. --
---------
Balance, end of period.................................. $ 23,479
=========
-------------------
(1) Gains or losses (realized/unrealized) are included in other income in the consolidated statements
of operations.
From time to time, First Banks measures certain assets at fair value on a
nonrecurring basis. These include assets that are measured at the lower of cost
or market value that were recognized at fair value below cost at the end of the
period. Assets measured at fair value on a nonrecurring basis as of March 31,
2008 are reflected in the following table:
Fair Value Measurements
-------------------------------------------------------
March 31, 2008
-------------------------------------------------------
Level 1 Level 2 Level 3 Fair Value
------- ------- ------- ----------
(dollars expressed in thousands)
Assets:
Loans held for sale........................ $ -- 67,821 -- 67,821
Loans...................................... -- 222,295 14,510 236,805
--------- --------- -------- ---------
Total................................... $ -- 290,116 14,510 304,626
========= ========= ======== =========
(13) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty contracts. For
value received, and for the purpose of inducing a pension fund and its trustees
and a welfare fund and its trustees (the Funds) to conduct business with MVP,
First Bank's institutional investment management subsidiary, First Banks
irrevocably and unconditionally guaranteed payment of and promised to pay to
each of the Funds any amounts up to the sum of $5.0 million to the extent MVP is
liable to the Funds for a breach of the Investment Management Agreements
(including the Investment Policy Statement and Investment Guidelines), by and
between MVP and the Funds and/or any violation of the Employee Retirement Income
Security Act by MVP resulting in liability to the Funds. The guaranties are
continuing guaranties of all obligations that may arise for transactions
occurring prior to termination of the Investment Management Agreements and are
coexistent with the term of the Investment Management Agreements. The Investment
Management Agreements have no specified term but may be terminated at any time
upon written notice by the Trustees or, at First Banks' option, upon thirty days
written notice to the Trustees. In the event of termination of the Investment
Management Agreements, such termination shall have no effect on the liability of
First Banks with respect to obligations incurred before such termination. The
obligations of First Banks are joint and several with those of MVP. First Banks
does not have any recourse provisions that would enable it to recover from third
parties any amounts paid under the contracts nor does First Banks hold any
assets as collateral that, upon occurrence of a required payment under the
contract, could be liquidated to recover all or a portion of the amount(s) paid.
At March 31, 2008 and December 31, 2007, 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.
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.
(14) SUBSEQUENT EVENTS
On May 14, 2008, First Banks formed FB Holdings, LLC, a limited liability
company organized in the state of Missouri (FB Holdings). FB Holdings operates
as a majority-owned subsidiary of First Bank and was formed for the primary
purpose of holding and managing certain nonperforming loans and assets to allow
the liquidation of such assets at a time that is more economically advantageous
to First Bank. During the second quarter of 2008, First Bank contributed
nonperforming loans and assets with a fair value of approximately $88.6 million
and FCA, a corporation owned by First Banks' Chairman of the Board and members
of his immediate family, contributed cash of $85.0 million to FB Holdings. In
July 2008, First Bank contributed cash of $9.0 million and nonperforming loans
with a fair value of approximately $6.5 million and FCA contributed cash of
$15.0 million to FB Holdings. As a result, First Bank owns 51.01% and FCA owns
the remaining 48.99% of FB Holdings. The contribution of cash by FCA is
reflected as minority interest in the Company's consolidated financial
statements and, consequently, increased the Company's total risk-based capital
ratio.
On May 15, 2008, First Banks entered into a Revolving Credit Note and a Stock
Pledge Agreement (the New Credit Agreement) with Investors of America Limited
Partnership (Investors of America, LP). Investors of America, LP is a Nevada
limited partnership that was created by and for the benefit of Mr. James F.
Dierberg, First Banks' Chairman of the Board, and members of his immediate
family.
The New Credit Agreement provides for a $30.0 million secured revolving line of
credit to be utilized for general working capital needs and capital investments
in subsidiaries. Advances outstanding under the New Credit Agreement bear
interest at the three-month LIBOR plus 300 basis points. Interest is payable on
outstanding advances on the first day of each month (in arrears) and the
aggregate principal balance of all outstanding advances and any accrued interest
thereon is due and payable in full on June 30, 2009, the maturity date of the
New Credit Agreement. The maturity date of the New Credit Agreement may be
accelerated at the option of Investors of America, LP if an event of default
under the New Credit Agreement has occurred and has not been cured to the
satisfaction of Investors of America LP. The default provisions of the New
Credit Agreement are normal and customary for agreements of this type. In this
situation, the aggregate principal balance of all outstanding advances and any
accrued interest thereon will become immediately due and payable in full. The
New Credit Agreement is secured by First Banks' ownership interest in all of the
capital stock of both SFC and CFHI.
First Banks advanced the entire $30.0 million under the New Credit Agreement on
May 15, 2008 and utilized the proceeds of the advance to terminate and repay in
full all of the obligations under its existing Amended Secured Credit Agreement.
In July 2008, First Banks repaid in full its outstanding balance under the New
Credit Agreement in the aggregate amount of $30.0 million, including the accrued
interest thereon.
On May 19, 2008, First Banks entered into a Termination Agreement regarding its
Amended Secured Credit Agreement. In accordance with the terms and conditions of
the Termination Agreement, First Banks repaid in full all of its existing
obligations associated with the Amended Secured Credit Agreement in the
aggregate amount of $58.1 million, including the accrued interest and fees
thereon. First Banks repaid in full its obligations under the Amended Secured
Credit Agreement with existing cash reserves, dividends from First Bank, and
advances under the New Credit Agreement. First Banks did not incur any
significant or unusual early termination penalties under the terms and
conditions of the Termination Agreement or recognize any gain or loss upon
termination.
On June 30, 2008, First Banks recognized other-than-temporary impairment of $6.4
million on an equity investment in the common stock of a single company in the
financial services industry. The other-than-temporary impairment was primarily
caused by economic events affecting the financial services industry as a whole.
The $6.4 million represented the difference between the cost basis and the fair
value of the equity investment as of June 30, 2008.
ITEM 1A. RISK FACTORS
In addition to the risk factors described in Amendment No. 1 to our Annual
Report on Form 10-K, we have identified three additional risk factors, described
below, that readers of this Quarterly Report on Form 10-Q should consider in
conjunction with the other information included in this Quarterly Report on Form
10-Q, including Management's Discussion and Analysis of Financial Condition and
Results of Operations and our consolidated financial statements and the related
notes thereto.
Our information systems could suffer an interruption or breach in security. Our
operations are heavily reliant upon our communication and information systems. A
failure, interruption or breach in security of these systems could result in
failures or disruptions in our customer relationship management, general ledger,
deposits, loan and other systems. While we have policies and procedures designed
to prevent or limit the impact of any such failure, interruption or security
breach, there can be no assurance that any such failure, interruption or
security breach will not occur. Any such failure, interruption or breach could
adversely affect our operations and financial condition including a resulting
loss in customer business, damage to our reputation, and possible exposure to
regulatory scrutiny and litigation, any of which could have a material adverse
affect on our financial condition and results of operations.
Severe weather, natural disasters, acts of war or terrorism, and other external
events could significantly impact our business. Severe weather, natural
disasters, acts of war or terrorism, and other adverse external events could
have a significant impact on our ability to conduct business. Such events could
affect the stability of our deposit base, impair the ability of borrowers to
repay outstanding loans, impair the value of collateral securing loans, cause
significant property damage, result in loss of revenue, and/or cause us to incur
additional expenses. Although we have established policies and procedures
addressing these types of events, the occurrence of any such event could have a
material adverse effect on our business and operations.
We have identified material weaknesses in our internal control over financial
reporting, and concluded that our internal control was not effective as of
December 31, 2007. We have identified material weaknesses in our internal
control over financial reporting and, as a result, have concluded that our
internal control over financial reporting as of December 31, 2007 was not
effective. Although we are in the process of implementing several changes in our
internal controls, there can be no assurance that our remedial efforts will be
effective, nor can there be any assurances that we will not incur losses due to
internal or external acts intended to defraud, misappropriate assets, or
circumvent applicable law or our system of internal controls. The inability to
maintain effective internal controls could adversely affect our operations or
financial results. See Item 4 -- "Controls and Procedures."
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
with respect to our financial condition, results of operations and business.
Generally, forward-looking statements may be identified through the use of words
such as: "believe," "expect," "anticipate," "intend," "plan," "estimate," or
words of similar meaning or future or conditional terms such as: "will,"
"would," "should," "could," "may," "likely," "probably," or "possibly." Examples
of forward-looking statements include, but are not limited to, estimates or
projections with respect to our future financial condition, and expected or
anticipated revenues with respect to our results of operations and our business.
These forward-looking statements are subject to certain risks and uncertainties,
not all of which can be predicted or anticipated. Factors that may cause our
actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and in the economy, including the threat of future terrorist activities,
existing and potential wars and/or military actions related thereto, and
domestic responses to terrorism or threats of terrorism; the impact of laws and
regulations applicable to us and changes therein; the impact of accounting
pronouncements applicable to us and changes therein; competitive conditions in
the markets in which we conduct our operations, including competition from
banking and non-banking companies with substantially greater resources than us,
some of which may offer and develop products and services not offered by us; our
ability to control the composition of our loan portfolio without adversely
affecting interest income; the credit risk associated with consumers who may not
repay loans; the geographic dispersion of our offices; the impact our hedging
activities may have on our operating results; the highly regulated environment
in which we operate; and our ability to respond to changes in technology. With
regard to our efforts to grow through acquisitions, factors that could affect
the accuracy or completeness of forward-looking statements contained herein
include: our ability to consummate pending acquisitions; the competition of
larger acquirers with greater resources; fluctuations in the prices at which
acquisition targets may be available for sale; the impact of making acquisitions
without using our common stock; and possible asset quality issues, pending
litigation, unknown liabilities and/or integration issues with the businesses
that we have acquired. For discussion of these and other risk factors, refer to
Amendment No. 1 to our 2007 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission. We do not have a duty to and will not update
these forward-looking statements. Readers of this Quarterly Report on Form 10-Q
should therefore consider these risks and uncertainties in evaluating
forward-looking statements and should not place undo reliance on these
statements.
General
We are a registered bank holding company incorporated in Missouri in 1978 and
headquartered in St. Louis, Missouri. We operate through our wholly owned
subsidiary bank holding company, The San Francisco Company, or SFC,
headquartered in St. Louis, Missouri; our wholly owned subsidiary holding
company, Coast Financial Holdings, Inc., or CFHI, headquartered in Bradenton,
Florida; and SFC's majority-owned subsidiary bank, First Bank, also
headquartered in St. Louis, Missouri. First Bank operates through its
subsidiaries, as listed below, and its branch banking offices. First Bank's
subsidiaries are wholly owned except Small Business Loan Source LLC, or SBLS
LLC, which is 76.0% owned by First Bank and 24.0% owned by First Capital
America, Inc.
>> First Bank Business Capital, Inc.;
>> Missouri Valley Partners, Inc., or MVP;
>> Adrian N. Baker & Company, or Adrian Baker;
>> Universal Premium Acceptance Corporation and its wholly owned
subsidiary, UPAC of California, Inc., collectively UPAC; and
>> SBLS LLC.
At March 31, 2008, we had assets of $10.84 billion, loans, net of unearned
discount, of $9.01 billion, deposits of $8.91 billion and stockholders' equity
of $860.9 million, and we currently operate 217 branch banking offices in
California, Florida, Illinois, Missouri and Texas.
Through First Bank, we offer a broad range of financial services, including
commercial and personal deposit products, commercial and consumer lending, and
many other financial products and services. Commercial and personal deposit
products include demand, savings, money market and time deposit accounts. In
addition, we market combined basic services for various customer groups,
including packaged accounts for more affluent customers, and sweep accounts,
lock-box deposits and cash management products for commercial customers.
Commercial lending includes commercial, financial and agricultural loans, real
estate construction and development loans, commercial real estate loans, small
business lending, asset-based loans, trade financing and insurance premium
financing. Consumer lending includes residential real estate, home equity and
installment lending. Other financial services include mortgage banking, debit
cards, brokerage services, employee benefit and commercial and personal
insurance services, internet banking, remote deposit, automated teller machines,
telephone banking, safe deposit boxes, and trust, private banking and
institutional money management services. The revenues generated by First Bank
and its subsidiaries consist primarily of interest income, generated from the
loan and investment security portfolios, service charges and fees generated from
deposit products and services, and fees and commissions generated by our
mortgage banking, insurance, and trust, private banking and institutional money
management business units. Our extensive line of products and services are
offered to customers primarily within our geographic areas, which include
eastern Missouri, Illinois, including the Chicago metropolitan area, southern
and northern California, 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, respectively.
Primary responsibility for managing our banking unit rests with the officers and
directors of each unit, but we centralize many of our overall corporate
policies, procedures and administrative functions and provide centralized
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our banking units to focus
on customer service.
Restatement of Previously Issued Consolidated Interim Financial Statements
As discussed in Amendment No. 1 to our 2007 Annual Report on Form 10-K, the
Audit Committee of our Board of Directors (the Audit Committee), with the
assistance of legal counsel and other third parties, commissioned an
investigation into the circumstances and possible irregularities that led to
certain fraudulent transactions in our mortgage banking division being
improperly recorded in our consolidated financial statements due to the
circumvention of established internal controls. The investigation was completed
on July 29, 2008.
On May 16, 2008, management and the Audit Committee determined that we needed to
restate our previously issued consolidated financial statements as of December
31, 2007 and 2006, and for the years ended December 31, 2007, 2006 and 2005 and
restate certain financial information as of December 31, 2005, 2004 and 2003,
and for the years ended December 31, 2004 and 2003 and each of the quarters in
2007 and 2006, and that these previously issued consolidated financial
statements should no longer be relied upon. Accordingly, we have restated our
previously issued consolidated financial statements in Amendment No. 1 to our
Annual Report on Form 10-K for the year ended December 31, 2007. We have not
amended our previously filed Annual Reports on Form 10-K or Quarterly Reports on
Form 10-Q for the periods affected by this restatement. The financial
information presented herein as of December 31, 2007 and for the three months
ended March 31, 2007 has been restated as set forth in Amendment No. 1 to our
2007 Annual Report on Form 10-K.
Financial Condition
Total assets were $10.84 billion at March 31, 2008, compared to $10.90 billion
at December 31, 2007. The decrease in our total assets was primarily
attributable to a decrease in our available-for-sale investment securities,
partially offset by organic loan growth.
Loans, net of unearned discount, increased $126.2 million to $9.01 billion at
March 31, 2008, from $8.89 billion at December 31, 2007, reflecting organic
growth, partially offset by net loan charge-offs and the sale of approximately
$10.8 million of our small business loans in March 2008. The loan growth during
the quarter was primarily associated with our commercial and industrial loan
portfolio commensurate with our strategy of reducing our exposure to real estate
transactions in light of current market conditions, as further discussed under
"--Loans and Allowance for Loan Losses."
Investment securities decreased $183.5 million to $835.8 million at March 31,
2008, from $1.02 billion at December 31, 2007. Funds provided by maturities and
sales of investment securities were primarily utilized to fund internal loan
growth. The decrease reflects maturities and/or calls of investment securities
of $138.6 million and sales of investment securities of $82.4 million for the
three months ended March 31, 2008.
Other assets increased $12.8 million to $134.5 million at March 31, 2008, from
$121.7 million at December 31, 2007. The increase resulted from an increase in
the fair value of servicing rights and derivative instruments, partially offset
by a decrease in accrued interest receivable.
Deposits decreased $238.6 million to $8.91 billion at March 31, 2008, from $9.15
billion at December 31, 2007. During the first quarter of 2008, we achieved
organic growth in savings and money market deposits and demand deposits, which
increased $72.9 million and $20.3 million, respectively, through our deposit
development programs, including enhanced product and service offerings coupled
with marketing campaigns. However, anticipated run-off of higher rate
certificates of deposit, primarily in the Florida region, resulted in a
significant decrease in our time deposits of $331.7 million during the first
quarter of 2008. The Florida region accounted for $167.5 million of the decrease
in certificates of deposit. Deposit growth, which is our primary funding source
for loans, was temporarily replaced with other borrowings.
Other borrowings, which are comprised of securities sold under agreements to
repurchase, Federal Home Loan Bank, or FHLB, advances, and federal funds
purchased, increased $135.3 million to $545.0 million at March 31, 2008,
compared to $409.6 million at December 31, 2007. In light of uncertain market
conditions, increased loan funding needs and current deposit trends, we
implemented several strategies during the first quarter of 2008 to improve our
liquidity position, including increasing our outstanding FHLB borrowings by
$200.0 million, as further discussed under "--Liquidity." Our term repurchase
agreements increased $20.0 million as a result of the restructuring of a term
repurchase agreement, as further described in Note 8 to our consolidated
financial statements.
Our notes payable were $58.0 million and $39.0 million at March 31, 2008 and
December 31, 2007, respectively. During the first quarter of 2008, we borrowed
$25.0 million on our revolving credit facility and made scheduled quarterly
principal payments of $6.0 million on our outstanding term loans, as further
described in Note 9 to our consolidated financial statements. Subordinated
debentures were $353.8 million at March 31, 2008 and December 31, 2007.
Stockholders' equity was $860.9 million and $842.1 million at March 31, 2008 and
December 31, 2007, respectively, reflecting an increase of $18.8 million during
the first quarter of 2008. The increase was primarily attributable to: (a) a
$17.6 million increase in accumulated other comprehensive income, comprised of
$12.3 million associated with changes in unrealized gains and losses on our
available-for-sale investment securities portfolio and $5.3 million associated
with changes in the fair value of our derivative financial instruments; (b) a
$6.3 million cumulative effect adjustment of a change in accounting principle
recorded in conjunction with our election to measure servicing rights at fair
value as permitted by Statement of Financial Accounting Standards, or SFAS, No.
156 -- Accounting for Servicing of Financial Assets, as further discussed in
Note 1 and Note 3 to our consolidated financial statements; partially offset by
(c) a net loss of $4.9 million and dividends paid on our Class A and Class B
preferred stock.
Results of Operations
Net Income. We recorded a net loss of $4.9 million for the three months ended
March 31, 2008, compared to net income of $17.4 million for the three months
ended March 31, 2007. The decrease in our earnings for the three months ended
March 31, 2008 as compared to the three months ended March 31, 2007 was
primarily driven by the following:
>> An increase in the provision for loan losses to $45.9 million for the
three months ended March 31, 2008, compared to $3.5 million for the
three months ended March 31, 2007; and
>> A decline in net interest income and net interest margin to $89.5
million and 3.65% for the three months ended March 31, 2008,
respectively, compared to $94.1 million and 4.12% for the three months
ended March 31, 2007; partially offset by
>> An increase in noninterest income to $33.1 million for the three
months ended March 31, 2008, compared to $22.6 million for the three
months ended March 31, 2007;
>> A decline in noninterest expense to $83.4 million for the three months
ended March 31, 2008, compared to $86.0 million for the three months
ended March 31, 2007; and
>> A benefit for income taxes of $2.0 million for the three months ended
March 31, 2008, compared to a provision for income taxes of $9.7
million for the three months ended March 31, 2007.
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 "--Loans and Allowance for Loan Losses."
The decline in our net interest income and our net interest margin was primarily
attributable to the 300 basis point decrease, in aggregate, in the prime lending
rate, from the third quarter of 2007 through the first quarter of 2008. We are
currently in an asset-sensitive position, and as such, interest rate cuts by the
Board of Governors of the Federal Reserve System, or Federal Reserve, have an
immediate short-term negative effect on our net interest income and net interest
margin until we can fully re-price our deposits to reflect current market
interest rates. See further discussion under "--Net Interest Income."
The increase in our noninterest income for the first quarter of 2008 primarily
resulted from a pre-tax gain of $5.0 million recorded on the extinguishment of a
term repurchase agreement, net gains on investment securities sales and calls of
$1.2 million and a net gain of $3.4 million on our derivative instruments. See
further discussion under "--Noninterest Income."
The decrease in noninterest expense primarily resulted from reductions in
salaries and employee benefits expense attributable to decreased staffing levels
in our mortgage banking division and the completion of certain other staff
reductions in 2007 and the first quarter of 2008. This decrease was partially
offset by an increase in occupancy and furniture and equipment expenses. See
further discussion under "--Noninterest Expense."
The change in the (benefit) provision for income taxes primarily resulted from
decreased earnings, as further discussed under "--Provision for Income Taxes."
Net Interest Income. Net interest income, expressed on a tax-equivalent basis,
decreased to $89.9 million for the three months ended March 31, 2008, compared
to $94.5 million for the comparable period in 2007. Our net interest margin
declined to 3.65% for the three months ended March 31, 2008, reflecting a
decrease of 47 basis points from 4.12% for the three months ended March 31,
2007. Net interest income is the difference between interest earned on our
interest-earning assets, such as loans and investment securities, and interest
paid on our interest-bearing liabilities, such as deposits and borrowings. Net
interest income is affected by the level and composition of assets, liabilities
and stockholders' equity, as well as the general level of interest rates and
changes in interest rates. Interest income expressed on a tax-equivalent basis
includes the additional amount of interest income that would have been earned if
our investment in certain tax-exempt interest-earning assets had been made in
assets subject to federal, state and local income taxes yielding the same
after-tax income. Net interest margin is determined by dividing net interest
income computed on a tax-equivalent basis by average interest-earning assets.
The interest rate spread is the difference between the average tax-equivalent
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities.
The decline in our net interest margin and net interest income is primarily
attributable to the decrease in the prime lending rate that began in September
2007 and continued through March 2008. During 2007 and the three months ended
March 31, 2008, the Federal Reserve decreased the targeted federal funds rate
six times, resulting in six reductions in the prime lending rate totaling 300
basis points in aggregate. Our balance sheet is currently asset sensitive, and
as such, our net interest margin is negatively impacted with each interest rate
cut as our loan portfolio re-prices on an immediate basis; whereas we are unable
to immediately re-price our deposit portfolio to current market interest rates,
thereby resulting in a compression of our net interest margin. The average rates
paid on our interest-bearing deposits decreased 36 basis points to 3.32% for the
three months ended March 31, 2008, compared to 3.68% for the same period in
2007, while the average yield earned on our interest-earning assets decreased 80
basis points to 6.68% for the three months ended March 31, 2008, compared to
7.48% for the same period in 2007, resulting in a reduction of our net interest
margin. Average interest-earning assets increased $609.9 million to $9.91
billion for the three months ended March 31, 2008, from $9.30 billion for the
comparable period in 2007. The increase is primarily attributable to internal
loan growth and interest-earning assets provided by our acquisitions completed
in 2007. Average interest-bearing liabilities increased $685.9 million to $8.69
billion for the three months ended March 31, 2008, from $8.00 billion for the
comparable period in 2007.
Interest income on our loan portfolio, expressed on a tax-equivalent basis,
decreased to $152.9 million for the three months ended March 31, 2008, compared
to $153.2 million for the comparable period in 2007. Average loans, net of
unearned discount, increased $1.13 billion to $8.95 billion for the three months
ended March 31, 2008, from $7.82 billion for the comparable period in 2007. The
yield on our loan portfolio decreased 107 basis points to 6.87% for the three
months ended March 31, 2008, compared to 7.94% for the comparable period in
2007, reflecting decreases in the prime lending rate throughout the latter part
of 2007 and the first quarter of 2008, competitive pressures on loan yields
within our markets and a significant increase in the average amount of
nonaccrual loans during the respective periods, partially offset by an increase
in interest income associated with our interest rate swap agreements. The prime
lending rate decreased 100 basis points during 2007, from 8.25% at December 31,
2006 to 7.25% at December 31, 2007, and decreased an additional 200 basis points
during the first quarter of 2008 to 5.25% at March 31, 2008. Our interest rate
swap agreements contributed to an increase in interest income on our loan
portfolio of $1.8 million for the three months ended March 31, 2008, in contrast
to a decrease in interest income on our loan portfolio of $1.4 million for the
comparable period in 2007. The increase in average loans primarily reflects
internal growth and our acquisitions completed in 2007.
Interest income on our investment securities, expressed on a tax-equivalent
basis, was $11.6 million and $16.4 million for the three months ended March 31,
2008 and 2007, respectively. Average investment securities were $942.4 million
and $1.33 billion for the three months ended March 31, 2008 and 2007,
respectively, and the yield earned on our investment portfolio was 4.95% and
5.01% for the three months ended March 31, 2008 and 2007, respectively.
Interest expense on our interest-bearing deposits was $64.1 million and $65.8
million for the three months ended March 31, 2008 and 2007, respectively.
Average interest-bearing deposits increased to $7.77 billion for the three
months ended March 31, 2008, compared to $7.24 billion for the comparable period
in 2007. The increase in average interest-bearing deposits reflects organic
growth through enhanced product marketing campaigns during the period, and
growth provided by our acquisitions completed during 2007. The aggregate
weighted average rate paid on our deposit portfolio was 3.32% for the three
months ended March 31, 2008, compared to 3.68% for the comparable period in
2007. The decrease in the aggregate weighted average rate paid for these periods
is primarily reflective of the declining interest rate environment.
Specifically, the weighted average rate paid on our time deposit portfolio
declined to 4.42% for the three months ended March 31, 2008 from 4.75% for the
comparable period in 2007. We expect the weighted average rate paid on our
deposit portfolio to further decline as we continue to reduce overall deposit
rates to reflect current market conditions and as our time deposits mature and
re-price at current market rates.
Interest expense on our other borrowings was $3.9 million and $4.4 million for
the three months ended March 31, 2008 and 2007, respectively. Average other
borrowings were $531.2 million and $393.3 million for the three months ended
March 31, 2008 and 2007, respectively. The aggregate weighted average rate paid
on our other borrowings was 2.97% and 4.56% for the three months ended March 31,
2008 and 2007, respectively. The decrease in the weighted average rate paid on
our other borrowings reflects the reduction in short-term interest rates during
the periods. The increase in average other borrowings reflects an additional
$200.0 million of FHLB advances entered into during January 2008, and an
increase in our term repurchase agreement of $20.0 million, partially offset by
the termination of a $100.0 million term repurchase agreement in August 2007, as
further discussed under "--Liquidity."
Interest expense on our notes payable was $569,000 and $908,000 for the three
months ended March 31, 2008 and 2007, respectively. Our notes payable averaged
$39.5 million and $56.6 million for the three months ended March 31, 2008 and
2007, respectively. The aggregate weighted average rate paid on our notes
payable was 5.80% and 6.51% for the three months ended March 31, 2008 and 2007,
respectively, reflecting the reduction in short-term interest rates during the
periods, partially offset by an increase in fees paid on our notes payable. The
weighted average rate paid on our notes payable includes unused commitment,
arrangement and renewal fees. Exclusive of these fees, the weighted average rate
paid on our notes payable was 4.67% and 6.46% for the three months ended March
31, 2008 and 2007, respectively. The decrease in our average notes payable is
primarily attributable to contractual payments and additional prepayments made
on our term loan, as further described in Note 9 to our consolidated financial
statements.
Interest expense on our subordinated debentures was $6.2 million and $5.9
million for the three months ended March 31, 2008 and 2007, respectively.
Average subordinated debentures were $353.8 million and $310.1 million for the
three months ended March 31, 2008 and 2007, respectively. The aggregate weighted
average rate paid on our subordinated debentures was 7.01% and 7.72% for the
three months ended March 31, 2008 and 2007, respectively, reflecting the
reduction in short-term interest rates during the periods as $282.5 million, or
79.4% of our subordinated debentures are variable rate. The change in volume and
average rates paid reflects 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 in April 2007, as further described in Note 10 to our consolidated
financial statements. In addition, in March 2008, we entered into four interest
rate swap agreements designated as cash flow hedges to effectively convert the
interest rate on $125.0 million of our variable rate subordinated debentures to
a blended fixed rate of interest of approximately 4.90%, as further discussed
under "--Interest Rate Risk Management" and in Note 10 to our consolidated
financial statements.
The following table sets forth, on a tax-equivalent basis, certain information
relating to our average balance sheets, and reflects the average yield earned on
our interest-earning assets, the average cost of our interest-bearing
liabilities and the resulting net interest income for the three months ended
March 31, 2008 and 2007.
Three Months Ended March 31,
-----------------------------------------------------------
2008 2007
----------------------------- -----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
(Restated)
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1)(2)(3)(4)................................ $ 8,950,752 152,892 6.87% $ 7,822,656 153,179 7.94%
Investment securities (4)......................... 942,408 11,602 4.95 1,329,215 16,424 5.01
Short-term investments............................ 18,210 162 3.58 149,604 1,878 5.09
----------- ------- ----------- -------
Total interest-earning assets............... 9,911,370 164,656 6.68 9,301,475 171,481 7.48
------- -------
Nonearning assets..................................... 932,839 835,818
----------- -----------
Total assets................................ $10,844,209 $10,137,293
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand........................ $ 998,996 2,032 0.82% $ 983,776 2,616 1.08%
Savings and money market....................... 2,709,104 17,527 2.60 2,437,295 18,337 3.05
Time deposits of $100 or more.................. 1,498,582 16,769 4.50 1,425,704 17,030 4.84
Other time deposits............................ 2,559,345 27,787 4.37 2,397,926 27,790 4.70
----------- ------- ----------- -------
Total interest-bearing deposits............. 7,766,027 64,115 3.32 7,244,701 65,773 3.68
Other borrowings.................................. 531,213 3,928 2.97 393,271 4,418 4.56
Notes payable (5)................................. 39,472 569 5.80 56,594 908 6.51
Subordinated debentures........................... 353,761 6,165 7.01 310,056 5,903 7.72
----------- ------- ----------- -------
Total interest-bearing liabilities.......... 8,690,473 74,777 3.46 8,004,622 77,002 3.90
------- -------
Noninterest-bearing liabilities:
Demand deposits................................... 1,195,776 1,224,318
Other liabilities................................. 112,837 123,129
----------- -----------
Total liabilities........................... 9,999,086 9,352,069
Stockholders' equity.................................. 845,123 785,224
----------- -----------
Total liabilities and stockholders' equity.. $10,844,209 $10,137,293
=========== ===========
Net interest income................................... 89,879 94,479
======= =======
Interest rate spread.................................. 3.22 3.58
Net interest margin (6)............................... 3.65% 4.12%
==== ====
- ------------------
(1) For purposes of these calculations, nonaccrual loans are included in average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income includes 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 $352,000 and $401,000 for the three months ended March 31, 2008 and 2007, respectively.
(5) Interest expense on our notes payable includes commitment, arrangement and renewal fees. Exclusive of these fees,
the interest rates paid were 4.67% and 6.46% for the three months ended March 31, 2008 and 2007, 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 change in interest
income and interest expense that is attributable to the change in average volume
and change in average rates, for the three months ended March 31, 2008 as
compared to the three months ended March 31, 2007. 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:
----------------------------------------------
Three Months Ended March 31, 2008
Compared to 2007
----------------------------------------------
Net
Volume Rate Change
------ ---- ------
(dollars expressed in thousands)
Interest earned on:
Loans: (1)(2)(3)
Taxable................................ $ 21,126 (21,415) (289)
Tax-exempt (4)......................... 52 (50) 2
Investment securities:
Taxable................................ (4,464) (215) (4,679)
Tax-exempt (4)......................... (158) 15 (143)
Short-term investments.................... (1,283) (433) (1,716)
-------- --------- --------
Total interest income................ 15,273 (22,098) (6,825)
-------- --------- --------
Interest paid on:
Interest-bearing demand deposits.......... 41 (625) (584)
Savings and money market deposits......... 1,980 (2,790) (810)
Time deposits............................. 2,792 (3,056) (264)
Other borrowings.......................... 1,301 (1,791) (490)
Notes payable (5)......................... (249) (90) (339)
Subordinated debentures................... 816 (554) 262
-------- --------- --------
Total interest expense............... 6,681 (8,906) (2,225)
-------- --------- --------
Net interest income.................. $ 8,592 (13,192) (4,600)
======== ========= ========
-------------------------
(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 includes 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.
Provision for Loan Losses. We recorded a provision for loan losses of $45.9
million for the three months ended March 31, 2008, compared to $3.5 million for
the three months ended March 31, 2007. The increase in our provision for loan
losses for the first three months of 2008 was primarily driven by increased net
loan charge-offs, an increase in nonperforming loans, higher levels of problem
loans in our one-to-four family residential real estate and construction and
land development loan portfolios, and growth within our loan portfolio, as
further discussed under "--Loans and Allowance for Loan Losses." We expect the
provision for loan losses to remain at higher levels in the near term as a
result of continued distress in our one-to-four family residential real estate
and construction and land development loan portfolios.
Tables summarizing nonperforming assets, past due loans and charge-off and
recovery experience are presented under "--Loans and Allowance for Loan Losses."
Noninterest Income. Noninterest income was $33.1 million and $22.6 million for
the three months ended March 31, 2008 and 2007, respectively. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, investment management income, insurance fee and
commission income, net gains on investment securities and derivative
instruments, and other income.
Service charges on deposit accounts and customer service fees were $12.1 million
and $10.6 million for the three months ended March 31, 2008 and 2007,
respectively. The increase in service charges and customer service fees is
primarily attributable to: (a) higher deposit levels associated with internal
growth and our acquisitions of banks completed in 2007, as further described
under "--Financial Condition," as well as changes in the overall mix of our
deposit portfolio; (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 checks from
our commercial deposit base resulting from our efforts to control 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 $1.7 million from $2.0 million
for the three months ended March 31, 2008 and 2007, respectively. The decrease
in 2008 is primarily attributable to a decline in loan origination and sale
volume in our mortgage banking division, primarily resulting from current market
conditions, partially offset by a pre-tax gain of $504,000 recognized on the
sale of approximately $10.8 million of our small business loans recorded in
March 2008.
We recorded a net gain on investment securities of $1.2 million and $293,000 for
the three months ended March 31, 2008 and 2007, respectively. In March 2008, we
sold approximately $81.5 million of mortgage-backed available-for-sale
investment securities resulting in a pre-tax gain of approximately $867,000.
Bank-owned life insurance investment income was $973,000 and $713,000 for the
three months ended March 31, 2008 and 2007, respectively, reflecting an
increased return on the performance of the underlying investments surrounding
the insurance contracts, which is primarily attributable to the portfolio mix of
investments and overall market conditions.
Investment management income generated by MVP, our institutional money
management subsidiary, was $1.4 million for the three months ended March 31,
2008, in comparison to $1.5 million for the three months ended March 31, 2007,
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, was $2.0 million and $1.7 million for the three months ended
March 31, 2008 and 2007, respectively, primarily reflecting increased customer
volumes.
We recorded a net gain on derivative instruments of $3.4 million and $2,000 for
the three months ended March 31, 2008 and 2007, respectively. The net gain in
2008 is primarily attributable to the increase in the fair value of our interest
rate floor agreements as a result of the decline in forward rates resulting from
the Federal Reserve interest rate cuts during the first quarter of 2008 as
further discussed under "--Interest Rate Risk Management." Our interest rate
floor agreements increase in value as interest rates decline.
We recorded a gain of $5.0 million on the extinguishment of our term repurchase
agreement for the three months ended March 31, 2008. In March 2008, we
restructured our $100.0 million term repurchase agreement, as further discussed
in Note 8 to our consolidated financial statements. The primary modifications
were to: (a) increase the borrowing amount to $120.0 million; (b) extend the
maturity date from October 12, 2010 to April 12, 2012; (c) convert the interest
rate from a variable rate to a fixed rate of 3.36%; and (d) terminate the
embedded interest rate floor agreements contained within the term repurchase
agreement. These modifications resulted in a pre-tax gain of $5.0 million.
Other income was $5.4 million and $5.8 million for the three months ended March
31, 2008 and 2007, respectively. The decrease is primarily attributable to a
decrease in net loan servicing fees of $271,000 and other items partially offset
by a gain recognized in March 2008 on the Visa, Inc., or Visa, initial public
offering of $743,000, representing the cash payment received in exchange for a
portion of our membership interest in Visa as a result of Visa's initial public
offering.
Noninterest Expense. Noninterest expense was $83.4 million and $86.0 million for
the three months ended March 31, 2008 and 2007, respectively. Our efficiency
ratio was 68.02% for the three months ended March 31, 2008, compared to 73.69%
for the comparable period in 2007. The decrease in noninterest expense and
related improvement in the efficiency ratio was primarily attributable to
certain profit improvement initiatives that we implemented throughout 2007 and
the first quarter of 2008.
Salaries and employee benefits expense was $40.6 million and $45.2 million for
the three months ended March 31, 2008 and 2007, respectively. We attribute the
overall decrease in salaries and employee benefits expense to reduced staffing
levels within our mortgage banking division and the completion of certain other
staff reductions in 2007 and the first quarter of 2008. Our total full-time
equivalent employees (FTEs) decreased to approximately 2,390 at March 31, 2008,
from 2,720 at March 31, 2007, representing a decrease of approximately 12.1%. We
reduced our FTEs by 12.1% despite adding an aggregate of 26 additional branch
offices through acquisitions in 2007 and an aggregate of nine de novo branches
opened in 2007 and 2008. The decrease in salaries and employee benefits expense
also related to a decrease in incentive compensation expense resulting from the
decline in our earnings between the comparable periods.
Occupancy, net of rental income, and furniture and equipment expense was $15.4
million and $12.3 million for the three months ended March 31, 2008 and 2007,
respectively. The increase reflects higher levels of expense resulting from our
de novo activities and acquisitions in 2007 and 2008, as discussed above, as
well as increased technology equipment expenditures, continued expansion and
renovation of certain 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 $9.3 million for the three
months ended March 31, 2008 and 2007. As more fully described in Note 5 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
Adrian Baker and UPAC.
Legal, examination and professional fees were $2.8 million and $1.7 million for
the three months ended March 31, 2008 and 2007, respectively, primarily
reflecting an increase in the level of loan fees related to foreclosure and
collection fees. In addition, the continued expansion of overall corporate
activities and the level of legal fees associated with certain litigation
matters, including those assumed in conjunction with our acquisition of CFHI and
Coast Bank of Florida in November 2007, have contributed to the overall expense
levels in 2007 and 2008.
Advertising and business development expense was $1.5 million and $1.9 million
for the three months ended March 31, 2008 and 2007, respectively, reflecting our
efforts to control these expenses as a result of the decrease in our earnings.
Charitable contributions expense was $97,000 and $1.9 million for the three
months ended March 31, 2008 and 2007, 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 5 to our consolidated financial statements.
Other expense was $9.3 million and $8.9 million for the three months ended March
31, 2008 and 2007, 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 an increase in expenses associated
with continued growth and expansion of our banking franchise, partially offset
by a credit recorded to other expense of $350,000 resulting from the reversal of
a portion of a previously recorded litigation reserve related to the Visa
initial public offering.
Provision for Income Taxes. The provision (benefit) for income taxes reflects an
income tax benefit of $2.0 million for the three months ended March 31, 2008,
compared to income tax expense of $9.7 million for the three months ended March
31, 2007. The decrease in income taxes is primarily attributable to our reduced
level of earnings.
Interest Rate Risk Management
We utilize derivative financial instruments to assist in our management of
interest rate sensitivity by modifying the re-pricing, maturity and option
characteristics of certain assets and liabilities. The derivative financial
instruments we held as of March 31, 2008 and December 31, 2007 are summarized as
follows:
March 31, 2008 December 31, 2007
------------------------ -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges - loans..................... $ 400,000 371 400,000 5,271
Cash flow hedges - subordinated debentures... 125,000 -- -- --
Interest rate floor agreements............... 300,000 5,172 300,000 1,699
Interest rate cap agreements................. 400,000 9 400,000 50
Interest rate lock commitments............... 18,000 151 3,000 23
Forward commitments to sell
mortgage-backed securities................. 99,000 -- 55,000 40
========= ====== ======== ======
The notional amounts of our derivative financial instruments do not represent
amounts exchanged by the parties and, therefore, are not a measure of our credit
exposure through our use of these instruments. The credit exposure represents
the loss we would incur in the event the counterparties failed completely to
perform according to the terms of the derivative financial instruments and the
collateral held to support the credit exposure was of no value.
For the three months ended March 31, 2008, we realized net interest income of
$1.8 million on our derivative financial instruments, whereas for the three
months ended March 31, 2007, we realized net interest expense of $1.4 million on
our derivative financial instruments. The $3.2 million increase in net interest
income is primarily attributable to the decline in the prime lending rate, which
has significantly reduced our cost associated with these instruments. We
recorded net gains on derivative instruments, which are included in noninterest
income in the consolidated statements of operations, of $3.4 million and $2,000
for the three months ended March 31, 2008 and 2007, respectively. The net gains
on our derivative instruments reflect changes in the fair value of our interest
rate floor and interest rate cap agreements, as further discussed below.
Our asset-sensitive position, coupled with the effect of recent cuts in interest
rates in late 2007 and in the first three months of 2008, as further discussed
under "-- Results of Operations," has negatively impacted our net interest
income and will continue to impact the level of our net interest income over
time, as reflected in our net interest margin for the three months ended March
31, 2008 as compared to the comparable period in 2007.
Cash Flow Hedges - Loans. We entered into the following interest rate swap
agreements, which have been designated as cash flow hedges, to effectively
lengthen the repricing characteristics of certain of our loans to correspond
more closely with their funding source with the objective of stabilizing cash
flow, and accordingly, net interest income over time:
>> In July 2003, we entered into an interest rate swap agreement
with a $200.0 million notional amount. The underlying hedged
assets were certain variable rate loans within our commercial
loan portfolio. The swap agreement provided for us to receive a
fixed rate of interest and pay an adjustable rate of interest
equivalent to the weighted average prime lending rate minus
2.85%. The terms of the swap agreement provided for us to pay and
receive interest on a quarterly basis. The interest rate swap
agreement matured on July 31, 2007.
>> In September 2006, we entered into a $200.0 million notional
amount three-year interest rate swap agreement and a $200.0
million notional amount four-year interest rate swap agreement.
The underlying hedged assets are certain variable rate loans
within our commercial loan portfolio. The swap agreements provide
for us to receive a fixed rate of interest and pay an adjustable
rate of interest equivalent to the weighted average prime lending
rate minus 2.86%. The terms of the swap agreements provide for us
to pay and receive interest on a quarterly basis.
The amount receivable by us under these swap agreements was $752,000 and $6.0
million at March 31, 2008 and December 31, 2007, respectively, and the amount
payable by us under these swap agreements was $380,000 and $683,000 at March 31,
2008 and December 31, 2007, respectively.
The maturity dates, notional amounts, interest rates paid and received and fair
value of our interest rate swap agreements designated as cash flow hedges on
certain loans as of March 31, 2008 and December 31, 2007 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
March 31, 2008:
September 18, 2009...................... $ 200,000 2.39% 5.20% $ 7,828
September 20, 2010...................... 200,000 2.39 5.20 12,676
--------- --------
$ 400,000 2.39 5.20 $ 20,504
========= ===== ===== ========
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
========= ===== ===== ========
Cash Flow Hedges - Subordinated Debentures. We entered into the following
interest rate swap agreements, which have been designated as cash flow hedges,
with the objective of stabilizing our long-term cost of capital and cash flow,
and accordingly, net interest income on our subordinated debentures to the
respective call dates of certain subordinated debentures:
>> In March 2008, we entered into the following four interest rate
swap agreements totaling $125.0 million notional amount, in
aggregate, to effectively convert the interest rate on $125.0
million of our subordinated debentures from a variable rate to a
blended fixed rate of interest of approximately 4.90%: (a) $25.0
million notional amount with a maturity date of July 7, 2011; (b)
$50.0 million notional amount with a maturity date of December
15, 2011; (c) $25.0 million notional amount with a maturity date
of March 30, 2012; and (d) $25.0 million notional amount with a
maturity date of December 15, 2012. These swap agreements provide
for us to receive an adjustable rate of interest equivalent to
the three-month London Interbank Offered Rate, or LIBOR, plus
1.65%, 1.85%, 1.61% and 2.25%, respectively, and pay a fixed rate
of interest. The terms of the swap agreements provide for us to
pay and receive interest on a quarterly basis.
The amount receivable by us under these swap agreements was $198,000 at March
31, 2008, and the amount payable by us under these swap agreements was $209,000
at March 31, 2008.
The maturity dates, notional amounts, interest rates paid and received and fair
value of our interest rate swap agreements designated as cash flow hedges on
certain subordinated debentures as of March 31, 2008 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
July 7, 2011................................ $ 25,000 4.40% 4.41% $ 42
December 15, 2011........................... 50,000 4.91 4.65 (222)
March 30, 2012.............................. 25,000 4.71 4.31 (84)
December 15, 2012........................... 25,000 5.57 5.05 (139)
--------- ------
$ 125,000 4.90 4.61 $ (403)
========= ===== ===== ======
Interest Rate Floor Agreements. In September 2005, we entered into a $100.0
million notional amount three-year interest rate floor agreement in conjunction
with our interest rate risk management program. The interest rate floor
agreement provides for us to receive a quarterly fixed rate of interest of 5.00%
should the three-month LIBOR equal or fall below the strike price of 2.00%. In
August 2006, we entered into a $200.0 million notional amount three-year
interest rate floor agreement in conjunction with the restructuring of one of
our $100.0 million term repurchase agreements, as further described below, to
further stabilize net interest income in the event of a declining rate scenario.
The interest rate floor agreement provides for us to receive a quarterly
adjustable rate of interest equivalent to the differential between the strike
price of 4.00% and the three-month LIBOR should the three-month LIBOR equal or
fall below the strike price. The fair value of the interest rate floor
agreements, which is included in other assets in our consolidated balance
sheets, was $5.0 million and $1.7 million at March 31, 2008 and December 31,
2007, respectively. On May 9, 2008, we terminated our interest rate floor
agreements to modify our overall hedge position in accordance with our interest
rate risk management program.
Interest Rate Floor Agreements Embedded in Term Repurchase Agreements. We have a
term repurchase agreement under a master repurchase agreement with an
unaffiliated third party, as further described in Note 8 to our consolidated
financial statements. The underlying securities associated with the term
repurchase agreement are agency collateralized mortgage obligation securities
and are held by other financial institutions under safekeeping agreements. The
term repurchase agreement was entered into with the objective of stabilizing net
interest income over time, further protecting our net interest margin against
changes in interest rates and providing funding for security purchases. At
December 31, 2007, the term repurchase agreement had a borrowing amount of
$100.0 million, a maturity date of October 12, 2010, and interest rate floor
agreements included within the term repurchase agreement, which represented
embedded derivative instruments that, in accordance with existing accounting
literature governing derivative instruments, were not required to be separated
from the term repurchase agreement and accounted for separately as a derivative
financial instrument. On March 31, 2008, we restructured our existing $100.0
million term repurchase agreement. The primary modifications were to: (a)
increase the borrowing amount from $100.0 million to $120.0 million; (b) extend
the maturity date from October 12, 2010 to April 12, 2012; (c) convert the
interest rate from a variable rate tied to LIBOR to a fixed rate of 3.36%; and
(d) terminate the embedded interest rate floor agreements contained within the
term repurchase agreement. These modifications resulted in a pre-tax gain of
$5.0 million, which is reflected in noninterest income in our consolidated
statements of operations. The term repurchase agreement is reflected in other
borrowings in our consolidated balance sheets and the related interest expense
is reflected as interest expense on other borrowings in our consolidated
statements of operations.
Interest Rate Cap Agreements. In September 2006, we entered into a $200.0
million notional amount three-year interest rate cap agreement and a $200.0
million notional amount four-year interest rate cap agreement in conjunction
with the interest rate swap agreements designated as cash flow hedges that we
entered into in September 2006, as previously described, to limit the net
interest expense associated with our interest rate swap agreements in the event
of a rising rate scenario. The $200.0 million notional amount three-year
interest rate cap agreement provides for us to receive a quarterly adjustable
rate of interest equivalent to the differential between the three-month LIBOR
and the strike price of 7.00% should the three-month LIBOR exceed the strike
price. The $200.0 million notional amount four-year interest rate cap agreement
provides for us to receive a quarterly adjustable rate of interest equivalent to
the differential between the three-month LIBOR and the strike price of 7.50%
should the three-month LIBOR exceed the strike price. The fair value of the
interest rate cap agreements, which is included in other assets in our
consolidated balance sheets, was $9,000 and $50,000 at March 31, 2008 and
December 31, 2007, respectively.
Pledged Collateral. At March 31, 2008 and December 31, 2007, we had accepted
cash of $26.0 million and $21.4 million, respectively, as collateral in
connection with our interest rate swap agreements. At March 31, 2008, we had
pledged cash of $1.1 million as collateral in connection with our interest rate
swap agreements.
Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed
Securities. Derivative financial instruments issued by us consist of interest
rate lock commitments to originate fixed-rate loans to be sold. Commitments to
originate fixed-rate loans consist primarily of residential real estate loans.
These net loan commitments and loans held for sale are hedged with forward
contracts to sell mortgage-backed securities, which expire in June 2008. The
fair value of the interest rate lock commitments, which is included in other
assets in our consolidated balance sheets, was $151,000 and $23,000 at March 31,
2008 and December 31, 2007, respectively. The fair value of the forward
contracts to sell mortgage-backed securities, which is included in loans held
for sale in our consolidated balance sheets, was ($424,000) and $40,000 at March
31, 2008 and December 31, 2007, respectively.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source of income
for First Bank. Interest and fees on loans were 93.0% of our total interest
income for the three months ended March 31, 2008, in comparison to 89.4% for the
comparable period in 2007. Loans, net of unearned discount, increased to $9.01
billion, or 83.2% of our assets, at March 31, 2008, compared to $8.89 billion,
or 81.5% of our assets, at December 31, 2007. The following table summarizes the
composition of our loan portfolio at March 31, 2008 and December 31, 2007:
March 31, December 31,
2008 2007
---- ----
(Restated)
(dollars expressed in thousands)
Commercial, financial and agricultural............................ $2,501,363 2,382,067
Real estate construction and development.......................... 2,103,765 2,141,234
Real estate mortgage:
One-to-four family residential................................ 1,614,231 1,602,575
Multi-family residential...................................... 206,163 177,246
Commercial real estate........................................ 2,432,513 2,431,464
Consumer and installment, net of unearned discount................ 86,573 85,519
Loans held for sale............................................... 67,821 66,079
---------- ----------
Loans, net of unearned discount............................... $9,012,429 8,886,184
========== ==========
The overall increase in loans, net of unearned discount, during the first
quarter of 2008 is primarily attributable to the following:
>> An increase of $119.3 million in our commercial, financial and
agricultural portfolio attributable to internal loan production
growth, partially offset by the sale of the guaranteed portion of
approximately $10.8 million of our small business loans in March
2008, which resulted in a pre-tax gain of $504,000;
>> An increase of $11.7 million in our one-to-four family
residential real estate mortgage portfolio, primarily
attributable to internal loan production growth, partially offset
by increased charge-offs recorded on certain existing loans, as
further discussed below. Our one-to-four family residential loan
portfolio included approximately $50.8 million and $54.8 million
of sub-prime mortgage loans at March 31, 2008 and December 31,
2007, respectively, representing 3.1% and 3.4% of our one-to-four
family residential real estate loan portfolio, respectively; and
>> An increase of $28.9 million in our multi-family residential real
estate mortgage portfolio attributable to internal loan
production growth; partially offset by
>> A decrease of $37.5 million in our real estate construction and
development portfolio attributable to internal efforts to
decrease our exposure to real estate construction and development
loans, and increased charge-offs recorded on certain existing
loans, as further discussed below.
Nonperforming assets include nonaccrual loans, restructured loans and other real
estate. The following table presents the categories of nonperforming assets and
certain ratios as of March 31, 2008 and December 31, 2007:
March 31, December 31,
2008 2007
---- ----
(Restated)
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual................................................... $ 8,186 5,916
Real estate construction and development:
Nonaccrual................................................... 162,443 151,812
Real estate mortgage:
One-to-four family residential:
Nonaccrual............................................... 46,882 32,931
Restructured............................................. 6,140 7
Multi-family residential:
Nonaccrual............................................... 61 --
Commercial real estate:
Nonaccrual............................................... 12,909 11,294
Consumer and installment:
Nonaccrual................................................... 184 263
----------- ---------
Total nonperforming loans.............................. 236,805 202,223
Other real estate................................................. 13,157 11,225
----------- ---------
Total nonperforming assets............................. $ 249,962 213,448
=========== =========
Loans, net of unearned discount................................... $ 9,012,429 8,886,184
=========== =========
Loans past due 90 days or more and still accruing................. $ 23,553 26,753
=========== =========
Ratio of:
Allowance for loan losses to loans.............................. 2.05% 1.89%
Nonperforming loans to loans.................................... 2.63 2.28
Allowance for loan losses to nonperforming loans................ 78.20 83.27
Nonperforming assets to loans and other real estate............. 2.77 2.40
=========== =========
Nonperforming loans, consisting of loans on nonaccrual status and restructured
loans, were $236.8 million at March 31, 2008, compared to $202.2 million at
December 31, 2007 and $62.5 million at March 31, 2007. Nonperforming loans were
2.63% of loans, net of unearned discount, at March 31, 2008, compared to 2.28%
and 0.79% of loans, net of unearned discount, at December 31, 2007 and March 31,
2007, respectively. Other real estate owned was $13.2 million, $11.2 million and
$8.5 million at March 31, 2008, December 31, 2007 and March 31, 2007,
respectively. Nonperforming assets, consisting of nonperforming loans and other
real estate owned, were $250.0 million at March 31, 2008, compared to $213.4
million at December 31, 2007 and $71.0 million at March 31, 2007. Loans past due
90 days or more and still accruing interest were $23.6 million at March 31,
2008, compared to $26.8 million and $4.2 million at December 31, 2007 and March
31, 2007, respectively.
Nonperforming loans at March 31, 2008 increased $34.6 million, or 17.1%, from
nonperforming loans at December 31, 2007. We attribute the increase in our
nonperforming loans to the following:
>> An increase in one-to-four family residential nonaccrual loans of
$14.0 million, primarily comprised of an increase in our mortgage
banking division of $10.7 million, to $38.5 million at March 31,
2008 from $27.7 million at December 31, 2007. During the first
three months of 2008, we placed approximately $26.1 million of
one-to-four family residential mortgage loans, including
sub-prime loans, associated with our mortgage banking division on
nonaccrual status. The increase in these nonaccrual loans was
partially offset by net loan charge-offs of $9.7 million,
transfers to other real estate and payment activity. Our
one-to-four family residential mortgage portfolio included
approximately $50.8 million and $54.8 million of sub-prime
mortgage loans, or 3.1% and 3.4% of our one-to-four family
residential mortgage portfolio, at March 31, 2008 and December
31, 2007, respectively, of which approximately $11.0 million and
$6.6 million were nonperforming at March 31, 2008 and December
31, 2007, respectively. Of the $26.1 million of loans that were
placed on nonaccrual status in the first quarter of 2008, $1.7
million represented residential mortgage loans sold with recourse
that we were required to repurchase based on the terms of the
underlying sales contracts, and $5.8 million related to our
Florida region;
>> An increase in one-to-four family restructured loans during the
first three months of 2008 of $6.1 million. Our mortgage banking
division restructured approximately $6.1 million of one-to-four
family residential mortgage loans, primarily located in
California and Florida, whereby the contractual interest rate was
reduced over a certain time period. At the time of the
restructures, the loans were in full compliance with the terms of
the respective loan contracts and none of the restructured loans
were delinquent under the modified loan contracts as of March 31,
2008; and
>> An increase in real estate construction and development
nonaccrual loans of $10.6 million, primarily resulting from a net
increase in certain nonaccrual credits of approximately $27.9
million, of which $13.8 million resulted from the Northern
California region; partially offset by net charge-offs of $17.3
million, of which $15.9 million resulted from the Northern
California region.
Nonperforming loans in our Northern California real estate portfolio were $97.2
million and $99.2 million, or 41.0% and 49.1%, of our total nonperforming loans
at March 31, 2008 and December 31, 2007, respectively. Nonperforming loans in
our Florida region were $61.4 million and $45.1 million, or 25.9% and 22.3%, of
our total nonperforming loans at March 31, 2008 and December 31, 2007,
respectively. We expect the declining and unstable market conditions associated
with our one-to-four family residential mortgage loan portfolio and our real
estate construction and development portfolio, particularly in Northern
California and Florida, to continue in the near term, which could increase the
amount of our nonperforming loans, loan charge-offs and provision for loan
losses.
The outstanding balance and carrying amount of impaired loans acquired in
acquisitions was $79.5 million and $42.1 million, respectively, at March 31,
2008, and $84.9 million and $46.0 million, respectively, at December 31, 2007.
We recorded impaired loans acquired in acquisitions during the year ended
December 31, 2007 of $45.7 million at the time of acquisition. There was no
allowance for loan losses related to these loans at March 31, 2008 and December
31, 2007. As the loans were classified as nonaccrual loans, there was no
accretable yield related to these loans at March 31, 2008 and December 31, 2007.
Transfers to other real estate, charge-offs and payments of $2.3 million, $1.4
million and $225,000, respectively, were recorded on these loans during the
three months ended March 31, 2008.
Changes in the allowance for loan losses for the three months ended March 31,
2008 and 2007 were as follows:
Three Months Ended
March 31,
-----------------------
2008 2007
---- ----
(dollars expressed in thousands)
Balance, beginning of period............................................. $ 168,391 145,729
Acquired allowance for loan losses....................................... -- 2,925
--------- --------
168,391 148,654
--------- -------
Loans charged-off........................................................ (31,339) (11,715)
Recoveries of loans previously charged-off............................... 2,185 1,709
--------- --------
Net loan charge-offs................................................ (29,154) (10,006)
--------- --------
Provision for loan losses................................................ 45,947 3,500
--------- --------
Balance, end of period................................................... $ 185,184 142,148
========= ========
We recorded net loan charge-offs of $29.2 million for the three months ended
March 31, 2008, compared to $10.0 million for the three months ended March 31,
2007. Net loan charge-offs recorded for the three months ended March 31, 2008
included $15.9 million of net loan charge-offs associated with our Northern
California real estate construction and development portfolio, compared to $2.5
million for the comparable period in 2007. We continue to experience distress
and declining conditions within our Northern California real estate market,
resulting in further increased developer inventories, slower lot and home sales,
and substantially declining market values. Net loan charge-offs recorded for the
three months ended March 31, 2008 also include $9.7 million of net loan
charge-offs associated with our mortgage banking division, compared to $5.5
million for the comparable period in 2007. Our annualized net loan charge-offs
as a percentage of average loans was 1.31% for the first three months of 2008,
compared to 0.52% for the comparable period in 2007.
Our allowance for loan losses was $185.2 million at March 31, 2008, compared to
$168.4 million at December 31, 2007 and $142.1 million at March 31, 2007. Our
allowance for loan losses as a percentage of loans, net of unearned discount,
was 2.05% at March 31, 2008, compared to 1.89% at December 31, 2007 and 1.79% at
March 31, 2007. Our allowance for loan losses as a percentage of nonperforming
loans was 78.20%, 83.27% and 227.37% at March 31, 2008, December 31, 2007 and
March 31, 2007, respectively. We continue to closely monitor our loan portfolio
and address the ongoing challenges posed by the economic environment, including
highly competitive markets within certain sectors of our loan portfolio.
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.
Furthermore, management has implemented additional procedures to analyze
concentrations in our real estate portfolio in light of current economic and
market conditions. These procedures include monthly meetings with our real
estate groups and enhanced reporting to track land, lot, construction and
finished inventory levels within our real estate construction and development
portfolio. In addition, a quarterly evaluation of each lending unit is performed
based on certain factors, such as lending personnel experience, recent credit
reviews, loan concentrations and other factors. Based on this evaluation,
changes to the allowance for loan losses may be required due to the perceived
risk of particular portfolios. The calculated allowance required for the
portfolio is then compared to the actual allowance balance to determine the
adjustments necessary to maintain the allowance at an appropriate level. In
addition, management exercises a certain degree of judgment in its analysis of
the overall adequacy of the allowance for loan losses. In its analysis,
management considers the changes in the portfolio, including growth,
composition, the ratio of net loans to total assets, and the economic conditions
of the regions in which we operate. Based on this quantitative and qualitative
analysis, adjustments are made to the allowance for loan losses. Such
adjustments are reflected in our consolidated statements of operations.
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. The aggregate funds acquired from
these sources were $2.01 billion and $2.00 billion at March 31, 2008 and
December 31, 2007, respectively.
The following table presents the maturity structure of these other sources of
funds, which consists of certificates of deposit of $100,000 or more and other
borrowings, including our notes payable, at March 31, 2008:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less............................. $ 601,165 225,150 826,315
Over three months through six months............. 431,259 46,054 477,313
Over six months through twelve months............ 280,905 101,000 381,905
Over twelve months............................... 95,388 230,760 326,148
---------- -------- ----------
Total....................................... $1,408,717 602,964 2,011,681
========== ======== ==========
In addition to these sources of funds, First Bank has established a borrowing
relationship with the Federal Reserve Bank of St. Louis. This borrowing
relationship, which is secured by commercial loans, provides an additional
liquidity facility that may be utilized for contingency purposes. At March 31,
2008 and December 31, 2007, First Bank's borrowing capacity under the agreement
was approximately $1.73 billion and $523.3 million, respectively.
In addition, First Bank's borrowing capacity through its relationship with the
FHLB was approximately $553.4 million and $672.3 million at March 31, 2008 and
December 31, 2007, respectively. We had FHLB advances outstanding of $200.8
million at March 31, 2008, compared to $857,000 at December 31, 2007. The
increase during the three months ended March 31, 2008 resulted from two $100.0
million FHLB advances drawn by First Bank in January 2008 that mature in January
2009 and July 2009.
Our loan-to-deposit ratio increased to 101.1% at March 31, 2008 from 97.1% at
December 31, 2007. As a result of this increase, we implemented certain
strategies during the first quarter of 2008 to improve our liquidity position,
including the $200.0 million FHLB borrowings, as discussed above, as well as
increasing the availability of our borrowing relationship with both the Federal
Reserve Bank of St. Louis and the FHLB through a review of available collateral.
Our borrowing capacity with the FHLB increased to $906.5 million in April 2008
as a result of additional collateral availability. We are continuing to monitor
liquidity and take appropriate actions in light of uncertain market conditions,
increased loan funding needs and deposit trends.
In addition to our owned banking facilities, we have entered into long-term
leasing arrangements to support our ongoing activities. The required payments
under such commitments and other obligations at March 31, 2008 were as follows:
Less than 1-3 3-5 Over
1 Year Years Years 5 Years Total (1)
------ ------ ----- ------- -----
(dollars expressed in thousands)
Operating leases....................... $ 16,935 28,294 20,312 51,785 117,326
Certificates of deposit (2)............ 3,500,835 296,542 61,205 2,182 3,860,764
Other borrowings (2)................... 324,203 100,761 120,000 -- 544,964
Notes payable (2)...................... 48,000 10,000 -- -- 58,000
Subordinated debentures (2)............ -- -- -- 353,771 353,771
Other contractual obligations.......... 1,271(3) 189 136 60 1,656
----------- -------- -------- -------- ----------
Total............................. $ 3,891,244 435,786 201,653 407,798 4,936,481
=========== ======== ======== ======== ==========
---------------
(1) Amounts exclude FIN 48 unrecognized tax liabilities of $12.5 million and related accrued interest
expense of $1.6 million for which the timing of payment of such liabilities cannot be reasonably
estimated as of March 31, 2008.
(2) Amounts exclude the related interest expense accrued on these obligations as of March 31, 2008.
(3) Includes an accrued expense related to our remaining 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.
Effects of New Accounting Standards
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 $6.3 million, which was recorded as an increase to beginning
retained earnings as further described in Note 1 and Note 3 to our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157 - Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
U.S. generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, and does not
require any new fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years, for financial assets and liabilities and nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). Implementation is
deferred for all nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis to fiscal years beginning after November 15, 2008. 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. 157 related to financial assets and liabilities and
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in our consolidated financial statements on a recurring
basis (at least annually) on January 1, 2008, which did not have a material
impact on our financial condition or results of operations other than certain
additional disclosure requirements.
In September 2006, the FASB issued SFAS No. 158 - Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires
companies to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as a net asset or liability in the balance sheet and to
recognize changes in the funded status of the plan through comprehensive income
in the year in which the changes occur. The funded status is measured as the
difference between the fair value of the plan assets and the benefit obligation
as of the date of the company's fiscal year end. Effective December 31, 2007, we
adopted the recognition and disclosure provisions of SFAS No. 158, resulting in
a cumulative effect of change in accounting principle of $902,000, which was
recorded as a decrease to accumulated other comprehensive loss as of December
31, 2007. We have not yet adopted the measurement date provisions of SFAS No.
158, which become effective for us as of December 31, 2008; however, we do not
anticipate the adoption of the measurement date provisions of SFAS No. 158 to
have a material effect on our consolidated financial statements.
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 November 2007, the SEC issued SEC Staff Accounting Bulletin, or SAB, No. 109
- - Written Loan Commitments Recorded at Fair Value Through Earnings. SAB No. 109
requires fair value measurements of derivative loan commitments or other written
loan commitments recorded through earnings to include the expected net future
cash flows related to the associated servicing of the loan. SAB No. 109
supersedes SAB 105 - Application of Accounting Principles to Loan Commitments,
which applied only to derivative loan commitments accounted for at fair value
through earnings, and broadens its application to all written loan commitments
that are accounted for at fair value through earnings. SAB No. 109 also states
that internally developed intangible assets should not be recorded as part of
the fair value of a derivative loan commitment. SAB No. 109 is effective on a
prospective basis to derivative loan commitments issued or modified in fiscal
quarters beginning after December 15, 2007. We implemented SAB No. 109 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.
In March 2008, the FASB issued SFAS No. 161 - Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of SFAS No. 133 - Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 161 requires
entities to provide greater transparency about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under No. SFAS 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity's financial
position, results of operations and cash flows. To meet those objectives, SFAS
No. 161 requires (1) qualitative disclosures about objectives for using
derivatives by primary underlying risk exposure and by purpose or strategy (fair
value hedge, cash flow hedge, and non-hedges), (2) information about the volume
of derivative activity in a flexible format that the preparer believes is the
most relevant and practicable, (3) tabular disclosures about balance sheet
location and gross fair value amounts of derivative instruments, income
statement and other comprehensive income location of gain and loss amounts on
derivative instruments by type of contract, and (4) disclosures about
credit-risk related contingent features in derivative agreements. SFAS No. 161
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. We are currently evaluating the
requirements of SFAS No. 161 to determine their impact on the disclosures that
will be presented in our consolidated financial statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2007, our risk management program's simulation model indicated a
loss of projected net interest income should interest rates decline. We are
"asset-sensitive," indicating that our assets would generally reprice with
changes in 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 was
projected to have a relatively minimal impact on our net interest income, an
instantaneous parallel decline in the interest yield curve of 100 basis points
indicated a pre-tax projected loss of approximately 3.9% of net interest income,
based on assets and liabilities at December 31, 2007. At March 31, 2008, we
remain in an "asset-sensitive" position and thus, remain subject to a higher
level of risk in a declining interest rate environment. Although we do not
anticipate that instantaneous shifts in the yield curve as projected in our
simulation model are likely, these are indications of the effects that changes
in interest rates would have over time.
Our asset-sensitive position, coupled with the effect of recent cuts in interest
rates in late 2007 and in the first three months of 2008, has negatively
impacted our net interest income and will continue to impact the level of our
net interest income over time, as reflected in our net interest margin for the
three months ended March 31, 2008 as compared to the comparable period in 2007,
and further discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
ITEM 4 - CONTROLS AND PROCEDURES
Except for the changes noted below, there was no change in our 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 quarter ended March 31, 2008 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
As reported in Amendment No. 1 to our 2007 Annual Report on Form 10-K,
management identified material weaknesses in internal control over financial
reporting at our mortgage banking division. Specifically, we did not maintain
sufficient anti-fraud controls for the mortgage banking division which allowed
the former President of our mortgage banking division to intentionally effect
certain transactions and journal entries to omit a repurchase agreement
obligation, including the related interest expense thereon, and overstate
mortgage banking revenues.
The following material weaknesses were identified related to our internal
control over financial reporting:
>> We did not maintain appropriate oversight and supervision of certain
operational and accounting personnel in the mortgage banking division;
>> We did not maintain a sufficient complement of personnel in our
mortgage banking division with an appropriate level of accounting
knowledge, experience and training necessary to properly account for
certain complex transactions associated with the operations of the
mortgage banking division; and
>> We did not maintain effective controls over the recording of journal
entries necessary to properly account for certain complex transactions
associated with the operations of the mortgage banking division.
Specifically, effective controls were not designed and in place to
provide reasonable assurance that journal entries were prepared with
sufficient supporting documentation and reviewed and approved to
provide reasonable assurance of the completeness and accuracy of the
journal entries recorded.
As a result of these material weaknesses, management concluded that the
Company's disclosure controls and procedures were not effective as of December
31, 2007.
As of July 30, 2008, we have implemented additional measures to address the
aforementioned material weaknesses, including the following:
>> Changed the oversight and supervision of the operational and
accounting personnel in the mortgage banking division through
the establishment of a direct reporting line to the Company's
President and Chief Executive Officer and Chief Financial Officer;
>> Centralized and realigned certain areas of responsibility and
functions previously handled within the mortgage banking division;
>> Instituted increased segregation of duties controls within the
Company's mortgage banking division; and
>> Examined the methods in which internal controls were circumvented and
developed measures to strengthen such controls.
In addition, the individual directly responsible for the omission of the
repurchase agreement obligation, including the related interest expense thereon,
and an overstatement of mortgage banking revenues was terminated subsequent to
December 31, 2007 and prior to the identification of the material weaknesses.
We will continue to evaluate the effectiveness of our remediation process and
the actions taken to date as summarized above.
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 Securities Exchange Act of
1934, or the Exchange Act), as of the end of the period covered by this report.
Based on such evaluation, our 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 are not 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 as a result of the material weaknesses outlined above. Under the
direction of our President and Chief Executive Officer and our Chief Financial
Officer, we are further evaluating our disclosure controls and procedures and
internal control over financial reporting, including modifications to controls
currently planned and being implemented, with the intent to fully remediate the
material weaknesses in our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit Number Description
-------------- -----------
31.1 Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive
Officer - filed herewith.
31.2 Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial
Officer - filed herewith.
32.1 Section 1350 Certifications of Chief Executive Officer -
filed herewith.
32.2 Section 1350 Certifications of Chief Financial Officer -
filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: July 30, 2008
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)