UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
----------
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 Smaller reporting company [ ]
if a 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 July 31, 2008
------------------------------- -------------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS ............................... 1
CONSOLIDATED STATEMENTS OF 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................... 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK ................................................... 41
ITEM 4. CONTROLS AND PROCEDURES ................................... 41
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....... 43
ITEM 5. OTHER INFORMATION ......................................... 43
ITEM 6. EXHIBITS .................................................. 43
SIGNATURES ............................................................ 44
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2008 2007
----------- ------------
(unaudited) (Restated)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks ......................................................... $ 308,633 217,597
Short-term investments .......................................................... 14,214 14,078
----------- ------------
Total cash and cash equivalents .............................................. 322,847 231,675
----------- ------------
Investment securities:
Available for sale .............................................................. 671,705 1,000,392
Held to maturity (fair value of $19,494 and $19,078, respectively) .............. 19,204 18,879
----------- ------------
Total investment securities .................................................. 690,909 1,019,271
----------- ------------
Loans:
Commercial, financial and agricultural .......................................... 2,601,426 2,382,067
Real estate construction and development ........................................ 1,979,404 2,141,234
Real estate mortgage ............................................................ 4,317,108 4,211,285
Consumer and installment ........................................................ 97,776 97,117
Loans held for sale ............................................................. 60,043 66,079
----------- ------------
Total loans .................................................................. 9,055,757 8,897,782
Unearned discount ............................................................... (10,643) (11,598)
Allowance for loan losses ....................................................... (200,957) (168,391)
----------- ------------
Net loans .................................................................... 8,844,157 8,717,793
----------- ------------
Bank premises and equipment, net ................................................... 240,449 240,456
Goodwill and other intangible assets ............................................... 312,420 315,651
Bank-owned life insurance .......................................................... 117,753 116,619
Deferred income taxes .............................................................. 132,398 139,277
Other assets ....................................................................... 138,813 121,728
----------- ------------
Total assets ................................................................. $10,799,746 10,902,470
=========== ============
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand ...................................................... $ 1,265,002 1,259,123
Interest-bearing demand ......................................................... 962,975 980,850
Savings and money market ........................................................ 2,929,410 2,716,726
Time deposits of $100 or more ................................................... 1,293,466 1,546,857
Other time deposits ............................................................. 2,396,430 2,645,637
----------- ------------
Total deposits ............................................................... 8,847,283 9,149,193
Other borrowings ................................................................... 593,634 409,616
Notes payable ...................................................................... 30,000 39,000
Subordinated debentures ............................................................ 353,790 353,752
Deferred income taxes .............................................................. 38,188 48,209
Accrued expenses and other liabilities ............................................. 38,226 55,079
Minority interest in subsidiaries .................................................. 90,720 5,544
----------- ------------
Total liabilities ............................................................ 9,991,841 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 .................................................................. 779,537 818,343
Accumulated other comprehensive loss ............................................... (295) (4,929)
----------- ------------
Total stockholders' equity ................................................... 807,905 842,077
----------- ------------
Total liabilities and stockholders' equity ................................... $10,799,746 10,902,470
=========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
1
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
(Restated) (Restated)
---------- ----------
Interest income:
Interest and fees on loans .............................................. $ 138,142 157,075 290,864 310,085
Investment securities ................................................... 9,457 17,182 20,877 33,374
Short-term investments .................................................. 154 2,315 316 4,193
---------- ---------- ---------- ----------
Total interest income ............................................. 147,753 176,572 312,057 347,652
---------- ---------- ---------- ----------
Interest expense:
Deposits:
Interest-bearing demand .............................................. 1,321 2,313 3,353 4,929
Savings and money market ............................................. 14,417 20,460 31,944 38,797
Time deposits of $100 or more ........................................ 13,016 18,204 29,785 35,234
Other time deposits .................................................. 22,728 28,180 50,515 55,970
Other borrowings ........................................................ 3,859 4,869 7,787 9,287
Notes payable ........................................................... 696 636 1,265 1,544
Subordinated debentures ................................................. 4,933 6,442 11,098 12,345
---------- ---------- ---------- ----------
Total interest expense ............................................ 60,970 81,104 135,747 158,106
---------- ---------- ---------- ----------
Net interest income ............................................... 86,783 95,468 176,310 189,546
Provision for loan losses .................................................. 84,053 3,417 130,000 6,917
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ............... 2,730 92,051 46,310 182,629
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts and customer service fees ........... 13,071 11,661 25,173 22,269
Gain on loans sold and held for sale .................................... 968 120 2,648 2,072
Net loss on investment securities ....................................... (5,784) (1,533) (4,623) (1,240)
Bank-owned life insurance investment income ............................. 724 999 1,697 1,712
Investment management income ............................................ 686 1,542 2,042 3,052
Insurance fee and commission income ..................................... 1,930 1,868 3,904 3,563
Net (loss) gain on derivative instruments ............................... (1,646) (344) 1,786 (342)
Gain on extinguishment of term repurchase agreement ..................... -- -- 5,000 --
Other ................................................................... 8,942 5,286 14,375 11,122
---------- ---------- ---------- ----------
Total noninterest income .......................................... 18,891 19,599 52,002 42,208
---------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits .......................................... 37,099 43,732 77,669 88,960
Occupancy, net of rental income ......................................... 8,969 8,023 18,914 15,731
Furniture and equipment ................................................. 5,473 4,676 10,902 9,227
Postage, printing and supplies .......................................... 1,688 1,649 3,334 3,431
Information technology fees ............................................. 9,052 9,189 18,391 18,520
Legal, examination and professional fees ................................ 4,488 2,681 7,302 4,414
Amortization of intangible assets ....................................... 2,785 3,227 5,561 6,153
Advertising and business development .................................... 1,983 1,670 3,447 3,570
FDIC insurance .......................................................... 2,066 268 3,013 516
Charitable contributions ................................................ 307 1,462 404 3,378
Other ................................................................... 10,732 8,134 19,129 16,799
---------- ---------- ---------- ----------
Total noninterest expense ......................................... 84,642 84,711 168,066 170,699
---------- ---------- ---------- ----------
(Loss) income before (benefit) provision for income taxes
and minority interest in income of subsidiaries ................ (63,021) 26,939 (69,754) 54,138
(Benefit) provision for income taxes ....................................... (23,137) 9,537 (25,142) 19,283
---------- ---------- ---------- ----------
(Loss) income before minority interest in income of
subsidiaries ................................................... (39,884) 17,402 (44,612) 34,855
Minority interest in income of subsidiaries ................................ 33 31 178 101
---------- ---------- ---------- ----------
Net (loss) income ................................................. (39,917) 17,371 (44,790) 34,754
Preferred stock dividends .................................................. 132 132 328 328
---------- ---------- ---------- ----------
Net (loss) income available to common stockholders ................ $ (40,049) 17,239 (45,118) 34,426
========== ========== ========== ==========
Basic (loss) earnings per common share ..................................... $(1,692.61) 728.65 (1,906.87) 1,454.99
========== ========== ========== ==========
Diluted (loss) earnings per common share ................................... $(1,692.61) 722.40 (1,906.87) 1,444.47
========== ========== ========== ==========
Weighted average shares of common stock outstanding ........................ 23,661 23,661 23,661 23,661
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
2
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME - (UNAUDITED)
Six Months Ended June 30, 2008 and 2007 and Six 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
----------
Six months ended June 30, 2007:
Comprehensive income:
Net income ..................................... -- -- -- -- 34,754 -- 34,754
Other comprehensive income, net of tax:
Unrealized losses on investment
securities ............................... -- -- -- -- -- (8,565) (8,565)
Reclassification adjustment for investment
securities gains included in net income .. -- -- -- -- -- (94) (94)
Derivative instruments:
Current period transactions .............. -- -- -- -- -- (596) (596)
----------
Total comprehensive income ........................ 25,499
Cumulative effect of change in accounting
principle ...................................... -- -- -- -- 2,470 -- 2,470
Class A preferred stock dividends, $0.50 per
share .......................................... -- -- -- -- (321) -- (321)
Class B preferred stock dividends, $0.04 per
share .......................................... -- -- -- -- (7) -- (7)
-------- ------- -------- ---------- ---------- ---------- ----------
Balances, June 30, 2007 .............................. 12,822 241 5,915 9,685 804,095 (22,347) 810,411
----------
Six months ended December 31, 2007:
Comprehensive income:
Net income ..................................... -- -- -- -- 14,706 -- 14,706
Other comprehensive income, net of tax:
Unrealized losses on investment
securities ............................... -- -- -- -- -- 8,360 8,360
Reclassification adjustment for investment
securities losses included in net
income ................................... -- -- -- -- -- 216 216
Derivative instruments:
Current period transactions .............. -- -- -- -- -- 9,744 9,744
----------
Total comprehensive income ........................ 33,026
Impact of adoption of SFAS No. 158 ................ -- -- -- -- -- (902) (902)
Class A preferred stock dividends, $0.70 per
share .......................................... -- -- -- -- (448) -- (448)
Class B preferred stock dividends, $0.07 per
share .......................................... -- -- -- -- (10) -- (10)
-------- ------- -------- ---------- ---------- ---------- ----------
Balances, December 31, 2007 .......................... 12,822 241 5,915 9,685 818,343 (4,929) 842,077
----------
Six months ended June 30, 2008:
Comprehensive income:
Net loss ....................................... -- -- -- -- (44,790) -- (44,790)
Other comprehensive income, net of tax:
Unrealized losses on investment
securities ............................... -- -- -- -- -- (1,572) (1,572)
Reclassification adjustment for investment
securities losses included in net loss ... -- -- -- -- -- 3,005 3,005
Derivative instruments:
Current period transactions .............. -- -- -- -- -- 3,201 3,201
----------
Total comprehensive loss .......................... (40,156)
Cumulative effect of change in accounting
principle ...................................... -- -- -- -- 6,312 -- 6,312
Class A preferred stock dividends, $0.50 per
share .......................................... -- -- -- -- (321) -- (321)
Class B preferred stock dividends, $0.04 per
share .......................................... -- -- -- -- (7) -- (7)
-------- ------- -------- ---------- ---------- ---------- ----------
Balances, June 30, 2008 .............................. $ 12,822 241 5,915 9,685 779,537 (295) 807,905
======== ======= ======== ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Six Months Ended
June 30,
----------------------
2008 2007
--------- ----------
(Restated)
Cash flows from operating activities:
Net (loss) income .......................................................................... $ (44,790) 34,754
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment ............................ 12,310 9,817
Amortization of intangible assets ....................................................... 5,561 6,153
Originations of loans held for sale ..................................................... (123,468) (379,622)
Proceeds from sales of loans held for sale .............................................. 160,920 397,664
Payments received on loans held for sale ................................................ 12,828 11,506
Provision for loan losses ............................................................... 130,000 6,917
(Benefit) provision for current income taxes ............................................ (15,087) 18,308
(Benefit) provision for deferred income taxes ........................................... (10,055) 975
Decrease in accrued interest receivable ................................................. 10,215 2,317
Decrease in accrued interest payable .................................................... (4,422) (5,403)
Proceeds from sales of trading securities ............................................... -- 13,177
Maturities of trading securities ........................................................ -- 16,476
Purchases of trading securities ......................................................... -- (17,939)
Gain on loans sold and held for sale .................................................... (2,648) (2,072)
Net loss on investment securities ....................................................... 4,623 1,240
Net (gain) loss on derivative instruments ............................................... (1,786) 342
Gain on extinguishment of term repurchase agreement ..................................... (5,000) --
Other operating activities, net ......................................................... 8,872 2,978
Minority interest in income of subsidiaries ............................................. 178 101
--------- ----------
Net cash provided by operating activities ............................................ 138,251 117,689
--------- ----------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received ................. -- (14,720)
Cash paid for earn-out consideration to Adrian N. Baker & Company .......................... (2,920) (1,513)
Proceeds from sales of investment securities available for sale ............................ 127,384 487
Maturities of investment securities available for sale ..................................... 186,179 606,058
Maturities of investment securities held to maturity ....................................... 1,216 4,223
Purchases of investment securities available for sale ...................................... (22,519) (520,751)
Purchases of investment securities held to maturity ........................................ (1,557) (134)
Proceeds from sale of commercial loans held for sale ....................................... 3,421 --
Net increase in loans ...................................................................... (301,466) (194,528)
Recoveries of loans previously charged-off ................................................. 3,471 3,546
Purchases of bank premises and equipment ................................................... (12,837) (36,963)
Cash received for minority interest in FB Holdings, LLC .................................... 85,000 --
Other investing activities, net ............................................................ 8,182 4,088
--------- ----------
Net cash provided by (used in) investing activities .................................. 73,554 (150,207)
--------- ----------
Cash flows from financing activities:
Increase in demand, savings and money market deposits ...................................... 200,688 224,746
Decrease in time deposits .................................................................. (500,018) (73,677)
Increase (decrease) in Federal Home Loan Bank advances ..................................... 299,914 (33,283)
Decrease in federal funds purchased ........................................................ (76,500) --
(Decrease) increase in securities sold under agreements to repurchase ...................... (35,389) 62,618
Advances drawn on notes payable ............................................................ 55,000 --
Repayments of notes payable ................................................................ (64,000) (30,000)
Proceeds from issuance of subordinated debentures .......................................... -- 25,774
Repayments of subordinated debentures ...................................................... -- (82,681)
Payment of preferred stock dividends ....................................................... (328) (328)
--------- ----------
Net cash (used in) provided by financing activities .................................. (120,633) 93,169
--------- ----------
Net increase in cash and cash equivalents ............................................ 91,172 60,651
Cash and cash equivalents, beginning of period ................................................ 231,675 369,557
--------- ----------
Cash and cash equivalents, end of period ...................................................... $ 322,847 430,208
========= ==========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest on liabilities ................................................................. $ 141,162 163,632
Income taxes ............................................................................ (5,259) (7,462)
========= ==========
Noncash investing and financing activities:
Cumulative effect of change in accounting principle ..................................... $ 6,312 2,470
Loans held for sale transferred to loan portfolio ....................................... -- 7,368
Loans transferred to other real estate .................................................. 17,382 6,400
========= ==========
Business combinations:
Fair value of tangible assets acquired (noncash) ........................................ $ -- 189,275
Goodwill and other intangible assets recorded with net assets acquired .................. -- 28,557
Liabilities assumed ..................................................................... -- (201,599)
========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
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 and six months ended June 30, 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 (ANB); Universal Premium Acceptance Corporation and its wholly
owned subsidiary, UPAC of California, Inc. (collectively, UPAC); Small Business
Loan Source LLC (SBLS LLC) and FB Holdings, LLC (FB Holdings). All of the
subsidiaries are wholly owned as of June 30, 2008, except SBLS LLC, which was
76.0% owned by First Bank and 24.0% owned by First Capital America, Inc. (FCA),
and FB Holdings, which was 51.02% owned by First Bank and 48.98% owned by FCA,
as further described in Note 5 to the consolidated financial statements. SBLS
LLC and FB Holdings are included in the consolidated financial statements with
the minority ownership interests reported in the liabilities section of the
consolidated balance sheets as "minority interest in subsidiaries" and the
minority ownership interest of earnings or loss, net of tax, reported as
"minority interest in income of subsidiaries" in the consolidated statements of
operations.
Restatement of Previously Issued Consolidated Interim Financial Statements.
As discussed in Amendment No. 1 to the 2007 Annual Report on Form 10-K, as filed
with the United States Securities and Exchange Commission (SEC) on July 30,
2008, 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 any of its other previously filed Annual
Reports on Form 10-K or any Quarterly Reports on Form 10-Q for the periods
affected by this restatement.
5
The following table presents the effects of the adjustments made to First Banks'
previously reported consolidated statements of operations for the three and six
months ended June 30, 2007:
Three Months Ended Six Months Ended
June 30, 2007 June 30, 2007
---------------------------------- ----------------------------------
As As
Previously As Previously As
Reported Adjustment Restated Reported Adjustment Restated
---------- ---------- -------- ---------- ---------- --------
(dollars in thousands, except share and per share data)
Interest and fees on loans ......................... $157,822 (747) 157,075 311,579 (1,494) 310,085
Total interest income .............................. 177,319 (747) 176,572 349,146 (1,494) 347,652
Interest expense on other borrowings ............... 4,941 (72) 4,869 9,292 (5) 9,287
Interest expense on subordinated debentures ........ 5,814 628 6,442 11,748 597 12,345
Total interest expense ............................. 80,548 556 81,104 157,514 592 158,106
Net interest income ................................ 96,771 (1,303) 95,468 191,632 (2,086) 189,546
Provision for loan losses .......................... 5,500 (2,083) 3,417 9,000 (2,083) 6,917
Net interest income after provision for loan
losses .......................................... 91,271 780 92,051 182,632 (3) 182,629
Gain on loans sold and held for sale ............... 4,558 (4,438) 120 8,484 (6,412) 2,072
Total noninterest income ........................... 24,037 (4,438) 19,599 48,620 (6,412) 42,208
Occupancy expense, net of rental income ............ 7,747 276 8,023 15,168 563 15,731
Total noninterest expense .......................... 84,435 276 84,711 170,136 563 170,699
Income before provision for income taxes and
minority interest in income of subsidiary ....... 30,873 (3,934) 26,939 61,116 (6,978) 54,138
Provision for income taxes ......................... 11,092 (1,555) 9,537 22,042 (2,759) 19,283
Income before minority interest in income of
subsidiaries .................................... 19,781 (2,379) 17,402 39,074 (4,219) 34,855
Net income ......................................... 19,750 (2,379) 17,371 38,973 (4,219) 34,754
Net income available to common stockholders ........ 19,618 (2,379) 17,239 38,645 (4,219) 34,426
Basic earnings per common share .................... 829.17 (100.52) 728.65 1,633.29 (178.30) 1,454.99
Diluted earnings per common share .................. 821.63 (99.23) 722.40 1,620.45 (175.98) 1,444.47
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.
6
(2) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of amortization, were comprised of the
following at June 30, 2008 and December 31, 2007:
June 30, 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 (28,562) 53,916 (23,873)
Customer list intangibles .... 23,320 (3,155) 23,320 (2,408)
Other intangibles ............ 2,385 (1,562) 2,386 (1,437)
--------- ------------ -------- ------------
Total ..................... $ 79,621 (33,279) 79,622 (27,718)
========= ============ ======== ============
Unamortized intangible assets:
Goodwill ..................... $ 266,078 263,747
========= ========
Amortization of intangible assets was $2.8 million and $5.6 million for the
three and six months ended June 30, 2008, respectively, and $3.2 million and
$6.2 million for the comparable periods in 2007. 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 ...................................... $ 5,570
2009 ................................................ 9,280
2010 ................................................ 8,852
2011 ................................................ 6,674
2012 ................................................ 2,459
2013 ................................................ 1,524
Thereafter .......................................... 11,983
--------
Total ............................................ $ 46,342
========
Changes in the carrying amount of goodwill for the three and six months ended
June 30, 2008 and 2007 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2008 2007 2008 2007
--------- ------- -------- --------
(dollars expressed in thousands)
Balance, beginning of period .............. $ 264,379 252,617 263,747 230,036
Goodwill acquired during the period (1) ... 2,920 1,476 2,920 24,659
Acquisition-related adjustments (2) ....... (1,221) -- (589) (602)
--------- ------- -------- --------
Balance, end of period .................... $ 266,078 254,093 266,078 254,093
========= ======= ======== ========
- ----------
(1) Goodwill acquired during 2008 pertains to additional earn-out
consideration associated with the acquisition of ANB in March 2006.
Goodwill acquired during 2007 pertains to the acquisition of Royal Oaks
Bancshares, Inc. in February 2007 and additional earn-out consideration
associated with the acquisition of ANB.
(2) Acquisition-related adjustments include additional purchase accounting
adjustments for prior years' acquisitions necessary to appropriately
adjust preliminary goodwill recorded at the time of the acquisition, which
was based upon current estimates available at that time, to reflect the
receipt of additional valuation data. Acquisition-related adjustments
recorded in 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.
7
(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 June 30, 2008 and December 31, 2007, First Banks
serviced mortgage loans for others totaling $1.09 billion and $1.10 billion,
respectively. Changes in mortgage servicing rights for the three and six months
ended June 30, 2008 and 2007 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2008 2007 2008 2007
-------- ------- ------- -------
(dollars expressed in thousands)
Balance, beginning of period .............................. $ 14,169 5,407 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 ...................... 998 322 1,673 655
Change in fair value resulting from changes in valuation
inputs or assumptions used in valuation model (1) ...... 1,235 -- 551 --
Other changes in fair value (2) ........................... (435) -- (1,085) --
Amortization .............................................. -- (725) -- (1,518)
-------- ------- ------- -------
Balance, end of period .................................... $ 15,967 5,004 15,967 5,004
======== ======= ======= =======
- ----------
(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.
Other Servicing Activities. At June 30, 2008 and December 31, 2007, First Banks
serviced United States Small Business Administration (SBA) loans for others
totaling $208.0 million and $149.9 million, respectively. Changes in SBA
servicing rights for the three and six months ended June 30, 2008 and 2007 were
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2008 2007 2008 2007
------- ------- ------- -------
(dollars expressed in thousands)
Balance, beginning of period .............................. $ 9,310 7,795 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 ........................... 691 523 2,053 990
Change in fair value resulting from changes in valuation
inputs or assumptions used in valuation model (1) ...... 134 -- 15 --
Other changes in fair value (2) ........................... (379) -- (685) --
Amortization .............................................. -- (403) -- (816)
Impairment ................................................ -- (295) -- (618)
-------- ------- ------- -------
Balance, end of period .................................... $ 9,756 7,620 9,756 7,620
======== ======= ======= =======
- ----------
(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.
8
(4) EARNINGS (LOSS) PER COMMON SHARE
The following is a reconciliation of basic and diluted earnings (loss) per share
(EPS) for the three and six months ended June 30, 2008 and 2007:
Income Per Share
(Loss) Shares Amount
---------- ---------- ----------
(dollars in thousands, except share and per share data)
Three months ended June 30, 2008:
Basic EPS - loss to common stockholders ................ $ (40,049) 23,661 $(1,692.61)
Effect of dilutive securities:
Class A convertible preferred stock .................. -- -- --
---------- ---------- ----------
Diluted EPS - loss to common stockholders .............. $ (40,049) 23,661 $(1,692.61)
========== ========== ==========
(Restated) (Restated) (Restated)
---------- ---------- ----------
Three months ended June 30, 2007:
Basic EPS - income available to common stockholders .... $ 17,239 23,661 $ 728.65
Effect of dilutive securities:
Class A convertible preferred stock .................. 130 382 (6.25)
---------- ---------- ----------
Diluted EPS - income available to common stockholders .. $ 17,369 24,043 $ 722.40
========== ========== ==========
Six months ended June 30, 2008:
Basic EPS - loss to common stockholders ................ $ (45,118) 23,661 $(1,906.87)
Effect of dilutive securities:
Class A convertible preferred stock .................. -- -- --
---------- ---------- ----------
Diluted EPS - loss to common stockholders .............. $ (45,118) 23,661 $(1,906.87)
========== ========== ==========
(Restated) (Restated) (Restated)
---------- ---------- ----------
Six months ended June 30, 2007:
Basic EPS - income available to common stockholders .... $ 34,426 23,661 $ 1,454.99
Effect of dilutive securities:
Class A convertible preferred stock .................. 321 394 (10.52)
---------- ---------- ----------
Diluted EPS - income available to common stockholders .. $ 34,747 24,055 $ 1,444.47
========== ========== ==========
(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 $17.2 million for the three and six months ended June 30, 2008,
respectively, and $8.6 million and $17.5 million for the comparable periods in
2007. First Services leases information technology and other equipment from
First Bank. First Services paid First Bank rental fees for the use of that
equipment of $801,000 and $1.9 million during the three and six months ended
June 30, 2008, respectively, and $885,000 and $2.0 million for the comparable
periods in 2007. In addition, First Services paid approximately $463,000 and
$927,000 for the three and six months ended June 30, 2008, respectively, and
$441,000 and $882,000 for the comparable periods in 2007, 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 $1.9 million and $3.6 for the three and six months ended
June 30, 2008, respectively, and $1.4 million and $2.4 million for the
comparable periods in 2007, 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 $75,000 and $120,000
for the three and six months ended June 30, 2008, respectively, and $53,000 and
$86,000 for the comparable periods in 2007, to First Bank 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. (the Foundation), a
charitable foundation established by First Banks' Chairman and members of his
immediate family. In conjunction with this transaction, First Banks recorded
charitable contribution expense of $1.7 million, which was partially offset by a
gain on the contribution of these available-for-sale investment securities of
$147,000, representing the difference between the cost basis and the fair value
of the common stock on the date of the contribution. In addition, First Banks
recognized a tax benefit of $1.0 million associated with this transaction.
During the second quarter of
9
2007, First Bank contributed $1.3 million in cash to the Foundation, thereby
bringing the total value of charitable contributions to the Foundation to $1.3
million and $3.0 million for the three and six months ended June 30, 2007,
respectively. There were no charitable contributions made to this organization
during the three and six months ended June 30, 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 $105,000 and
$204,000 for the three and six months ended June 30, 2008, respectively, and
$99,000 and $197,000 for the comparable periods in 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 (LIBOR) plus 40 basis points.
The balance of advances outstanding under the Promissory Note was $59.0 million
and $52.3 million at June 30, 2008 and December 31, 2007, respectively. Interest
expense recorded by SBLS LLC under the Promissory Note and Agreement was
$431,000 and $992,000 for the three and six months ended June 30, 2008,
respectively, and $947,000 and $1.9 million for the comparable periods in 2007.
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.
On May 14, 2008, First Banks formed FB Holdings, 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 contributed cash of $85.0 million to FB Holdings. As a result, First
Bank owned 51.02% and FCA owned the remaining 48.98% of FB Holdings as of June
30, 2008. The contribution of cash by FCA is reflected as minority interest in
the consolidated financial statements and, consequently, increased the Company's
and First Bank's total risk-based capital ratios.
On May 15, 2008, First Banks entered into a Revolving Credit Note and a Stock
Pledge Agreement with Investors of America Limited Partnership (Investors of
America, LP) (the New Credit Agreement), as further described in Note 9 to the
consolidated financial statements. 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
balance of advances outstanding under the New Credit Agreement was $30.0 million
at June 30, 2008. Interest expense, including commitment fees, recorded by First
Banks under the New Credit Agreement was $239,000 for the three and six months
ended June 30, 2008.
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 $44.5
million and $57.7 million at June 30, 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.
10
(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 June
30, 2008, First Banks and First Bank were well capitalized. As of June 30, 2008,
the most recent notification from First Banks' primary regulator categorized
First Banks and First Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, First Banks
and First Bank must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios as set forth in the following table.
At June 30, 2008 and December 31, 2007, First Banks' and First Bank's required
and actual capital ratios were as follows:
Actual
----------------------------------------------------- For To be Well
June 30, 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 ............................. $ 1,036,966 10.25% $ 1,008,253 9.84% 8.0% 10.0%
First Bank .............................. 1,048,786 10.37 1,023,990 10.01 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks ............................. 743,239 7.35 811,432 7.92 4.0 6.0
First Bank .............................. 921,386 9.11 895,571 8.75 4.0 6.0
Tier 1 capital (to average assets):
First Banks ............................. 743,239 7.12 811,432 7.99 3.0 5.0
First Bank .............................. 921,386 8.84 895,571 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 June 30, 2008, would have reduced First Banks' Tier 1 capital
(to risk-weighted assets) and Tier 1 capital (to average assets) to 6.47% and
6.27%, respectively, and would not have an impact on total capital (to
risk-weighted assets).
11
(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
------------------------------- -------------------------- ---------------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2008 2007 2008 2007 2008 2007
-------------- -------------- ----------- ------------ ------------ ------------
(Restated) (Restated) (Restated)
(dollars expressed in thousands)
Balance sheet information:
Investment securities ................. $ 672,119 997,486 18,790 21,785 690,909 1,019,271
Loans, net of unearned discount ....... 9,045,114 8,886,184 -- -- 9,045,114 8,886,184
Goodwill and other intangible assets .. 312,420 315,651 -- -- 312,420 315,651
Total assets .......................... 10,768,050 10,872,602 31,696 29,868 10,799,746 10,902,470
Deposits .............................. 8,870,686 9,164,868 (23,403) (15,675) 8,847,283 9,149,193
Other borrowings ...................... 593,634 409,616 -- -- 593,634 409,616
Notes payable ......................... -- -- 30,000 39,000 30,000 39,000
Subordinated debentures ............... -- -- 353,790 353,752 353,790 353,752
Stockholders' equity .................. 1,149,347 1,203,008 (341,442) (360,931) 807,905 842,077
============== ============== =========== ============ ============ ============
12
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
------------------------------ ------------------------ ---------------------------
Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30,
------------------------------ ------------------------ ---------------------------
2008 2007 2008 2007 2008 2007
--------------- ------------ ---------- ----------- ------------ ------------
(Restated) (Restated) (Restated)
(dollars expressed in thousands)
Income statement information:
Interest income .......................... $ 147,531 176,330 222 242 147,753 176,572
Interest expense ......................... 55,353 74,051 5,617 7,053 60,970 81,104
--------------- ------------ ---------- ----------- ------------ ------------
Net interest income ................... 92,178 102,279 (5,395) (6,811) 86,783 95,468
Provision for loan losses ................ 84,053 3,417 -- -- 84,053 3,417
--------------- ------------ ---------- ----------- ------------ ------------
Net interest income after provision
for loan losses ..................... 8,125 98,862 (5,395) (6,811) 2,730 92,051
--------------- ------------ ---------- ----------- ------------ ------------
Noninterest income ....................... 25,435 19,742 (6,544) (143) 18,891 19,599
Amortization of intangible assets ........ 2,785 3,227 -- -- 2,785 3,227
Other noninterest expense ................ 79,840 81,450 2,017 34 81,857 81,484
--------------- ------------ ---------- ----------- ------------ ------------
Income (loss) before provision
(benefit) for income taxes and
minority interest in income
of subsidiaries ..................... (49,065) 33,927 (13,956) (6,988) (63,021) 26,939
Provision (benefit) for income taxes ..... (18,239) 11,994 (4,898) (2,457) (23,137) 9,537
--------------- ------------ ---------- ----------- ------------ ------------
Income (loss) before minority
interest in income of
subsidiaries ........................ (30,826) 21,933 (9,058) (4,531) (39,884) 17,402
Minority interest in income
of subsidiaries ..................... 33 31 -- -- 33 31
--------------- ------------ ---------- ----------- ------------ ------------
Net income (loss) ..................... $ (30,859) 21,902 (9,058) (4,531) (39,917) 17,371
=============== ============ ========== =========== ============ ============
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
------------------------------ ------------------------ ---------------------------
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
------------------------------ ------------------------ ---------------------------
2008 2007 2008 2007 2008 2007
--------------- ------------ ---------- ----------- ------------ ------------
(Restated) (Restated) (Restated)
(dollars expressed in thousands)
Income statement information:
Interest income .......................... $ 311,579 347,152 478 500 312,057 347,652
Interest expense ......................... 123,413 144,319 12,334 13,787 135,747 158,106
--------------- ------------ ---------- ----------- ------------ ------------
Net interest income ................... 188,166 202,833 (11,856) (13,287) 176,310 189,546
Provision for loan losses ................ 130,000 6,917 -- -- 130,000 6,917
--------------- ------------ ---------- ----------- ------------ ------------
Net interest income after provision
for loan losses ..................... 58,166 195,916 (11,856) (13,287) 46,310 182,629
--------------- ------------ ---------- ----------- ------------ ------------
Noninterest income ....................... 58,732 42,384 (6,730) (176) 52,002 42,208
Amortization of intangible assets ........ 5,561 6,153 -- -- 5,561 6,153
Other noninterest expense ................ 158,331 161,627 4,174 2,919 162,505 164,546
--------------- ------------ ---------- ----------- ------------ ------------
Income (loss) before provision
(benefit) for income taxes and
minority interest in income
of subsidiaries ..................... (46,994) 70,520 (22,760) (16,382) (69,754) 54,138
Provision (benefit) for income taxes ..... (17,152) 25,405 (7,990) (6,122) (25,142) 19,283
--------------- ------------ ---------- ----------- ------------ ------------
Income (loss) before minority
interest in income of
subsidiaries ........................ (29,842) 45,115 (14,770) (10,260) (44,612) 34,855
Minority interest in income
of subsidiaries ..................... 178 101 -- -- 178 101
--------------- ------------ ---------- ----------- ------------ ------------
Net income (loss) ..................... $ (30,020) 45,014 (14,770) (10,260) (44,790) 34,754
=============== ============ ========== =========== ============ ============
13
(8) OTHER BORROWINGS
Other borrowings were comprised of the following at June 30, 2008 and December
31, 2007:
June 30, December 31,
2008 2007
-------------- ---------------
(Restated)
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily ......................................... $ 172,863 198,766
Monthly ....................................... -- 33,493
Term .......................................... 120,000 100,000
Federal funds purchased .......................... -- 76,500
Federal Home Loan Bank (FHLB) advances (1) ....... 300,771 857
-------------- --------------
Total ....................................... $ 593,634 409,616
============== ==============
- ----------
(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, and in May 2008, First Banks entered into a $100.0
million FHLB advance that matures in November 2008 at a fixed interest rate
of 2.23%.
The maturity dates, par amounts, interest rates and interest rate floor strike
prices on First Bank's term repurchase agreements as of June 30, 2008 and
December 31, 2007 were as follows:
Interest Interest Rate Floor
Maturity Date Par Amount Rate Strike Price
------------- ------------------ -------------- -------------------
(dollars expressed
in thousands)
June 30, 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 May 15, 2008, First Banks entered into the New Credit Agreement with
Investors of America, LP, as further described in Note 5 to the consolidated
financial statements. 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 the event the maturity date is accelerated, the aggregate
principal balance of all outstanding advances and any accrued interest thereon
would 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 received an advance of 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 then existing secured credit
agreement with a group of unaffiliated financial institutions, as discussed
below.
14
On May 19, 2008, First Banks entered into a Termination Agreement regarding its
then existing secured credit agreement with a group of unaffiliated financial
institutions (the Former Credit Agreement). In accordance with the terms and
conditions of the Termination Agreement, First Banks repaid in full all of its
then existing obligations associated with the Former Credit Agreement in the
aggregate amount of $58.1 million, including the accrued interest and fees
thereon. First Banks repaid in full its obligations 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.
Notes payable were comprised of the following at June 30, 2008 and December 31,
2007:
June 30, December 31,
2008 2007
-------- ------------
(dollars expressed in thousands)
Term loans ........................... $ -- 19,000
Revolving credit ..................... 30,000 20,000
-------- -------
Total ............................. $ 30,000 39,000
======== =======
During the six months ended June 30, 2008, First Banks made payments of $64.0
million on the outstanding principal balance of the notes payable and had drawn
advances of $55.0 million on revolving credit notes, in aggregate.
(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 a publicly underwritten
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 $5.0 million
and $11.1 million for the three and six months ended June 30, 2008,
respectively, and $5.8 million and $11.7 million for the comparable periods in
2007, 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.
15
A summary of the subordinated debentures issued to the Trusts in conjunction
with the trust preferred securities offerings at June 30, 2008 and December 31,
2007 were as follows:
Subordinated
Debentures
Trust -----------------------
Maturity Call Interest Preferred June 30, December 31,
Name of Trust Issuance Date Date Date (1) Rate (2) Securities 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 June 30, 2008 and December 31, 2007, First Banks' liability for uncertain tax
positions, excluding interest and penalties, was $12.8 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 June 30,
2008 and December 31, 2007, respectively. During the six months ended June 30,
2008, First Banks recorded additional liabilities for unrecognized tax benefits
of $929,000 that, if recognized, would decrease the provision for income taxes
by $112,000, net of the federal tax benefit. During the six months ended June
30, 2008, First Banks reduced its liability for unrecognized tax benefits by
$346,000 as a result of the receipt of a no change letter in the first quarter
of 2008 following the close of an examination of the 2004 federal income tax
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 June 30, 2008 and December 31, 2007, interest accrued
for unrecognized tax positions was $1.9 million and $1.4 million, respectively.
The amount of interest expense recognized during the three and six months ended
June 30, 2008 was $279,000 and $430,000, respectively, compared to $281,000 and
$470,000 for the comparable periods in 2007. There were no penalties for
unrecognized tax positions accrued at June 30, 2008 and December 31, 2007, nor
did First Banks recognize any expense for penalties during the three and six
months ended June 30, 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 June 30, 2008 could decrease by approximately
$1.3 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
16
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 income tax 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
17
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 June
30, 2008 are reflected in the following table:
Fair Value Measurements
-------------------------------------------
June 30, 2008
-------------------------------------------
Level 1 Level 2 Level 3 Fair Value
--------- -------- ------- ----------
(dollars expressed in thousands)
Assets:
Available-for-sale investment securities ................ $ 10,279 661,426 -- 671,705
Derivative instruments .................................. -- 17,791 -- 17,791
Servicing rights ........................................ -- -- 25,723 25,723
--------- -------- ------- ----------
Total ................................................ $ 10,279 679,217 25,723 715,219
========= ======== ======= ==========
Liabilities:
Nonqualified deferred compensation plan ................. $ 9,212 -- -- 9,212
========= ======== ======= ==========
The following table presents the changes in Level 3 assets measured on a
recurring basis for the three and six months ended June 30, 2008:
Servicing Rights
--------------------------------
Three Months Six Months
Ended Ended
June 30, 2008 June 30, 2008
-------------- ---------------
(dollars expressed in thousands)
Balance, beginning of period ....................................... $ 23,479 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) ..................................... 555 (1,204)
Included in other comprehensive income ....................... -- --
Purchases, issuances and settlements ............................ 1,689 3,726
Transfers in and/or out of level 3 .............................. -- --
-------------- ---------------
Balance, end of period ............................................. $ 25,723 25,723
============== ===============
- ----------
(1) Gains or losses (realized/unrealized) are included in other income in the
consolidated statements of operations.
18
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 June 30,
2008 are reflected in the following table:
Fair Value Measurements
-------------------------------------------
June 30, 2008
-------------------------------------------
Level 1 Level 2 Level 3 Fair Value
--------- -------- ------- ----------
(dollars expressed in thousands)
Assets:
Loans held for sale ..................................... $ -- 60,043 -- 60,043
Loans ................................................... -- 114,940 184,540 299,480
--------- -------- ------- ----------
Total ................................................ $ -- 174,983 184,540 359,523
========= ======== ======= ==========
(13) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty contracts. For
value received, and for the purpose of inducing a pension fund and its trustees
and a welfare fund and its trustees (the Funds) to conduct business with MVP,
First Bank's institutional investment management subsidiary, First Banks
irrevocably and unconditionally guaranteed payment of and promised to pay to
each of the Funds any amounts up to the sum of $5.0 million to the extent MVP is
liable to the Funds for a breach of the Investment Management Agreements
(including the Investment Policy Statement and Investment Guidelines), by and
between MVP and the Funds and/or any violation of the Employee Retirement Income
Security Act by MVP resulting in liability to the Funds. The guaranties are
continuing guaranties of all obligations that may arise for transactions
occurring prior to termination of the Investment Management Agreements and are
coexistent with the term of the Investment Management Agreements. The Investment
Management Agreements have no specified term but may be terminated at any time
upon written notice by the Trustees or, at First Banks' option, upon thirty days
written notice to the Trustees. In the event of termination of the Investment
Management Agreements, such termination shall have no effect on the liability of
First Banks with respect to obligations incurred before such termination. The
obligations of First Banks are joint and several with those of MVP. First Banks
does not have any recourse provisions that would enable it to recover from third
parties any amounts paid under the contracts nor does First Banks hold any
assets as collateral that, upon occurrence of a required payment under the
contract, could be liquidated to recover all or a portion of the amount(s) paid.
At June 30, 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 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
19
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
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 currently owns 51.01%
and FCA owns the remaining 48.99% of FB Holdings, as further described in Note 5
to the consolidated financial statements.
On August 11, 2008, First Banks entered into a First Amended Revolving Credit
Note (the New Amended Credit Agreement) with Investors of America, LP. The New
Amended Credit Agreement modified the existing Revolving Credit Note to provide
that First Banks receive the prior written consent of Investors of America, LP
for any advance that would cause the aggregate outstanding principal amount to
exceed $10.0 million. In addition, in July 2008, First Banks repaid in full its
outstanding balance under the New Amended Credit Agreement in the aggregate
amount of $30.0 million, including the accrued interest thereon.
20
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 United
States Securities and Exchange Commission on July 30, 2008. 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 branch
banking offices and its subsidiaries, as listed below:
o First Bank Business Capital, Inc.;
o Missouri Valley Partners, Inc., or MVP;
o Adrian N. Baker & Company, or Adrian Baker;
o Universal Premium Acceptance Corporation and its wholly owned
subsidiary, UPAC of California, Inc., collectively UPAC;
o Small Business Loan Source LLC, or SBLS LLC; and
o FB Holdings, LLC, or FB Holdings.
First Bank's subsidiaries are wholly owned except SBLS LLC, which is 76.0% owned
by First Bank and 24.0% owned by First Capital America, Inc., or FCA, and FB
Holdings, which was 51.02% owned by First Bank and 48.98% owned by FCA as of
June 30, 2008.
At June 30, 2008, we had assets of $10.80 billion, loans, net of unearned
discount, of $9.05 billion, deposits of $8.85 billion and stockholders' equity
of $807.9 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
21
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 and six
months ended June 30, 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 $10.80 billion at June 30, 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 and an increase in cash and short-term investments and
other assets.
Cash and cash equivalents increased $91.2 million to $322.8 million at June 30,
2008, compared to $231.7 million at December 31, 2007. The increase in cash and
cash equivalents was primarily due to the decrease in investment securities as
further discussed below.
Loans, net of unearned discount, increased $158.9 million to $9.05 billion at
June 30, 2008, from $8.89 billion at December 31, 2007, reflecting organic
growth, partially offset by net loan charge-offs, and the sales of approximately
$10.8 million of our small business loans in March 2008 and approximately $24.0
million of our residential mortgage loans in April 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 loans in light of current market conditions, as further discussed under
"--Loans and Allowance for Loan Losses."
Investment securities decreased $328.4 million to $690.9 million at June 30,
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 $187.4 million and sales of investment securities of $127.4 million for the
six months ended June 30, 2008.
Other assets increased $17.1 million to $138.8 million at June 30, 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, and increased
22
other real estate owned balances associated with substantially higher
foreclosure activity, partially offset by a decrease in accrued interest
receivable.
Deposits decreased $301.9 million to $8.85 billion at June 30, 2008, from $9.15
billion at December 31, 2007. During the first six months of 2008, we achieved
organic growth in savings and money market deposits of $212.7 million through
our deposit development programs, including marketing campaigns coupled with
enhanced product and service offerings. However, continued anticipated run-off
of higher rate certificates of deposit resulted in a significant decrease in our
time deposits of $502.6 million, comprised of $331.7 million and $170.9 million
during the first and second quarters of 2008, respectively. The Florida region
accounted for $189.1 million of the decline in our certificates of deposit and
was anticipated as part of our planned post-acquisition strategy to improve the
net interest margin in this region. Deposit growth, which is our primary funding
source for loans, was 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 $184.0 million to $593.6 million at June 30, 2008, compared
to $409.6 million at December 31, 2007. In light of unstable market conditions,
increased loan funding needs and current deposit trends, we implemented several
strategies during 2008 to improve our liquidity position, including increasing
our outstanding FHLB borrowings by $300.0 million, as further discussed under
"--Liquidity." In addition, 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. The
increase in other borrowings was partially offset by: a decrease in our monthly
repurchase agreement of $33.5 million resulting from the payoff of this
borrowing in May 2008; a decrease in daily repurchase agreements of $25.9
million; and a decrease in federal funds purchased of $76.5 million.
Our notes payable were $30.0 million and $39.0 million at June 30, 2008 and
December 31, 2007, respectively. During the second quarter of 2008, we received
an advance of $30.0 million under a new secured revolving line of credit with an
affiliated entity and utilized the proceeds of the advance to terminate and
repay in full all of the obligations under our existing secured credit facility
with a group of unaffiliated financial institutions, as further described in
Note 9 to our consolidated financial statements.
Accrued expenses and other liabilities decreased $16.9 million to $38.2 million
at June 30, 2008, from $55.1 million at December 31, 2007. The decrease resulted
from decreases in accrued interest payable, accrued federal income taxes payable
and other miscellaneous accrued expenses and liabilities.
Minority interest in subsidiaries increased $85.2 million to $90.7 million at
June 30, 2008, from $5.5 million at December 31, 2007. The increase is primarily
due to FCA's contribution of cash of $85.0 million into FB Holdings during the
second quarter of 2008, as further described in Note 5 to our consolidated
financial statements. As of June 30, 2008, First Bank owned 51.02% of FB
Holdings and FCA owned the remaining 48.98%.
Stockholders' equity was $807.9 million and $842.1 million at June 30, 2008 and
December 31, 2007, respectively, reflecting a decrease of $34.2 million during
the first six months of 2008. The decrease was primarily attributable to a net
loss of $44.8 million and dividends paid on our Class A and Class B preferred
stock of $328,000, partially offset by (a) a $4.6 million increase in
accumulated other comprehensive income, comprised of $1.4 million associated
with changes in unrealized gains and losses on our available-for-sale investment
securities portfolio and $3.2 million associated with changes in the fair value
of our derivative financial instruments; and (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.
Results of Operations
Net Income. We recorded a net loss of $39.9 million and $44.8 million for the
three and six months ended June 30, 2008, respectively, compared to net income
of $17.4 million and $34.8 million for the comparable periods in 2007. The
change in our earnings for these periods was primarily driven by the following:
o An increase in the provision for loan losses to $84.1 million and
$130.0 million for the three and six months ended June 30, 2008,
respectively, compared to $3.4 million and $6.9 million for the
comparable periods in 2007;
o A decline in net interest income and net interest margin. Our net
interest margin declined to 3.55% and 3.60% for the three and six
months ended June 30, 2008, respectively, compared to 4.03% and
4.08% for the comparable periods in 2007, and our net interest
income declined to $86.8 million and $176.3 million
23
for the three and six months ended June 30, 2008, respectively,
compared to $95.5 million and $189.5 million for the comparable
periods in 2007;
o Noninterest income of $18.9 million and $52.0 million for the three
and six months ended June 30, 2008, respectively, compared to $19.6
million and $42.2 million for the comparable periods in 2007;
o A decrease in noninterest expense to $84.6 million and $168.1
million for the three and six months ended June 30, 2008,
respectively, compared to $84.7 million and $170.7 million for the
comparable periods in 2007; and
o A benefit for income taxes of $23.1 million and $25.1 million for
the three and six months ended June 30, 2008, respectively, compared
to a provision for income taxes of $9.5 million and $19.3 million
for the comparable periods in 2007.
The increase in our provision for loan losses for the three and six months ended
June 30, 2008 was primarily driven by increased net loan charge-offs, an
increase in nonperforming loans, and higher levels of problem loans in our
one-to-four family residential real estate and construction and land 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 an increase in nonaccrual loans of $147.7 million during 2008
and the 325 basis point decrease, in aggregate, in the prime lending rate, from
the third quarter of 2007 through the second 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 six months of 2008
primarily resulted from a pre-tax gain of $5.0 million recorded on the
extinguishment of a term repurchase agreement; a net gain of $1.8 million on
derivative instruments compared to a net loss of $342,000 in the prior period;
income from the sale of tax credits of $1.8 million compared to zero in the
prior period; and increased service charges on deposits and customer service
fees of $2.9 million. This increase was partially offset by an increase in net
losses on investment securities, primarily attributable to other-than-temporary
impairment of $6.4 million recognized in June 2008 on a single equity investment
in the common stock of a bank holding company. 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 six months of 2008 as well as a decrease in
charitable contributions expense. This decrease was partially offset by
increases in occupancy and furniture and equipment expenses; legal, examination
and professional fees; FDIC insurance; and other 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 $87.1 million and $177.0 million for the three and six months ended
June 30, 2008, respectively, compared to $95.9 million and $190.4 million for
the comparable periods in 2007. Our net interest margin declined to 3.55% and
3.60% for the three and six months ended June 30, 2008, respectively, compared
to 4.03% and 4.08% for the comparable periods in 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 and liabilities, 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 April 2008. Throughout this period, the Federal
Reserve decreased the targeted federal funds rate, resulting in reductions in
the prime lending rate totaling 325 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
24
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 98 and 67 basis points to 2.73%
and 3.03% for the three and six months ended June 30, 2008, respectively,
compared to 3.71% and 3.70% for the same periods in 2007, while the average
yield earned on our interest-earning assets decreased 142 and 110 basis points
to 6.03% and 6.36% for the three and six months ended June 30, 2008,
respectively, compared to 7.45% and 7.46% for the same periods in 2007,
resulting in a reduction of our net interest margin. Average interest-earning
assets increased to $9.87 billion and $9.89 billion for the three and six months
ended June 30, 2008, respectively, from $9.54 billion and $9.42 billion for the
comparable periods in 2007, reflecting increases of $333.1 million and $470.9
million, respectively. The increase is primarily attributable to internal loan
growth and interest-earning assets provided by our acquisitions completed in
2007, partially offset by net loan charge-offs and reductions in our short-term
investments and our investment securities portfolio. Average interest-bearing
liabilities increased to $8.60 billion and $8.64 billion for the three and six
months ended June 30, 2008, respectively, from $8.22 billion and $8.12 billion
for the comparable periods in 2007.
Interest income on our loan portfolio, expressed on a tax-equivalent basis,
decreased to $138.3 million and $291.2 million for the three and six months
ended June 30, 2008, respectively, compared to $157.3 million and $310.5 million
for the comparable periods in 2007. Average loans, net of unearned discount,
increased $1.08 billion and $1.10 billion to $9.05 billion and $9.00 billion for
the three and six months ended June 30, 2008, respectively, from $7.97 billion
and $7.89 billion for the comparable periods in 2007. The increase in average
loans primarily reflects internal growth and our acquisitions completed in 2007,
partially offset by net loan charge-offs. The yield on our loan portfolio
decreased 177 and 142 basis points to 6.15% and 6.51% for the three and six
months ended June 30, 2008, respectively, compared to 7.92% and 7.93% for the
comparable periods in 2007, reflecting decreases in the prime lending rate
throughout the latter part of 2007 and the first two quarters of 2008, a
significant increase in the average amount of nonaccrual loans during the
respective periods, and competitive pressures on loan yields within our markets;
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 225 basis points during the first six months of 2008 to
5.00% at June 30, 2008. Our interest rate swap agreements contributed to an
increase in interest income on our loan portfolio of $3.0 million and $4.8
million for the three and six months ended June 30, 2008, respectively, in
contrast to a decrease in interest income on our loan portfolio of $1.4 million
and $2.8 million for the comparable periods in 2007.
Interest income on our investment securities, expressed on a tax-equivalent
basis, was $9.6 million and $21.2 million for the three and six months ended
June 30, 2008, respectively, compared to $17.4 million and $33.8 million for the
comparable periods in 2007. Average investment securities were $791.2 million
and $866.8 million for the three and six months ended June 30, 2008,
respectively, compared to $1.39 billion and $1.36 billion for the comparable
periods in 2007. The reduction in our average investment securities reflects the
utilization of funds provided by maturities and sales of investment securities
to primarily fund organic growth within our loan portfolio. The yield earned on
our investment portfolio was 4.90% and 4.93% for the three and six months ended
June 30, 2008, respectively, compared to 5.00% and 5.01% for the comparable
periods in 2007. Funds provided by maturities and sales of investment securities
were primarily utilized to fund internal loan growth.
Interest income on our short-term investments was $154,000 and $316,000 for the
three and six months ended June 30, 2008, respectively, compared to $2.3 million
and $4.2 million for the comparable periods in 2007. Average short-term
investments were $31.8 million and $25.0 million for the three and six months
ended June 30, 2008, respectively, compared to $175.2 million and $162.5 million
for the comparable periods in 2007, reflecting the utilization of available
short-term investments to fund organic loan growth. The yield earned on our
short-term investments was 1.95% and 2.54% for the three and six months ended
June 30, 2008, respectively, compared to 5.30% and 5.20% for the comparable
periods in 2007, reflecting current market conditions and the reduced interest
rate environment.
Interest expense on our interest-bearing deposits decreased to $51.5 million and
$115.6 million for the three and six months ended June 30, 2008, respectively,
compared to $69.2 million and $134.9 million for the comparable periods in 2007.
Average interest-bearing deposits increased to $7.59 billion and $7.68 billion
for the three and six months ended June 30, 2008, respectively, compared to
$7.47 billion and $7.36 billion for the comparable periods in 2007. The increase
in average interest-bearing deposits reflects organic growth through enhanced
product marketing campaigns during the periods, and growth provided by our
acquisitions completed during 2007. The aggregate weighted average rate paid on
our deposit portfolio was 2.73% and 3.03% for the three and six months ended
June 30, 2008, compared to 3.71% and 3.70% for the comparable periods 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 3.84%
and 4.14% for the three and six months ended June 30, 2008, respectively, from
4.80% and 4.78% for the comparable periods in 2007, and
25
the average rate paid on our savings and money market deposit portfolio declined
to 2.02% and 2.30% for the three and six months ended June 30, 2008,
respectively, from 3.11% and 3.08% for the comparable periods 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 $7.8 million for
the three and six months ended June 30, 2008, respectively, compared to $4.9
million and $9.3 million for the same periods in 2007. Average other borrowings
were $611.6 million and $571.4 million for the three and six months ended June
30, 2008, respectively, compared to $409.2 million and $401.2 million for the
same periods in 2007. The aggregate weighted average rate paid on our other
borrowings was 2.54% and 2.74% for the three and six months ended June 30, 2008,
respectively, compared to 4.77% and 4.67% for the comparable periods in 2007.
The decrease in the weighted average rate paid on our other borrowings reflects
the reduction in short-term interest rates during the periods, as previously
discussed. The increase in average other borrowings is primarily due to an
additional $300.0 million of FHLB advances entered into during the first six
months of 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" and in Note 8
to our consolidated financial statements.
Interest expense on our notes payable was $696,000 and $1.3 million for the
three and six months ended June 30, 2008, respectively, compared to $636,000 and
$1.5 million for the comparable periods in 2007. Our notes payable averaged
$42.5 million and $41.0 million for the three and six months ended June 30,
2008, respectively, compared to $37.9 million and $47.2 million for the
comparable periods in 2007. The aggregate weighted average rate paid on our
notes payable was 6.58% and 6.20% for the three and six months ended June 30,
2008, respectively, compared to 6.73% and 6.60% for the comparable periods in
2007, 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 4.60% and 4.63% for the three and six months ended June 30,
2008, respectively, compared to 6.68% and 6.55% for the same periods in 2007.
The decrease in our average notes payable during the periods is primarily
attributable to contractual payments and additional prepayments made on our term
loan and advances on our term and revolving credit loans, as further described
in Note 5 and Note 9 to our consolidated financial statements.
Interest expense on our subordinated debentures was $4.9 million and $11.1
million for the three and six months ended June 30, 2008, respectively, compared
to $6.4 million and $12.3 million for the comparable periods in 2007. Average
subordinated debentures were $353.8 million for the three and six months ended
June 30, 2008, compared to $308.4 million and $309.2 million for the three and
six months ended June 30, 2007, respectively. The aggregate weighted average
rate paid on our subordinated debentures was 5.61% and 6.31% for the three and
six months ended June 30, 2008, respectively, compared to 8.38% and 8.05% for
the comparable periods in 2007, 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.
26
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 and six months
ended June 30, 2008 and 2007.
Three Months Ended June 30,
-----------------------------------------------------------------
2008 2007 (Restated)
------------------------------- -------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------- -------- ------ ----------- -------- ------
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1)(2)(3)(4) ......................................... $ 9,046,080 138,290 6.15% $ 7,966,082 157,294 7.92%
Investment securities (4) .................................. 791,206 9,635 4.90 1,394,677 17,400 5.00
Short-term investments ..................................... 31,770 154 1.95 175,158 2,315 5.30
----------- -------- ----------- --------
Total interest-earning assets ........................ 9,869,056 148,079 6.03 9,535,917 177,009 7.45
-------- --------
Nonearning assets ............................................. 904,886 870,747
----------- -----------
Total assets ......................................... $10,773,942 $10,406,664
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand ................................. $ 972,832 1,321 0.55% $ 959,300 2,313 0.97%
Savings and money market ................................ 2,872,992 14,417 2.02 2,634,607 20,460 3.11
Time deposits of $100 or more ........................... 1,333,043 13,016 3.93 1,478,324 18,204 4.94
Other time deposits ..................................... 2,409,569 22,728 3.79 2,396,534 28,180 4.72
----------- -------- ----------- --------
Total interest-bearing deposits ...................... 7,588,436 51,482 2.73 7,468,765 69,157 3.71
Other borrowings ........................................... 611,619 3,859 2.54 409,232 4,869 4.77
Notes payable (5) .......................................... 42,525 696 6.58 37,906 636 6.73
Subordinated debentures .................................... 353,781 4,933 5.61 308,387 6,442 8.38
----------- -------- ----------- --------
Total interest-bearing liabilities ................... 8,596,361 60,970 2.85 8,224,290 81,104 3.96
-------- --------
Noninterest-bearing liabilities:
Demand deposits ............................................ 1,225,073 1,251,213
Other liabilities .......................................... 112,121 124,013
----------- -----------
Total liabilities .................................... 9,933,555 9,599,516
Stockholders' equity .......................................... 840,387 807,148
----------- -----------
Total liabilities and stockholders' equity ........... $10,773,942 $10,406,664
=========== ===========
Net interest income ........................................... 87,109 95,905
======== ========
Interest rate spread .......................................... 3.18 3.49
Net interest margin (6) ....................................... 3.55% 4.03%
====== ======
Six Months Ended June 30,
-----------------------------------------------------------------
2008 2007 (Restated)
------------------------------- -------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------- -------- ------ ----------- -------- ------
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1)(2)(3)(4) ......................................... $ 8,998,416 291,182 6.51% $ 7,894,765 310,473 7.93%
Investment securities (4) .................................. 866,807 21,237 4.93 1,362,127 33,824 5.01
Short-term investments ..................................... 24,991 316 2.54 162,451 4,193 5.20
----------- -------- ----------- --------
Total interest-earning assets ........................ 9,890,214 312,735 6.36 9,419,343 348,490 7.46
-------- --------
Nonearning assets ............................................. 918,862 853,380
----------- -----------
Total assets ......................................... $10,809,076 $10,272,723
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand ................................. $ 985,914 3,353 0.68% $ 971,471 4,929 1.02%
Savings and money market ................................ 2,791,048 31,944 2.30 2,536,496 38,797 3.08
Time deposits of $100 or more ........................... 1,415,813 29,785 4.23 1,452,159 35,234 4.89
Other time deposits ..................................... 2,484,457 50,515 4.09 2,397,226 55,970 4.71
----------- -------- ----------- --------
Total interest-bearing deposits ...................... 7,677,232 115,597 3.03 7,357,352 134,930 3.70
Other borrowings ........................................... 571,417 7,787 2.74 401,240 9,287 4.67
Notes payable (5) .......................................... 40,999 1,265 6.20 47,198 1,544 6.60
Subordinated debentures .................................... 353,771 11,098 6.31 309,217 12,345 8.05
----------- -------- ----------- --------
Total interest-bearing liabilities ................... 8,643,419 135,747 3.16 8,115,007 158,106 3.93
-------- --------
Noninterest-bearing liabilities:
Demand deposits ............................................ 1,210,424 1,237,840
Other liabilities .......................................... 112,478 123,573
----------- -----------
Total liabilities .................................... 9,966,321 9,476,420
Stockholders' equity .......................................... 842,755 796,303
----------- -----------
Total liabilities and stockholders' equity ........... $10,809,076 $10,272,723
=========== ===========
Net interest income ........................................... 176,988 190,384
======== ========
Interest rate spread .......................................... 3.20 3.53
Net interest margin (6) ....................................... 3.60% 4.08%
====== ======
- ----------
(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 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 $326,000 and
$678,000 for the three and six months ended June 30, 2008, and $437,000
and $838,000 for the comparable periods in 2007, respectively.
(5) Interest expense on our notes payable includes commitment, arrangement and
renewal fees. Exclusive of these fees, the interest rates paid were 4.60%
and 4.63% for the three and six months ended June 30, 2008, and 6.68% and
6.55% for the comparable periods in 2007, respectively.
(6) Net interest margin is the ratio of net interest income (expressed on a
tax-equivalent basis) to average interest-earning assets.
27
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 and six months ended June 30, 2008 as
compared to the three and six months ended June 30, 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 Six Months Ended
June 30, 2008 June 30, 2008
Compared to 2007 (Restated) Compared to 2007 (Restated)
---------------------------- ---------------------------
Net Net
Volume Rate Change Volume Rate Change
-------- ------- ------- ------- ------- -------
(dollars expressed in thousands)
Interest earned on:
Loans: (1)(2)(3)
Taxable ....................................... $ 19,426 (38,227) (18,801) 40,554 (59,644) (19,090)
Tax-exempt (4) ................................ (59) (144) (203) (6) (195) (201)
Investment securities:
Taxable ....................................... (7,189) (461) (7,650) (11,690) (639) (12,329)
Tax-exempt (4) ................................ (137) 22 (115) (295) 37 (258)
Short-term investments ........................... (1,219) (942) (2,161) (2,416) (1,461) (3,877)
-------- ------- ------- ------- ------- -------
Total interest income ...................... 10,822 (39,752) (28,930) 26,147 (61,902) (35,755)
-------- ------- ------- ------- ------- -------
Interest paid on:
Interest-bearing demand deposits ................. 32 (1,024) (992) 73 (1,649) (1,576)
Savings and money market deposits ................ 1,698 (7,741) (6,043) 3,655 (10,508) (6,853)
Time deposits .................................... (1,551) (9,089) (10,640) 1,228 (12,132) (10,904)
Other borrowings ................................. 1,820 (2,830) (1,010) 3,152 (4,652) (1,500)
Notes payable (5) ................................ 75 (15) 60 (191) (88) (279)
Subordinated debentures .......................... 847 (2,356) (1,509) 1,647 (2,894) (1,247)
-------- ------- ------- ------- ------- -------
Total interest expense ..................... 2,921 (23,055) (20,134) 9,564 (31,923) (22,359)
-------- ------- ------- ------- ------- -------
Net interest income ........................ $ 7,901 (16,697) (8,796) 16,583 (29,979) (13,396)
======== ======= ======= ======= ======= =======
- ----------
(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 $84.1
million for the three months ended June 30, 2008, compared to $45.9 million for
the three months ended March 31, 2008 and $3.4 million for the three months
ended June 30, 2007. Our provision for loan losses was $130.0 million for the
first six months of 2008, compared to $6.9 million for the comparable period in
2007. The increase in our provision for loan losses for the three and six months
ended June 30, 2008 was primarily driven by increased net loan charge-offs, an
increase in nonperforming loans, and higher levels of problem loans in our
one-to-four family residential real estate and construction and land development
loan portfolios, as further discussed under "--Loans and Allowance for Loan
Losses." We expect the provision for loan losses to remain at elevated 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
coupled with highly unstable market conditions in certain sectors of these
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 $18.9 million and $52.0 million for
the three and six months ended June 30, 2008, respectively, compared to $19.6
million and $42.2 million for the comparable periods in 2007. 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 (losses) on investment securities and derivative
instruments, and other income.
Service charges on deposit accounts and customer service fees increased to $13.1
million and $25.2 million for the three and six months ended June 30, 2008,
respectively, from $11.7 million and $22.3 million for the comparable periods in
2007. The increase in service charges and customer service fees is primarily
attributable to: (a) higher deposit volumes 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 from time deposits to increased savings and money market deposits; (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
28
for non-sufficient funds and returned checks from our commercial deposit base
resulting from our newly implemented overdraft privilege program and 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 increased to $968,000 and $2.6 million for
the three and six months ended June 30, 2008, respectively, in comparison to
$120,000 and $2.1 million for the comparable periods in 2007. The increase in
2008 is primarily attributable to a decrease in repurchase obligations on
mortgage loans sold with recourse. For the three and six months ended June 30,
2007, we established recourse reserves of $3.2 million which had the effect of
decreasing our gain on sale by this amount. Gain on loans sold and held for sale
for 2008 also reflects a pre-tax gain of $504,000 recognized in March 2008 on
the sale of approximately $10.8 million of our small business loans. These
increases were partially offset by a significant decrease in the volume of
mortgage loans originated and subsequently sold in the secondary market, a
pre-tax loss of $804,000 on the sale of approximately $24.0 million of
residential real estate mortgage loans in April 2008, and a pre-tax gain of
$851,000 recorded in April 2007 on the sale of approximately $13.4 million of
certain repurchased and other residential mortgage loans.
We recorded net losses on investment securities of $5.8 million and $4.6 million
for the three and six months ended June 30, 2008, respectively, in comparison to
net losses of $1.5 million and $1.2 million for the comparable periods in 2007.
In June 2008, we 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 impacting the financial services industry as a whole, and
represented the difference between our cost basis and the fair value of the
equity security as of June 30, 2008. The other-than-temporary impairment of $6.4
million was partially offset by a pre-tax gain of approximately $867,000
recognized on the sale of $81.5 million of available-for-sale investment
securities in March 2008.
Bank owned life insurance investment income was $724,000 and $1.7 million for
the three and six months ended June 30, 2008, respectively, in comparison to
$999,000 and $1.7 million for the comparable periods in 2007, and reflects the
return on the performance of the underlying investments associated with the
insurance contracts, which is directly correlated to the portfolio mix of
investments, the crediting rate associated with the embedded stable value
protection program, and overall market conditions.
Investment management income generated by MVP, our institutional money
management subsidiary, was $686,000 and $2.0 million for the three and six
months ended June 30, 2008, respectively, in comparison to $1.5 million and $3.1
million for the same periods in 2007, reflecting decreased portfolio management
fee income associated with a decline in the level of assets under management
primarily attributable to the loss of a single large customer in the fourth
quarter of 2007 and current market conditions.
Insurance fee and commission income generated by Adrian Baker, our insurance
brokerage agency, was $1.9 million and $3.9 million for the three and six months
ended June 30, 2008, respectively, in comparison to $1.9 million and $3.6
million for the same periods in 2007, primarily reflecting increased customer
volumes.
We recorded net losses of $1.6 million and net gains of $1.8 million on
derivative instruments for the three and six months ended June 30, 2008,
respectively, in comparison to net losses of $344,000 and $342,000 for the three
and six months ended June 30, 2007, respectively. The net gain for the six
months ended June 30, 2008 is primarily attributable to the net 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 through
April 2008. In May 2008, we terminated our $300.0 million interest rate floor
agreements to modify our overall hedge position in accordance with our interest
rate risk management program, as further described under "--Interest Rate Risk
Management." We did not incur any gains or losses in conjunction with the
termination of our interest rate floor agreements.
We recorded a gain of $5.0 million on the extinguishment of our term repurchase
agreement in the first quarter of 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 the recognition of the pre-tax gain of $5.0 million.
Other income was $8.9 million and $14.4 million for the three and six months
ended June 30, 2008, respectively, in comparison to $5.3 million and $11.1
million for the comparable periods in 2007. The increase in 2008 is primarily
attributable to the following:
o A net increase in mortgage and other servicing rights of $555,000
for the three months ended June 30, 2008, compared to net decreases
in mortgage servicing rights of $1.2 million for the six months
ended June 30, 2008, and $1.4 million and $3.0 million for the three
and six months ended June 30, 2007, respectively. As further
discussed under "--Effects of New Accounting Standards," on January
1, 2008, we opted to
29
measure our servicing rights at fair value. As such, the
fluctuations in 2008, as compared to 2007, reflect changes in the
fair value of our servicing rights in comparison to amortization and
impairment recognized in 2007;
o Recoveries of certain loan principal balances that had been
previously charged off by the financial institutions prior to their
acquisition by First Banks of $686,000 and $1.5 million for the
three and six months ended June 30, 2008, compared to $215,000 and
$1.1 million for the same periods in 2007;
o A gain of $1.8 million for the three and six months ended June 30,
2008 recognized on the sale of various state tax credits in April
2008; and
o 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 $84.6 million and $168.1 million
for the three and six months ended June 30, 2008, respectively, in comparison to
$84.7 million and $170.7 million for the comparable periods in 2007. Our
efficiency ratio was 80.10% and 73.61% for the three and six months ended June
30, 2008, respectively, compared to 73.62% and 73.66% for the comparable periods
in 2007. The decrease in noninterest expense was primarily attributable to
certain profit improvement initiatives that we implemented throughout 2007 and
the first two quarters of 2008.
Salaries and employee benefits expense was $37.1 million and $77.7 million for
the three and six months ended June 30, 2008, respectively, in comparison to
$43.7 million and $89.0 million for the comparable periods in 2007. 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 two quarters of 2008. Our
total full-time equivalent employees (FTEs) decreased to approximately 2,340 at
June 30, 2008, from 2,530 at June 30, 2007, representing a decrease of
approximately 7.5%. We reduced our FTEs by 7.5% despite adding an aggregate of
26 additional branch offices through acquisitions in 2007 and an aggregate of 10
de novo branches opened in 2007 and 2008. The decrease in salaries and employee
benefits expense is also reflective of reduced incentive compensation expense
resulting from the significant decline in our earnings between the comparable
periods.
Occupancy, net of rental income, and furniture and equipment expense was $14.4
million and $29.8 million for the three and six months ended June 30, 2008,
respectively, in comparison to $12.7 million and $25.0 million for the
comparable periods in 2007. The increase in 2008 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 are expected to be
utilized for future branch office locations, and depreciation expense associated
with acquisitions and capital expenditures.
Information technology and item processing fees were $9.1 million and $18.4
million for the three and six months ended June 30, 2008, respectively, in
comparison to $9.2 million and $18.5 million for the same periods in 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 $4.5 million and $7.3 million for
the three and six months ended June 30, 2008, respectively, in comparison to
$2.7 million and $4.4 million for the same periods in 2007, primarily reflecting
an increase in professional fees resulting from internal investigations,
including the investigation commissioned by the Audit Committee regarding
certain matters associated with the mortgage banking division and the resulting
restatement of our consolidated financial statements, as further discussed in
Note 1 to our consolidated financial statements. The increased professional fees
were also attributable to higher legal expenses related to collection and
foreclosure efforts on problem loans and ongoing litigation matters, including
those assumed through the acquisition of Coast Bank of Florida.
Amortization of intangible assets was $2.8 million and $5.6 million for the
three and six months ended June 30, 2008, respectively, in comparison to $3.2
million and $6.2 million for the same periods in 2007, primarily reflecting a
decrease in amortization expense on core deposit intangibles.
Advertising and business development expense was $2.0 million and $3.4 million
for the three and six months ended June 30, 2008, respectively, in comparison to
$1.7 million and $3.6 million for the same periods in 2007, primarily reflecting
a marketing campaign in the second quarter of 2008 associated with expanded
deposit product and service offerings.
30
FDIC insurance expense was $2.1 million and $3.0 million for the three and six
months ended June 30, 2008, respectively, in comparison to $268,000 and $516,000
for the comparable periods in 2007. We had built up several million dollars of
credits through previous acquisitions that were utilized to offset FDIC
insurance premiums over the past several quarters and have now been depleted. As
such, beginning in the third quarter of 2008, we expect our FDIC insurance
premiums to approximate $2.1 million per quarter based on current premium rates.
We further anticipate that premium rates will likely increase in the future
based on recent developments within the banking industry, including the failure
of certain financial institutions.
Charitable contributions expense was $307,000 and $404,000 for the three and six
months ended June 30, 2008, respectively, in comparison to $1.5 million and $3.4
million for the same periods in 2007, 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 $10.7 million and $19.1 million for the three and six months
ended June 30, 2008, respectively, in comparison to $8.1 million and $16.8
million for the comparable periods in 2007. 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, and
increases of $1.1 million and $1.5 million in other real estate write-downs and
expenses to $1.3 million and $1.9 million for the three and six months ended
June 30, 2008, respectively, compared to $182,000 and $351,000 for the
comparable periods in 2007. We expect the level of write-downs and expenses on
other real estate to remain at elevated levels in the near term as a result of
the increase in our other real estate owned, which increased to $20.0 million at
June 30, 2008, from $11.2 million and $8.0 million at December 31, 2007 and June
30, 2007, respectively.
Provision for Income Taxes. The provision (benefit) for income taxes reflects an
income tax benefit of $23.1 million and $25.1 million for the three and six
months ended June 30, 2008, respectively, compared to an income tax provision of
$9.5 million and $19.3 million for the comparable periods in 2007. Our effective
tax rate was 36.7% and 36.0% for the three and six months ended June 30, 2008,
respectively, compared to 35.4% and 35.6% for the comparable periods in 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 June 30, 2008 and December 31, 2007 are summarized as
follows:
June 30, 2008 December 31, 2007
-------------------- -------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
--------- -------- -------- --------
(dollars expressed in thousands)
Cash flow hedges - loans ...................... $ 400,000 5,645 400,000 5,271
Cash flow hedges - subordinated debentures .... 125,000 -- -- --
Interest rate floor agreements ................ -- -- 300,000 1,699
Interest rate cap agreements .................. 400,000 58 400,000 50
Interest rate lock commitments ................ 8,000 162 3,000 23
Forward commitments to sell
mortgage-backed securities ................. 40,000 731 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 and six months ended June 30, 2008, we realized net interest
income of $2.9 million and $4.7 million, respectively, on our derivative
financial instruments, whereas for the three and six months ended June 30, 2007,
we realized net interest expense of $1.4 million and $2.8 million, respectively,
on our derivative financial instruments. The 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 losses of $1.6 million and net gains of $1.8 million on derivative
instruments for the three and six months ended June 30, 2008, respectively, in
comparison to net losses of $344,000 and $342,000 for the three and six months
ended June 30, 2007, respectively. These net gains and losses are included in
noninterest income in our consolidated statements of operations. The net
31
losses and 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. 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.
Our asset-sensitive position, coupled with the effect of reductions in interest
rates from September 2007 through April 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 and six months ended June 30, 2008 as
compared to the comparable period in 2007, and further discussed under "-- Net
Interest Income."
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:
o 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.
o 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 $6.0 million at June
30, 2008 and December 31, 2007 and the amount payable by us under these swap
agreements was $309,000 and $683,000 at June 30, 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 June 30, 2008 and December 31, 2007 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- --------- ------------- ------------- -----
(dollars expressed in thousands)
June 30, 2008:
September 18, 2009 ...................... $ 200,000 2.14% 5.20% $ 4,916
September 20, 2010 ...................... 200,000 2.14 5.20 8,038
--------- --------
$ 400,000 2.14 5.20 $ 12,954
========= ===== ===== ========
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:
o 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.
32
The amount receivable by us under these swap agreements was $409,000 at June 30,
2008, and the amount payable by us under these swap agreements was $423,000 at
June 30, 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 June 30, 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% 4.36% $ 793
December 15, 2011 .......................... 50,000 4.91 4.63 1,476
March 30, 2012 ............................. 25,000 4.71 4.41 793
December 15, 2012 .......................... 25,000 5.57 5.03 824
--------- --------
$ 125,000 4.90 4.61 $ 3,886
========= ===== ===== ========
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 provided 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 provided 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. 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. We did not incur any gains or losses in
conjunction with the termination of our interest rate floor agreements. The fair
value of the interest rate floor agreements, which was included in other assets
in our consolidated balance sheets, was $1.7 million at December 31, 2007.
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 $58,000 and $50,000 at June 30, 2008 and
December 31, 2007, respectively.
33
Pledged Collateral. At June 30, 2008 and December 31, 2007, we had accepted cash
of $18.4 million and $21.4 million, respectively, as collateral in connection
with our interest rate swap agreements. At June 30, 2008, we had pledged cash of
$1.0 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 August 2008. The
fair value of the interest rate lock commitments, which is included in other
assets in our consolidated balance sheets, was $162,000 and $23,000 at June 30,
2008 and December 31, 2007, respectively. The fair value of the forward
contracts to sell mortgage-backed securities, which is included in other assets
in our consolidated balance sheets, was $731,000 and $40,000 at June 30, 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 93.5% and 93.2% of our total
interest income for the three and six months ended June 30, 2008, respectively,
in comparison to 89.0% and 89.2% for the comparable periods in 2007. Loans, net
of unearned discount, increased to $9.05 billion, or 83.8% of our assets, at
June 30, 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 June 30, 2008 and December 31, 2007:
June 30, December 31,
2008 2007
--------------- -------------
(Restated)
(dollars expressed in thousands)
Commercial, financial and agricultural ...................... $ 2,601,426 2,382,067
Real estate construction and development .................... 1,979,404 2,141,234
Real estate mortgage:
One-to-four family residential ........................... 1,601,249 1,602,575
Multi-family residential ................................. 190,323 177,246
Commercial real estate ................................... 2,525,536 2,431,464
Consumer and installment, net of unearned discount .......... 87,133 85,519
Loans held for sale ......................................... 60,043 66,079
--------------- -------------
Loans, net of unearned discount .......................... $ 9,045,114 8,886,184
=============== =============
The overall increase in loans, net of unearned discount, during the first six
months of 2008 is primarily attributable to the following:
o An increase of $219.4 million in our commercial, financial and
agricultural portfolio primarily 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; and
o An increase of $94.1 million in our commercial real estate portfolio
primarily attributable to internal loan production growth; partially
offset by
o A decrease of $161.8 million in our real estate construction and
development portfolio primarily 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.
The overall change in the mix of our loan portfolio is commensurate with our
strategy of reducing our exposure to real estate, particularly construction and
land development, in the current economic environment in which many of our
market sectors have experienced significant declines in real estate values. We
are redeploying the proceeds from the net decrease in construction and land
development loans into commercial, financial and agricultural loans.
34
Nonperforming assets include nonaccrual loans, restructured loans and other real
estate. The following table presents the categories of nonperforming assets and
certain ratios as of June 30, 2008 and December 31, 2007:
June 30, December 31,
2008 2007
--------------- -------------
(Restated)
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual ............................................ $ 8,711 5,916
Real estate construction and development:
Nonaccrual ............................................ 257,916 151,812
Real estate mortgage:
One-to-four family residential:
Nonaccrual ......................................... 70,749 32,931
Restructured ....................................... 16,984 7
Multi-family residential:
Nonaccrual ......................................... 141 --
Commercial real estate:
Nonaccrual ......................................... 12,023 11,294
Consumer and installment:
Nonaccrual ............................................ 394 263
--------------- -------------
Total nonperforming loans ....................... 366,918 202,223
Other real estate ........................................... 20,039 11,225
--------------- -------------
Total nonperforming assets ...................... $ 386,957 213,448
=============== =============
Loans, net of unearned discount ............................. $ 9,045,114 8,886,184
=============== =============
Loans past due 90 days or more and still accruing ........... $ 14,485 26,753
=============== =============
Ratio of:
Allowance for loan losses to loans ....................... 2.22% 1.89%
Nonperforming loans to loans ............................. 4.06 2.28
Allowance for loan losses to nonperforming loans ......... 54.77 83.27
Nonperforming assets to loans and other real estate ...... 4.27 2.40
=============== =============
Nonperforming loans, consisting of loans on nonaccrual status and restructured
loans, were $366.9 million at June 30, 2008, compared to $236.8 million at March
31, 2008 and $202.2 million at December 31, 2007. Nonperforming loans were 4.06%
of loans, net of unearned discount, at June 30, 2008, compared to 2.63% and
2.28% of loans, net of unearned discount, at March 31, 2008 and December 31,
2007, respectively. Other real estate owned was $20.0 million, $13.2 million and
$11.2 million at June 30, 2008, March 31, 2008 and December 31, 2007,
respectively. Nonperforming assets, consisting of nonperforming loans and other
real estate owned, were $387.0 million at June 30, 2008, compared to $250.0
million at March 31, 2008, and $213.4 million at December 31, 2007. Loans past
due 90 days or more and still accruing interest were $14.5 million at June 30,
2008, compared to $23.6 million at March 31, 2008 and $26.8 million at December
31, 2007.
Nonperforming loans at June 30, 2008 increased $164.7 million, or 81.4%, from
nonperforming loans at December 31, 2007. The following table summarizes the
composition of our nonperforming loans as of June 30, 2008 and December 31,
2007:
June 30, December 31,
2008 2007
--------------- -------------
(dollars expressed in thousands)
Northern California real estate ............................. $ 117,310 99,234
Mortgage banking division ................................... 74,815 27,727
Florida, excluding mortgage banking division ................ 46,862 37,718
Southern California real estate ............................. 49,118 --
Chicago real estate ......................................... 20,510 --
Metro St. Louis, Missouri real estate ....................... 15,057 5,000
Texas real estate ........................................... 11,832 6,533
Other ....................................................... 31,414 26,011
--------------- -------------
Total nonperforming loans ................................ $ 366,918 202,223
=============== =============
35
We attribute the increase in our nonperforming loans to the following:
o An increase in one-to-four family residential nonaccrual loans of
$37.8 million, primarily due to an increase of $30.1 million in our
mortgage banking division. One-to-four family residential nonaccrual
loans in our Florida region increased $16.0 million, from $7.4
million at December 31, 2007 to $23.4 million at June 30, 2008,
accounting for approximately 53.1% of the total increase in our
mortgage banking division. Net loan charge-offs of one-to-four
family residential loans were $12.3 million and $23.5 million for
the three and six months ended June 30, 2008, respectively, of which
$9.4 million and $19.2 million relate to our mortgage banking
division. We continue to experience deterioration in our one-to-four
family residential portfolio as a result of weak economic conditions
in the nationwide housing markets and significant declines in real
estate values, particularly in Florida and California;
o An increase in one-to-four family restructured loans during the
first six months of 2008 of $17.0 million. Throughout the first six
months of 2008, our mortgage banking division has restructured
certain 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
restructuring, the individual loans were in full compliance with the
terms of the original loan contracts; and
o An increase in real estate construction and development nonaccrual
loans of $106.1 million. Real estate construction and development
nonaccrual loans in Northern California increased $18.1 million from
$99.2 million at December 31, 2007 to $117.3 million at June 30,
2008. Real estate construction and development nonaccrual loans also
increased throughout our other regions, including Southern
California and Chicago, which experienced increases of $49.1 million
and $20.5 million, respectively. Our Southern California and Chicago
regions did not have any nonaccrual loans at December 31, 2007. We
recorded net charge-offs of $50.5 million and $67.9 million on our
real estate construction and development loan portfolio during the
three and six months ended June 30, 2008, of which $41.4 million and
$57.3 million relates to the Northern California region,
respectively. We continue to experience deterioration in our real
estate construction and development portfolio as a result of weak
economic conditions and significant declines in real estate values,
particularly in California.
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 will likely 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 $57.9 million and $30.4 million at June 30, 2008, respectively,
and $84.9 million and $46.0 million at December 31, 2007, respectively. We
recorded impaired loans acquired in acquisitions during the year ended December
31, 2007 of $45.7 million at the time of acquisition. Changes in the carrying
amount of impaired loans acquired in acquisitions for the three and six months
ended June 30, 2008 were as follows:
Three Months Six Months
Ended Ended
June 30, 2008 June 30, 2008
--------------- ----------------
(dollars expressed in thousands)
Balance, beginning of period ............... $ 42,067 46,003
Transfers to other real estate ............. (2,883) (5,206)
Loans charged-off .......................... (3,672) (5,060)
Payments and settlements ................... (5,129) (5,354)
------------- ----------------
Balance, end of period ..................... $ 30,383 30,383
============= ================
There was no allowance for loan losses related to these loans at June 30, 2008
and December 31, 2007. As the loans were classified as nonaccrual loans, there
was no accretable yield related to these loans at June 30, 2008 and December 31,
2007.
36
Changes in the allowance for loan losses for the three and six months ended June
30, 2008 and 2007 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2008 2007 2008 2007
--------- ---------- ---------- ----------
(Restated) (Restated)
(dollars expressed in thousands)
Balance, beginning of period ................... $ 185,184 142,148 168,391 145,729
Acquired allowance for loan losses ............. -- -- -- 2,925
--------- ---------- ---------- ----------
185,184 142,148 168,391 148,654
--------- ---------- ---------- ----------
Loans charged-off .............................. (69,566) (4,480) (100,905) (16,195)
Recoveries of loans previously charged-off ..... 1,286 1,837 3,471 3,546
--------- ---------- ---------- ----------
Net loan charge-offs ........................ (68,280) (2,643) (97,434) (12,649)
--------- ---------- ---------- ----------
Provision for loan losses ...................... 84,053 3,417 130,000 6,917
--------- ---------- ---------- ----------
Balance, end of period ......................... $ 200,957 142,922 200,957 142,922
========= ========== ========== ==========
We recorded net loan charge-offs of $68.3 million and $97.4 million for the
three and six months ended June 30, 2008, compared to $2.6 million and $12.6
million for the comparable periods in 2007. Net loan charge-offs recorded for
the three and six months ended June 30, 2008 included $41.4 million and $57.3
million of net loan charge-offs associated with our Northern California real
estate construction and development portfolio, compared to zero and $2.5 million
for the comparable periods 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 and six months ended June 30, 2008 also include $9.4 million and $19.2
million of net loan charge-offs associated with our mortgage banking division,
compared to $3.2 million and $8.7 million for the comparable periods in 2007.
Our annualized net loan charge-offs as a percentage of average loans was 2.18%
for the first six months of 2008, compared to 0.32% for the comparable period in
2007.
Our allowance for loan losses was $201.0 million at June 30, 2008, $185.2
million at March 31, 2008, and $168.4 million at December 31, 2007. Our
allowance for loan losses as a percentage of loans, net of unearned discount,
was 2.22% at June 30, 2008, 2.05% at March 31, 2008, and 1.89% at December 31,
2007. The increase in this ratio is primarily due to the increase in
nonperforming and other problem loans throughout the three and six months ended
June 30, 2008, which has led to a provision for loan losses in excess of net
charge-offs to reserve for probable losses in the loan portfolio.
Our allowance for loan losses as a percentage of nonperforming loans was 54.77%,
78.20%, and 83.27% at June 30, 2008, March 31, 2008, and December 31, 2007,
respectively. The decrease in this ratio is primarily due to $84.6 million of
nonperforming loans being contributed from First Bank into FB Holdings, which
was formed during the second quarter of 2008, as further described in Note 5 to
our consolidated financial statements. These loans were contributed by First
Bank to FB Holdings at estimated fair value, and as such, have no related
allowance for loan losses allocation at June 30, 2008. Net loan charge-offs
associated with the loans contributed to FB Holdings were approximately $45.3
million and $61.2 million for the three and six months ended June 30, 2008,
respectively, of which $41.4 million and $57.3 million, respectively, relate to
our Northern California real estate portfolio. 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 and significantly declining real estate values.
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. 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
37
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 $1.92 billion and $2.00 billion at June 30, 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 June 30, 2008:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
----------------------- ---------- ---------
(dollars expressed in thousands)
Three months or less .................... $ 608,993 202,890 811,883
Over three months through six months .... 311,175 100,000 411,175
Over six months through twelve months ... 257,040 100,000 357,040
Over twelve months ...................... 116,258 220,744 337,002
----------------------- ---------- ---------
Total ................................ $ 1,293,466 623,634 1,917,100
======================= ========== =========
In addition to these sources of funds, First Bank has established a borrowing
relationship with the Federal Reserve Bank of St. Louis. This borrowing
relationship, which is secured by commercial loans, provides an additional
liquidity facility that may be utilized for contingency purposes. At June 30,
2008 and December 31, 2007, First Bank's borrowing capacity under the agreement
was approximately $1.65 billion and $523.3 million, respectively.
In addition, First Bank's borrowing capacity through its relationship with the
FHLB was approximately $804.1 million and $672.3 million at June 30, 2008 and
December 31, 2007, respectively. We had FHLB advances outstanding of $300.8
million at June 30, 2008, compared to $857,000 at December 31, 2007. The
increase during the six months ended June 30, 2008 resulted from three $100.0
million FHLB advances drawn by First Bank that mature in November 2008, January
2009 and July 2009. In July 2008, we entered into a $100.0 million FHLB advance
that matures in February 2009 at a fixed rate of 2.92%.
Our loan-to-deposit ratio increased to 102.2% at June 30, 2008 from 97.1% at
December 31, 2007. As a result of this increase, we implemented certain
strategies during the first six months of 2008 to improve our liquidity
position, including the additional 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 additional collateral
availability. We are continuing to closely monitor liquidity and take
appropriate actions deemed necessary to maintain an appropriate level of
liquidity in light of unstable market conditions, increased loan funding needs,
operating and debt service requirements, and current 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 June 30, 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 ................ $ 16,907 27,753 19,272 49,551 113,483
Certificates of deposit (2) ..... 3,275,306 363,559 49,397 1,634 3,689,896
Other borrowings (2) ............ 372,890 100,744 120,000 -- 593,634
Notes payable (2) ............... 30,000 -- -- -- 30,000
Subordinated debentures (2) ..... -- -- -- 353,790 353,790
Other contractual obligations ... 1,320(3) 128 136 43 1,627
----------- ------- ------- ------- ---------
Total ........................ $ 3,696,423 492,184 188,805 405,018 4,782,430
=========== ======= ======= ======= =========
- ----------
(1) Amounts exclude FIN 48 unrecognized tax liabilities of $12.8 million and
related accrued interest expense of $1.9 million for which the timing of
payment of such liabilities cannot be reasonably estimated as of June 30,
2008.
(2) Amounts exclude the related interest expense accrued on these obligations
as of June 30, 2008.
(3) Includes an accrued expense related to our remaining estimated
indemnification obligation, as a member bank, to share certain litigation
costs of Visa.
38
Management believes the available liquidity will be sufficient 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 No. 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
39
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.
In May 2008, the FASB issued SFAS No. 162 - The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformance with U.S. generally accepted accounting principles. The
hierarchical guidance provided by SFAS No. 162 is not expected to have a
significant impact on our consolidated financial statements.
40
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 June 30, 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 four 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
and six months ended June 30, 2008 as compared to the comparable periods 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 June 30, 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:
o We did not maintain appropriate oversight and supervision of certain
operational and accounting personnel in the mortgage banking
division;
o 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
o 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 the date of this report, we have implemented additional measures to
address the aforementioned material weaknesses, including the following:
o 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;
o Centralized and realigned certain areas of responsibility and
functions previously handled within the mortgage banking division;
o Instituted increased segregation of duties controls within the
Company's mortgage banking division; and
o Examined the methods in which internal controls were circumvented
and developed measures to strengthen such controls.
41
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.
42
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the April 25, 2008 Annual Meeting of Shareholders of First Banks, Messrs.
James F. Dierberg, Gordon A. Gundaker, Terrance M. McCarthy, Steven F. Schepman,
David L. Steward and Douglas H. Yaeger, constituting all of the directors, were
unanimously re-elected.
ITEM 5 - OTHER INFORMATION
(a) On May 15, 2008, First Banks entered into a Revolving Credit Note and a
Stock Pledge Agreement with Investors of America, LP, which provided for a $30.0
million secured revolving line of credit to be utilized for general working
capital needs and capital investments in subsidiaries, as previously reported on
a Current Report on Form 8-K filed on May 21, 2008. On August 11, 2008, First
Banks entered into a First Amended Revolving Credit Note with 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, Chairman of First
Banks' Board of Directors, and members of his immediate family. The First
Amended Revolving Credit Note replaced the Revolving Credit Note, as further
described in Note 14 to our consolidated financial statements, and modified the
Revolving Credit Note to provide that First Banks receive the prior written
consent of Investors of America, LP for any advance that would cause the
aggregate outstanding principal amount to exceed $10.0 million.
ITEM 6 - EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit Number Description
-------------- -----------
5.1 First Banks, Inc. Non-Qualified Deferred Compensation Plan,
as Amended - filed herewith.
10.1 First Amended Revolving Credit Note, dated as of August 11,
2008, by and between First Banks, Inc. and Investors of
America Limited Partnership - filed herewith.
10.2 Stock Pledge Agreement, dated as of May 15, 2008, by and
between First Banks, Inc. and Investors of America Limited
Partnership - filed herewith.
10.3 Termination Agreement, dated as of May 19, 2008, by and
among First Banks, Inc. and Wells Fargo Bank, National
Association, as Agent, JP Morgan Chase Bank, N.A., LaSalle
Bank National Association, The Northern Trust Company, Union
Bank of California, N.A. and Fifth Third Bank (Chicago) -
filed herewith.
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive
Officer - filed herewith.
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial
Officer - filed herewith.
32.1 Section 1350 Certifications of Chief Executive Officer -
filed herewith.
32.2 Section 1350 Certifications of Chief Financial Officer -
filed herewith.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: August 13, 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)
44