UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 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..................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 46
ITEM 4. CONTROLS AND PROCEDURES........................................ 47
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 48
ITEM 1A. RISK FACTORS................................................... 48
ITEM 6. EXHIBITS....................................................... 49
SIGNATURES.................................................................. 50
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
September 30, December 31,
2008 2007
---- ----
(unaudited) (Restated)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks ............................................................... $ 465,036 217,597
Short-term investments ................................................................ 8,030 14,078
------------ ------------
Total cash and cash equivalents .................................................. 473,066 231,675
------------ ------------
Investment securities:
Available for sale .................................................................... 661,695 1,000,392
Held to maturity (fair value of $19,236 and $19,078, respectively) .................... 19,004 18,879
------------ ------------
Total investment securities ...................................................... 680,699 1,019,271
------------ ------------
Loans:
Commercial, financial and agricultural ................................................ 2,594,643 2,382,067
Real estate construction and development .............................................. 1,810,619 2,141,234
Real estate mortgage .................................................................. 4,342,211 4,211,285
Consumer and installment .............................................................. 94,637 97,117
Loans held for sale ................................................................... 41,519 66,079
------------ ------------
Total loans ...................................................................... 8,883,629 8,897,782
Unearned discount ..................................................................... (8,458) (11,598)
Allowance for loan losses ............................................................. (211,026) (168,391)
------------ ------------
Net loans ........................................................................ 8,664,145 8,717,793
------------ ------------
Bank premises and equipment, net ........................................................... 240,316 240,456
Goodwill and other intangible assets ....................................................... 309,591 315,651
Bank-owned life insurance .................................................................. 118,288 116,619
Deferred income taxes ...................................................................... 152,640 139,277
Other assets ............................................................................... 193,759 121,728
------------ ------------
Total assets ..................................................................... $ 10,832,504 10,902,470
============ ============
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand ............................................................ $ 1,243,280 1,259,123
Interest-bearing demand ............................................................... 933,125 980,850
Savings and money market .............................................................. 2,928,650 2,716,726
Time deposits of $100 or more ......................................................... 1,281,291 1,546,857
Other time deposits ................................................................... 2,503,042 2,645,637
------------ ------------
Total deposits ................................................................... 8,889,388 9,149,193
Other borrowings ........................................................................... 587,914 409,616
Notes payable .............................................................................. -- 39,000
Subordinated debentures .................................................................... 353,809 353,752
Deferred income taxes ...................................................................... 36,643 48,209
Accrued expenses and other liabilities ..................................................... 59,284 55,079
Minority interest in subsidiaries .......................................................... 120,565 5,544
------------ ------------
Total liabilities ................................................................ 10,047,603 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 .......................................................................... 754,380 818,343
Accumulated other comprehensive income (loss) .............................................. 1,858 (4,929)
------------ ------------
Total stockholders' equity ....................................................... 784,901 842,077
------------ ------------
Total liabilities and stockholders' equity ....................................... $ 10,832,504 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 Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2008 2007 2008 2007
---- ---- ---- ----
(Restated) (Restated)
Interest income:
Interest and fees on loans .......................................... $ 134,565 159,561 425,429 469,646
Investment securities ............................................... 8,883 16,493 29,760 49,867
Short-term investments .............................................. 849 1,478 1,165 5,671
----------- ----------- ----------- -----------
Total interest income ......................................... 144,297 177,532 456,354 525,184
----------- ----------- ----------- -----------
Interest expense:
Deposits:
Interest-bearing demand .......................................... 1,207 2,242 4,560 7,171
Savings and money market ......................................... 14,633 21,012 46,577 59,809
Time deposits of $100 or more .................................... 11,808 18,299 41,593 53,533
Other time deposits .............................................. 21,628 27,881 72,143 83,851
Other borrowings .................................................... 3,891 4,140 11,678 13,427
Notes payable ....................................................... 45 544 1,310 2,088
Subordinated debentures ............................................. 4,980 5,920 16,078 18,265
----------- ----------- ----------- -----------
Total interest expense ........................................ 58,192 80,038 193,939 238,144
----------- ----------- ----------- -----------
Net interest income ........................................... 86,105 97,494 262,415 287,040
Provision for loan losses ............................................... 99,000 13,503 229,000 20,420
----------- ----------- ----------- -----------
Net interest (loss) income after provision for loan losses .... (12,895) 83,991 33,415 266,620
----------- ----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts and customer service fees ....... 14,551 12,053 39,724 34,322
Gain (loss) on loans sold and held for sale ......................... 908 (2,627) 3,556 (555)
Net loss on investment securities ................................... (1,092) (74) (5,715) (1,314)
Bank-owned life insurance investment income ......................... 554 1,081 2,251 2,793
Investment management income ........................................ 737 1,447 2,779 4,499
Insurance fee and commission income ................................. 1,835 1,750 5,739 5,313
Net (loss) gain on derivative instruments ........................... (57) 603 1,729 261
Gain on extinguishment of term repurchase agreement ................. -- -- 5,000 --
Other ............................................................... 1,255 5,618 15,630 16,740
----------- ----------- ----------- -----------
Total noninterest income ...................................... 18,691 19,851 70,693 62,059
----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits ...................................... 35,217 43,093 112,886 132,053
Occupancy, net of rental income ..................................... 9,934 8,566 28,848 24,297
Furniture and equipment ............................................. 5,320 4,944 16,222 14,171
Postage, printing and supplies ...................................... 1,479 1,609 4,813 5,040
Information technology fees ......................................... 8,777 8,995 27,168 27,515
Legal, examination and professional fees ............................ 4,409 2,535 11,711 6,949
Amortization of intangible assets ................................... 2,785 3,142 8,346 9,295
Advertising and business development ................................ 1,784 1,577 5,231 5,147
FDIC insurance ...................................................... 1,515 233 4,528 749
Charitable contributions ............................................ 68 1,664 472 5,042
Other ............................................................... 12,422 8,416 31,551 25,215
----------- ----------- ----------- -----------
Total noninterest expense ..................................... 83,710 84,774 251,776 255,473
----------- ----------- ----------- -----------
(Loss) income before (benefit) provision for income taxes
and minority interest in (loss) income of subsidiaries .... (77,914) 19,068 (147,668) 73,206
(Benefit) provision for income taxes .................................... (52,799) 6,470 (77,941) 25,753
----------- ----------- ----------- -----------
(Loss) income before minority interest in (loss) income
of subsidiaries ........................................... (25,115) 12,598 (69,727) 47,453
Minority interest in (loss) income of subsidiaries ...................... (154) 74 24 175
----------- ----------- ----------- -----------
Net (loss) income ............................................. (24,961) 12,524 (69,751) 47,278
Preferred stock dividends ............................................... 196 196 524 524
----------- ----------- ----------- -----------
Net (loss) income available to common stockholders ............ $ (25,157) 12,328 (70,275) 46,754
=========== =========== =========== ===========
Basic (loss) earnings per common share .................................. $ (1,063.24) 521.02 (2,970.11) 1,976.00
=========== =========== =========== ===========
Diluted (loss) earnings per common share ................................ $ (1,063.24) 520.77 (2,970.11) 1,964.95
=========== =========== =========== ===========
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)
Nine Months Ended September 30, 2008 and 2007 and Three 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
--------
Nine months ended September 30, 2007:
Comprehensive income:
Net income .................................... -- -- -- -- 47,278 -- 47,278
Other comprehensive income, net of tax:
Unrealized losses on investment securities .. -- -- -- -- -- (4,448) (4,448)
Reclassification adjustment for investment
securities gains included in net income ... -- -- -- -- -- (94) (94)
Derivative instruments:
Current period transactions ............... -- -- -- -- -- 5,053 5,053
--------
Total comprehensive income ...................... 47,789
Cumulative effect of change in accounting
principle .................................... -- -- -- -- 2,470 -- 2,470
Class A preferred stock dividends, $0.80 per
share ........................................ -- -- -- -- (513) -- (513)
Class B preferred stock dividends, $0.07 per
share ........................................ -- -- -- -- (11) -- (11)
--------- ------ ------ ------ -------- -------- --------
Balances, September 30, 2007 ....................... 12,822 241 5,915 9,685 816,423 (12,581) 832,505
--------
Three months ended December 31, 2007:
Comprehensive income:
Net income .................................... -- -- -- -- 2,182 -- 2,182
Other comprehensive income, net of tax:
Unrealized gains on investment securities ... -- -- -- -- -- 4,243 4,243
Reclassification adjustment for investment
securities losses included in net income .. -- -- -- -- -- 216 216
Derivative instruments:
Current period transactions ............... -- -- -- -- -- 4,095 4,095
--------
Total comprehensive income ...................... 10,736
Impact of adoption of SFAS No. 158 .............. -- -- -- -- -- (902) (902)
Class A preferred stock dividends, $0.40 per
share ........................................ -- -- -- -- (256) -- (256)
Class B preferred stock dividends, $0.04 per
share ........................................ -- -- -- -- (6) -- (6)
--------- ------ ------ ------ -------- -------- --------
Balances, December 31, 2007 ........................ 12,822 241 5,915 9,685 818,343 (4,929) 842,077
--------
Nine months ended September 30, 2008:
Comprehensive loss:
Net loss ...................................... -- -- -- -- (69,751) -- (69,751)
Other comprehensive income, net of tax:
Unrealized losses on investment securities .. -- -- -- -- -- (153) (153)
Reclassification adjustment for investment
securities losses included in net loss .... -- -- -- -- -- 3,715 3,715
Derivative instruments:
Current period transactions ............... -- -- -- -- -- 3,225 3,225
--------
Total comprehensive loss ........................ (62,964)
Cumulative effect of change in accounting
principle .................................... -- -- -- -- 6,312 -- 6,312
Class A preferred stock dividends, $0.80 per
share ........................................ -- -- -- -- (513) -- (513)
Class B preferred stock dividends, $0.07 per
share ........................................ -- -- -- -- (11) -- (11)
--------- ------ ------ ------ -------- -------- --------
Balances, September 30, 2008 ....................... $ 12,822 241 5,915 9,685 754,380 1,858 784,901
========= ====== ====== ====== ======== ======== ========
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)
Nine Months Ended
September 30,
--------------------------
2008 2007
---- ----
(Restated)
Cash flows from operating activities:
Net (loss) income ............................................................................. $ (69,751) 47,278
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment ................................ 18,611 15,203
Amortization of intangible assets ........................................................... 8,346 9,295
Originations of loans held for sale ......................................................... (168,726) (433,016)
Proceeds from sales of loans held for sale .................................................. 226,187 472,325
Payments received on loans held for sale .................................................... 13,560 14,507
Provision for loan losses ................................................................... 229,000 20,420
(Benefit) provision for current income taxes ................................................ (66,611) 26,041
Benefit for deferred income taxes ........................................................... (11,330) (288)
Decrease in accrued interest receivable ..................................................... 16,034 6,667
Decrease in accrued interest payable ........................................................ (4,867) (9,581)
Proceeds from sales of trading securities ................................................... -- 81,038
Maturities of trading securities ............................................................ -- 16,651
Purchases of trading securities ............................................................. -- (17,939)
(Gain) loss on loans sold and held for sale ................................................. (3,556) 555
Net loss on investment securities ........................................................... 5,715 1,314
Net gain on derivative instruments .......................................................... (1,729) (261)
Decrease in carrying value of servicing rights .............................................. 6,508 4,062
Gain on extinguishment of term repurchase agreement ......................................... (5,000) --
Other operating activities, net ............................................................. 20,138 (4,632)
Minority interest in income of subsidiaries ................................................. 24 175
---------- ----------
Net cash provided by operating activities ................................................ 212,553 249,814
---------- ----------
Cash flows from investing activities:
Cash paid for acquired entities, net of cash and cash equivalents received .................... -- (14,720)
Cash paid for sale of branches, net of cash and cash equivalents sold ......................... -- (48,926)
Cash paid for earn-out consideration to Adrian N. Baker & Company ............................. (2,920) (1,513)
Proceeds from sales of investment securities available for sale ............................... 351,751 487
Maturities of investment securities available for sale ........................................ 293,131 858,873
Maturities of investment securities held to maturity .......................................... 1,411 4,510
Purchases of investment securities available for sale ......................................... (341,031) (643,548)
Purchases of investment securities held to maturity ........................................... (1,557) (133)
Proceeds from sale of commercial loans held for sale .......................................... 3,421 33,471
Net increase in loans ......................................................................... (276,128) (429,845)
Recoveries of loans previously charged-off .................................................... 5,998 6,360
Purchases of bank premises and equipment ...................................................... (19,377) (50,058)
Net proceeds from sale of other real estate owned ............................................. 11,170 8,911
Cash received for minority interest in FB Holdings, LLC ....................................... 115,000 --
Other investing activities, net ............................................................... 1,987 (1,752)
---------- ----------
Net cash provided by (used in) investing activities ...................................... 142,856 (277,883)
---------- ----------
Cash flows from financing activities:
Increase in demand, savings and money market deposits ......................................... 148,356 139,206
Decrease in time deposits ..................................................................... (405,155) (67,228)
Increase (decrease) in Federal Home Loan Bank advances ........................................ 299,870 (33,325)
Decrease in federal funds purchased ........................................................... (76,500) --
Decrease in securities sold under agreements to repurchase .................................... (41,065) (58,722)
Advances drawn on notes payable ............................................................... 55,000 --
Repayments of notes payable ................................................................... (94,000) (55,000)
Proceeds from issuance of subordinated debentures ............................................. -- 77,322
Repayments of subordinated debentures ......................................................... -- (82,681)
Payment of preferred stock dividends .......................................................... (524) (524)
---------- ----------
Net cash used in financing activities .................................................... (114,018) (80,952)
---------- ----------
Net increase (decrease) in cash and cash equivalents ..................................... 241,391 (109,021)
Cash and cash equivalents, beginning of period ..................................................... 231,675 369,557
---------- ----------
Cash and cash equivalents, end of period ........................................................... $ 473,066 260,536
========== ==========
4
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED) (CONTINUED)
(dollars expressed in thousands)
Nine Months Ended
September 30,
---------------------------
2008 2007
---- ----
(Restated)
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest on liabilities .................................................................. $ 199,799 248,452
Income taxes ............................................................................. (14,427) (1,636)
========== ==========
Noncash investing and financing activities:
Cumulative effect of change in accounting principle ...................................... $ 6,312 2,470
Loans held for sale transferred to loan portfolio ........................................ -- 86,559
Loans transferred to other real estate ................................................... 49,778 10,169
========== ==========
Business combinations:
Fair value of tangible assets acquired (noncash) ......................................... $ -- 189,280
Goodwill and other intangible assets recorded with net assets acquired ................... 2,920 28,613
Liabilities assumed ...................................................................... -- (201,660)
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
5
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 nine months ended September 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 September 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 53.66% owned by First Bank and 46.34% 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 (loss) 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.
6
The following table presents the effects of the adjustments made to First Banks'
previously reported consolidated statements of operations for the three and nine
months ended September 30, 2007:
Three Months Ended Nine Months Ended
September 30, 2007 September 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 ........................ $160,134 (573) 159,561 471,713 (2,067) 469,646
Total interest income ............................. 178,105 (573) 177,532 527,251 (2,067) 525,184
Interest expense on other borrowings .............. 4,361 (221) 4,140 13,653 (226) 13,427
Interest expense on subordinated debentures ....... 5,920 -- 5,920 17,668 597 18,265
Total interest expense ............................ 80,259 (221) 80,038 237,773 371 238,144
Net interest income ............................... 97,846 (352) 97,494 289,478 (2,438) 287,040
Provision for loan losses ......................... 17,000 (3,497) 13,503 26,000 (5,580) 20,420
Net interest income after provision for loan losses 80,846 3,145 83,991 263,478 3,142 266,620
Gain (loss) on loans sold and held for sale ....... 3,535 (6,162) (2,627) 12,019 (12,574) (555)
Other noninterest income .......................... 6,445 (827) 5,618 17,567 (827) 16,740
Total noninterest income .......................... 26,840 (6,989) 19,851 75,460 (13,401) 62,059
Occupancy expense, net of rental income ........... 8,321 245 8,566 23,489 808 24,297
Total noninterest expense ......................... 84,529 245 84,774 254,665 808 255,473
Income before provision for income taxes and
minority interest in income of subsidiary. ... 23,157 (4,089) 19,068 84,273 (11,067) 73,206
Provision for income taxes ........................ 8,087 (1,617) 6,470 30,129 (4,376) 25,753
Income before minority interest in
income of subsidiary ......................... 15,070 (2,472) 12,598 54,144 (6,691) 47,453
Net income ........................................ 14,996 (2,472) 12,524 53,969 (6,691) 47,278
Net income available to common stockholders ....... 14,800 (2,472) 12,328 53,445 (6,691) 46,754
Basic earnings per common share ................... 625.48 (104.46) 521.02 2,258.77 (282.77) 1,976.00
Diluted earnings per common share ................. 623.84 (103.07) 520.77 2,243.90 (278.95) 1,964.95
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.
7
(2) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net of amortization, were comprised of the
following at September 30, 2008 and December 31, 2007:
September 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 (30,906) 53,916 (23,873)
Customer list intangibles ........................ 23,320 (3,528) 23,320 (2,408)
Other intangibles ................................ 2,385 (1,630) 2,386 (1,437)
--------- --------- --------- ---------
Total ........................................ $ 79,621 (36,064) 79,622 (27,718)
========= ========= ========= =========
Unamortized intangible assets:
Goodwill ......................................... $ 266,034 263,747
========= =========
Amortization of intangible assets was $2.8 million and $8.3 million for the
three and nine months ended September 30, 2008, respectively, and $3.1 million
and $9.3 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......................................................... $ 2,785
2009................................................................... 9,280
2010................................................................... 8,852
2011................................................................... 6,674
2012................................................................... 2,459
2013................................................................... 1,524
Thereafter............................................................. 11,983
--------
Total.............................................................. $ 43,557
========
Changes in the carrying amount of goodwill for the three and nine months ended
September 30, 2008 and 2007 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2008 2007 2008 2007
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period ....................... $ 266,079 254,093 263,747 230,036
Goodwill acquired during the period (1) ............ -- (121) 2,920 24,538
Acquisition-related and other adjustments (2) ...... (45) (273) (633) (875)
--------- --------- --------- ---------
Balance, end of period ............................. $ 266,034 253,699 266,034 253,699
========= ========= ========= =========
----------
(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 primarily pertain
to the acquisition of CFHI in November 2007. Acquisition-related
adjustments recorded in 2007 pertain to the acquisition of San Diego
Community Bank in August 2006 and other adjustments recorded in 2007
pertain to the sale of certain branch offices in July 2007.
8
(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 September 30, 2008 and December 31, 2007, First
Banks serviced mortgage loans for others totaling $1.10 billion. Changes in
mortgage servicing rights for the three and nine months ended September 30, 2008
and 2007 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2008 2007 2008 2007
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period ................................... $ 15,967 5,004 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 ........................... 158 286 1,831 941
Change in fair value resulting from changes in valuation
inputs or assumptions used in valuation model (1) ............ (4,134) -- (3,583) --
Other changes in fair value (2) ................................ (343) -- (1,428) --
Amortization ................................................... -- (637) -- (2,155)
---------- ---------- ---------- ----------
Balance, end of period ......................................... $ 11,648 4,653 11,648 4,653
========== ========== ========== ==========
----------
(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 September 30, 2008 and December 31, 2007, First
Banks serviced United States Small Business Administration (SBA) loans for
others totaling $216.4 million and $149.9 million, respectively. Changes in SBA
servicing rights for the three and nine months ended September 30, 2008 and 2007
were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2008 2007 2008 2007
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period ................................... $ 9,756 7,620 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 ................................ 559 709 2,612 1,699
Change in fair value resulting from changes in valuation
inputs or assumptions used in valuation model (1) ............ (552) -- (537) --
Other changes in fair value (2) ................................ (275) -- (960) --
Amortization ................................................... -- (417) -- (1,233)
Impairment ..................................................... -- (56) -- (674)
---------- ---------- ---------- ----------
Balance, end of period ......................................... $ 9,488 7,856 9,488 7,856
========== ========== ========== ==========
----------
(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.
9
(4) EARNINGS (LOSS) PER COMMON SHARE
The following is a reconciliation of basic and diluted earnings (loss) per share
(EPS) for the three and nine months ended September 30, 2008 and 2007:
Income Per Share
(Loss) Shares Amount
------ ------ ------
(dollars in thousands, except share and per share data)
Three months ended September 30, 2008:
Basic EPS - loss to common stockholders ............................ $ (25,157) 23,661 $ (1,063.24)
Effect of dilutive securities:
Class A convertible preferred stock .............................. -- -- --
----------- ----------- -----------
Diluted EPS - loss to common stockholders .......................... $ (25,157) 23,661 $ (1,063.24)
=========== =========== ===========
(Restated) (Restated) (Restated)
---------- ---------- ----------
Three months ended September 30, 2007:
Basic EPS - income available to common stockholders ................ $ 12,328 23,661 $ 521.02
Effect of dilutive securities:
Class A convertible preferred stock .............................. 192 380 (0.25)
----------- ----------- -----------
Diluted EPS - income available to common stockholders .............. $ 12,520 24,041 $ 520.77
=========== =========== ===========
Nine months ended September 30, 2008:
Basic EPS - loss to common stockholders ............................ $ (70,275) 23,661 $ (2,970.11)
Effect of dilutive securities:
Class A convertible preferred stock .............................. -- -- --
----------- ----------- -----------
Diluted EPS - loss to common stockholders .......................... $ (70,275) 23,661 $ (2,970.11)
=========== =========== ===========
(Restated) (Restated) (Restated)
---------- ---------- ----------
Nine months ended September 30, 2007:
Basic EPS - income available to common stockholders ................ $ 46,754 23,661 $ 1,976.00
Effect of dilutive securities:
Class A convertible preferred stock .............................. 513 394 (11.05)
----------- ----------- -----------
Diluted EPS - income available to common stockholders .............. $ 47,267 24,055 $ 1,964.95
=========== =========== ===========
(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 $8.4
million and $25.6 million for the three and nine months ended September 30,
2008, respectively, and $8.4 million and $25.9 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 $920,000 and $2.9 million during the three and nine
months ended September 30, 2008, respectively, and $903,000 and $2.9 million for
the comparable periods in 2007. In addition, First Services paid approximately
$464,000 and $1.4 million for the three and nine months ended September 30,
2008, respectively, and $464,000 and $1.3 million 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 $1.2 million and $4.9 for the three and nine months ended
September 30, 2008, respectively, and $1.2 million and $3.6 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 $55,000 and $175,000
for the three and nine months ended September 30, 2008, respectively, and
$51,000 and $137,000 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 and third quarter of 2007, First Bank contributed $1.3 million
and $1.5 million, respectively, in cash to the Foundation,
10
thereby bringing the total value of charitable contributions to the Foundation
to $1.5 million and $4.5 million for the three and nine months ended September
30, 2007, respectively. There were no charitable contributions made to this
organization during the three and nine months ended September 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 $109,000 and
$313,000 for the three and nine months ended September 30, 2008, respectively,
and $99,000 and $296,000 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 provided a $75.0 million unsecured
revolving line of credit that was subsequently renewed at maturity on September
30, 2008 with a new maturity date of September 30, 2009. 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 $62.9 million and
$52.3 million at September 30, 2008 and December 31, 2007, respectively.
Interest expense recorded by SBLS LLC under the Promissory Note and Agreement
was $464,000 and $1.5 million for the three and nine months ended September 30,
2008, respectively, and $835,000 and $2.7 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. During the third
quarter of 2008, First Bank contributed cash of $9.0 million and nonperforming
loans and assets with a fair value of approximately $35.6 million and FCA
contributed cash of $30.0 million to FB Holdings. As a result, First Bank owned
53.66% and FCA owned the remaining 46.34% of FB Holdings as of September 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.
FB Holdings entered into a Services Agreement with First Banks and First Bank
effective May 30, 2008. The Services Agreement relates to various services
provided to FB Holdings by First Banks and First Bank, including loan servicing
and special assets services as well as various other financial, legal, human
resources and property management services. Fees paid under the Services
Agreement by FB Holdings to First Banks and First Bank were $72,000 and $168,000
for the three and nine months ended September 30, 2008, respectively.
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), and on August 11, 2008, First Banks
entered into a First Amended Revolving Credit Note (the New Amended Credit
Agreement) with Investors of America, LP, 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. There
were no advances outstanding under the New Amended Credit Agreement at September
30, 2008. Interest expense, including commitment fees, recorded by First Banks
under the New Amended Credit Agreement was $44,000 and $283,000 for the three
and nine months ended September 30, 2008, respectively.
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
11
more than the normal risk of collectability or present other unfavorable
features. Loans to directors, their affiliates and executive officers of First
Banks, Inc. were approximately $41.2 million and $57.7 million at September 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.
(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. In addition, First Bank is
currently required to maintain its Tier 1 capital ratio at no less than 7.00% in
accordance with the provisions of an agreement recently entered into with its
primary federal and state banking agencies, as further described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Regulatory Matters."
Quantitative measures established by regulation to ensure capital adequacy
require First Banks and First Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
September 30, 2008, First Banks and First Bank were well capitalized. As of
September 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 September 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
September 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 ............................. $1,015,353 10.31% $1,008,253 9.84% 8.0% 10.0%
First Bank .............................. 1,005,665 10.20 1,023,990 10.01 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks ............................. 686,618 6.97 811,432 7.92 4.0 6.0
First Bank .............................. 881,392 8.94 895,571 8.75 4.0 6.0
Tier 1 capital (to average assets):
First Banks ............................. 686,618 6.55 811,432 7.99 3.0 5.0
First Bank .............................. 881,392 8.42 895,571 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
12
1 capital is limited to 25% of the sum of the following core capital elements:
qualifying common stockholders' equity, qualifying noncumulative and cumulative
perpetual preferred stock, qualifying minority interest in the equity accounts
of consolidated subsidiaries and qualifying trust preferred securities. First
Banks has determined that the Federal Reserve's final rules that will be
effective in March 2009, if implemented as of September 30, 2008, would have
reduced First Banks' Tier 1 capital (to risk-weighted assets) and Tier 1 capital
(to average assets) to 6.07% and 5.70%, respectively, and would not have an
impact on total capital (to risk-weighted assets).
(7) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business segment is
consistent with the management structure of First Banks, First Bank and the
internal reporting system that monitors performance. First Bank provides similar
products and services in its defined geographic areas through its branch
network. The products and services offered include a broad range of commercial
and personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, First Bank markets combined basic services for
various customer groups, including packaged accounts for more affluent
customers, and sweep accounts, lock-box deposits and cash management products
for commercial customers. First Bank also offers consumer and commercial loans.
Consumer lending includes residential real estate, home equity and installment
lending. Commercial lending includes commercial, financial and agricultural
loans, real estate construction and development loans, commercial real estate
loans, small business lending, asset-based loans, trade financing and insurance
premium financing. Other financial services include mortgage banking, debit
cards, brokerage services, employee benefit and commercial and personal
insurance services, internet banking, remote deposit, ATMs, telephone banking,
safe deposit boxes, and trust, private banking and institutional money
management services. The revenues generated by First Bank and its subsidiaries
consist primarily of interest income, generated from the loan and investment
security portfolios, service charges and fees generated from deposit products
and services, and fees generated by First Banks' mortgage banking, insurance,
and trust, private banking and institutional money management business units.
First Banks' products and services are offered to customers primarily within its
respective geographic areas, which include eastern Missouri, Illinois, including
the Chicago metropolitan area, southern and northern California, Houston and
Dallas, Texas and Florida's Manatee, Pinellas, Hillsborough and Pasco counties.
Certain loan products, including small business loans and insurance premium
financing loans, are available nationwide through SBLS LLC and UPAC.
The business segment results are consistent with First Banks' internal reporting
system and, in all material respects, with U.S. generally accepted accounting
principles and practices predominant in the banking industry. The business
segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
--------------------------- ---------------------------- ---------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2008 2007 2008 2007 2008 2007
---- ---- ---- ---- ---- ----
(Restated) (Restated) (Restated)
(dollars expressed in thousands)
Balance sheet information:
Investment securities .................... $ 663,291 997,486 17,408 21,785 680,699 1,019,271
Loans, net of unearned discount .......... 8,875,171 8,886,184 -- -- 8,875,171 8,886,184
Goodwill and other intangible assets ..... 309,591 315,651 -- -- 309,591 315,651
Total assets ............................. 10,796,545 10,872,602 35,959 29,868 10,832,504 10,902,470
Deposits ................................. 8,912,390 9,164,868 (23,002) (15,675) 8,889,388 9,149,193
Other borrowings ......................... 587,914 409,616 -- -- 587,914 409,616
Notes payable ............................ -- -- -- 39,000 -- 39,000
Subordinated debentures .................. -- -- 353,809 353,752 353,809 353,752
Stockholders' equity ..................... 1,106,230 1,203,008 (321,329) (360,931) 784,901 842,077
=========== =========== =========== =========== =========== ===========
13
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
----------------------- ----------------------- -----------------------
Three Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
----------------------- ----------------------- -----------------------
2008 2007 2008 2007 2008 2007
---- ---- ---- ---- ---- ----
(Restated) (Restated) (Restated)
(dollars expressed in thousands)
Income statement information:
Interest income .................................. $ 144,073 177,196 224 336 144,297 177,532
Interest expense ................................. 53,178 73,619 5,014 6,419 58,192 80,038
--------- --------- --------- --------- --------- ---------
Net interest income ........................... 90,895 103,577 (4,790) (6,083) 86,105 97,494
Provision for loan losses ........................ 99,000 13,503 -- -- 99,000 13,503
--------- --------- --------- --------- --------- ---------
Net interest (loss) income after
provision for loan losses. ................. (8,105) 90,074 (4,790) (6,083) (12,895) 83,991
--------- --------- --------- --------- --------- ---------
Noninterest income ............................... 18,881 20,002 (190) (151) 18,691 19,851
Amortization of intangible assets ................ 2,785 3,142 -- -- 2,785 3,142
Other noninterest expense ........................ 81,203 80,489 (278) 1,143 80,925 81,632
--------- --------- --------- --------- --------- ---------
(Loss) income before (benefit)
provision for income taxes and
minority interest in (loss)
income of subsidiaries ..................... (73,212) 26,445 (4,702) (7,377) (77,914) 19,068
(Benefit) provision for income taxes ............. (51,152) 9,086 (1,647) (2,616) (52,799) 6,470
--------- --------- --------- --------- --------- ---------
(Loss) income before minority
interest in (loss) income
of subsidiaries ............................ (22,060) 17,359 (3,055) (4,761) (25,115) 12,598
Minority interest in (loss) income
of subsidiaries ............................ (154) 74 -- -- (154) 74
--------- --------- --------- --------- --------- ---------
Net (loss) income ............................. $ (21,906) 17,285 (3,055) (4,761) (24,961) 12,524
========= ========= ========= ========= ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications Consolidated Totals
----------------------- ----------------------- -----------------------
Nine Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30,
----------------------- ----------------------- -----------------------
2008 2007 2008 2007 2008 2007
---- ---- ---- ---- ---- ----
(Restated) (Restated) (Restated)
(dollars expressed in thousands)
Income statement information:
Interest income .................................. $ 455,652 524,348 702 836 456,354 525,184
Interest expense ................................. 176,591 217,938 17,348 20,206 193,939 238,144
--------- --------- --------- --------- --------- ---------
Net interest income ........................... 279,061 306,410 (16,646) (19,370) 262,415 287,040
Provision for loan losses ........................ 229,000 20,420 -- -- 229,000 20,420
--------- --------- --------- --------- --------- ---------
Net interest income after provision
for loan losses ............................ 50,061 285,990 (16,646) (19,370) 33,415 266,620
--------- --------- --------- --------- --------- ---------
Noninterest income ............................... 77,613 62,386 (6,920) (327) 70,693 62,059
Amortization of intangible assets ................ 8,346 9,295 -- -- 8,346 9,295
Other noninterest expense ........................ 239,534 242,116 3,896 4,062 243,430 246,178
--------- --------- --------- --------- --------- ---------
(Loss) income before (benefit)
provision for income taxes and
minority interest in income
of subsidiaries ............................ (120,206) 96,965 (27,462) (23,759) (147,668) 73,206
(Benefit) provision for income taxes ............. (68,304) 34,491 (9,637) (8,738) (77,941) 25,753
--------- --------- --------- --------- --------- ---------
(Loss) income before minority
interest in income of
subsidiaries ............................... (51,902) 62,474 (17,825) (15,021) (69,727) 47,453
Minority interest in income of
subsidiaries ............................... 24 175 -- -- 24 175
--------- --------- --------- --------- --------- ---------
Net (loss) income ............................. $ (51,926) 62,299 (17,825) (15,021) (69,751) 47,278
========= ========= ========= ========= ========= =========
14
(8) OTHER BORROWINGS
Other borrowings were comprised of the following at September 30, 2008 and
December 31, 2007:
September 30, December 31,
2008 2007
---- ----
(Restated)
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily ............................................... $167,187 198,766
Monthly ............................................. -- 33,493
Term ................................................ 120,000 100,000
Federal funds purchased .................................. -- 76,500
Federal Home Loan Bank (FHLB) advances (1) ............... 300,727 857
-------- --------
Total ........................................... $587,914 409,616
======== ========
----------
(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. In May 2008, First Bank
entered into a $100.0 million FHLB advance that was scheduled to
mature in November 2008 at a fixed interest rate of 2.23%, and in
July 2008, First Bank entered into a $100.0 million FHLB advance
that matures in February 2009 at a fixed interest rate of 2.92%. In
September 2008, First Bank prepaid the $100.0 million FHLB advance
that was scheduled to mature in November 2008.
The maturity dates, par amounts, interest rates and interest rate floor strike
prices on First Bank's term repurchase agreements as of September 30, 2008 and
December 31, 2007 were as follows:
Interest Interest Rate Floor
Maturity Date Par Amount Rate Strike Price
------------- ---------- ---- ------------
(dollars expressed
in thousands)
September 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, and on August 11, 2008, First Banks entered into the
New Amended Credit Agreement (collectively, the Credit Agreement), as further
described in Note 5 to the consolidated financial statements, which modified the
existing New Credit Agreement 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. The 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 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 Credit Agreement. The
maturity date of the Credit Agreement may be accelerated at the option of
Investors of America, LP if an event of default under the Credit Agreement has
occurred and has not been cured to the satisfaction of Investors of America, LP.
The default provisions of the 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 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 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. In July 2008, First Banks repaid in full its outstanding balance under
the Credit Agreement in the aggregate amount of $30.0 million,
15
including the accrued interest thereon, and as such, there were no balances
outstanding on First Banks' Credit Agreement at September 30, 2008.
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 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. Balances outstanding under the Former Credit Agreement at
December 31, 2007 were $39.0 million and were comprised of $19.0 million in term
loans and $20.0 million in revolving credit advances.
(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 $4.8 million
and $15.8 million for the three and nine months ended September 30, 2008,
respectively, and $5.9 million and $17.6 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.
A summary of the subordinated debentures issued to the Trusts in conjunction
with the trust preferred securities offerings at September 30, 2008 and December
31, 2007 were as follows:
Subordinated
Debentures
-------------------
Trust September December
Maturity Call Interest Preferred 30, 31,
Name of Trust Issuance Date Date Date (1) Rate (2) Securities 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%.
16
(11) INCOME TAXES
The realization of First Banks' net deferred tax assets is based on the
availability of carrybacks to prior taxable periods, the expectation of future
taxable income and the utilization of tax planning strategies. Based on these
factors, management believes it is more likely than not that First Banks will
realize the recognized net deferred tax assets of $116.0 million at September
30, 2008.
At December 31, 2007, First Banks had a deferred tax asset valuation allowance
of $23.3 million. Upon completion of the 2004 acquisition of CIB Bank and the
2007 acquisition of CFHI, the net deferred tax assets associated with the
respective acquisitions were evaluated to determine whether it is more likely
than not that the net deferred tax assets will be recognized in the future. The
ability to utilize the net deferred tax assets recorded in connection with the
acquisitions is subject to a number of limitations. Among these limitations is
the restriction that any built-in-loss (the fair value of the entity was less
than the tax basis) that existed at the date of acquisition, if realized within
the first five years subsequent to the date of acquisition, will be deferred and
must be carried forward and subjected to rules similar to the rules for carrying
forward net operating losses. Based on these factors, First Banks carried
deferred tax asset valuation allowances on CIB Bank and CFHI of $3.1 million and
$20.2 million, respectively, at December 31, 2007. The deferred tax asset
valuation allowance related to CFHI was increased by $842,000 during the first
quarter of 2008 after further review of the acquired deferred tax assets with no
impact to the benefit for income taxes. The deferred tax asset valuation
allowance related to CIB Bank was decreased by $270,000 during the second
quarter of 2008 and resulted in an increase to the benefit for income taxes.
On September 30, 2008, the Internal Revenue Service (IRS) issued Notice 2008-83.
The IRS and the U.S. Department of the Treasury are studying the proper
treatment of certain items of deduction or loss allowed after an ownership
change to a corporation that is a bank both immediately before and after the
acquisition date. In accordance with Notice 2008-83, any deduction properly
allowed after an ownership change to a bank with respect to losses on loans or
bad debts (including any deduction for a reasonable addition to a reserve for
bad debts) shall not be treated as a built-in loss. As a result of Note 2008-83,
certain loan charge-offs and additions to First Bank's allowance for loan losses
are no longer considered built-in losses. Consequently, on September 30, 2008,
First Banks concluded that $1.8 million and $21.0 million of the deferred tax
asset valuation allowances related to CIB Bank and CFHI, respectively, were no
longer required and recorded a reversal of the deferred tax asset allowances in
the amount of $22.8 million as an increase to the benefit for income taxes for
the three months ended September 30, 2008. The remaining deferred tax asset
valuation allowance at September 30, 2008 is $1.0 million, all of which relates
to CIB Bank.
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 September 30, 2008 and December 31, 2007, First Banks' liability for
uncertain tax positions, excluding interest and penalties, was $13.1 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
September 30, 2008 and December 31, 2007, respectively. During the nine months
ended September 30, 2008, First Banks recorded additional liabilities for
unrecognized tax benefits of $1.9 million that, if recognized, would decrease
the provision for income taxes by $202,000, net of the federal tax benefit.
During the nine months ended September 30, 2008, First Banks reduced its
liability for unrecognized tax benefits by $1.0 million 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 and the closing of the
2004 federal statute of limitations.
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 September 30, 2008 and December 31, 2007, interest
accrued for unrecognized tax positions was $1.9 million and $1.4 million,
respectively. The Company increased its interest expense by $5,000 and $435,000
during the three and nine months ended September 30, 2008, respectively, whereas
the amount of interest expense decreased by $2,000 and increased by $468,000 for
the three and nine months ended September 30, 2007, respectively. There were no
penalties for unrecognized tax positions accrued at September 30, 2008 and
December 31, 2007, nor did First Banks recognize any expense for penalties
during the three and nine months ended September 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 September 30, 2008 could decrease by
approximately $616,000 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
17
taxes is estimated to be approximately $486,000. 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. Mortgage loans held for sale are carried at fair value on a
recurring basis effective July 1, 2008. The determination of fair value is based
on quoted market prices of comparable instruments obtained from independent
pricing vendors based on recent trading activity and other relevant information.
Other 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 mortgage loans held for sale subjected
to recurring fair value adjustments as recurring Level 2. The Company classifies
other 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
18
discounting the total expected future cash flows at the loan's effective rate of
interest as stated in the original loan agreement. In accordance with Statement
of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer, acquired impaired loans are classified as nonaccrual loans and are
initially measured at fair value with no allocated allowance for loan losses. An
allowance for loan losses is recorded to the extent there is further credit
deterioration subsequent to acquisition date. In accordance with SFAS No. 157,
impaired loans where an allowance is established based on the fair value of
collateral require classification in the fair value hierarchy. When the fair
value of the collateral is based on an observable market price or a current
appraised value, the Company classifies the impaired loan as nonrecurring Level
2. When an appraised value is not available or management determines the fair
value of the collateral is further impaired below the appraised value and there
is no observable market price, the Company classifies the impaired loan as
nonrecurring Level 3.
Derivative instruments. Substantially all derivative instruments utilized by the
Company are traded in over-the-counter markets where quoted market prices are
not readily available. Derivative instruments utilized by the Company include
interest rate swap agreements, interest rate floor and cap agreements, interest
rate lock commitments and forward commitments to sell mortgage-backed
securities. For these derivative instruments, fair value is based on market
observable inputs utilizing pricing systems and valuation models, and where
applicable, the values are compared to the market values calculated
independently by the respective counterparties. The Company classifies its
derivative instruments as Level 2.
Servicing rights. Servicing rights are valued based on valuation models that
utilize assumptions based on the predominant risk characteristics of the
underlying loans, including principal balance, interest rate, weighted average
life, cost to service and estimated prepayment speeds. The valuation models
estimate the present value of estimated future net servicing income. The Company
classifies its servicing rights as Level 3.
Nonqualified Deferred Compensation Plan. The Company's nonqualified deferred
compensation plan is recorded at fair value on a recurring basis. The unfunded
plan allows participants to hypothetically invest in various specified
investment options such as equity funds, international stock funds, capital
appreciation funds, money market funds, bond funds, mid-cap value funds and
growth funds. The nonqualified deferred compensation plan liability is valued
based on quoted market prices of the underlying investments. The Company
classifies its nonqualified deferred compensation plan liability as Level 1.
Assets and liabilities measured at fair value on a recurring basis as of
September 30, 2008 are reflected in the following table:
Fair Value Measurements
-------------------------------------------------------
September 30, 2008
-------------------------------------------------------
Level 1 Level 2 Level 3 Fair Value
------- ------- ------- ----------
(dollars expressed in thousands)
Assets:
Available-for-sale investment securities ............... $ 8,233 653,462 -- 661,695
Mortgage loans held for sale ........................... -- 20,996 -- 20,996
Derivative instruments ................................. -- 17,052 -- 17,052
Servicing rights ....................................... -- -- 21,136 21,136
---------- ---------- ---------- ----------
Total ............................................... $ 8,233 691,510 21,136 720,879
========== ========== ========== ==========
Liabilities:
Nonqualified deferred compensation plan. ............... $ 8,565 -- -- 8,565
========== ========== ========== ==========
19
The following table presents the changes in Level 3 assets measured on a
recurring basis for the three and nine months ended September 30, 2008:
Servicing Rights
---------------------------------------
Three Months Nine Months
Ended Ended
September 30, 2008 September 30, 2008
------------------ ------------------
(dollars expressed in thousands)
Balance, beginning of period .................................. $ 25,723 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) ............................. (5,304) (6,508)
Included in other comprehensive income ............... -- --
Purchases, issuances and settlements ..................... 717 4,443
Transfers in and/or out of level 3 ....................... -- --
---------- ----------
Balance, end of period ........................................ $ 21,136 21,136
========== ==========
----------
(1) Gains or losses (realized/unrealized) are included in other income
in the consolidated statements of operations.
From time to time, First Banks measures certain assets at fair value on a
nonrecurring basis. These include assets that are measured at the lower of cost
or market value that were recognized at fair value below cost at the end of the
period. Assets measured at fair value on a nonrecurring basis as of September
30, 2008 are reflected in the following table:
Fair Value Measurements
-----------------------------------------------------------------
September 30, 2008
-----------------------------------------------------------------
Level 1 Level 2 Level 3 Fair Value
------- ------- ------- ----------
(dollars expressed in thousands)
Assets:
Loans held for sale ........................ $ -- 20,523 -- 20,523
Impaired loans ............................. -- 113,278 215,897 329,175
----------- ----------- ----------- -----------
Total ................................... $ -- 133,801 215,897 349,698
=========== =========== =========== ===========
(13) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty contracts. For
value received, and for the purpose of inducing a pension fund and its trustees
and a welfare fund and its trustees (the Funds) to conduct business with MVP,
First Bank's institutional investment management subsidiary, First Banks
irrevocably and unconditionally guaranteed payment of and promised to pay to
each of the Funds any amounts up to the sum of $5.0 million to the extent MVP is
liable to the Funds for a breach of the Investment Management Agreements
(including the Investment Policy Statement and Investment Guidelines), by and
between MVP and the Funds and/or any violation of the Employee Retirement Income
Security Act by MVP resulting in liability to the Funds. The guaranties are
continuing guaranties of all obligations that may arise for transactions
occurring prior to termination of the Investment Management Agreements and are
coexistent with the term of the Investment Management Agreements. The Investment
Management Agreements have no specified term but may be terminated at any time
upon written notice by the Trustees or, at First Banks' option, upon thirty days
written notice to the Trustees. In the event of termination of the Investment
Management Agreements, such termination shall have no effect on the liability of
First Banks with respect to obligations incurred before such termination. The
obligations of First Banks are joint and several with those of MVP. First Banks
does not have any recourse provisions that would enable it to recover from third
parties any amounts paid under the contracts nor does First Banks hold any
assets as collateral that, upon occurrence of a required payment under the
contract, could be liquidated to recover all or a portion of the amount(s) paid.
At September 30, 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)
- -----------------------
20
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.
Subsequent to the disposition of certain preliminary motions filed by plaintiffs
and defendants, on April 2, 2008, the Lead Plaintiffs and an additional
plaintiff, St. Denis J. Villere & Co., LLC, filed a second consolidated amended
class action complaint (the "Amended Complaint"). The Amended complaint names as
defendants (i) certain former officers and members of CHFI's board of directors,
(ii) the underwriters of CFHI's October 5, 2005 public offering of common stock,
and (iii) 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 also alleges 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 or about September 26, 2008, CFHI and the plaintiffs reached an
agreement-in-principle for the settlement of the Securities Actions. Pursuant to
the agreement-in-principle, CFHI and its insurer will pay an amount in
settlement of the claims, and CFHI, the former officer and director defendants,
and the underwriter defendants will be released and dismissed with prejudice
from the action. Under the proposed terms, the Company's allocation of the
settlement amount is $750,000, and was recorded as other expense in the
consolidated statement of operations for the three months ended September 30,
2008. CFHI and the plaintiffs are in the process of preparing definitive
documentation formalizing the settlement and defining its terms. Among other
terms and conditions, the settlement is subject to approval by the Court and
will not be consummated if the Court fails to grant approval. The timing of any
final settlement cannot be determined at this time as it remains subject to
final negotiations and approval by the Court.
Other. In the ordinary course of business, First Banks and its subsidiaries
become involved in legal proceedings other than those discussed above.
Management, in consultation with legal counsel, believes the ultimate resolution
of these proceedings will not have a material adverse effect on the financial
condition or results of operations of First Banks and/or its subsidiaries.
21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements and Factors that Could Affect Future Results
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:
>> 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;
>> Congress recently enacted the Emergency Economic Stabilization Act
of 2008, and the U.S. Treasury and banking regulators are
implementing a number of programs to address capital and liquidity
issues in the banking system, all of which may have significant
effects on us and the financial services industry, the exact nature
and extent of which cannot be determined at this time;
>> The current stresses in the financial and residential real estate
markets, including possible continued deterioration in property
values;
>> Possible changes in interest rates may increase funding costs and
reduce earning asset yields, thus reducing margins;
>> Possible changes in general economic and business conditions in the
United States in general and particularly in the communities and
market segments we serve;
>> Volatility and disruption in national and international financial
markets;
>> Government intervention in the U.S. financial system;
>> Changes in consumer spending, borrowings and savings habits;
>> The impact of laws and regulations applicable to us and changes
therein;
>> The impact of changes in accounting policies and practices, as may
be adopted by the regulatory agencies, as well as the Public Company
Accounting Oversight Board, the Financial Accounting Standards
Board, and other accounting standard setters;
>> 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;
>> Possible changes in the creditworthiness of customers and the
possible impairment of collectability of 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;
>> Regulatory actions that impact the Company and First Bank, including
the regulatory agreements entered into between the Company, First
Bank, the Federal Reserve Bank of St. Louis and the Missouri
Division of Finance; 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:
>> The competition of larger acquirers with greater resources;
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>> Fluctuations in the prices at which acquisition targets may be
available for sale;
>> The impact of making acquisitions without using our common stock;
>> Possible asset quality issues, pending litigation, unknown
liabilities and/or integration issues with the businesses that we
have acquired; and
>> The impact of the regulatory agreements between the Company, First
Bank, the Federal Reserve Bank of St. Louis and the Missouri
Division of Finance.
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 undue reliance on these
statements.
Recent Market Developments
The global and U.S. economies are experiencing significantly reduced business
activity as a result of, among other factors, disruptions in the financial
system during the past year. Dramatic declines in the housing market during the
past year, with falling home prices and increasing foreclosures and
unemployment, have resulted in significant write-downs of asset values by
financial institutions, including government-sponsored entities and major
commercial and investment banks. These write-downs, initially of mortgage-backed
securities but spreading to credit default swaps and other derivative
securities, have caused many financial institutions to seek additional capital,
to merge with larger and stronger institutions and, in some cases, to fail.
Reflecting concern about the stability of the financial markets generally and
the strength of counterparties, many lenders and institutional investors have
reduced, and in some cases, ceased to provide funding to borrowers, including
other financial institutions. The availability of credit, confidence in the
financial sector, and level of volatility in the financial markets have been
significantly adversely affected as a result. In recent weeks, volatility and
disruption in the capital and credit markets has reached unprecedented levels.
In some cases, the markets have produced downward pressure on stock prices and
credit capacity for certain issuers without regard to those issuers' underlying
financial strength.
In response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008, or the EESA, was signed into law. Pursuant to the EESA, the U.S.
Department of the Treasury, or the Treasury, has authority to, among other
things, purchase up to $700 billion of mortgages, mortgage-backed securities and
certain other financial instruments from financial institutions for the purpose
of stabilizing and providing liquidity to the U.S. financial markets.
On October 14, 2008, Secretary Henry Paulson, after consulting with the Board of
Governors of the Federal Reserve System, or the Federal Reserve, and the Federal
Deposit Insurance Corporation, or the FDIC, announced that the Treasury will
purchase equity stakes in a wide variety of banks and thrifts. Under this
program, known as the Troubled Asset Relief Program Capital Purchase Program, or
the TARP Capital Purchase Program, from the $700 billion authorized by the EESA,
the Treasury will make $250 billion of capital available to U.S. financial
institutions in the form of preferred stock. In conjunction with the purchase of
preferred stock, the Treasury will receive warrants to purchase common stock
with an aggregate market price equal to 15% of the preferred stock investment.
Participating financial institutions will be required to adopt the Treasury's
standards for executive compensation and corporate governance for the period
during which the Treasury holds equity issued under the TARP Capital Purchase
Program. Secretary Paulson also announced that nine large financial institutions
have already agreed to participate in the TARP Capital Purchase Program.
Subsequent to this initial announcement, several additional financial
institutions have elected to participate in the TARP Capital Purchase Program
and have been approved to do so by the Treasury.
Also on October 14, 2008, after receiving a recommendation from the boards of
the FDIC and the Federal Reserve, and consulting with the President, Secretary
Paulson invoked the systemic risk exception to the FDIC Act, enabling the FDIC
to temporarily provide a 100% guarantee of the senior debt of all FDIC-insured
institutions and their holding companies, as well as deposits in non-interest
bearing transaction deposit accounts under a Temporary Liquidity Guarantee
Program. Coverage under the Temporary Liquidity Guarantee Program is available
for 30 days without charge and thereafter at a cost of 75 basis points per annum
for senior unsecured debt and 10 basis points per annum for non-interest bearing
transaction deposits. We are continuing to evaluate the requirements of both the
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TARP Capital Purchase Program and the Temporary Liquidity Guarantee Program. We
have elected to participate in the Temporary Liquidity Guarantee Program, but
have not yet made a definitive decision as to whether we will seek to
participate in the TARP Capital Purchase Program as we are further evaluating
its requirements as applicable to companies such as ours with private equity
ownership and publicly-traded subordinated debentures, and we are expecting
additional guidance and clarification from the Treasury with respect to these
matters.
It is not clear at this time what impact the EESA, the TARP Capital Purchase
Program, the Temporary Liquidity Guarantee Program, other liquidity and funding
initiatives of the Federal Reserve and other agencies that have been previously
announced, and any additional programs that may be initiated in the future will
have on the financial markets and the other difficulties described above,
including the extreme levels of volatility and limited credit availability
currently being experienced, or on the U.S. banking and financial industries and
the broader U.S. and global economies. Further adverse effects could have an
adverse effect on our business, financial condition and results of operations.
Regulatory Matters
In connection with the most recent regular examinations of the Company and First
Bank by the Federal Reserve Bank of St. Louis, or FRB, and the Missouri Division
of Finance, or MDOF, the Company and First Bank entered into informal agreements
with each agency. On September 18, 2008, First Bank and its Board of Directors
entered into an informal agreement with the FRB and the MDOF. In addition, on
October 2, 2008, the Company and its Board of Directors entered into a
Memorandum of Understanding with the FRB. Each of the agreements is
characterized by regulatory authorities as an informal action that is neither
published nor made publicly available by the agencies and is used when
circumstances warrant a milder form of action than a formal supervisory action,
such as a cease and desist order.
Under the terms of the Memorandum of Understanding with the FRB, the Company
agreed, among other things, to provide certain information to the FRB including,
but not limited to, financial performance updates, notice of plans to materially
change its fundamental business and notice to issue trust preferred securities
or raise additional equity capital. In addition, the Company agreed not to
declare any dividends on its common or preferred stock or make any distributions
of interest or other sums on its trust preferred securities without the prior
approval of the FRB. The Company has received the approval of the FRB to declare
the regular dividends on its preferred stock to be paid in January, 2009 and to
make its regular interest payments on its outstanding subordinated debentures
for further payment to the individual holders of the respective underlying trust
preferred securities in December, 2008 and January, 2009.
First Bank, under its agreement with the MDOF and the FRB, has agreed to, among
other things, prepare and submit plans and reports to the agencies regarding
certain matters including, but not limited to, the performance of First Bank's
loan portfolio. In addition, First Bank agreed not to declare or pay any
dividends or make certain other payments without the prior consent of the MDOF
and the FRB and to maintain its Tier 1 capital ratio at no less than 7.00%. As
further described in Note 6 to our accompanying consolidated financial
statements, at September 30, 2008, First Bank's Tier 1 capital ratio was 8.94%,
or approximately $191.6 million over the minimum level required by the
agreement.
The Company and First Bank are committed to ensuring that the requirements of
the agreements are met in a timely manner.
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:
>> First Bank Business Capital, Inc.;
>> Missouri Valley Partners, Inc., or MVP;
>> Adrian N. Baker & Company, or Adrian Baker;
>> Universal Premium Acceptance Corporation and its wholly owned
subsidiary, UPAC of California, Inc., collectively UPAC;
>> Small Business Loan Source LLC, or SBLS LLC; and
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>> 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 53.66% owned by First Bank and 46.34% owned by FCA as of
September 30, 2008.
At September 30, 2008, we had assets of $10.83 billion, loans, net of unearned
discount, of $8.88 billion, deposits of $8.89 billion and stockholders' equity
of $784.9 million, and we currently operate 218 branch banking offices in
California, Florida, Illinois, Missouri and Texas.
Through First Bank, we offer a broad range of financial services, including
commercial and personal deposit products, commercial and consumer lending, and
many other financial products and services. Commercial and personal deposit
products include demand, savings, money market and time deposit accounts. In
addition, we market combined basic services for various customer groups,
including packaged accounts for more affluent customers, and sweep accounts,
lock-box deposits and cash management products for commercial customers.
Commercial lending includes commercial, financial and agricultural loans, real
estate construction and development loans, commercial real estate loans, small
business lending, asset-based loans, trade financing and insurance premium
financing. Consumer lending includes residential real estate, home equity and
installment lending. Other financial services include mortgage banking, debit
cards, brokerage services, employee benefit and commercial and personal
insurance services, internet banking, remote deposit, automated teller machines,
telephone banking, safe deposit boxes, and trust, private banking and
institutional money management services. The revenues generated by First Bank
and its subsidiaries consist primarily of interest income, generated from the
loan and investment security portfolios, service charges and fees generated from
deposit products and services, and fees and commissions generated by our
mortgage banking, insurance, and trust, private banking and institutional money
management business units. Our extensive line of products and services are
offered to customers primarily within our geographic areas, which include
eastern Missouri, Illinois, including the Chicago metropolitan area, southern
and northern California, Houston and Dallas, Texas, and Florida's Manatee,
Pinellas, Hillsborough and Pasco counties. Certain loan products, including
small business loans and insurance premium financing loans, are available
nationwide through SBLS LLC and UPAC, respectively.
Primary responsibility for managing our banking unit rests with the officers and
directors of each unit, but we centralize many of our overall corporate
policies, procedures and administrative functions and provide centralized
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our banking units to focus
on customer service.
Restatement of Previously Issued Consolidated Interim Financial Statements
As discussed in Amendment No. 1 to our 2007 Annual Report on Form 10-K, the
Audit Committee of our Board of Directors (the Audit Committee), with the
assistance of legal counsel and other third parties, commissioned an
investigation into the circumstances and possible irregularities that led to
certain fraudulent transactions in our mortgage banking division being
improperly recorded in our consolidated financial statements due to the
circumvention of established internal controls. The investigation was completed
on July 29, 2008.
On May 16, 2008, management and the Audit Committee determined that we needed to
restate our previously issued consolidated financial statements as of December
31, 2007 and 2006, and for the years ended December 31, 2007, 2006 and 2005 and
restate certain financial information as of December 31, 2005, 2004 and 2003,
and for the years ended December 31, 2004 and 2003 and each of the quarters in
2007 and 2006, and that these previously issued consolidated financial
statements should no longer be relied upon. Accordingly, we have restated our
previously issued consolidated financial statements in Amendment No. 1 to our
Annual Report on Form 10-K for the year ended December 31, 2007. We have not
amended our previously filed Annual Reports on Form 10-K or Quarterly Reports on
Form 10-Q for the periods affected by this restatement. The financial
information presented herein as of December 31, 2007 and for the three and nine
months ended September 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 $10.83 billion at September 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 an increase in cash and short-term investments and other
assets.
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Cash and cash equivalents increased $241.4 million to $473.1 million at
September 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.
Investment securities decreased $338.6 million to $680.7 million at September
30, 2008, from $1.02 billion at December 31, 2007. Funds provided by maturities
and sales of investment securities were primarily invested in cash and cash
equivalents and, to a lesser extent, utilized to fund internal loan growth. The
decrease reflects maturities and/or calls of investment securities of $294.5
million and sales of investment securities of $351.8 million partially offset by
purchases of investment securities of $342.6 million for the nine months ended
September 30, 2008.
Loans, net of unearned discount, decreased $11.0 million to $8.88 billion at
September 30, 2008, from $8.89 billion at December 31, 2007, reflecting 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, partially offset by organic growth. 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."
Other assets increased $72.0 million to $193.8 million at September 30, 2008,
from $121.7 million at December 31, 2007. The increase primarily resulted from:
(a) an increase of $33.1 million in other real estate owned from $11.2 million
at December 31, 2007 to $44.3 million at September 30, 2008 reflecting
substantially higher foreclosure activity; (b) an increase in the carrying value
of servicing rights of $8.3 million from $12.8 million at December 31, 2007 to
$21.1 million at September 30, 2008, as further described in Note 3 to our
consolidated financial statements; (c) an increase in current income taxes
receivable of $28.8 million from $14.9 million at December 31, 2007 to $43.7
million at September 30, 2008; and (d) an increase in the fair value of
derivative instruments of $3.4 million from $13.7 million at December 31, 2007
to $17.1 million at September 30, 2008; partially offset by a decrease in
accrued interest receivable of $16.0 million from $55.2 million at December 31,
2007 to $39.2 million at September 30, 2008.
Deposits decreased $259.8 million to $8.89 billion at September 30, 2008, from
$9.15 billion at December 31, 2007. During the first nine months of 2008, we
achieved organic growth in savings and money market deposits of $211.9 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 $408.2 million, comprised of declines of $331.7
million and $170.9 million during the first and second quarters of 2008,
respectively, partially offset by an increase in time deposits of $94.4 million
during the third quarter of 2008. The Florida region accounted for $234.7
million of the decline in our certificates of deposit which was anticipated as
part of our planned post-acquisition strategy to improve the net interest margin
in this region. The increase in time deposits in the third quarter of 2008
primarily resulted from marketing campaigns and an increase in time deposits in
the Certificate of Deposit Account Registry Service, or CDARS, to $55.7 million
at September 30, 2008. Prior to the third quarter of 2008, we placed deposits
into CDARS and received fee income in return. Beginning in the third quarter of
2008, we elected to receive deposits placed into the CDARS program on a
reciprocal basis, thereby increasing our time deposits and further enhancing our
overall liquidity position.
Other borrowings, which are comprised of securities sold under agreements to
repurchase, Federal Home Loan Bank, or FHLB, advances, and federal funds
purchased, increased $178.3 million to $587.9 million at September 30, 2008,
compared to $409.6 million at December 31, 2007. In light of unstable market
conditions, 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 approximately $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 $31.6 million; and a decrease in federal funds purchased of $76.5
million.
Our notes payable were zero and $39.0 million at September 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. During the third quarter of
2008, we repaid in full the outstanding balance on the new secured revolving
line of credit.
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Accrued expenses and other liabilities increased $4.2 million to $59.3 million
at September 30, 2008, from $55.1 million at December 31, 2007. The increase
resulted from increases in accrued federal income taxes payable, partially
offset by a decrease in other miscellaneous accrued expenses and liabilities and
accrued interest payable.
Minority interest in subsidiaries increased $115.0 million to $120.6 million at
September 30, 2008, from $5.5 million at December 31, 2007. The increase is
primarily due to FCA's contribution of cash of $115.0 million into FB Holdings
during the second and third quarters of 2008, as further described in Note 5 to
our consolidated financial statements. As of September 30, 2008, First Bank
owned 53.66% of FB Holdings and FCA owned the remaining 46.34%.
Stockholders' equity was $784.9 million and $842.1 million at September 30, 2008
and December 31, 2007, respectively, reflecting a decrease of $57.2 million
during the first nine months of 2008. The decrease was primarily attributable to
a net loss of $69.8 million and dividends paid on our Class A and Class B
preferred stock of $524,000, partially offset by (a) a $6.8 million increase in
accumulated other comprehensive income, comprised of $3.6 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 $25.0 million and $69.8 million for the
three and nine months ended September 30, 2008, respectively, compared to net
income of $12.5 million and $47.3 million for the comparable periods in 2007.
The change in our earnings for these periods was primarily driven by the
following:
>> An increase in the provision for loan losses to $99.0 million and
$229.0 million for the three and nine months ended September 30,
2008, respectively, compared to $13.5 million and $20.4 million for
the comparable periods in 2007;
>> A decline in net interest income and net interest margin. Our net
interest margin declined to 3.47% and 3.56% for the three and nine
months ended September 30, 2008, respectively, compared to 4.10% and
4.08% for the comparable periods in 2007, and our net interest
income declined to $86.1 million and $262.4 million for the three
and nine months ended September 30, 2008, respectively, compared to
$97.5 million and $287.0 million for the comparable periods in 2007;
>> A benefit for income taxes of $52.8 million and $77.9 million for
the three and nine months ended September 30, 2008, respectively,
compared to a provision for income taxes of $6.5 million and $25.8
million for the comparable periods in 2007;
>> Noninterest income of $18.7 million and $70.7 million for the three
and nine months ended September 30, 2008, respectively, compared to
$19.9 million and $62.1 million for the comparable periods in 2007;
and
>> A decrease in noninterest expense to $83.7 million and $251.8
million for the three and nine months ended September 30, 2008,
respectively, compared to $84.8 million and $255.5 million for the
comparable periods in 2007.
The increase in our provision for loan losses for the three and nine months
ended September 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 $183.0 million during 2008
and the 325 basis point decrease, in aggregate, in the prime lending rate, from
the third quarter of 2007 through September 30, 2008. We are currently in an
asset-sensitive position, and as such, interest rate cuts by the 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 nine 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 $1.7 million on
derivative instruments compared to $261,000 in the prior period; income from the
sale of tax credits of $1.8 million compared to zero in the prior period; a net
gain on loans sold and held for sale of $3.6 million compared to a net loss of
$555,000 in the prior period; and an increase in service charges on deposits and
customer service fees of $5.4
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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 the second quarter of 2008 on a single equity
investment in the common stock of a bank holding company and $1.0 million
recognized in the third quarter of 2008 on a preferred stock investment. 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 nine 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; expenses and market valuation adjustments
associated with maintaining and selling other real estate properties; and other
expenses. See further discussion under "--Noninterest Expense."
The change in the (benefit) provision for income taxes primarily resulted from
decreased earnings and a partial reversal of our deferred tax asset valuation
allowance of $22.8 million, which resulted in an increase in the benefit for
income taxes of $21.6 million during the third quarter of 2008, as further
discussed under "--Provision for Income Taxes."
Net Interest Income. Net interest income, expressed on a tax-equivalent basis,
decreased to $86.4 million and $263.4 million for the three and nine months
ended September 30, 2008, respectively, compared to $97.9 million and $288.3
million for the comparable periods in 2007. Our net interest margin declined to
3.47% and 3.56% for the three and nine months ended September 30, 2008,
respectively, compared to 4.10% 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. In addition, the
Federal Reserve further reduced the targeted federal funds rate by an additional
100 basis points during October 2008. Our balance sheet is currently asset
sensitive, and as such, our net interest margin is negatively impacted with each
interest rate cut as our loan portfolio re-prices on an immediate basis; whereas
we are unable to immediately re-price our deposit portfolio to current market
interest rates, thereby resulting in a compression of our net interest margin.
The average rates paid on our interest-bearing deposits decreased 113 and 82
basis points to 2.57% and 2.88% for the three and nine months ended September
30, 2008, respectively, compared to 3.70% for the same periods in 2007, while
the average yield earned on our interest-earning assets decreased 165 and 129
basis points to 5.80% and 6.17% for the three and nine months ended September
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 $9.91 billion and $9.90 billion for the
three and nine months ended September 30, 2008, respectively, from $9.47 billion
and $9.44 billion for the comparable periods in 2007, reflecting increases of
$440.9 million and $460.7 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 a
reduction in our investment securities portfolio. Average interest-bearing
liabilities increased to $8.63 billion and $8.64 billion for the three and nine
months ended September 30, 2008, respectively, from $8.19 billion and $8.14
billion for the comparable periods in 2007.
Interest income on our loan portfolio, expressed on a tax-equivalent basis,
decreased to $134.7 million and $425.9 million for the three and nine months
ended September 30, 2008, respectively, compared to $159.8 million and $470.3
million for the comparable periods in 2007. Average loans, net of unearned
discount, increased $889.8 million and $1.03 billion to $8.97 billion and $8.99
billion for the three and nine months ended September 30, 2008, respectively,
from $8.08 billion and $7.96 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 187 and 157 basis points to 5.98% and
6.33% for the three and nine months ended September 30, 2008, respectively,
compared to 7.85% and 7.90% for the comparable periods in 2007, reflecting
decreases in the prime lending rate throughout the latter part of 2007 and the
first three quarters of 2008 and a significant increase in the average amount of
nonaccrual loans during the respective periods; partially offset by an increase
in interest income associated with our interest rate swap agreements. The prime
lending rate decreased
28
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
nine months of 2008 to 5.00% at September 30, 2008. Our interest rate swap
agreements contributed to an increase in interest income on our loan portfolio
of $2.9 million and $7.6 million for the three and nine months ended September
30, 2008, respectively, in contrast to a decrease in interest income on our loan
portfolio of $652,000 and $3.5 million for the comparable periods in 2007.
Interest income on our investment securities, expressed on a tax-equivalent
basis, was $9.1 million and $30.3 million for the three and nine months ended
September 30, 2008, respectively, compared to $16.7 million and $50.5 million
for the comparable periods in 2007. Average investment securities were $758.7
million and $830.5 million for the three and nine months ended September 30,
2008, respectively, compared to $1.28 billion and $1.34 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 4.75% and 4.87% for the three and nine
months ended September 30, 2008, respectively, compared to 5.16% and 5.06% for
the comparable periods in 2007, primarily reflecting the reduced interest rate
environment.
Interest income on our short-term investments was $849,000 and $1.2 million for
the three and nine months ended September 30, 2008, respectively, compared to
$1.5 million and $5.7 million for the comparable periods in 2007. Average
short-term investments were $186.8 million and $79.3 million for the three and
nine months ended September 30, 2008, respectively, compared to $109.8 million
and $144.7 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 1.81% and 1.96% for the three and
nine months ended September 30, 2008, respectively, compared to 5.34% and 5.24%
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 $49.3 million and
$164.9 million for the three and nine months ended September 30, 2008,
respectively, compared to $69.4 million and $204.4 million for the comparable
periods in 2007. Average interest-bearing deposits increased to $7.62 billion
and $7.66 billion for the three and nine months ended September 30, 2008,
respectively, compared to $7.45 billion and $7.39 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, partially offset
by anticipated run-off of higher rate certificates of deposit. The aggregate
weighted average rate paid on our deposit portfolio was 2.57% and 2.88% for the
three and nine months ended September 30, 2008, respectively, compared to 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 3.56% and 3.95% for the three and nine months
ended September 30, 2008, respectively, from 4.80% and 4.78% for the comparable
periods in 2007, and the average rate paid on our savings and money market
deposit portfolio declined to 1.98% and 2.19% for the three and nine months
ended September 30, 2008, respectively, from 3.10% and 3.09% for the comparable
periods in 2007.
Interest expense on our other borrowings was $3.9 million and $11.7 million for
the three and nine months ended September 30, 2008, respectively, compared to
$4.1 million and $13.4 million for the same periods in 2007. Average other
borrowings were $644.5 million and $596.0 million for the three and nine months
ended September 30, 2008, respectively, compared to $401.7 million and $401.5
million for the same periods in 2007. The aggregate weighted average rate paid
on our other borrowings was 2.40% and 2.62% for the three and nine months ended
September 30, 2008, respectively, compared to 4.09% and 4.47% 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 increase in FHLB advances of $299.9 million during the first
nine months of 2008, and an increase in our term repurchase agreement of $20.0
million, as further discussed under "--Liquidity" and in Note 8 to our
consolidated financial statements, partially offset by the termination of a
$100.0 million term repurchase agreement in August 2007.
Interest expense on our notes payable was $45,000 and $1.3 million for the three
and nine months ended September 30, 2008, respectively, compared to $544,000 and
$2.1 million for the comparable periods in 2007. Our notes payable averaged $3.1
million and $28.3 million for the three and nine months ended September 30,
2008, respectively, compared to $29.1 million and $41.1 million for the
comparable periods in 2007. The aggregate weighted average rate paid on our
notes payable was 5.79% and 6.19% for the three and nine months ended September
30, 2008, respectively, compared to 7.42% and 6.79% 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 3.47% and 4.52% for the three and nine months
ended September 30, 2008, respectively, compared to 6.51% and 6.54% for the same
29
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 $5.0 million and $16.1
million for the three and nine months ended September 30, 2008, respectively,
compared to $5.9 million and $18.3 million for the comparable periods in 2007.
Average subordinated debentures were $353.8 million for the three and nine
months ended September 30, 2008, compared to $310.8 million and $309.8 million
for the comparable periods in 2007. The aggregate weighted average rate paid on
our subordinated debentures was 5.60% and 6.07% for the three and nine months
ended September 30, 2008, respectively, compared to 7.56% and 7.88% 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.
30
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 nine months
ended September 30, 2008 and 2007.
Three Months Ended September 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).......................... $ 8,966,057 134,712 5.98% $ 8,076,224 159,779 7.85%
Investment securities (4)................... 758,735 9,061 4.75 1,284,707 16,702 5.16
Short-term investments...................... 186,793 849 1.81 109,800 1,478 5.34
----------- ------- ----------- -------
Total interest-earning
assets.......................... 9,911,585 144,622 5.80 9,470,731 177,959 7.45
------- -------
Nonearning assets.............................. 925,142 875,622
----------- -----------
Total assets....................... $10,836,727 $10,346,353
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand.................. $ 949,402 1,207 0.51% $ 944,542 2,242 0.94%
Savings and money market................. 2,940,949 14,633 1.98 2,687,208 21,012 3.10
Time deposits of $100
or more............................... 1,288,916 11,808 3.64 1,462,548 18,299 4.96
Other time deposits...................... 2,445,457 21,628 3.52 2,355,710 27,881 4.70
----------- ------- ----------- -------
Total interest-bearing
deposits........................ 7,624,724 49,276 2.57 7,450,008 69,434 3.70
Other borrowings............................ 644,546 3,891 2.40 401,691 4,140 4.09
Notes payable (5)........................... 3,092 45 5.79 29,070 544 7.42
Subordinated debentures..................... 353,799 4,980 5.60 310,804 5,920 7.56
----------- ------- ----------- -------
Total interest-bearing
liabilities..................... 8,626,161 58,192 2.68 8,191,573 80,038 3.88
------- -------
Noninterest-bearing liabilities:
Demand deposits............................. 1,245,366 1,225,157
Other liabilities........................... 170,448 114,555
----------- -----------
Total liabilities.................. 10,041,975 9,531,285
Stockholders' equity........................... 794,752 815,068
----------- -----------
Total liabilities and
stockholders' equity............ $10,836,727 $10,346,353
=========== ===========
Net interest income............................ 86,430 97,921
====== ======
Interest rate spread........................... 3.12 3.57
Net interest margin (6)........................ 3.47% 4.10%
==== ====
Nine Months Ended September 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).......................... $ 8,987,551 425,894 6.33% $ 7,955,916 470,252 7.90%
Investment securities (4)................... 830,520 30,298 4.87 1,336,036 50,526 5.06
Short-term investments...................... 79,319 1,165 1.96 144,709 5,671 5.24
----------- ------- ----------- -------
Total interest-earning
assets.......................... 9,897,390 457,357 6.17 9,436,661 526,449 7.46
------- -------
Nonearning assets.............................. 920,970 860,875
----------- -----------
Total assets....................... $10,818,360 $10,297,536
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand.................. $ 973,655 4,560 0.63% $ 962,396 7,171 1.00%
Savings and money market................. 2,841,380 46,577 2.19 2,587,286 59,809 3.09
Time deposits of $100
or more............................... 1,373,205 41,593 4.05 1,455,660 53,533 4.92
Other time deposits...................... 2,471,362 72,143 3.90 2,383,236 83,851 4.70
----------- ------- ----------- -------
Total interest-bearing
deposits........................ 7,659,602 164,873 2.88 7,388,578 204,364 3.70
Other borrowings............................ 595,972 11,678 2.62 401,471 13,427 4.47
Notes payable (5)........................... 28,271 1,310 6.19 41,089 2,088 6.79
Subordinated debentures..................... 353,780 16,078 6.07 309,752 18,265 7.88
----------- ------- ----------- -------
Total interest-bearing
liabilities..................... 8,637,625 193,939 3.00 8,140,890 238,144 3.91
------- -------
Noninterest-bearing liabilities:
Demand deposits............................. 1,222,156 1,233,565
Other liabilities........................... 131,942 120,534
----------- -----------
Total liabilities.................. 9,991,723 9,494,989
Stockholders' equity........................... 826,637 802,547
----------- -----------
Total liabilities and
stockholders' equity............ $10,818,360 $10,297,536
=========== ===========
Net interest income............................ 263,418 288,305
======= =======
Interest rate spread........................... 3.17 3.55
Net interest margin (6)........................ 3.56% 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 $325,000 and $1.0
million for the three and nine months ended September 30, 2008, and
$427,000 and $1.3 million 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 3.47%
and 4.52% for the three and nine months ended September 30, 2008, and
6.51% and 6.54% 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.
31
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 nine months ended September 30,
2008 as compared to the three and nine months ended September 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 Nine Months Ended
September 30, 2008 September 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 ................................. $ 16,202 (41,067) (24,865) 56,583 (100,538) (43,955)
Tax-exempt (4) .......................... (59) (143) (202) (66) (337) (403)
Investment securities:
Taxable ................................. (6,213) (1,340) (7,553) (17,926) (1,956) (19,882)
Tax-exempt (4) .......................... (125) 37 (88) (420) 74 (346)
Short-term investments ..................... 682 (1,311) (629) (1,889) (2,617) (4,506)
-------- -------- -------- -------- -------- --------
Total interest income ............... 10,487 (43,824) (33,337) 36,282 (105,374) (69,092)
-------- -------- -------- -------- -------- --------
Interest paid on:
Interest-bearing demand deposits ........... 11 (1,046) (1,035) 84 (2,695) (2,611)
Savings and money market deposits .......... 1,822 (8,201) (6,379) 5,479 (18,711) (13,232)
Time deposits .............................. (999) (11,745) (12,744) 204 (23,852) (23,648)
Other borrowings ........................... 1,885 (2,134) (249) 5,070 (6,819) (1,749)
Notes payable (5) .......................... (401) (98) (499) (606) (172) (778)
Subordinated debentures .................... 741 (1,681) (940) 2,382 (4,569) (2,187)
-------- -------- -------- -------- -------- --------
Total interest expense .............. 3,059 (24,905) (21,846) 12,613 (56,818) (44,205)
-------- -------- -------- -------- -------- --------
Net interest income ................. $ 7,428 (18,919) (11,491) 23,669 (48,556) (24,887)
======== ======== ======== ======== ======== ========
- ----------
(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 $99.0
million for the three months ended September 30, 2008, compared to $84.1 million
for the three months ended June 30, 2008 and $13.5 million for the three months
ended September 30, 2007. Our provision for loan losses was $229.0 million for
the first nine months of 2008, compared to $20.4 million for the comparable
period in 2007. The increase in our provision for loan losses for the three and
nine months ended September 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 $18.7 million and $70.7 million for
the three and nine months ended September 30, 2008, respectively, compared to
$19.9 million and $62.1 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 $14.6
million and $39.7 million for the three and nine months ended September 30,
2008, respectively, from $12.1 million and $34.3 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
32
service charges for non-sufficient funds and returned checks from our commercial
deposit base resulting from our recently 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 $908,000 and $3.6 million for
the three and nine months ended September 30, 2008, respectively, in comparison
to losses of $2.6 million and $555,000 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 nine months
ended September 30, 2007, we established recourse reserves of $3.9 million and
$7.2 million, respectively, which had the effect of decreasing our gain on sale.
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 $1.1 million and $5.7 million
for the three and nine months ended September 30, 2008, respectively, in
comparison to net losses of $74,000 and $1.3 million for the comparable periods
in 2007. In the second quarter of 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. In the
third quarter of 2008, we recognized other-than-temporary impairment of $1.0
million on a preferred stock investment. The $1.0 million impairment recognition
was the full amount of the investment and was necessitated by bankruptcy
proceedings of the underlying financial services company. The
other-than-temporary impairment of $7.4 million, in aggregate, 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 $554,000 and $2.3 million for
the three and nine months ended September 30, 2008, respectively, in comparison
to $1.1 million and $2.8 million for the comparable periods in 2007, and
reflects 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 $737,000 and $2.8 million for the three and nine
months ended September 30, 2008, respectively, in comparison to $1.4 million and
$4.5 million for the same periods in 2007, reflecting decreased portfolio
management fee income associated with a decline in 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 $1.8 million and $5.7 million for the three and nine
months ended September 30, 2008, respectively, in comparison to $1.8 million and
$5.3 million for the same periods in 2007, primarily reflecting increased
customer volumes.
We recorded net losses of $57,000 and net gains of $1.7 million on derivative
instruments for the three and nine months ended September 30, 2008,
respectively, in comparison to net gains of $603,000 and $261,000 for the same
periods in 2007. The net gain for the nine months ended September 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 $1.3 million and $15.6 million for the three and nine months
ended September 30, 2008, respectively, in comparison to $5.6 million and $16.7
million for the comparable periods in 2007. The decrease in 2008 is primarily
attributable to the following:
33
>> A net decrease in mortgage and other servicing rights of $5.3
million and $6.5 million for the three and nine months ended
September 30, 2008, compared to net decreases in mortgage and other
servicing rights of $1.1 million and $4.1 million for the comparable
periods in 2007. As further discussed under "--Effects of New
Accounting Standards," on January 1, 2008, we opted to 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;
>> Recoveries of certain loan principal balances that had been
previously charged off by the financial institutions prior to their
acquisition by First Banks of $186,000 and $1.7 million for the
three and nine months ended September 30, 2008, compared to $89,000
and $1.2 million for the same periods in 2007;
>> A gain of $1.8 million for the nine months ended September 30, 2008
recognized on the sale of various state tax credits in April 2008;
and
>> A gain recognized in March 2008 on the Visa, Inc., or Visa, initial
public offering of $743,000, representing the cash payment received
in exchange for a portion of our membership interest in Visa as a
result of Visa's initial public offering.
Noninterest Expense. Noninterest expense was $83.7 million and $251.8 million
for the three and nine months ended September 30, 2008, respectively, in
comparison to $84.8 million and $255.5 million for the comparable periods in
2007. Our efficiency ratio was 79.88% and 75.58% for the three and nine months
ended September 30, 2008, respectively, compared to 72.24% and 73.18% 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 nine months of 2008.
Salaries and employee benefits expense was $35.2 million and $112.9 million for
the three and nine months ended September 30, 2008, respectively, in comparison
to $43.1 million and $132.1 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 nine months of 2008. Our
total full-time equivalent employees (FTEs) decreased to approximately 2,302 at
September 30, 2008, from 2,453 at September 30, 2007 and 2,720 at March 31,
2007, representing decreases of approximately 6.2% and 15.4% from those
respective dates. We reduced our FTEs despite adding an aggregate of 26
additional branch offices through acquisitions in 2007 and an aggregate of 11 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 $15.3
million and $45.1 million for the three and nine months ended September 30,
2008, respectively, in comparison to $13.5 million and $38.5 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 $8.8 million and $27.2
million for the three and nine months ended September 30, 2008, respectively, in
comparison to $9.0 million and $27.5 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 $4.4 million and $11.7 million for
the three and nine months ended September 30, 2008, respectively, in comparison
to $2.5 million and $6.9 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 CFHI, as more fully
described in Note 13 to our consolidated financial statements, and Coast Bank of
Florida. We anticipate legal, examination and professional fees to remain at
higher than historical levels until economic conditions stabilize as a result of
higher legal and professional fees associated with foreclosures, collection
efforts and other real estate properties.
34
Amortization of intangible assets was $2.8 million and $8.3 million for the
three and nine months ended September 30, 2008, respectively, in comparison to
$3.1 million and $9.3 million for the same periods in 2007, primarily reflecting
a decrease in amortization expense on core deposit intangibles. As of the date
of this report, we are in the process of completing an assessment of the
carrying value of goodwill and other intangible assets. This assessment will be
completed during the fourth quarter of 2008.
Advertising and business development expense was $1.8 million and $5.2 million
for the three and nine months ended September 30, 2008, respectively, in
comparison to $1.6 million and $5.1 million for the same periods in 2007,
primarily reflecting a marketing campaign in the second and third quarters of
2008 associated with expanded deposit product and service offerings.
FDIC insurance expense was $1.5 million and $4.5 million for the three and nine
months ended September 30, 2008, respectively, in comparison to $233,000 and
$749,000 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. 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, as more fully described under
"--Recent Market Conditions."
Charitable contributions expense was $68,000 and $472,000 for the three and nine
months ended September 30, 2008, respectively, in comparison to $1.7 million and
$5.0 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 $12.4 million and $31.6 million for the three and nine months
ended September 30, 2008, respectively, in comparison to $8.4 million and $25.2
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 is primarily attributable to the following:
>> Other real estate write-downs and expenses of $1.9 million and $3.8
million for the three and nine months ended September 30, 2008,
respectively, compared to $235,000 and $586,000 for the same 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 $44.3 million at September 30, 2008, from $11.2 million
at December 31, 2007;
>> A litigation settlement of $750,000 during the third quarter of 2008
pertaining to a matter initially brought against CFHI prior to our
acquisition, as further described in Note 13 to our consolidated
financial statements;
>> Overdraft losses, net of recoveries, of $1.3 million and $1.7
million for the three and nine months ended September 30, 2008,
respectively, compared to $436,000 and $1.0 million for the same
periods in 2007, primarily resulting from our recently implemented
overdraft privilege program; and
>> An increase in expenses associated with continued growth and
expansion of our banking franchise, primarily associated with
expansionary activities in 2006 and 2007.
Provision for Income Taxes. The provision (benefit) for income taxes reflects an
income tax benefit of $52.8 million and $77.9 million for the three and nine
months ended September 30, 2008, respectively, compared to an income tax
provision of $6.5 million and $25.8 million for the comparable periods in 2007.
Our effective tax rate was 67.8% and 52.8% for the three and nine months ended
September 30, 2008, respectively, compared to 33.9% and 35.2% for the comparable
periods in 2007. The decrease in income taxes is primarily attributable to our
reduced level of earnings and a partial reversal of our deferred tax asset
valuation allowance of $22.8 million, which resulted in an increase in the
benefit for income taxes of $21.6 million during the third quarter of 2008.
Excluding the partial reversal of our deferred tax asset valuation allowance
associated with the tax law change that was enacted on September 30, 2008 as
further described in Note 11 to our consolidated financial statements, our
effective tax rate was 40.1% and 38.2% for the three and nine months ended
September 30, 2008, respectively.
35
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 September 30, 2008 and December 31, 2007 are
summarized as follows:
September 30, 2008 December 31, 2007
---------------------- -----------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges - loans ........................... $400,000 442 400,000 5,271
Cash flow hedges - subordinated debentures ......... 125,000 -- -- --
Interest rate floor agreements ..................... -- -- 300,000 1,699
Interest rate cap agreements ....................... 400,000 -- 400,000 50
Interest rate lock commitments ..................... 8,300 92 3,000 23
Forward commitments to sell
mortgage-backed securities ....................... 23,000 82 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 nine months ended September 30, 2008, we realized net interest
income of $2.9 million and $7.6 million, respectively, on our derivative
financial instruments, whereas for the three and nine months ended September 30,
2007, we realized net interest expense of $652,000 and $3.5 million,
respectively, on our derivative financial instruments. The increase in net
interest income is attributable to the decline in the prime lending rate. We
recorded net losses of $57,000 and net gains of $1.7 million on derivative
instruments for the three and nine months ended September 30, 2008,
respectively, in comparison to net gains of $603,000 and $261,000 for the three
and nine months ended September 30, 2007, respectively. These net gains and
losses are included in noninterest income in our consolidated statements of
operations. The net 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 late 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 nine months ended
September 30, 2008 as compared to the comparable periods 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:
>> 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 interest on a quarterly basis
and receive interest on a semi-annual basis. The interest rate swap
agreement matured on July 31, 2007.
>> In September 2006, we entered into a $200.0 million notional amount
three-year interest rate swap agreement and a $200.0 million
notional amount four-year interest rate swap agreement. The
underlying hedged assets are certain variable rate loans within our
commercial loan portfolio. The swap agreements provide for us to
receive a fixed rate of interest and pay an adjustable rate of
interest equivalent to the weighted average prime lending rate minus
2.86%. The terms of the swap agreements provide for us to pay
interest on a quarterly basis and receive interest on a semi-annual
basis.
The amount receivable by us under these swap agreements was $752,000 and $6.0
million at September 30, 2008 and December 31, 2007, respectively, and the
amount payable by us under these swap agreements was $309,000 and $683,000 at
September 30, 2008 and December 31, 2007, respectively.
36
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 September 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)
September 30, 2008:
September 18, 2009...................... $ 200,000 2.14% 5.20% $ 4,730
September 20, 2010...................... 200,000 2.14 5.20 9,509
--------- --------
$ 400,000 2.14 5.20 $ 14,239
========= ===== ===== ========
December 31, 2007:
September 18, 2009...................... $ 200,000 4.39% 5.20% $ 4,585
September 20, 2010...................... 200,000 4.39 5.20 7,331
--------- --------
$ 400,000 4.39 5.20 $ 11,916
========= ===== ===== ========
Cash Flow Hedges - Subordinated Debentures. We entered into the following
interest rate swap agreements, which have been designated as cash flow hedges,
with the objective of stabilizing our long-term cost of capital and cash flow,
and accordingly, net interest income on our subordinated debentures to the
respective call dates of certain subordinated debentures:
>> In March 2008, we entered into the following four interest rate swap
agreements totaling $125.0 million notional amount, in aggregate, to
effectively convert the interest rate on $125.0 million of our
subordinated debentures from a variable rate to a blended fixed rate
of interest of approximately 4.90%: (a) $25.0 million notional
amount with a maturity date of July 7, 2011; (b) $50.0 million
notional amount with a maturity date of December 15, 2011; (c) $25.0
million notional amount with a maturity date of March 30, 2012; and
(d) $25.0 million notional amount with a maturity date of December
15, 2012. These swap agreements provide for us to receive an
adjustable rate of interest equivalent to the three-month London
Interbank Offered Rate, or LIBOR, plus 1.65%, 1.85%, 1.61% and
2.25%, respectively, and pay a fixed rate of interest. The terms of
the swap agreements provide for us to pay and receive interest on a
quarterly basis.
The amount receivable by us under these swap agreements was $429,000 at
September 30, 2008, and the amount payable by us under these swap agreements was
$437,000 at September 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 September 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% 4.44% $ 586
December 15, 2011........................... 50,000 4.91 4.67 951
March 30, 2012.............................. 25,000 4.71 5.37 570
December 15, 2012........................... 25,000 5.57 5.07 531
--------- --------
$ 125,000 4.90 4.84 $ 2,638
========= ===== ===== ========
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.
37
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 zero and $50,000 at September 30, 2008 and
December 31, 2007, respectively.
Pledged Collateral. At September 30, 2008 and December 31, 2007, we had accepted
cash of $15.9 million and $21.4 million, respectively, as collateral in
connection with our interest rate swap agreements on loans. At September 30,
2008, we had pledged cash of $1.0 million as collateral in connection with our
interest rate swap agreements on our subordinated debentures.
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 December 2008. The
fair value of the interest rate lock commitments, which is included in other
assets in our consolidated balance sheets, was $92,000 and $23,000 at September
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 $82,000 and $40,000 at September 30,
2008 and December 31, 2007, respectively.
38
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 93.3% and 93.2% of our total
interest income for the three and nine months ended September 30, 2008,
respectively, in comparison to 89.9% and 89.4% for the comparable periods in
2007. Loans, net of unearned discount, decreased to $8.88 billion, or 81.9% of
our assets, at September 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 September 30, 2008 and December 31, 2007:
September 30, December 31,
2008 2007
---- ----
(Restated)
(dollars expressed in thousands)
Commercial, financial and agricultural............................ $ 2,594,643 2,382,067
Real estate construction and development.......................... 1,810,619 2,141,234
Real estate mortgage:
One-to-four family residential................................ 1,589,237 1,602,575
Multi-family residential...................................... 216,077 177,246
Commercial real estate........................................ 2,536,897 2,431,464
Consumer and installment, net of unearned discount................ 86,179 85,519
Loans held for sale............................................... 41,519 66,079
----------- ----------
Loans, net of unearned discount............................... $ 8,875,171 8,886,184
=========== ==========
The overall decrease in loans, net of unearned discount, during the first nine
months of 2008 is primarily attributable to the following:
>> A decrease of $330.6 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;
>> A decrease of $13.3 million in our one-to-four family residential
portfolio primarily attributable to a decrease in our loans secured
by first liens of $71.9 million from $1.25 billion at December 31,
2007 to $1.18 billion at September 30, 2008, primarily driven by net
loan charge-offs of $38.1 million, partially offset by an increase
in our home equity portfolio of $58.6 million from $348.9 million at
December 31, 2007 to $407.5 million at September 30, 2008 primarily
attributable to internal loan production growth; and
>> A decrease of $24.6 million in our loans held for sale primarily
attributable to lower production volume in our mortgage division;
partially offset by
>> An increase of $212.6 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
>> Increases of $105.4 million and $38.8 million, respectively, in our
commercial real estate and multi-family residential portfolios
primarily attributable to internal loan production growth.
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 primarily redeploying the proceeds from the net decrease in construction and
land development loans into commercial, financial and agricultural loans.
An Executive Loan Committee (ELC) was formed in July 2008 and weekly meetings
began on August 4, 2008. The ELC has been formed to provide expanded executive
focus on the appropriate direction and pricing of the loan portfolio. All new
loans over $5.0 million and all construction loans over $500,000 currently
require advance approval by the ELC. In addition, all loans and renewals over
$2.0 million are subsequently reviewed by the ELC. The ELC consists of the First
Banks President and Chief Executive Officer, the First Bank President and Chief
Executive Officer, the Chief Credit Officer, and the Midwest Senior Credit
Officer. The ELC meets weekly and also serves as the primary internal body
responsible for review of portfolio trends, concentrations, and loan segment
risks.
39
Nonperforming assets include nonaccrual loans, restructured loans and other real
estate. The following table presents the categories of nonperforming assets and
certain ratios as of September 30, 2008 and December 31, 2007:
September 30, December 31,
2008 2007
---- ----
(Restated)
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual ............................................. $ 8,748 5,916
Real estate construction and development:
Nonaccrual ............................................. 280,821 151,812
Real estate mortgage:
One-to-four family residential:
Nonaccrual ......................................... 77,254 32,931
Restructured ....................................... 24,894 7
Multi-family residential:
Nonaccrual ......................................... 152 --
Commercial real estate:
Nonaccrual ......................................... 17,934 11,294
Consumer and installment:
Nonaccrual ............................................. 278 263
---------- ----------
Total nonperforming loans ........................ 410,081 202,223
Other real estate ........................................... 44,332 11,225
---------- ----------
Total nonperforming assets ....................... $ 454,413 213,448
========== ==========
Loans, net of unearned discount ............................. $8,875,171 8,886,184
========== ==========
Loans past due 90 days or more and still accruing ........... $ 26,953 26,753
========== ==========
Ratio of:
Allowance for loan losses to loans ........................ 2.38% 1.89%
Nonperforming loans to loans .............................. 4.62 2.28
Allowance for loan losses to nonperforming loans .. ....... 51.46 83.27
Nonperforming assets to loans and other real estate ....... 5.09 2.40
========== ==========
Nonperforming loans, consisting of loans on nonaccrual status and restructured
loans, were $410.1 million at September 30, 2008, compared to $366.9 million at
June 30, 2008, $236.8 million at March 31, 2008 and $202.2 million at December
31, 2007. Nonperforming loans were 4.62% of loans, net of unearned discount, at
September 30, 2008, compared to 4.06%, 2.63% and 2.28% of loans, net of unearned
discount, at June 30, 2008, March 31, 2008 and December 31, 2007, respectively.
Other real estate owned was $44.3 million, $20.0 million, $13.2 million and
$11.2 million at September 30, 2008, June 30, 2008, March 31, 2008 and December
31, 2007, respectively. Nonperforming assets, consisting of nonperforming loans
and other real estate owned, were $454.4 million at September 30, 2008, compared
to $387.0 million, $250.0 million, and $213.4 million at June 30, 2008, March
31, 2008 and December 31, 2007, respectively. Loans past due 90 days or more and
still accruing interest were $27.0 million at September 30, 2008, compared to
$14.5 million, $23.6 million and $26.8 million at June 30, 2008, March 31, 2008
and December 31, 2007, respectively.
Nonperforming loans at September 30, 2008 increased $207.9 million, or 102.8%,
from nonperforming loans at December 31, 2007. The following table summarizes
the composition of our nonperforming loans as of September 30, 2008 and December
31, 2007:
September 30, December 31,
2008 2007
---- ----
(dollars expressed in thousands)
Northern California real estate ................................... $ 112,636 99,234
Mortgage banking division ......................................... 52,565 20,347
Florida ........................................................... 76,521 45,098
Southern California real estate ................................... 45,709 --
Chicago real estate ............................................... 35,821 --
Metro St. Louis, Missouri real estate ............................. 29,536 5,000
Texas real estate ................................................. 20,350 6,533
Other ............................................................. 36,943 26,011
---------- ----------
Total nonperforming loans .................................... $ 410,081 202,223
========== ==========
40
We attribute the increase in our nonperforming loans to the following:
>> An increase in one-to-four family residential nonaccrual loans of
$44.3 million, primarily due to increases in our mortgage banking
division and Florida region. One-to-four family residential
nonaccrual loans in our mortgage banking division increased $14.5
million, from $20.3 million at December 31, 2007 to $34.8 million at
September 30, 2008. One-to-four family residential nonaccrual loans
in our Florida region increased $20.8 million, from $7.4 million at
December 31, 2007 to $28.1 million at September 30, 2008. 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 in all of our markets generally and in particular, Florida
and California;
>> An increase in one-to-four family restructured loans during the
first nine months of 2008 of $24.9 million. At September 30, 2008,
restructured loans in our mortgage banking division and Florida
region were $17.8 million and $7.1 million, respectively. Throughout
the first nine months of 2008, certain one-to-four family
residential mortgage loans in our Florida region and mortgage
banking division, primarily located in California, have been
restructured, whereby the contractual interest rate was reduced over
a certain time period due to concentrated efforts to work with
borrowers. At the time of the restructuring, the individual loans
were in full compliance with the terms of the original loan
contracts; and
>> An increase in real estate construction and development nonaccrual
loans of $129.0 million. Real estate construction and development
nonaccrual loans in Northern California increased $13.4 million from
$99.2 million at December 31, 2007 to $112.6 million at September
30, 2008. Real estate construction and development nonaccrual loans
also increased throughout our other regions, including Southern
California, Chicago and Metro St. Louis, which experienced increases
of $45.7 million, $35.8 million, and $24.5 million, respectively,
during the nine months ended September 30, 2008. 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 California and Florida,
to continue, which will likely continue to impact the overall level of our
nonperforming loans, loan charge-offs and provision for loan losses. As of
September 30, 2008 and December 31, 2007, $206.7 million and $157.1 million,
respectively, of loans not included in the nonperforming assets table above were
identified by management as having potential credit problems, or problem loans.
The increase in the level of problem loans during 2008 primarily reflects weak
economic conditions in the nationwide housing markets and significant declines
in real estate values in all of our markets generally and, in particular,
Florida and California.
The outstanding balance and carrying amount of impaired loans acquired in
acquisitions was $44.0 million and $22.2 million at September 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 nine months ended September 30, 2008 were as follows:
Three Months Nine Months
Ended Ended
September 30, 2008 September 30, 2008
------------------ ------------------
(dollars expressed in thousands)
Balance, beginning of period............................. $ 30,383 46,003
Transfers to other real estate............................ (2,543) (7,749)
Loans charged-off......................................... (1,892) (6,952)
Payments and settlements.................................. (3,760) (9,114)
-------- -------
Balance, end of period.................................... $ 22,188 22,188
======== =======
There was no allowance for loan losses related to these loans at September 30,
2008 and December 31, 2007. As the loans were classified as nonaccrual loans,
there was no accretable yield related to these loans at September 30, 2008 and
December 31, 2007.
41
Changes in the allowance for loan losses for the three and nine months ended
September 30, 2008 and 2007 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2008 2007 2008 2007
---- ---- ---- ----
(Restated) (Restated)
(dollars expressed in thousands)
Balance, beginning of period ....................... $ 200,957 142,922 168,391 145,729
Acquired allowance for loan losses ................. -- -- -- 2,925
--------- --------- --------- ---------
200,957 142,922 168,391 148,654
--------- --------- --------- ---------
Loans charged-off .................................. (91,458) (19,074) (192,363) (35,269)
Recoveries of loans previously charged-off ......... 2,527 2,814 5,998 6,360
--------- --------- --------- ---------
Net loan charge-offs ............................. (88,931) (16,260) (186,365) (28,909)
--------- --------- --------- ---------
Provision for loan losses .......................... 99,000 13,503 229,000 20,420
--------- --------- --------- ---------
Balance, end of period ............................. $ 211,026 140,165 211,026 140,165
========= ========= ========= =========
We recorded net loan charge-offs of $88.9 million and $186.4 million for the
three and nine months ended September 30, 2008, respectively, compared to $16.3
million and $28.9 million for the comparable periods in 2007. Our annualized net
loan charge-offs as a percentage of average loans was 2.77% for the first nine
months of 2008, compared to 0.49% for the comparable period in 2007.
The following table summarizes the composition of our net loan charge-offs
(recoveries) for the three and nine months ended September 30, 2008 and 2007:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2008 2007 2008 2007
---- ---- ---- ----
(Restated) (Restated)
(dollars expressed in thousands)
Northern California real estate .................... $ 37,515 -- 94,791 2,500
Mortgage banking division .......................... 12,883 6,440 31,649 13,069
Florida ............................................ 10,641 -- 18,943 --
Southern California real estate .................... 8,992 -- 10,026 --
Chicago real estate ................................ 9,203 (191) 9,201 (358)
Metro St. Louis, Missouri real estate .............. 4,050 (2) 5,044 (15)
Texas real estate .................................. 370 1 3,592 77
Other .............................................. 5,277 10,012 13,119 13,636
--------- --------- --------- ---------
Net loan charge-offs ............................. $ 88,931 16,260 186,365 28,909
========= ========= ========= =========
Net loan charge-offs recorded for the three and nine months ended September 30,
2008 included $37.5 million and $94.8 million, respectively, 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 nine
months ended September 30, 2008 also include $12.9 million and $31.6 million,
respectively, of net loan charge-offs associated with our mortgage banking
division, compared to $6.4 million and $13.1 million for the comparable periods
in 2007, and $10.6 million and $18.9 million, respectively of net loan
charge-offs associated with our Florida region acquired in November 2007. We
continue to experience deterioration in our one-to-four family residential
portfolios as a result of weak economic conditions in the nationwide housing
markets and significant declines in real estate values in all of our markets
generally and, in particular, Florida and California.
Our allowance for loan losses was $211.0 million at September 30, 2008, $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 2.38% at September 30, 2008, 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 nine months ended September 30, 2008, which has
led to a provision for loan losses in excess of net loan charge-offs to reserve
for probable losses in the loan portfolio.
Our allowance for loan losses as a percentage of nonperforming loans was 51.46%,
54.77%, 78.20%, and 83.27% at September 30, 2008, June 30, 2008, March 31, 2008,
and December 31, 2007, respectively. The decrease in this ratio is primarily due
to $91.1 million of nonperforming loans in FB Holdings at September 30, 2008, as
further described in Note 5 to our consolidated financial statements. These
loans were contributed by First Bank to FB
42
Holdings at estimated fair value, and as such, currently have no related
allowance for loan losses allocation at September 30, 2008. Net loan charge-offs
associated with the loans contributed to FB Holdings were approximately $20.8
million and $82.7 million for the three and nine months ended September 30,
2008, respectively, of which $10.5 million and $67.8 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 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 $1.87 billion and $2.00 billion at September 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 September 30, 2008:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less............................. $ 410,771 167,187 577,958
Over three months through six months............. 243,774 200,000 443,774
Over six months through twelve months............ 425,164 100,000 525,164
Over twelve months............................... 201,582 120,727 322,309
----------- -------- ----------
Total....................................... $ 1,281,291 587,914 1,869,205
=========== ======== ==========
In addition to these sources of funds, First Bank has established a borrowing
relationship with the Federal Reserve Bank of St. Louis. This borrowing
relationship, which is secured by commercial loans, provides an additional
liquidity facility that may be utilized for contingency purposes. At September
30, 2008 and December 31, 2007, First Bank's borrowing capacity under the
agreement was approximately $1.57 billion and $523.3 million, respectively.
In addition, First Bank's borrowing capacity through its relationship with the
FHLB was approximately $764.3 million and $672.3 million at September 30, 2008
and December 31, 2007, respectively. We had FHLB advances outstanding of $300.7
million at September 30, 2008, compared to $857,000 at December 31, 2007. During
the first nine months of 2008, First Bank has entered into four $100.0 million
FHLB advances which mature in November 2008, January 2009, February 2009 and
July 2009. In September 2008, we prepaid the $100.0 million FHLB advance that
was scheduled to mature in November 2008 and incurred a prepayment penalty of
$3,000, which was recorded as interest expense on other borrowings.
43
First Banks, Inc. also has a borrowing relationship with its affiliated entity,
Investors of America, LP, which provides for a $30.0 million secured revolving
line of credit to be utilized for general working capital needs and capital
investments in subsidiaries, as further described in Note 5 and Note 9 to our
accompanying consolidated financial statements. First Banks, Inc. did not have
any balances outstanding on this borrowing arrangement at September 30, 2008. In
addition, the Company is currently required to obtain prior approval from the
FRB prior to incurring additional debt obligations, including advancing funds
under this borrowing arrangement, in accordance with the provisions of the
informal agreements further described under "--Regulatory Matters."
Our loan-to-deposit ratio increased to 99.8% at September 30, 2008 from 97.1% at
December 31, 2007. As a result of this increase, we implemented certain
strategies during the first nine months of 2008 to improve our liquidity
position, including the additional FHLB borrowings, as discussed above,
increasing the availability of our borrowing relationship with both the Federal
Reserve Bank of St. Louis and the FHLB through additional collateral
availability and receiving deposits placed into CDARS on a reciprocal basis,
thereby increasing our time deposits. 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 September 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 ....................... $ 16,806 27,150 18,639 47,800 110,395
Certificates of deposit (2) ............ 3,081,948 657,942 42,779 1,664 3,784,333
Other borrowings (2) ................... 467,187 727 120,000 -- 587,914
Subordinated debentures (2) ............ -- -- -- 353,809 353,809
Other contractual obligations .......... 2,014 (3) 381 367 25 2,787
---------- ---------- ---------- ---------- ----------
Total ............................. $3,567,955 686,200 181,785 403,298 4,839,238
========== ========== ========== ========== ==========
----------
(1) Amounts exclude FIN 48 unrecognized tax liabilities of $13.1 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 September 30, 2008.
(2) Amounts exclude the related interest expense accrued on these
obligations as of September 30, 2008. As further described under
"--Regulatory Matters," we currently may not make any distributions
of interest or other sums on our subordinated debentures and related
underlying trust preferred securities without the prior approval of
the FRB.
(3) Includes an accrued expense related to our remaining estimated
indemnification obligation, as a member bank, to share certain
litigation costs of Visa.
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
44
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. The application of SFAS No. 157 in
situations where the market for a financial asset is not active was clarified by
the issuance of FASB Staff Position, or FSP, No. SFAS 157-3 - Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active in
October 2008. FSP No. SFAS 157-3 became effective as of September 30, 2008 and
did not significantly impact the methods by which we determine the fair values
of our financial assets.
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 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
45
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.
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 September 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 nine months ended September 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."
Furthermore, the Federal
46
Reserve reduced interest rates by an additional 100 basis points during October
2008, which will further impact the level of our future net interest income.
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 September 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:
>> We did not maintain appropriate oversight and supervision of certain
operational and accounting personnel in the mortgage banking
division;
>> We did not maintain a sufficient complement of personnel in our
mortgage banking division with an appropriate level of accounting
knowledge, experience and training necessary to properly account for
certain complex transactions associated with the operations of the
mortgage banking division; and
>> We did not maintain effective controls over the recording of journal
entries necessary to properly account for certain complex
transactions associated with the operations of the mortgage banking
division. Specifically, effective controls were not designed and in
place to provide reasonable assurance that journal entries were
prepared with sufficient supporting documentation and reviewed and
approved to provide reasonable assurance of the completeness and
accuracy of the journal entries recorded.
As a result of these material weaknesses, management concluded that the
Company's disclosure controls and procedures were not effective as of December
31, 2007.
As of the date of this report, we have completed remediation efforts and have
implemented additional measures to address the aforementioned material
weaknesses, including the following:
>> Hired a new President of the Company's mortgage banking division and
established a direct reporting line to the Executive Vice President
and Director of Retail Banking;
>> Changed the oversight and supervision of the operational and
accounting personnel in the mortgage banking division through the
establishment of a direct reporting line to the Company's President
and Chief Executive Officer and Chief Financial Officer;
>> Centralized and realigned certain areas of responsibility and
functions previously handled within the mortgage banking division;
>> Instituted increased segregation of duties controls within the
Company's mortgage banking division; and
>> Examined the methods in which internal controls were circumvented
and developed measures to strengthen such controls; and
>> Implemented additional monitoring controls, including certain
analytical procedures and additional oversight of the mortgage
banking division.
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. In addition, certain completed
remediation efforts are subject to testing for operating effectiveness and
further evaluation by our Internal Audit and Risk Management Departments, and by
our Independent Registered Public Accounting Firm.
47
Our President and Chief Executive Officer and our Chief Financial Officer have
evaluated the effectiveness of our "disclosure controls and procedures" (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, or the Exchange Act), as of the end of the period covered by this report.
Based on such evaluation, our President and Chief Executive Officer and our
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are not effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act as a result of the material weaknesses outlined above. Under the
direction of our President and Chief Executive Officer and our Chief Financial
Officer, we are further evaluating our disclosure controls and procedures and
internal control over financial reporting, including modifications to controls
currently planned and being implemented, with the intent to fully remediate the
material weaknesses in our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
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.
Subsequent to the disposition of certain preliminary motions filed by plaintiffs
and defendants, on April 2, 2008, the Lead Plaintiffs and an additional
plaintiff, St. Denis J. Villere & Co., LLC, filed a second consolidated amended
class action complaint (the "Amended Complaint"). The Amended complaint names as
defendants (i) certain former officers and members of CHFI's board of directors,
(ii) the underwriters of CFHI's October 5, 2005 public offering of common stock,
and (iii) 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 also alleges 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 or about September 26, 2008, CFHI and the plaintiffs reached an
agreement-in-principle for the settlement of the Securities Actions. Pursuant to
the agreement-in-principle, CFHI and its insurer will pay an amount in
settlement of the claims, and CFHI, the former officer and director defendants,
and the underwriter defendants will be released and dismissed with prejudice
from the action. Under the proposed terms, the Company's allocation of the
settlement amount is $750,000, and was recorded as other expense in the
consolidated statement of operations for the three months ended September 30,
2008. CFHI and the plaintiffs are in the process of preparing definitive
documentation formalizing the settlement and defining its terms. Among other
terms and conditions, the settlement is subject to approval by the Court and
will not be consummated if the Court fails to grant approval. The timing of any
final settlement cannot be determined at this time as it remains subject to
final negotiations and approval by the Court.
As further described in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the Company and First Bank have entered
into informal agreements with the Federal Reserve Bank of St. Louis and the
Missouri Division of Finance.
ITEM 1A - RISK FACTORS
In addition to the risk factors described in Amendment No. 1 to our Annual
Report on Form 10-K for the year ended December 31, 2007 and Quarterly Report on
Form 10-Q for the period ended March 31, 2008, we have identified four
additional risk factors, described below, that readers of this Quarterly Report
on Form 10-Q should consider in conjunction with the other information included
in this Quarterly Report on Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations and our consolidated
financial statements and the related notes thereto.
48
There Can Be No Assurance That The Recently Enacted Emergency Economic
Stabilization Act of 2008 Will Help Stabilize The U.S. Financial System. On
October 3, 2008, President Bush signed into law the EESA. The Treasury and
banking regulators are implementing a number of programs under this legislation
to address capital and liquidity issues in the banking system. There can be no
assurance, however, as to the actual impact that the EESA will have on the
financial markets, including the extreme levels of volatility and limited credit
availability currently being experienced. The failure of the EESA to help
stabilize the financial markets and a continuation or worsening of current
financial market conditions could materially and adversely affect our business,
financial condition, results of operations and our access to credit and capital.
The Corporation May Be Adversely Affected By The Soundness Of Other Financial
Institutions. Financial services institutions are interrelated as a result of
trading, clearing, counterparty, or other relationships. We have exposure to
many different industries and counterparties, and routinely execute transactions
with counterparties in the financial services industry, including commercial
banks, brokers and dealers, investment banks, and other institutional clients.
Many of these transactions expose us to credit risk in the event of a default by
a counterparty or client. In addition, our credit risk may be exacerbated when
the collateral held by us cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the credit or derivative exposure due
to us. Any such losses could have a material adverse affect on our financial
condition and results of operations.
Current Levels of Market Volatility Are Unprecedented. The capital and credit
markets have been experiencing volatility and disruption for more than 12
months. In recent weeks, the volatility and disruption has reached unprecedented
levels. If current levels of market disruption and volatility continue or
worsen, there can be no assurance that we will not experience an adverse effect,
which may be material, on our ability to access capital and on our business,
financial condition and results of operations.
Current Market Developments May Adversely Affect Our Industry, Business And
Results Of Operations. Dramatic declines in the housing market during the prior
year, with falling home prices and increasing foreclosures and unemployment,
have resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities and major commercial and
investment banks. These write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative securities have caused
many financial institutions to seek additional capital, to merge with larger and
stronger institutions and, in some cases, to fail. Reflecting concern about the
stability of the financial markets generally and the strength of counterparties,
many lenders and institutional investors have reduced, and in some cases, ceased
to provide funding to borrowers including other financial institutions. The
resulting lack of available credit, lack of confidence in the financial sector,
increased volatility in the financial markets and reduced business activity
could materially and adversely affect our business, financial condition and
results of operations.
The Company and First Bank have entered into informal agreements with the
Federal Reserve Bank of St. Louis and the Missouri Division of Finance. As
further described in Management's Discussion and Analysis of Financial Condition
and Results of Operations, the Company and First Bank have entered into informal
agreements with the Federal Reserve Bank of St. Louis and the Missouri Division
of Finance (the "Regulatory Agreements"). Although the Company cannot predict
what the impact of not complying with the Regulatory Agreements would be,
failure to comply could have a material adverse effect on the Company's
financial condition, results of operations and cash flows. Furthermore, under
the Regulatory Agreements, the Company and First Bank must receive approval from
the relevant agency prior to paying any dividends on its capital stock or making
any interest payments on the Company's outstanding subordinated debentures.
Although the Company has received approval to make its next regular dividend and
interest payments, our ability to make subsequent payments depends on the prior
approval of the appropriate regulatory agency.
ITEM 6 - EXHIBITS
The exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit Number Description
-------------- -----------
31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Executive Officer - filed herewith.
31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief
Financial Officer - filed herewith.
32.1 Section 1350 Certifications of Chief Executive
Officer - filed herewith.
32.2 Section 1350 Certifications of Chief Financial
Officer - filed herewith.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 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)
50