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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File No. 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.
Yes X No
--------- ---------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------- ---------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Shares Outstanding
Class at July 31, 2004
----- ------------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS............................................................... 1
CONSOLIDATED STATEMENTS OF INCOME......................................................... 2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME.............................................................. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 32
ITEM 4. CONTROLS AND PROCEDURES................................................................... 33
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 34
SIGNATURES................................................................................................ 35
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
June 30, December 31,
2004 2003
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks.............................................................. $ 166,376 179,802
Short-term investments............................................................... 41,339 33,735
---------- ---------
Total cash and cash equivalents................................................. 207,715 213,537
---------- ---------
Investment securities:
Available for sale................................................................... 1,234,275 1,038,787
Held to maturity (fair value of $27,282 and $11,341, respectively)................... 27,310 10,927
---------- ---------
Total investment securities..................................................... 1,261,585 1,049,714
---------- ---------
Loans:
Commercial, financial and agricultural............................................... 1,391,668 1,407,626
Real estate construction and development............................................. 1,183,414 1,063,889
Real estate mortgage................................................................. 2,605,890 2,582,264
Lease financing...................................................................... 9,585 67,282
Consumer and installment............................................................. 55,273 71,652
Loans held for sale.................................................................. 164,928 145,746
---------- ---------
Total loans..................................................................... 5,410,758 5,338,459
Unearned discount.................................................................... (11,375) (10,384)
Allowance for loan losses............................................................ (120,966) (116,451)
---------- ---------
Net loans....................................................................... 5,278,417 5,211,624
---------- ---------
Derivative instruments.................................................................... 13,356 49,291
Bank premises and equipment, net of accumulated depreciation and amortization............. 130,365 136,739
Goodwill.................................................................................. 145,255 145,548
Bank-owned life insurance................................................................. 99,870 97,521
Deferred income taxes..................................................................... 105,970 102,844
Other assets.............................................................................. 81,543 100,122
---------- ---------
Total assets.................................................................... $7,324,076 7,106,940
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand........................................................... $1,059,045 1,034,367
Interest-bearing demand ............................................................. 815,189 843,001
Savings.............................................................................. 2,146,332 2,128,683
Time deposits of $100 or more........................................................ 475,533 436,439
Other time deposits.................................................................. 1,459,828 1,519,125
---------- ---------
Total deposits.................................................................. 5,955,927 5,961,615
Other borrowings.......................................................................... 532,548 273,479
Note payable.............................................................................. -- 17,000
Subordinated debentures................................................................... 206,795 209,320
Deferred income taxes..................................................................... 24,613 41,683
Accrued expenses and other liabilities.................................................... 48,245 54,028
---------- ---------
Total liabilities............................................................... 6,768,128 6,557,125
---------- ---------
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................................................................ 5,910 5,910
Retained earnings......................................................................... 539,658 495,714
Accumulated other comprehensive income (loss)............................................. (8,598) 29,213
---------- ---------
Total stockholders' equity...................................................... 555,948 549,815
---------- ---------
Total liabilities and stockholders' equity...................................... $7,324,076 7,106,940
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Interest and fees on loans........................................... $ 83,755 89,680 167,975 180,292
Investment securities................................................ 12,693 8,489 24,314 17,249
Short-term investments............................................... 137 312 423 754
--------- -------- -------- --------
Total interest income........................................... 96,585 98,481 192,712 198,295
--------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................ 824 1,478 1,791 3,151
Savings............................................................ 4,593 5,785 9,370 12,571
Time deposits of $100 or more...................................... 3,039 3,336 5,995 7,021
Other time deposits................................................ 8,173 11,088 16,660 23,282
Other borrowings..................................................... 757 519 1,401 1,121
Note payable......................................................... 64 50 169 186
Subordinated debentures.............................................. 3,529 5,212 7,067 10,787
--------- -------- -------- --------
Total interest expense.......................................... 20,979 27,468 42,453 58,119
--------- -------- -------- --------
Net interest income............................................. 75,606 71,013 150,259 140,176
Provision for loan losses................................................. 3,000 10,000 15,750 21,000
--------- -------- -------- --------
Net interest income after provision for loan losses............. 72,606 61,013 134,509 119,176
--------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees........ 9,792 9,005 18,741 17,649
Gain on mortgage loans sold and held for sale........................ 3,961 3,552 8,190 8,132
Net gain on sales of available-for-sale investment securities........ -- 307 -- 6,566
Gain on sales of branches, net of expenses........................... 630 -- 1,020 --
Bank-owned life insurance investment income.......................... 1,276 1,433 2,619 2,704
Other................................................................ 4,445 4,628 10,093 9,421
--------- -------- -------- --------
Total noninterest income........................................ 20,104 18,925 40,663 44,472
--------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits....................................... 28,203 24,994 55,889 48,255
Occupancy, net of rental income...................................... 4,433 5,549 9,070 10,483
Furniture and equipment.............................................. 4,290 4,535 8,703 9,104
Postage, printing and supplies....................................... 1,221 1,292 2,543 2,598
Information technology fees.......................................... 7,992 8,409 15,988 16,442
Legal, examination and professional fees............................. 1,688 2,165 3,251 3,771
Amortization of intangibles associated with the
purchase of subsidiaries.......................................... 658 658 1,316 1,190
Communications....................................................... 399 668 864 1,273
Advertising and business development................................. 1,324 925 2,605 2,234
Other................................................................ 5,197 8,350 7,778 15,782
--------- -------- -------- --------
Total noninterest expense....................................... 55,405 57,545 108,007 111,132
--------- -------- -------- --------
Income before provision for income taxes........................ 37,305 22,393 67,165 52,516
Provision for income taxes................................................ 11,302 7,693 22,893 18,785
--------- -------- -------- --------
Net income...................................................... 26,003 14,700 44,272 33,731
Preferred stock dividends................................................. 132 132 328 328
--------- -------- -------- --------
Net income available to common stockholders..................... $ 25,871 14,568 43,944 33,403
========= ======== ======== ========
Basic earnings per common share........................................... $1,093.42 615.70 1,857.23 1,411.74
========= ======== ======== ========
Diluted earnings per common share......................................... $1,074.06 606.04 1,827.13 1,390.06
========= ======== ======== ========
Weighted average common stock outstanding................................. 23,661 23,661 23,661 23,661
========= ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Six Months Ended June 30, 2004 and 2003 and Six Months Ended December 31, 2003
(dollars expressed in thousands, except per share data)
Accu-
Adjustable Rate mulated
Preferred Stock Other
--------------- Compre- Total
Class A Additional Compre- hensive Stock-
Conver- Common Paid-In hensive Retained Income holders'
tible Class B Stock Capital Income Earnings (Loss) Equity
----- ------- ----- ------- ------- -------- ------ ------
Consolidated balances, December 31, 2002......... $12,822 241 5,915 5,910 433,689 60,464 519,041
Six months ended June 30, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 33,731 33,731 -- 33,731
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (6,288) -- (6,288) (6,288)
Derivative instruments:
Current period transactions............ -- -- -- -- (7,639) -- (7,639) (7,639)
-------
Comprehensive income....................... 19,804
=======
Class A preferred stock dividends,
$0.50 per share............................ -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share............................ -- -- -- -- (7) -- (7)
------- ----- ----- ----- ------- ------- -------
Consolidated balances, June 30, 2003............. 12,822 241 5,915 5,910 467,092 46,537 538,517
Six months ended December 31, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 29,080 29,080 -- 29,080
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (3,698) -- (3,698) (3,698)
Derivative instruments:
Current period transactions............ -- -- -- -- (13,626) -- (13,626) (13,626)
-------
Comprehensive income....................... 11,756
=======
Class A preferred stock dividends,
$0.70 per share............................ -- -- -- -- (448) -- (448)
Class B preferred stock dividends,
$0.07 per share............................ -- -- -- -- (10) -- (10)
------- ----- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2003......... 12,822 241 5,915 5,910 495,714 29,213 549,815
Six months ended June 30, 2004:
Comprehensive income:
Net income................................. -- -- -- -- 44,272 44,272 -- 44,272
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (19,116) -- (19,116) (19,116)
Derivative instruments:
Current period transactions............ -- -- -- -- (18,695) -- (18,695) (18,695)
-------
Comprehensive income....................... 6,461
=======
Class A preferred stock dividends,
$0.50 per share............................ -- -- -- -- (321) -- (321)
Class B preferred stock dividends,
$0.04 per share............................ -- -- -- -- (7) -- (7)
------- ----- ----- ----- ------- ------- -------
Consolidated balances, June 30, 2004............. $12,822 241 5,915 5,910 539,658 (8,598) 555,948
======= ===== ===== ===== ======= ======= =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, December 31,
----------------- ---------------
2004 2003 2004 2003 2003
---- ---- ---- ---- ----
Unrealized losses on investment securities arising
during the period.................... ......................... $(24,607) (430) (19,116) (2,020) (2,271)
Less reclassification adjustment for gains included
in net income.................................................. -- 200 -- 4,268 1,427
-------- ---- ------- ------ ------
Unrealized losses on investment securities........................ $(24,607) (630) (19,116) (6,288) (3,698)
======== ==== ======= ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Six Months Ended
June 30,
-----------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 44,272 33,731
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of bank premises and equipment..................... 9,451 9,713
Amortization, net of accretion................................................... 8,708 11,706
Originations and purchases of loans held for sale................................ (588,123) (1,190,559)
Proceeds from sales of loans held for sale....................................... 461,514 1,112,660
Provision for loan losses........................................................ 15,750 21,000
Provision for income taxes....................................................... 22,893 18,785
Payments of income taxes......................................................... (24,231) (18,804)
Decrease in accrued interest receivable.......................................... 595 2,820
Interest accrued on liabilities.................................................. 42,453 58,119
Payments of interest on liabilities.............................................. (42,699) (60,629)
Gain on mortgage loans sold and held for sale.................................... (8,190) (8,132)
Net gain on sales of available-for-sale investment securities.................... -- (6,566)
Gain on sales of branches, net of expenses....................................... (1,020) --
Other operating activities, net.................................................. (2,477) 4,950
--------- ----------
Net cash used in operating activities......................................... (61,104) (11,206)
--------- ----------
Cash flows from investing activities:
Cash received for acquired entities, net of cash
and cash equivalents paid........................................................ -- 14,870
Proceeds from sales of investment securities available for sale.................... -- 3,251
Maturities of investment securities available for sale............................. 250,867 721,971
Maturities of investment securities held to maturity............................... 2,126 3,024
Purchases of investment securities available for sale.............................. (429,267) (326,616)
Purchases of investment securities held to maturity................................ (18,523) (102)
Net (increase) decrease in loans................................................... (15,809) 21,830
Recoveries of loans previously charged-off......................................... 13,539 10,317
Purchases of bank premises and equipment........................................... (3,565) (1,858)
Other investing activities, net.................................................... 12,513 4,369
--------- ----------
Net cash (used in) provided by investing activities........................... (188,119) 451,056
--------- ----------
Cash flows from financing activities:
Increase (decrease) in demand and savings deposits................................. 23,751 (38,337)
Decrease in time deposits.......................................................... (2,738) (212,505)
Decrease in federal funds purchased................................................ -- (55,000)
Decrease in Federal Home Loan Bank advances........................................ -- (3,165)
Increase (decrease) in securities sold under agreements to repurchase.............. 259,069 (11,617)
Advances drawn on note payable..................................................... -- 34,500
Repayments of note payable......................................................... (17,000) (7,000)
Proceeds from issuance of subordinated debentures.................................. -- 70,932
Payments for redemptions of subordinated debentures................................ -- (136,341)
Cash paid for sales of branches, net of cash
and cash equivalents sold........................................................ (19,353) --
Payment of preferred stock dividends............................................... (328) (328)
--------- ----------
Net cash provided by (used in) financing activities........................... 243,401 (358,861)
--------- ----------
Net (decrease) increase in cash and cash equivalents.......................... (5,822) 80,989
Cash and cash equivalents, beginning of period.......................................... 213,537 203,251
--------- ----------
Cash and cash equivalents, end of period................................................ $ 207,715 284,240
========= ==========
Noncash investing and financing activities:
Loans transferred to other real estate............................................. $ 2,498 10,850
========= ==========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of First Banks, Inc. and
subsidiaries (First Banks or the Company) are unaudited and should be read in
conjunction with the consolidated financial statements contained in the 2003
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles and
conform to predominant practices within the banking industry. Management of
First Banks has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare the consolidated financial statements in conformity with
U.S. generally accepted accounting principles. Actual results could differ from
those estimates. In the opinion of management, all adjustments, consisting of
normal recurring accruals considered necessary for a fair presentation of the
results of operations for the interim periods presented herein, have been
included. Operating results for the three and six months ended June 30, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004.
The consolidated financial statements include the accounts of First
Banks, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications of 2003 amounts
have been made to conform to the 2004 presentation.
First Banks operates through its wholly owned subsidiary bank holding
company, The San Francisco Company (SFC), headquartered in San Francisco,
California, and SFC's wholly owned subsidiary bank, First Bank, headquartered in
St. Louis County, Missouri.
(2) ACQUISITIONS, INTEGRATION COSTS AND OTHER CORPORATE TRANSACTIONS
First Banks and Small Business Loan Source, Inc. (SBLS), headquartered
in Houston, Texas, entered into an Asset Purchase Agreement on March 26, 2004,
and subsequently entered into an Amended and Restated Asset Purchase Agreement
on July 27, 2004, that provides for First Bank to purchase substantially all of
the assets and assume certain liabilities of SBLS in exchange for cash and
certain payments contingent on future valuations. The transaction is expected to
be completed during the third quarter of 2004, subject to the approval of the
United States Small Business Administration (SBA) and the expiration of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
SBLS reported assets of approximately $49.5 million, including $30.4 million of
SBA loans, at June 30, 2004.
On April 9, 2004, First Banks and Continental Mortgage Corporation -
Delaware (CMC), entered into an Agreement and Plan of Reorganization that
provided for First Banks to acquire CMC and its wholly owned banking subsidiary,
Continental Community Bank and Trust Company (CCB). As further discussed in Note
11 to the Consolidated Financial Statements, First Banks completed its
acquisition of CMC and CCB on July 30, 2004.
First Banks accrues certain costs associated with its acquisitions as
of the respective consummation dates. Essentially all of these accrued costs
relate either to adjustments to the staffing levels of the acquired entities or
to the anticipated termination of information technology or item processing
contracts of the acquired entities prior to their stated contractual expiration
dates. The most significant costs incurred relate to salary continuation
agreements, or other similar agreements, of executive management and certain
other employees of the acquired entities that were in place prior to the
acquisition dates. These agreements provide for payments over various time
periods generally ranging from two to 15 years and are triggered as a result of
the change in control of the acquired entity. Other severance benefits for
employees that are terminated in conjunction with the integration of the
acquired entities into First Banks' existing operations are normally paid to the
recipients within 90 days of the applicable consummation date. The accrued
severance balance of $1.1 million identified in the following table is comprised
of contractual obligations under salary continuation agreements to nine
individuals with original terms ranging from three to 15 years and remaining
terms ranging from approximately six months to 12 years. As the obligation to
make payments under these agreements is accrued at the consummation date, such
payments do not have any impact on the consolidated statements of income. First
Banks also incurs costs associated with acquisitions that are expensed in the
consolidated statements of income. These costs relate principally to additional
costs incurred in conjunction with the data processing conversions of the
respective entities.
A summary of the cumulative acquisition and integration costs
attributable to the Company's acquisitions, which were accrued as of the
consummation dates of the respective acquisitions, is listed below. These
acquisition and integration costs are reflected in accrued and other liabilities
in the consolidated balance sheets.
Severance
---------
(dollars expressed in thousands)
Balance at December 31, 2003..................................................... $ 1,412
Six Months Ended June 30, 2004:
Payments....................................................................... (332)
-------
Balance at June 30, 2004......................................................... $ 1,080
=======
On February 6, 2004, First Bank completed its divestiture of one branch
office in rural Missouri. This branch divestiture resulted in a reduction of the
deposit base of approximately $8.4 million, and a pre-tax gain of approximately
$390,000, which is included in noninterest income.
On April 16, 2004, First Bank completed its divestiture of one branch
office in southern Illinois. This branch divestiture resulted in a reduction of
the deposit base of approximately $15.0 million, and a pre-tax gain of
approximately $630,000, which is included in noninterest income.
On June 30, 2004, First Bank completed the sale of a significant
portion of the leases in its commercial leasing portfolio. The sale reduced the
Company's commercial leasing portfolio by approximately $33.1 million to $9.6
million at June 30, 2004. No gain or loss was recorded on the transaction. In
conjunction with the transaction, First Bank established a $2.0 million
liability associated with related recourse obligations for certain leases sold,
as further discussed in Note 10 to the Consolidated Financial Statements.
(3) INTANGIBLE ASSETS ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES, NET OF
AMORTIZATION
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at June 30, 2004 and December 31,
2003:
June 30, 2004 December 31, 2003
---------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles.............. $ 17,391 (5,478) 17,391 (4,233)
Goodwill associated with
purchases of branch offices......... 2,210 (932) 2,210 (861)
--------- --------- -------- --------
Total............................ $ 19,601 (6,410) 19,601 (5,094)
========= ========= ======== ========
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 143,977 144,199
========= ========
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $658,000 and $1.3 million for the three and
six months ended June 30, 2004, respectively, and $658,000 and $1.2 million for
the comparable periods in 2003. Amortization of intangibles associated with the
purchase of subsidiaries, including amortization of core deposit intangibles and
branch purchases, has been estimated through 2009 in the following table, and
does not take into consideration any potential future acquisitions or branch
purchases.
(dollars expressed in thousands)
Year ending December 31:
2004 Remaining...................................................... $ 1,316
2005................................................................ 2,632
2006................................................................ 2,632
2007................................................................ 2,632
2008................................................................ 2,632
2009 ............................................................... 726
-------
Total............................................................ $12,570
=======
Changes in the carrying amount of goodwill for the three and six months
ended June 30, 2004 and 2003 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ---------------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period......................... $ 145,513 141,102 145,548 140,112
Goodwill acquired during period...................... -- -- -- 1,026
Acquisition-related adjustments...................... (222) 1,101 (222) 1,101
Amortization - purchases of branch offices........... (36) (36) (71) (72)
--------- -------- -------- --------
Balance, end of period............................... $ 145,255 142,167 145,255 142,167
========= ======== ======== ========
(4) MORTGAGE BANKING ACTIVITIES
At June 30, 2004 and December 31, 2003, First Banks serviced loans for
others amounting to $1.10 billion and $1.22 billion, respectively. Borrowers'
escrow balances held by First Banks on such loans were $8.3 million and $4.7
million at June 30, 2004 and December 31, 2003, respectively.
Changes in mortgage servicing rights, net of amortization, for the
periods indicated were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $ 13,960 15,678 15,408 14,882
Originated mortgage servicing rights................ 465 2,521 819 4,494
Amortization........................................ (1,892) (1,220) (3,694) (2,397)
-------- ------- ------- -------
Balance, end of period.............................. $ 12,533 16,979 12,533 16,979
======== ======= ======= =======
The fair value of mortgage servicing rights was approximately $17.2
million and $18.2 million at June 30, 2004 and 2003, respectively, and $18.3
million at December 31, 2003. The excess of the fair value of mortgage servicing
rights over the carrying value was approximately $4.7 million and $1.2 million
at June 30, 2004 and 2003, respectively, and $2.9 million at December 31, 2003.
Amortization of mortgage servicing rights has been estimated through
2008 in the following table:
(dollars expressed in thousands)
Year ending December 31:
2004 Remaining...................................................... $ 2,112
2005................................................................ 4,072
2006................................................................ 3,477
2007................................................................ 2,112
2008................................................................ 760
--------
Total.......................................................... $ 12,533
========
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted earnings per
share computations for the periods indicated:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except share and per share data)
Three months ended June 30, 2004:
Basic EPS - income available to common stockholders............. $ 25,871 23,661 $ 1,093.42
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 546 (19.36)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 25,999 24,207 $ 1,074.06
========= ======= ==========
Three months ended June 30, 2003:
Basic EPS - income available to common stockholders............. $ 14,568 23,661 $ 615.70
Effect of dilutive securities:
Class A convertible preferred stock........................... 128 588 (9.66)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 14,696 24,249 $ 606.04
========= ======= ==========
Six months ended June 30, 2004:
Basic EPS - income available to common stockholders............. $ 43,944 23,661 $ 1,857.23
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 565 (30.10)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 44,265 24,226 $ 1,827.13
========= ======= ==========
Six months ended June 30, 2003:
Basic EPS - income available to common stockholders............. $ 33,403 23,661 $ 1,411.74
Effect of dilutive securities:
Class A convertible preferred stock........................... 321 600 (21.68)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 33,724 24,261 $ 1,390.06
========= ======= ==========
(6) TRANSACTIONS WITH RELATED PARTIES
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and members of his immediate family, provides information
technology and various related services to First Banks, Inc. and its
subsidiaries. Fees paid under agreements with First Services, L.P. decreased to
$6.6 million and $13.3 million for the three and six months ended June 30, 2004,
respectively, from $7.0 million and $13.7 million for the comparable periods in
2003. First Services, L.P. recorded reduced information technology costs as a
result of the renegotiation of vendor service contracts and passed the cost
reduction through to First Banks, Inc. and its subsidiaries. During the three
months ended June 30, 2004 and 2003, First Services, L.P. paid First Bank $1.1
million and $1.0 million, respectively, and during the six months ended June 30,
2004 and 2003, First Services, L.P. paid First Banks $2.2 million in rental fees
for the use of data processing and other equipment owned by First Banks.
First Brokerage America, L.L.C., a limited liability company which is
indirectly owned by First Banks' Chairman and members of his immediate family,
received approximately $876,000 and $1.8 million for the three and six months
ended June 30, 2004, respectively, and $725,000 and $1.6 million for the
comparable periods in 2003 in 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 Title Guaranty LLC (First Title), a limited liability company
established and administered by and for the benefit of First Banks' Chairman and
members of his immediate family, received approximately $105,000 and $204,000
for the three and six months ended June 30, 2004, respectively, and $138,000 and
$251,000 for the comparable periods in 2003 in commissions for policies
purchased by First Banks or customers of First Bank from unaffiliated,
third-party insurers.
First Bank has had in the past, and may have in the future, loan
transactions in the ordinary course of business with its directors or
affiliates. These loan transactions have been on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and did not involve more than the normal
risk of collectibility or present other unfavorable features. Loans to
directors, their affiliates and executive officers of First Banks, Inc. were
approximately $28.3 million and $20.0 million at June 30, 2004 and December 31,
2003, respectively. First Bank does not extend credit to its officers or to
officers of First Banks, Inc., except for extensions of credit secured by
mortgages on personal residences, loans to purchase automobiles and personal
credit card accounts.
(7) REGULATORY CAPITAL
First Banks and First Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Banks' consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, First Banks and First Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require First Banks and First Bank to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of June 30, 2004, First Banks and First Bank were each well
capitalized.
As of June 30, 2004, 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 I risk-based and Tier I leverage ratios as set forth in the
table below.
At June 30, 2004 and December 31, 2003, First Banks' and First Bank's
required and actual capital ratios were as follows:
Actual To Be Well
------------------------ Capitalized Under
June 30, December 31, For Capital Prompt Corrective
2004 2003 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks............................. 10.84% 10.27% 8.0% 10.0%
First Bank.............................. 10.66 10.41 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks............................. 9.26 8.46 4.0 6.0
First Bank.............................. 9.40 9.15 4.0 6.0
Tier 1 capital (to average assets):
First Banks............................. 8.31 7.62 3.0 5.0
First Bank.............................. 8.55 8.22 3.0 5.0
On May 6, 2004, the Board of Governors of the Federal Reserve System
(the Board) requested public comment on newly proposed rules that would allow
bank holding companies to retain trust preferred securities in their Tier 1
capital, subject to stricter quantitative and qualitative standards. The
proposed rules would implement several significant changes to the current
regulatory capital rules. Under the proposal, the aggregate amount of trust
preferred securities and certain other core capital elements would be limited to
25% of Tier 1 capital, net of goodwill. Additionally, qualifying trust preferred
securities and Class C minority interest in excess of the 25% limit would be
allowable in Tier 2 capital, but limited, together with subordinated debt and
limited-life preferred stock, to 50% of Tier 1 capital. The proposed rules also
provide that in the last five years before maturity of the underlying
subordinated note, the associated trust preferred securities would be treated as
limited-life preferred stock, at one-fifth amortization per year, and would be
excluded from Tier 1 capital and included in Tier 2 capital, subject, together
with subordinated debt and other limited-life preferred stock, to a limit of 50%
of Tier 1 capital. The public comment period on the newly proposed rules ended
on July 11, 2004. First Banks is awaiting further guidance from the Board
pending the outcome of the newly proposed rules, and is continuing to evaluate
the proposed changes and their overall impact on the Company's financial
condition and results of operations. Management expects that implementation of
the Board's proposed rules, as currently stated, would reduce the Company's
regulatory capital ratios. However, management believes its regulatory capital
levels will continue to meet the well capitalized thresholds under the
regulatory framework for prompt corrective action if the rules are adopted in
the form proposed.
(8) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business
segment is consistent with the management structure of First Banks, First Bank
and the internal reporting system that monitors performance. First Bank provides
similar products and services in its defined geographic areas through its branch
network. The products and services offered include a broad range of commercial
and personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, First Bank markets combined basic services for
various customer groups, including packaged accounts for more affluent
customers, and sweep accounts, lock-box deposits and cash management products
for commercial customers. First Bank also offers both 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, asset-based loans and trade financing. Other financial
services include mortgage banking, debit cards, brokerage services,
credit-related insurance, internet banking, automated teller machines, telephone
banking, safe deposit boxes and trust, private banking and institutional money
management services. The revenues generated by First Bank consist primarily of
interest income, generated from the loan and investment security portfolios, and
service charges and fees, generated from the deposit products and services. The
geographic areas include eastern Missouri, Illinois, southern and northern
California and Houston, Dallas, Irving, McKinney and Denton, Texas. The products
and services are offered to customers primarily within First Bank's respective
geographic areas.
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 (1) Consolidated Totals
------------------------ ------------------------ --------------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $1,254,679 1,042,809 6,906 6,905 1,261,585 1,049,714
Loans, net of unearned discount......... 5,399,383 5,328,075 -- -- 5,399,383 5,328,075
Goodwill................................ 145,255 145,548 -- -- 145,255 145,548
Total assets............................ 7,313,573 7,097,635 10,503 9,305 7,324,076 7,106,940
Deposits................................ 5,965,870 5,977,042 (9,943) (15,427) 5,955,927 5,961,615
Note payable............................ -- -- -- 17,000 -- 17,000
Subordinated debentures................. -- -- 206,795 209,320 206,795 209,320
Stockholders' equity.................... 750,915 766,397 (194,967) (216,582) 555,948 549,815
========= ========= ======== ======== ======== =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
----------------------- ----------------------- --------------------
Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30,
----------------------- ----------------------- -----------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Income statement information:
Interest income......................... $ 96,446 98,168 139 313 96,585 98,481
Interest expense........................ 17,399 22,278 3,580 5,190 20,979 27,468
--------- --------- -------- -------- -------- ---------
Net interest income................ 79,047 75,890 (3,441) (4,877) 75,606 71,013
Provision for loan losses............... 3,000 10,000 -- -- 3,000 10,000
--------- --------- -------- -------- -------- ---------
Net interest income after
provision for loan losses........ 76,047 65,890 (3,441) (4,877) 72,606 61,013
--------- --------- -------- -------- -------- ---------
Noninterest income...................... 20,250 18,856 (146) 69 20,104 18,925
Noninterest expense..................... 54,388 55,991 1,017 1,554 55,405 57,545
--------- --------- -------- -------- -------- ---------
Income before provision for
income taxes............... 41,909 28,755 (4,604) (6,362) 37,305 22,393
Provision for income taxes.............. 15,706 10,410 (4,404) (2,717) 11,302 7,693
--------- --------- -------- -------- -------- ---------
Net income......................... $ 26,203 18,345 (200) (3,645) 26,003 14,700
========= ========= ======== ======== ======== =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
----------------------- ----------------------- ------------------------
Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30,
----------------------- ----------------------- ------------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Income statement information:
Interest income.......................... $ 192,433 197,696 279 599 192,712 198,295
Interest expense......................... 35,246 47,282 7,207 10,837 42,453 58,119
--------- ------- ------- -------- -------- ---------
Net interest income................. 157,187 150,414 (6,928) (10,238) 150,259 140,176
Provision for loan losses................ 15,750 21,000 -- -- 15,750 21,000
--------- ------- ------- -------- -------- ---------
Net interest income after
provision for loan losses......... 141,437 129,414 (6,928) (10,238) 134,509 119,176
--------- ------- ------- -------- -------- ---------
Noninterest income....................... 40,969 38,385 (306) 6,087 40,663 44,472
Noninterest expense...................... 105,905 109,206 2,102 1,926 108,007 111,132
--------- ------- ------- -------- -------- ---------
Income before provision for
income taxes...................... 76,501 58,593 (9,336) (6,077) 67,165 52,516
Provision for income taxes............... 28,950 20,893 (6,057) (2,108) 22,893 18,785
--------- ------- ------ -------- -------- ---------
Net income.......................... $ 47,551 37,700 (3,279) (3,969) 44,272 33,731
========= ======= ======= ======== ======== =========
- ------------------
(1) Corporate and other includes $2.3 million and $3.4 million of interest expense on subordinated debentures, after applicable
income tax benefit of $1.2 million and $1.8 million for the three months ended June 30, 2004 and 2003, respectively. For the
six months ended June 30, 2004 and 2003, corporate and other includes $4.6 million and $7.0 million of interest expense on
subordinated debentures, after applicable income tax benefits of $2.5 million and $3.8 million, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at June 30, 2004 and
December 31, 2003:
June 30, December 31,
2004 2003
--------------- ----------------
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily............................................................... $ 175,548 166,479
Term................................................................ 350,000 100,000
Federal Home Loan Bank borrowings........................................ 7,000 7,000
--------- -------
Total other borrowings.......................................... $ 532,548 273,479
========= =======
In conjunction with First Banks' interest rate risk management program,
First Banks entered into the following transactions with the objective of
stabilizing net interest income over time:
>> Effective January 12, 2004, First Banks consummated a $150.0
million three-year reverse repurchase agreement under a master
repurchase agreement with a single unaffiliated third party.
Interest is paid quarterly and is equivalent to the three-month
London Interbank Offering Rate minus 0.8350% plus a floating
amount equal to the differential between the three-month London
Interbank Offing Rate reset in arrears and the strike price of
3.50%, if the three-month London Interbank Offering Rate reset in
arrears exceeds 3.50%. The underlying securities associated with
the reverse repurchase agreement are callable U.S. Government
agency securities and are not under First Banks' physical
control. In conjunction with this transaction, First Banks
purchased $150.0 million of callable U.S. Government agency
securities.
>> Effective June 14, 2004, First Banks consummated two $50.0
million three-year reverse repurchase agreements under a master
repurchase agreement with a single unaffiliated third party.
Interest is paid quarterly and is equivalent to the three-month
London Interbank Offering Rate minus 0.60% and 0.61%,
respectively, plus a floating amount equal to the differential
between the three-month London Interbank Offing Rate reset in
arrears and the strike price of 5.00%, if the three-month London
Interbank Offering Rate reset in arrears exceeds 5.00%. The
underlying securities associated with the reverse repurchase
agreements are callable U.S. Government agency securities and are
not under First Banks' physical control. In conjunction with
these transactions, First Banks purchased $100.0 million of
callable U.S. Government agency securities.
(10) 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 Missouri Valley Partners, Inc. (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 co-existent with the term of the
Investment Management Agreements. The Investment Management Agreements have no
specified term but may be terminated at any time upon written notice by the
Trustees or, at First Banks' option, upon thirty days written notice to the
Trustees. In the event of termination of the Investment Management Agreements,
such termination shall have no effect on the liability of First Banks with
respect to obligations incurred before such termination. The obligations of
First Banks are joint and several with those of MVP. First Banks does not have
any recourse provisions that would enable it to recover from third parties any
amounts paid under the contracts nor does First Banks hold any assets as
collateral that, upon occurrence of a required payment under the contract, could
be liquidated to recover all or a portion of the amount(s) paid. At June 30,
2004 and December 31, 2003, 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.
On June 30, 2004, as further discussed in Note 2 to the Consolidated
Financial Statements, First Bank recorded a liability of $2.0 million for
recourse obligations related to the completion of the sale of a portion of its
commercial leasing portfolio. For value received, First Bank, as seller,
indemnified the buyer of certain leases from any liability or loss resulting
from defaults subsequent to the transaction sale. First Bank's indemnification
for the recourse obligations is limited to a specified percentage, ranging from
15% to 25%, of the aggregate lease purchase price of specific pools of leases
sold.
(11) SUBSEQUENT EVENTS
On July 30, 2004, First Banks completed its acquisition of CMC, and its
wholly owned banking subsidiary, CCB, acquiring all of the outstanding common
stock of CMC in exchange for $4.2 million in cash. In addition, First Banks
redeemed in full all of the outstanding subordinated promissory notes of CMC,
including accumulated accrued and unpaid interest, of $4.5 million in aggregate.
The transaction was funded through internally generated funds. CMC, through CCB,
operated two banking offices in the Chicago suburban communities of Aurora and
Villa Park. At the time of the transaction, CMC had $140.7 million in total
assets, $73.9 million in loans, net of unearned discount, and $100.8 million in
deposits. The transaction was accounted for using the purchase method of
accounting. Goodwill was approximately $1.9 million and the core deposit
intangibles, which are amortized over seven years utilizing the straight-line
method, were approximately $2.0 million. CMC was merged with and into SFC and
CCB was merged with and into First Bank.
On August 12, 2004, First Banks entered into a first amendment to its
revolving credit line with a group of unaffiliated financial institutions. The
material changes in the First Amendment to Secured Credit Agreement (Credit
Agreement) are amendments to the termination date and an increase in the
revolving credit line and letter of credit facility. The Credit Agreement
provides a $75.0 million revolving credit line and a $25.0 million letter of
credit facility. Interest is payable on outstanding principal loan balances at a
floating rate equal to either the lender's prime rate or, at First Banks'
option, the London Interbank Offering Rate plus a margin determined by the
outstanding loan balances and First Banks' net income for the preceding four
calendar quarters. If the loan balances outstanding under the revolving credit
line are accruing at the prime rate, interest is paid monthly. If the loan
balances outstanding under the revolving credit line are accruing at the London
Interbank Offering Rate, interest is payable based on the one, two, three or
six-month London Interbank Offering Rate, as selected by First Banks. Amounts
may be borrowed under the Credit Agreement until August 11, 2005, at which time
the principal and interest outstanding is due and payable. The Credit Agreement
requires maintenance of certain minimum capital ratios for First Banks and its
subsidiary bank, certain maximum nonperforming assets ratios for First Banks and
its subsidiary bank and a minimum return on assets ratio for First Banks. In
addition, it prohibits the payment of dividends on First Banks' common stock and
contains additional covenants. Loans under the Credit Agreement are secured by
First Banks' ownership interest in the capital stock of its subsidiaries.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause our actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and in the economy, including the threat of future terrorist activities,
existing and potential wars and/or military actions related thereto, and
domestic responses to terrorism or threats of terrorism; the impact of laws and
regulations applicable to us and changes therein; the impact of accounting
pronouncements applicable to us and changes therein; competitive conditions in
the markets in which we conduct our operations, including competition from
banking and non-banking companies with substantially greater resources than us,
some of which may offer and develop products and services not offered by us; our
ability to control the composition of our loan portfolio without adversely
affecting interest income; the credit risk associated with consumers who may not
repay loans; the geographic dispersion of our offices; the impact our hedging
activities may have on our operating results; the highly regulated environment
in which we operate; and our ability to respond to changes in technology. With
regard to our efforts to grow through acquisitions, factors that could affect
the accuracy or completeness of forward-looking statements contained herein
include the competition of larger acquirers with greater resources; fluctuations
in the prices at which acquisition targets may be available for sale; the impact
of making acquisitions without using our common stock; and possible asset
quality issues, unknown liabilities or integration issues with the businesses
that we have acquired. 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 not place undue reliance on forward-looking statements.
General
We are a registered bank holding company incorporated in Missouri in
1978 and headquartered in St. Louis County, Missouri. Through the operation of
our subsidiaries, we offer a broad array of financial services to consumer and
commercial customers. We operate through our wholly owned subsidiary bank
holding company, The San Francisco Company, or SFC, headquartered in San
Francisco, California, and its wholly owned subsidiary bank, First Bank,
headquartered in St. Louis County, Missouri. First Bank currently operates 147
branch offices in California, Illinois, Missouri and Texas. At June 30, 2004, we
had total assets of $7.32 billion, loans, net of unearned discount, of $5.40
billion, total deposits of $5.96 billion and total stockholders' equity of
$555.9 million.
Through First Bank, we offer a broad range of commercial and personal
deposit products, including 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. We also offer both 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,
asset-based loans and trade financing. Other financial services include mortgage
banking, debit cards, brokerage services, credit-related insurance, internet
banking, automated teller machines, telephone banking, safe deposit boxes and
trust, private banking and institutional money management services.
Primary responsibility for managing our banking unit rests with the
officers and directors of each unit, but we centralize overall corporate
policies, procedures and administrative functions and provide centralized
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our banking units to focus
on customer service.
Financial Condition
Total assets were $7.32 billion and $7.11 billion at June 30, 2004 and
December 31, 2003, respectively, an increase of 3.06%. The $217.1 million
increase in total assets is primarily attributable to increases in investment
securities and loans, net of unearned discount, which were primarily funded by
increases in other borrowings. Investment securities increased $211.9 million,
or 20.18%, to $1.26 billion at June 30, 2004 from $1.05 billion at December 31,
2003, reflecting purchases of $447.8 million and maturities of $253.0 million.
Loans, net of unearned discount, increased $71.3 million to $5.40 billion at
June 30, 2004 from $5.33 billion at December 31, 2003, and the allowance for
loan losses increased to $121.0 million at June 30, 2004 from $116.5 million at
December 31, 2003, as further discussed under "--Loans and Allowance for Loan
Losses." The overall increase in total assets was partially offset by a $35.9
million decline in our derivative instruments to $13.4 million from $49.3
million due to a decline in the fair value of certain derivative financial
instruments, particularly $600.0 million notional amount of interest rate swap
agreements designated as cash flow hedges which will mature in September 2004
and the maturity of $200.0 million notional amount of interest rate swap
agreements, as further discussed under "--Interest Rate Risk Management." In
addition, other assets decreased $18.6 million to $81.5 million at June 30, 2004
from $100.1 million at December 31, 2003. This decrease primarily results from a
$9.2 million net decrease in other real estate, as further discussed under
"--Loans and Allowance for Loan Losses," and a $2.9 million decrease in mortgage
servicing rights.
Total deposits reflected a slight decrease of $5.7 million, or 0.10%,
from December 31, 2003 to $5.96 billion at June 30, 2004. The decrease is
primarily attributable to the divestiture of two Midwest branch offices during
the first and second quarters of 2004, which resulted in a reduction of our
deposit base of approximately $23.4 million. This decrease is partially offset
by an increase in deposits due to the expansion of our banking franchise with
the opening of two de novo branch offices, one in West St. Louis County,
Missouri and one in Houston, Texas. In addition, our continued deposit marketing
efforts and efforts to further develop multiple account relationships with our
customers, in addition to slightly higher deposit rates on certain products,
have contributed to deposit growth despite continued aggressive competition
within our market areas and an anticipated level of attrition associated with
ongoing low deposit rates. The deposit mix reflects our continued efforts to
restructure the composition of our deposit base as the majority of our deposit
development programs are directed toward increased transaction accounts, such as
demand and savings accounts, rather than higher-yielding time deposits.
Other borrowings increased $259.1 million to $532.5 million at June 30,
2004 from $273.5 million at December 31, 2003. The increase is primarily
attributable to $250.0 million of term securities sold under agreements to
repurchase that we entered into during the first and second quarters of 2004, as
further discussed in Note 9 to our Consolidated Financial Statements. Our note
payable was fully repaid in April 2004 through dividends from our subsidiary
bank, resulting in a decrease of $17.0 million since December 31, 2003. Our
subordinated debentures decreased $2.5 million to $206.8 million at June 30,
2004 from $209.3 million at December 31, 2003. This decrease is primarily
attributable to a decrease in the fair value of our interest rate swap
agreements that are designated as fair value hedges and utilized to hedge
certain issues of our subordinated debentures. The decrease was partially offset
by the continued amortization of debt issuance costs that contributed to an
increase in our subordinated debentures during the first six months of 2004.
Our deferred income tax liability decreased from $41.7 million at
December 31, 2003 to $24.6 million at June 30, 2004, and is primarily
attributable to taxes associated with changes in our unrealized gains and losses
on available-for-sale investment securities and changes in our derivative
financial instruments.
Stockholders' equity was $555.9 million and $549.8 million at June 30,
2004 and December 31, 2003, respectively, reflecting an increase of $6.1
million. The increase is primarily attributable to net income of $44.3 million,
partially offset by a $37.8 million decrease in accumulated other comprehensive
income. The decrease in accumulated other comprehensive income is comprised of
$19.1 million associated with the change in our unrealized gains and losses on
available-for-sale investment securities and $18.7 million associated with the
change in our derivative financial instruments. The decrease is reflective of
changes in prevailing interest rates as well as a decline in the fair value of
our derivative financial instruments, specifically associated with $600.0
million notional amount of our interest rate swap agreements, designated as cash
flow hedges, which will mature in September 2004.
Results of Operations
Net Income
Net income was $26.0 million and $44.3 million for the three and six
months ended June 30, 2004, respectively, compared to $14.7 million and $33.7
million for the comparable periods in 2003. Results for the three months ended
June 30, 2004 reflect increased net interest income and noninterest income and a
reduced provision for loan losses and noninterest expenses, partially offset by
an increased provision for income taxes. Results for the six months ended June
30, 2004 over the comparable period in 2003 reflect increased net interest
income and reduced provisions for loan losses and noninterest expenses,
partially offset by a decline in noninterest income and an increased provision
for income taxes. Our return on average assets was 1.43% and 1.22% for the three
and six months ended June 30, 2004, respectively, compared to 0.82% and 0.95%
for the comparable periods in 2003. Our return on average stockholders' equity
was 18.21% and 15.72% for the three and six months ended June 30, 2004,
respectively, compared to 11.03% and 12.82% for the comparable periods in 2003.
Included in the first quarter of 2003 was a nonrecurring gain of $6.3 million,
before applicable income taxes, relating to the exchange of part of our
investment in Allegiant Bancorp, Inc., or Allegiant, for a 100% ownership
interest in Bank of Ste. Genevieve, or BSG, located in Ste. Genevieve, Missouri.
The increase in earnings in 2004 continues to reflect our adaptation to the
current interest rate environment and weak economic conditions that have
prevailed in recent years. Our ongoing efforts to improve asset quality,
maintain an acceptable net interest margin in the current low interest rate
environment, improve our noninterest income and control operating expenses are
reflected in our financial performance. We experienced continued growth of net
interest income primarily resulting from the earnings on our interest rate swap
agreements that were entered into in conjunction with our interest rate risk
management program to mitigate the effects of decreasing interest rates as well
as a $63.1 million net reduction in our subordinated debentures during the
second quarter of 2003. However, prevailing low interest rates, generally weak
loan demand and overall economic conditions continue to exert pressure on our
net interest income. Our overall asset quality levels have substantially
improved during the second quarter of 2004, resulting in a $19.1 million
reduction in nonperforming assets since December 31, 2003. We also sold a
majority of the leases in our commercial leasing portfolio on June 30, 2004 to
further reduce our outstanding balances within this segment of our portfolio,
consistent with our business strategy initiated in late 2002 to reduce our
commercial leasing activities. Residual problems in our loan portfolio that
primarily resulted from weak economic conditions in our markets remain a primary
focus of management as we continue our ongoing efforts to further reduce our
nonperforming asset levels. Due to economic conditions within our markets, we
experienced higher-than-historical levels of loan charge-offs, loan
delinquencies and nonperforming loans in 2003, which resulted in an increased
provision for loan losses. Although we have realized a substantial reduction in
nonperforming assets in 2004, we continue to monitor our loan and leasing
portfolios and focus on asset quality and related challenges stemming from the
current economic environment, including weak loan demand and lower prevailing
interest rates.
Noninterest income was $20.1 million and $40.7 million for the three
and six months ended June 30, 2004, respectively, in comparison to $18.9 million
and $44.5 million for the comparable periods in 2003. The decrease for the six
months ended June 30, 2004 is primarily due to a nonrecurring $6.3 million gain
recorded in the first quarter of 2003 on the exchange of part of our investment
in the common stock of Allegiant for a 100% ownership interest in BSG. Excluding
this transaction, noninterest income for the six months ended June 30, 2004
increased $2.5 million, or 6.41%, over the comparable period in 2003. The
increase is attributable to increased service charges on deposit accounts and
customer service fees, increased portfolio management fees associated with our
institutional money management subsidiary, gains, net of expenses, recognized on
the sale of two Midwest branch banking offices and a decrease in losses on the
valuation or sale of certain assets, primarily related to our commercial leasing
portfolio. This increase was partially offset by reduced loan servicing fees.
Noninterest expense was $55.4 million and $108.0 million for the three
and six months ended June 30, 2004, respectively, in comparison to $57.5 million
and $111.1 million for the comparable periods in 2003. Our efficiency ratio,
which is defined as the ratio of noninterest expense to the sum of net interest
income and noninterest income, improved to 57.89% and 56.57% for the three and
six months ended June 30, 2004, respectively, from 63.98% and 60.19% for the
comparable periods in 2003. The decrease in noninterest expense reflects a
reduction in expenses and losses, net of gains, on other real estate, primarily
related to a $2.7 million gain recorded in February 2004 on the sale of a
residential and recreational development property that was foreclosed on in
January 2003, as further discussed under "--Loans and Allowance for Loan
Losses." The decrease also reflects a reduction in write-downs on commercial
operating leases as well as a decrease in occupancy and furniture and equipment
expenses, primarily related to a lease termination obligation incurred in the
second quarter of 2003. The decrease in noninterest expense was partially offset
by an increase in salary and employee benefit costs associated with generally
higher salary and employee benefit costs associated with employing and retaining
qualified personnel, offset by a decrease in the allocation of direct loan
origination costs from salaries and benefits expense to gains on loans sold and
held for sale. This resulted from the slowdown in the volume of mortgage loans
originated and sold coupled with an increase in the volume of mortgage loans
originated that we retained in our loan portfolio, as further discussed under
"--Loans and Allowance for Loan Losses."
Net Interest Income
Net interest income (expressed on a tax equivalent basis) increased to
$75.9 million and $150.9 million for the three and six months ended June 30,
2004, respectively, compared to $71.4 million and $140.9 million for the
comparable periods in 2003, reflecting an increase of 6.35% and 7.08%,
respectively. Net interest margin improved 13 basis points to 4.56% for the
three months ended June 30, 2004, from 4.43% for the comparable period in 2003.
Net interest margin improved 16 basis points to 4.56% for the six months ended
June 30, 2004, from 4.40% for the comparable period in 2003. We credit the
increase in net interest income primarily to lower rates on deposits and other
borrowings, the earnings on our interest rate swap agreements that were entered
into in conjunction with our interest rate risk management program to mitigate
the effects of decreasing interest rates, increased average investment
securities with higher yields and a $63.1 million net reduction in our
outstanding subordinated debentures in 2003. As further discussed under
"--Interest Rate Risk Management," our derivative financial instruments used to
hedge our interest rate risk contributed $15.4 million and $31.7 million to net
interest income for the three and six months ended June 30, 2004, respectively,
compared to $15.8 million and $30.8 million for the comparable periods in 2003.
Average interest-earning assets increased to $6.70 billion and $6.65 billion for
the three and six months ended June 30, 2004, respectively, from $6.46 billion
for the three and six months ended June 30, 2003. The increase is primarily
attributable to our acquisition of BSG on March 31, 2003, which provided assets
of $115.1 million. In addition, the decline in prevailing interest rates led to
the early redemption of $136.3 million of subordinated debentures, issued during
1997 and 1998, in the second quarter of 2003 and the issuance of $73.2 million
of additional subordinated debentures at lower interest rates, while providing
replacement regulatory capital through the associated trust preferred securities
issued by our financing business and statutory trusts. In March 2003, we issued
$25.8 million of subordinated debentures to First Bank Statutory Trust, and in
April 2003, we issued $47.4 million of subordinated debentures to First
Preferred Capital Trust IV. These transactions, coupled with the use of
additional derivative financial instruments, have allowed us to reduce our
overall expense associated with our subordinated debentures. However, prevailing
low interest rates, generally weak loan demand, increased competition and
overall economic conditions continue to exert pressure on our net interest
margin.
Average investment securities were $1.26 billion and $1.21 billion for
the three and six months ended June 30, 2004, respectively, in comparison to
$950.7 million and $959.8 million for the comparable periods in 2003. The yield
on our investment portfolio increased to 4.11% for the three and six months
ended June 30, 2004, compared to 3.68% and 3.73% for the comparable periods in
2003, respectively. Funds available from maturities of investment securities
were used to purchase additional investment securities during the first six
months of 2004, including purchases of $250.0 million of callable U.S.
Government agency securities. These securities represented the underlying
securities associated with $250.0 million, in aggregate, of three-year reverse
repurchase agreements under a master repurchase agreement that we consummated in
the first and second quarters of 2004, as further described in Note 9 to our
Consolidated Financial Statements.
Average loans, net of unearned discount, were $5.38 billion and $5.35
billion for the three and six months ended June 30, 2004, respectively, compared
to $5.39 billion and $5.38 billion for the comparable periods in 2003,
reflecting decreases of $19.5 million and $23.1 million, respectively. The yield
on our loan portfolio decreased to 6.27% and 6.32% for the three and six months
ended June 30, 2004, respectively, compared to 6.68% and 6.77% for the
comparable periods in 2003. We attribute the decline in the average balance and
yields primarily to increased competition and general economic conditions within
our market areas resulting in continued weak loan demand and decreases in
prevailing interest rates. The reduced level of interest income earned on our
loan portfolio was partially mitigated by the earnings associated with our
interest rate swap agreements. Mortgage loans held for sale declined
approximately $162.8 million due to a slowdown in overall loan volumes that
began in the fourth quarter of 2003 as well as management's business strategy
decision in mid-2003 to retain a portion of new residential mortgage loan
production in our portfolio to offset continued weak loan demand in other
sectors of our loan portfolio. This decision contributed to an increase in
average real estate mortgage loan volumes retained in our portfolio of
approximately $147.8 million. Average real estate construction and development
loans increased approximately $80.7 million primarily as a result of seasonal
increases on existing and available credit lines. Average lease financing
volumes decreased approximately $64.7 million primarily resulting from our
business strategy initiated in late 2002 to reduce our commercial leasing
activities and the sale of a significant portion of the remaining leases in our
commercial leasing portfolio in June 2004, as further discussed under "--Loans
and Allowance for Loan Losses."
Average deposits decreased to $6.01 billion and $6.00 billion for the
three and six months ended June 30, 2004, respectively, from $6.05 billion and
$6.07 billion for the comparable periods in 2003. For the three and six months
ended June 30, 2004, the aggregate weighted average rate paid on our deposit
portfolio decreased 36 basis points and 45 basis points to 1.36%, and 1.37%,
respectively, compared to 1.72% and 1.82% for the comparable periods in 2003. We
attribute the decline in rates paid primarily to rates paid on our savings and
time deposits, which have continued to decline in conjunction with the interest
rate reductions previously discussed. The earnings associated with certain of
our interest rate swap agreements designated as fair value hedges also
contributed to the reduction in deposit rates paid on our time deposits.
However, the continued competitive pressures on our deposit pricing within our
market areas precluded us from fully reflecting the general interest rate
decreases in our deposit pricing while still providing an adequate funding
source for our loan portfolio. The change in average deposit mix reflects our
continued efforts to restructure the composition of our deposit base as the
majority of our deposit development programs are directed toward increased
transactional accounts, such as demand and savings accounts, rather than time
deposits, and emphasize attracting more than one account relationship with
customers. Average demand and savings deposits increased to $4.07 billion and
$4.06 billion for the three and six months ended June 30, 2004, respectively,
from $3.98 billion and $3.96 billion for the comparable periods in 2003. Average
total time deposits decreased to $1.93 billion and $1.94 billion for the three
and six months ended June 30, 2004, respectively, from $2.07 billion and $2.11
billion for the comparable periods in 2003.
Average other borrowings increased to $439.1 million and $413.9 million
for the three and six months ended June 30, 2004, respectively, compared to
$173.1 million and $177.2 million for the comparable periods in 2003. The
aggregate weighted average rate paid on our other borrowings was 0.69% and 0.68%
for the three and six months ended June 30, 2004, respectively, compared to
1.20% and 1.28% for the comparable periods in 2003, reflecting reductions in the
current interest rate environment. The increase in average other borrowings is
primarily attributable to $250.0 million of term securities sold under
agreements to repurchase that we consummated during 2004 as further described in
Note 9 to our Consolidated Financial Statements.
The aggregate weighted average rate paid on our note payable was 23.66%
and 7.20% for the three and six months ended June 30, 2004, respectively,
compared to 52.36% and 17.44% for the comparable periods in 2003. The unusually
high weighted average rates paid reflect commitment, arrangement and other fees
paid on our secured credit agreement. Amounts outstanding under our revolving
line of credit with a group of unaffiliated financial institutions bear interest
at the lead bank's corporate base rate or, at our option, at the London
Interbank Offering Rate plus a margin determined by the outstanding balance and
our profitability for the preceding four calendar quarters. Thus, our revolving
credit line represents a relatively high-cost funding source as increased
advances have the effect of increasing the weighted average rate of non-deposit
liabilities. However, the borrowing level for these periods has been minimal.
Average subordinated debentures were $209.0 million and $210.0 million
for the three and six months ended June 30, 2004, respectively, compared to
$295.8 million and $288.9 million for the comparable periods in 2003. The
aggregate weighted average rate paid on our subordinated debentures was 6.79%
and 6.77% for the three and six months ended June 30, 2004, respectively, and
7.07% and 7.53% for the comparable periods in 2003. Interest expense on our
subordinated debentures was $3.5 million and $7.1 million for the three and six
months ended June 30, 2004, respectively, compared to $5.2 million and $10.8
million for the comparable periods in 2003. As previously discussed, the
decrease for 2004 primarily reflects the redemption of $136.3 million of
subordinated debentures and the issuance of $73.2 million of subordinated
debentures at lower interest rates, as well as the earnings impact of our
interest rate swap agreements as further discussed under "--Interest Rate Risk
Management."
The following table sets forth, on a tax-equivalent basis, certain
information relating to our average balance sheets, and reflects the average
yield earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting net interest income for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------- -----------------------------------------------
2004 2003 2004 2003
-------------------------- ------------------------ ------------------------ ----------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- -------- ---- ------- ------- ---- ------- -------- ---- ------- ------- ----
(dollars expressed in thousands)
Assets
------
Interest-earning assets:
Loans (1)(2)(3)(4).......... $5,375,102 83,861 6.27% $5,394,650 89,803 6.68% $5,354,228 168,189 6.32% $5,377,314 180,540 6.77%
Investment securities (4)... 1,263,191 12,894 4.11 950,672 8,734 3.68 1,208,927 24,725 4.11 959,786 17,732 3.73
Federal funds sold
and other................ 58,164 137 0.95 111,365 312 1.12 90,461 423 0.94 127,416 754 1.19
--------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-earning
assets............... 6,696,457 96,892 5.82 6,456,687 98,849 6.14 6,653,616 193,337 5.84 6,464,516 199,026 6.21
------ ------ ------- -------
Nonearning assets.............. 631,260 712,851 641,890 717,658
---------- ---------- ---------- ----------
Total assets........... $7,327,717 $7,169,538 $7,295,506 $7,182,174
========== ========== ========== ==========
Liabilities and
Stockholders' Equity
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits................ $ 854,874 824 0.39% $ 866,540 1,478 0.68% $ 861,793 1,791 0.42% $ 853,487 3,151 0.74%
Savings deposits.......... 2,143,816 4,593 0.86 2,115,298 5,785 1.10 2,152,863 9,370 0.88 2,141,369 12,571 1.18
Time deposits of $100
or more (3)............. 459,164 3,039 2.66 418,893 3,336 3.19 448,791 5,995 2.69 438,131 7,021 3.23
Other time deposits (3)... 1,474,899 8,173 2.23 1,654,476 11,088 2.69 1,489,267 16,660 2.25 1,672,850 23,282 2.81
---------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
deposits............. 4,932,753 16,629 1.36 5,055,207 21,687 1.72 4,952,714 33,816 1.37 5,105,837 46,025 1.82
Other borrowings............ 439,070 757 0.69 173,068 519 1.20 413,932 1,401 0.68 177,247 1,121 1.28
Note payable (5)............ 1,088 64 23.66 383 50 52.36 4,717 169 7.20 2,151 186 17.44
Subordinated debentures (3). 209,036 3,529 6.79 295,788 5,212 7.07 209,963 7,067 6.77 288,851 10,787 7.53
---------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
liabilities.......... 5,581,947 20,979 1.51 5,524,446 27,468 1.99 5,581,326 42,453 1.53 5,574,086 58,119 2.10
------ ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits............. 1,073,988 994,395 1,047,866 960,771
Other liabilities........... 97,585 116,351 99,955 116,621
---------- ---------- ---------- ----------
Total liabilities...... 6,753,520 6,635,192 6,729,147 6,651,478
Stockholders' equity........... 574,197 534,346 566,359 530,696
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity. $7,327,717 $7,169,538 $7,295,506 $7,182,174
========== ========== ========== ==========
Net interest income............ 75,913 71,381 150,884 140,907
====== ====== ======= =======
Interest rate spread........... 4.31 4.15 4.31 4.11
Net interest margin (6)........ 4.56% 4.43% 4.56% 4.40%
===== ===== ===== =====
- --------------------
(1) For purposes of these computations, nonaccrual loans are included in the average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income and interest expense include the effects of interest rate swap agreements.
(4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were approximately
$307,000 and $625,000 for the three and six months ended June 30, 2004, and $368,000 and $731,000 for the comparable periods in
2003, respectively.
(5) Interest expense on the note payable includes commitment, arrangement and renewal fees.
(6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning
assets.
Provision for Loan Losses
The provision for loan losses was $3.0 million and $15.8 million for
the three and six months ended June 30, 2004, respectively, compared to $10.0
million and $21.0 million for the comparable periods in 2003. Net loan
charge-offs were $5.4 million and $10.8 million for the three and six months
ended June 30, 2004, respectively, compared to $10.8 million and $13.3 million
for the comparable periods in 2003. In 2003, we continued to experience the
higher level of problem loans and related loan charge-offs and past due loans
that we began to experience in early 2002. This was a result of economic
conditions within our markets, additional problems identified in certain
acquired loan portfolios and continuing deterioration in our commercial leasing
portfolio, particularly the segment of the portfolio relating to the airline
industry. These factors necessitated higher provisions for loan losses than in
prior periods. The reduced provision during the second quarter of 2004 resulted
from an overall improvement in asset quality and a reduction in nonperforming
loans, primarily resulting from significant loan payoffs. Nonperforming assets
were $67.4 million at June 30, 2004, reflecting a substantial decline from $90.2
million at March 31, 2004, $86.5 million at December 31, 2003 and $83.2 million
at June 30, 2003. The decrease in nonperforming assets during 2004 primarily
reflects transactions associated with three significant customer relationships:
(a) the sale of a residential and recreational development property that was
foreclosed on in January 2003 with a carrying value of $9.2 million,
representing approximately 83.0% of total other real estate assets at the time
of sale; (b) a $13.9 million commercial credit relationship in the southern
California region that had been downgraded to nonaccrual status in March 2004,
for which a $3.9 million charge-off and a $10.0 million cash payment were
recorded in the second quarter of 2004; and (c) the sale of a $7.3 million St.
Louis region commercial credit relationship in the second quarter of 2004 that
had been on nonaccrual status, as further discussed under "--Loans and Allowance
for Loan Losses." Our allowance for loan losses was $121.0 million at June 30,
2004, compared to $124.9 million at March 31, 2004, $116.5 million at December
31, 2003 and $107.8 million at June 30, 2003. Management expects nonperforming
loans to remain at somewhat elevated levels throughout most of 2004 and
considers this in its overall assessment of the adequacy of the allowance for
loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $20.1 million and $40.7 million for the three
and six months ended June 30, 2004, respectively, in comparison to $18.9 million
and $44.5 million for the comparable periods in 2003. Noninterest income
consists primarily of service charges on deposit accounts and customer service
fees, mortgage-banking revenues, net gains on sales of available-for-sale
investment securities, investment income on bank owned life insurance and other
miscellaneous income. The reduction experienced in the first six months of 2004
is primarily attributable to a $6.3 million gain recorded in March 2003 on the
exchange of common stock of Allegiant, as further discussed below. Excluding
this nonrecurring transaction in the first quarter of 2003, noninterest income
for the three and six months ended June 30, 2004 increased $1.2 million, or
6.23%, and $2.5 million, or 6.41%, respectively, from the comparable periods in
2003.
Service charges on deposit accounts and customer service fees were $9.8
million and $18.7 million for the three and six months ended June 30, 2004,
respectively, in comparison to $9.0 million and $17.6 million for the comparable
periods in 2003. The increase in service charges and customer service fees is
primarily attributable to increased demand deposit account balances, our
acquisition of BSG completed in March 2003, additional products and services
available and utilized by our retail and commercial customers, and increases in
non-sufficient fund and returned check fee rates that became effective in
December 2003.
The gain on mortgage loans sold and held for sale was $4.0 million and
$8.2 million for the three and six months ended June 30, 2004, respectively, in
comparison to $3.6 million and $8.1 million for the comparable periods in 2003.
The slowdown in the volume of mortgage loans originated and sold that was
initially experienced in the fourth quarter of 2003 continued into 2004
resulting in reduced gains on mortgage loans sold and held for sale. However, a
decrease in the allocation of direct loan origination costs from salaries and
benefits as a result of a change in the fallout percentage resulted in the
overall net increase for the periods noted. The fallout percentage represents
the percentage of the number of loan applications that do not result in the
ultimate origination of a loan divided by the total number of loan applications
received.
In March 2003, we recorded a $6.3 million nonrecurring gain on the
exchange of 974,150 shares of our Allegiant common stock for a 100% ownership
interest in BSG. There were no net gains on sales of available-for-sale
investment securities for the six months ended June 30, 2004.
Gains, net of expenses, on the sale of two Midwest branch banking
offices totaled $1.0 million for the six months ended June 30, 2004. There were
no sales of branch banking offices for the comparable period in 2003. On
February 6, 2004, we sold one of our Missouri branch banking offices, resulting
in a $390,000 gain, net of expenses, upon consummation of this transaction.
Additionally, on April 16, 2004, we sold one of our Illinois banking offices,
resulting in a $630,000 gain, net of expenses, upon consummation of the
transaction.
Other income was $4.4 million and $10.1 million for the three and six
months ended June 30, 2004, respectively, in comparison to $4.6 million and $9.4
million for the comparable periods in 2003. We attribute the primary components
of the fluctuations in 2004 to:
>> increased portfolio management fee income of $1.1 million
associated with our Institutional Money Management division;
>> a net decrease in losses on the valuation or sale of certain
assets of $694,000, primarily related to our commercial leasing
portfolio. Net losses for 2004 were $438,000 and included a
$750,000 write-down on repossessed jet engine equipment
associated with our commercial leasing business. Net losses for
2003 of $1.1 million primarily related to the disposition of
fixed assets, including approximately $419,000 in losses on the
disposal of leasing equipment;
>> an increase in income associated with standby letters of credit
of $431,000;
>> an increase of $408,000 in fees from fiduciary activities; and
>> our acquisition of BSG completed during 2003; partially offset by
>> net losses on derivative instruments in 2004 compared to net
gains on derivative instruments in 2003 resulting from changes in
the fair value of our interest rate cap agreements, fair value
hedges and underlying hedged liabilities. Net losses on
derivative instruments were $487,000 and $455,000 for the three
and six months ended June 30, 2004, respectively, compared to net
gains on derivative instruments of $419,000 and $426,000 for the
comparable periods in 2003;
>> a decline of $503,000 in loan servicing fees. The net decrease is
primarily attributable to increased amortization of mortgage
servicing rights, offset by a lower level of interest shortfall
and an increase in fees from loans serviced for others. Interest
shortfall is the difference between the interest collected from a
loan-servicing customer upon prepayment of the loan and a full
month's interest that is required to be remitted to the security
owner;
>> a decline of $465,000 in rental income associated with our
reduced commercial leasing activities; and
>> a decline of $148,000 in brokerage revenue primarily associated
with overall market conditions and reduced customer demand.
Noninterest Expense
Noninterest expense was $55.4 million and $108.0 million for the three
and six months ended June 30, 2004, respectively, in comparison to $57.5 million
and $111.1 million for the comparable periods in 2003. Our efficiency ratio
improved to 57.89% and 56.57% for the three and six months ended June 30, 2004,
respectively, from 63.98% and 60.19% for the comparable periods in 2003. The
decrease in noninterest expense primarily reflects a decline in expenses and
losses, net of gains, on other real estate owned and a decrease in write-downs
on various operating leases associated with our commercial leasing business,
partially offset by an increase in salaries and employee benefits expense. These
expenses and losses are included in other expense in our consolidated statements
of income as further discussed below.
Salaries and employee benefits were $28.2 million and $55.9 million for
the three and six months ended June 30, 2004, respectively, in comparison to
$25.0 million and $48.3 million for the comparable periods in 2003. We attribute
the overall increase to increased salary and benefit expenses associated with
our acquisition of BSG in 2003 and generally higher salary and employee benefit
costs associated with employing and retaining qualified personnel. The increase
is also attributable to a lower allocation of direct loan origination costs from
salaries and benefits expense to gains on mortgage loans sold and held for sale
due to a slowdown in the volume of mortgage loans originated and sold,
management's decision to retain a portion of new mortgage loan production in our
real estate mortgage portfolio in mid-2003 and a change in the fallout
percentage associated with the allocation.
Occupancy, net of rental income, and furniture and equipment expense
totaled $8.7 million and $17.8 million for the three and six months ended June
30, 2004, respectively, in comparison to $10.1 million and $19.6 million for the
comparable periods in 2003. The decrease is partially attributable to decreased
rent expense associated with various lease terminations in 2003, including a
$1.0 million lease termination obligation recorded in the second quarter of 2003
associated with the relocation of our San Francisco-based loan administration
department to southern California and a $200,000 lease buyout on a California
branch facility recorded in the first quarter of 2003. However, these overall
expenses remain at relatively higher levels and are attributable to
acquisitions, technology expenditures for equipment, continued expansion and
renovation of various corporate and branch offices and the relocation of certain
branches and operational areas.
Information technology fees were $8.0 million and $16.0 million for the
three and six months ended June 30, 2004, respectively, in comparison to $8.4
million and $16.4 million for the comparable periods in 2003. As more fully
described in Note 6 to our Consolidated Financial Statements, First Services,
L.P., a limited partnership indirectly owned by our Chairman and members of his
immediate family, provides information technology and operational support
services to our subsidiaries and us. We attribute the level of fees to growth
and technological advancements consistent with our product and service
offerings, continued expansion and upgrades to technological equipment, networks
and communication channels, offset by expense reductions resulting from the data
processing conversion of BSG completed in 2003 and the achievement of certain
efficiencies associated with the implementation of certain technology projects.
Legal, examination and professional fees were $1.7 million and $3.3
million for the three and six months ended June 30, 2004, respectively, in
comparison to $2.2 million and $3.8 million for the comparable periods in 2003.
The continued expansion of overall corporate activities, the ongoing
professional services utilized by certain of our acquired entities, and
increased legal fees associated with commercial loan documentation, collection
efforts and certain defense litigation costs related to acquired entities have
all contributed to the overall expense levels in 2003 and 2004. The overall
decrease in these fees in 2004 is primarily associated with higher legal fees
paid in 2003 related to an ongoing lawsuit that reached final resolution in the
second quarter of 2004.
Amortization of intangibles associated with the purchase of
subsidiaries was $658,000 and $1.3 million for the three and six months ended
June 30, 2004, respectively, in comparison to $658,000 and $1.2 million for the
comparable periods in 2003. The increase for the first six months of 2004 is
solely attributable to core deposit intangibles associated with our acquisition
of BSG in March 2003.
Communications and advertising and business development expenses
remained consistent at $1.7 million and $3.5 million for the three and six
months ended June 30, 2004, respectively, compared to $1.6 million and $3.5
million for the comparable periods in 2003. We continue our efforts to manage
these expenses through renegotiation of contracts, enhanced focus on advertising
and promotional activities in markets that offer greater benefits, as well as
ongoing cost containment efforts. The recent expansion of our sales, marketing
and product group is expected to contribute to higher expenditures and is
consistent with our continued focus on expanding our banking franchise and the
products and services available to our customers.
Other expense was $5.2 million and $7.8 million for the three and six
months ended June 30, 2004, respectively, in comparison to $8.4 million and
$15.8 million for the comparable periods in 2003. Other expense encompasses
numerous general and administrative expenses including travel, meals and
entertainment, insurance, freight and courier services, correspondent bank
charges, miscellaneous losses and recoveries, expenses on other real estate
owned, memberships and subscriptions, transfer agent fees and sales taxes. The
decrease is primarily attributable to:
>> a decrease of $4.6 million on expenditures and losses, net of
gains, on other real estate. In February 2004, we recorded a $2.7
million gain on the sale of a residential and recreational
development property that was transferred to other real estate in
January 2003, as further discussed under "--Loans and Allowance
for Loan Losses," as well as approximately $390,000 in gains
recorded on the sale of two additional holdings of other real
estate. Net expenditures on other real estate for the first six
months of 2003 were $1.5 million and primarily included
expenditures associated with the operation of the residential and
recreational development property that was sold in February 2004
as well as a $200,000 expenditure associated with an unrelated
residential real estate property located in the northern
California region; and
>> a $3.6 million decrease in write-downs on various operating
leases associated with our commercial leasing business, primarily
as a result of reductions in estimated residual values. For the
first six months of 2004, we recorded write-downs of $187,000,
compared to $3.7 million for the comparable period in 2003;
partially offset by
>> expenses associated with our acquisition completed during 2003;
and
>> continued growth and expansion of our banking franchise.
Provision for Income Taxes
The provision for income taxes was $11.3 million and $22.9 million for
the three and six months ended June 30, 2004, respectively, in comparison to
$7.7 million and $18.8 million for the comparable periods in 2003. The effective
tax rate was 30.30% and 34.08% for the three and six months ended June 30, 2004,
respectively, in comparison to 34.35% and 35.77% for the comparable periods in
2003. The decrease in the effective tax rate is primarily attributable to the
reversal of a $2.8 million tax reserve that was no longer deemed necessary as a
result of the resolution of a potential tax liability. Excluding this
transaction, the effective tax rate was 37.80% and 38.25% for the three and six
months ended June 30, 2004, reflecting higher taxable income and the merger of
our two bank charters on March 31, 2003, which has resulted in higher taxable
income allocations in states where we file separate state tax returns.
Interest Rate Risk Management
We utilize derivative financial instruments to assist in our management
of interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The derivative instruments we
held as of June 30, 2004 and December 31, 2003 are summarized as follows:
June 30, 2004 December 31, 2003
------------------------ ------------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $1,100,000 2,825 1,250,000 2,857
Fair value hedges.................................... 276,200 10,992 326,200 12,614
Interest rate cap agreements......................... 450,000 -- 450,000 --
Interest rate lock commitments....................... 13,800 -- 15,500 --
Forward commitments to sell
mortgage-backed securities......................... 42,000 -- 58,500 --
========== ====== ========= =======
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.
During the three and six months ended June 30, 2004, we realized net
interest income on our derivative financial instruments of $15.4 million and
$31.7 million, respectively, in comparison to $15.8 million and $30.8 million
for the comparable periods in 2003. The increase is primarily attributable to
interest income associated with the additional swap agreements that we entered
into during March, April and July 2003 as well as the continued decline in
prevailing interest rates in 2003. We recorded net losses on derivative
instruments, which are included in noninterest income in our consolidated
statements of income, of $487,000 and $455,000 for the three and six months
ended June 30, 2004, respectively, in comparison to net gains on derivative
instruments of $419,000 and $426,000 for the comparable periods in 2003. The
decrease in 2004 reflects changes in the fair value of our interest rate cap
agreements, fair value hedges and the underlying hedged liabilities.
Cash Flow Hedges
During September 2000, March 2001, April 2001, March 2002 and July
2003, we entered into interest rate swap agreements of $600.0 million, $200.0
million, $175.0 million, $150.0 million and $200.0 million notional amount,
respectively, to effectively lengthen the repricing characteristics of certain
interest-earning assets to correspond more closely with their funding source
with the objective of stabilizing cash flow, and accordingly, net interest
income over time. The underlying hedged assets are certain loans within our
commercial loan portfolio. The swap agreements, which have been designated as
cash flow hedges, 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 2.70%, 2.82%, 2.82%, 2.80% and 2.85%, respectively. The terms of the
swap agreements provide for us to pay and receive interest on a quarterly basis.
In November 2001, we terminated $75.0 million notional amount of the swap
agreements originally entered into in April 2001, which would have expired in
April 2006, in order to appropriately modify our overall hedge position in
accordance with our interest rate risk management program. In addition, the
$150.0 million notional amount swap agreement that we entered into in March 2002
matured on March 14, 2004. The amount receivable by us under the swap agreements
was $3.8 million and $3.9 million at June 30, 2004 and December 31, 2003,
respectively, and the amount payable by us under the swap agreements was
$967,000 and $1.1 million at June 30, 2004 and December 31, 2003, respectively.
The maturity dates, notional amounts, interest rates paid and received
and fair value of our interest rate swap agreements designated as cash flow
hedges as of June 30, 2004 and December 31, 2003 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
June 30, 2004:
September 20, 2004.............................. $ 600,000 1.30% 6.78% $ 6,742
March 21, 2005.................................. 200,000 1.18 5.24 4,556
April 2, 2006................................... 100,000 1.18 5.45 4,029
July 31, 2007................................... 200,000 1.15 3.08 (3,873)
---------- ---------
$1,100,000 1.24 5.71 $ 11,454
========== ===== ===== =========
December 31, 2003:
March 14, 2004.................................. $ 150,000 1.20% 3.93% $ 879
September 20, 2004.............................. 600,000 1.30 6.78 23,250
March 21, 2005.................................. 200,000 1.18 5.24 8,704
April 2, 2006................................... 100,000 1.18 5.45 6,881
July 31, 2007................................... 200,000 1.15 3.08 501
---------- ---------
$1,250,000 1.24 5.49 $ 40,215
========== ===== ===== =========
Fair Value Hedges
We entered into the following interest rate swap agreements, designated
as fair value hedges, to effectively shorten the repricing characteristics of
certain interest-bearing liabilities to correspond more closely with their
funding source with the objective of stabilizing net interest income over time:
>> During January 2001, we entered into $50.0 million notional
amount of three-year interest rate swap agreements and $150.0
million notional amount of five-year interest rate swap
agreements that provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
three-month London Interbank Offering Rate. The underlying hedged
liabilities are a portion of our other time deposits. The terms
of the swap agreements provide for us to pay interest on a
quarterly basis and receive interest on a semiannual basis. The
amount receivable by us under the swap agreements was $3.9
million and $5.2 million at June 30, 2004 and December 31, 2003,
respectively, and the amount payable by us under the swap
agreements was $375,000 and $537,000 at June 30, 2004 and
December 31, 2003, respectively. In September 2003, we
discontinued hedge accounting treatment on the $50.0 million
notional amount of three-year swap agreements entered into in
January 2001 due to the loss of our highly correlated hedge
positions between the swap agreements and the underlying hedged
liabilities. Consequently, the related $1.3 million basis
adjustment of the underlying hedged liabilities was recorded as a
reduction of interest expense over the remaining weighted average
maturity of the underlying hedged liabilities. This $50.0 million
notional swap agreement matured in January 2004.
>> During May 2002, we entered into $55.2 million notional amount of
interest rate swap agreements that provide for us to receive a
fixed rate of interest and pay an adjustable rate of interest
equivalent to the three-month London Interbank Offering Rate plus
2.30%. During June 2002, we entered into $86.3 million and $46.0
million notional amount, respectively, of interest rate swap
agreements that provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
three-month London Interbank Offering Rate plus 2.75% and 1.97%,
respectively. The underlying hedged liabilities are a portion of
our subordinated debentures. The terms of the swap agreements
provide for us to pay and receive interest on a quarterly basis.
There were no amounts receivable or payable by us at June 30,
2004 or December 31, 2003. The $86.3 million notional amount
interest rate swap agreement was called by its counterparty in
November 2002 resulting in final settlement of this swap
agreement in December 2002. In addition, the $46.0 million
notional amount interest rate swap agreement was called by its
counterparty on May 14, 2003 resulting in final settlement of
this swap agreement on June 30, 2003. There was no gain or loss
recorded as a result of these transactions.
>> During March 2003 and April 2003, we entered into $25.0 million
and $46.0 million notional amount, respectively, of interest rate
swap agreements that provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
three-month London Interbank Offering Rate plus 2.55% and 2.58%,
respectively. The underlying hedged liabilities are a portion of
our subordinated debentures. The terms of the swap agreements
provide for us to pay and receive interest on a quarterly basis.
There were no amounts receivable or payable by us at June 30,
2004 or December 31, 2003.
The maturity dates, notional amounts, interest rates paid and received
and fair value of our interest rate swap agreements designated as fair value
hedges as of June 30, 2004 and December 31, 2003 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
June 30, 2004:
January 9, 2006.................................. $ 150,000 1.14% 5.51% $ 6,096
December 31, 2031................................ 55,200 3.41 9.00 1,246
March 20, 2033................................... 25,000 3.66 8.10 (1,944)
June 30, 2033.................................... 46,000 3.69 8.15 (3,502)
--------- --------
$ 276,200 2.25 6.88 $ 1,896
========= ===== ===== ========
December 31, 2003:
January 9, 2004 (1).............................. $ 50,000 1.15% 5.37% $ --
January 9, 2006.................................. 150,000 1.15 5.51 9,932
December 31, 2031................................ 55,200 3.44 9.00 2,499
March 20, 2033................................... 25,000 3.69 8.10 (1,270)
June 30, 2033.................................... 46,000 3.72 8.15 (2,008)
--------- --------
$ 326,200 2.10 6.65 $ 9,153
========= ===== ===== ========
---------------
(1)Hedge accounting treatment was discontinued in September 2003 as further discussed above.
Interest Rate Cap Agreements
In conjunction with our interest rate swap agreements designated as
cash flow hedges that mature in September 2004, we also entered into $450.0
million notional amount of four-year interest rate cap agreements to limit the
net interest expense associated with our interest rate swap agreements in the
event of a rising rate scenario. The interest rate cap agreements provide for us
to receive a quarterly adjustable rate of interest equivalent to the
differential between the three-month London Interbank Offering Rate and the
strike price of 7.50% should the three-month London Interbank Offering Rate
exceed the strike price. At June 30, 2004 and December 31, 2003, the carrying
value of these interest rate cap agreements, which is included in derivative
instruments in the consolidated balance sheets, was zero.
Pledged Collateral
At June 30, 2004 and December 31, 2003, we had a $5.0 million letter of
credit issued on our behalf to the counterparty and had pledged investment
securities available for sale with a carrying value of $231,000 and $229,000,
respectively, in connection with our interest rate swap agreements. At June 30,
2004 and December 31, 2003, we had pledged cash of $5.1 million and $700,000,
respectively, as collateral in connection with our interest rate swap
agreements. At June 30, 2004 and December 31, 2003, we had accepted cash of
$15.9 million and $51.3 million, respectively, as collateral in connection with
our interest rate swap agreements.
Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed
Securities
Derivative financial instruments issued by us consist of interest rate
lock commitments to originate fixed-rate loans. 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.
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 86.7% and 87.2% of
total interest income for the three and six months ended June 30, 2004,
respectively, in comparison to 91.1% and 90.9% for the comparable periods in
2003. Total loans, net of unearned discount, increased $71.3 million, or 1.34%,
to $5.40 billion, or 73.7% of total assets, at June 30, 2004, compared to $5.33
billion, or 75.0% of total assets, at December 31, 2003. The continued low loan
demand from our commercial customers during 2004, indicative of increased
competition and the current economic conditions prevalent within most of our
markets, contributed to a modest increase in total loans. The overall increase
in loans, net of unearned discount, is primarily attributable to:
>> an increase of $119.5 million in our real estate construction and
development portfolio resulting primarily from seasonal increases
on existing and available credit lines;
>> an increase of $23.6 million in our real estate mortgage
portfolio primarily associated with management's business
strategy decision in mid 2003 to retain a portion of the new loan
production in our real estate mortgage portfolio to offset
continued weak loan demand in other sectors of our loan
portfolio; and
>> an increase of $19.2 million in loans held for sale resulting
from the timing of loan sales in the secondary mortgage market,
offset by a combination of management's business strategy
decision in mid-2003 to retain a portion of the new residential
mortgage loan production in our portfolio, as discussed above,
and an overall slowdown in loan origination volumes experienced
during the fourth quarter of 2003 and continuing through the
first six months of 2004; partially offset by
>> a decrease of $16.0 million in our commercial, financial and
agricultural portfolio, primarily related to two significant
commercial credits as further discussed below;
>> a decrease of $57.7 million in our lease financing portfolio
primarily resulting from the sale of a significant portion of our
commercial leasing portfolio, reducing the portfolio by
approximately $33.1 million to $9.6 million on June 30, 2004; the
remaining decline in balance was consistent with the
discontinuation of our New Mexico based leasing operation during
2002, the transfer of all responsibilities for the existing
portfolio to a new leasing staff in St. Louis, Missouri and a
change in our overall business strategy resulting in reduced
commercial leasing activities; and
>> a decrease of $17.3 million in consumer and installment loan
volumes, reflecting the continued decline of new loans and the
repayment of principal on our existing portfolio consistent with
our objectives of de-emphasizing consumer lending and expanding
commercial lending.
Nonperforming assets include nonaccrual loans, restructured loans and
other real estate. The following table presents the categories of nonperforming
assets and certain ratios as of June 30, 2004 and December 31, 2003:
June 30, December 31,
2004 2003
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual..................................................... $ 19,592 26,876
Real estate construction and development:
Nonaccrual..................................................... 7,560 6,402
Real estate mortgage:
One-to-four family residential:
Nonaccrual..................................................... 16,864 21,611
Restructured................................................... 12 13
Multi-family residential loans:
Nonaccrual..................................................... 138 804
Commercial real estate loans:
Nonaccrual..................................................... 17,925 13,994
Lease financing:
Nonaccrual..................................................... 3,167 5,328
Consumer and installment:
Nonaccrual..................................................... 264 336
----------- ----------
Total nonperforming loans.................................. 65,522 75,364
Other real estate................................................... 1,913 11,130
----------- ----------
Total nonperforming assets................................. $ 67,435 86,494
=========== ==========
Loans, net of unearned discount..................................... $ 5,399,383 5,328,075
=========== ==========
Loans past due 90 days or more and still accruing................... $ 2,551 2,776
=========== ==========
Ratio of:
Allowance for loan losses to loans............................. 2.24% 2.19%
Nonperforming loans to loans................................... 1.21 1.41
Allowance for loan losses to nonperforming loans............... 184.62 154.52
Nonperforming assets to loans and other real estate............ 1.25 1.62
=========== ==========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $65.5 million at June 30, 2004, in comparison
to $87.4 million at March 31, 2004, $75.4 million at December 31, 2003 and $68.0
million at June 30, 2003. Other real estate owned was $1.9 million, $2.9
million, $11.1 million and $15.1 million at June 30, 2004, March 31, 2004,
December 31, 2003 and June 30, 2003, respectively. Nonperforming assets,
consisting of nonperforming loans and other real estate owned, were $67.4
million at June 30, 2004, compared to $90.2 million at March 31, 2004, $86.5
million at December 31, 2003 and $83.2 million at June 30, 2003. The 22.0% net
decrease in nonperforming assets during the first six months of 2004 reflects
the following significant changes:
>> On February 9, 2004, we sold a residential and recreational
development property that had been held as other real estate
since January 2003. Prior to foreclosure, the real estate
construction and development loan had been on nonaccrual status
due to significant financial difficulties, inadequate project
financing, project delays and weak project management. At the
time of sale, the property had a carrying value of $9.2 million,
representing approximately 83.0% of our total other real estate
assets. We recorded a gain, before applicable income taxes, of
approximately $2.7 million on the sale of this property;
>> In March 2004, we downgraded a $13.9 million commercial credit
relationship in the southern California region to nonaccrual
status, representing approximately 15.9% of nonperforming loans
at March 31, 2004. On April 29, 2004, we recorded a $3.9 million
charge-off on this credit relationship as a result of workout
negotiations with the borrower and on May 7, 2004, the remaining
net balance of $10.0 million was refinanced by an independent
third party, resulting in our receipt of a cash payment on the
remaining net balance of this credit relationship;
>> On January 5, 2004, we funded a $5.3 million letter of credit
associated with a commercial credit relationship in the St. Louis
region. Additionally, in January 2004, we recorded a $750,000
charge-off on this credit relationship and downgraded the
remaining balance to nonaccrual status, bringing the total
commercial credit relationship on nonaccrual status to
approximately $7.3 million. On April 30, 2004, we sold the entire
$7.3 million commercial credit relationship to an independent
third party for $9.6 million and recorded a $2.3 million recovery
of previously recorded charge-offs; and
>> On June 30, 2004, we completed the sale of a significant portion
of our commercial leasing portfolio, reducing the portfolio by
$33.1 million to $9.6 million. The level of nonperforming loans
related to the remaining lease portfolio was $3.2 million at June
30, 2004, compared to $3.1 million, $5.3 million and $10.9
million at March 31, 2004, December 31, 2003 and June 30, 2003,
respectively.
Loan charge-offs were $12.8 million and $24.3 million for the three and
six months ended June 30, 2004, respectively, in comparison to $14.9 million and
$23.7 million for the comparable periods in 2003. Loan charge-offs, net of
recoveries, were $5.4 million and $10.8 million for the three and six months
ended June 30, 2004, respectively, in comparison to $10.8 million and $13.3
million for the comparable periods in 2003. Our allowance for loan losses as a
percentage of loans, net of unearned discount, decreased to 2.24% at June 30,
2004 from 2.34% at March 31, 2004, and increased from 2.19% at December 31,
2003, and our allowance for loan losses as a percentage of nonperforming loans
increased to 184.62% at June 30, 2004, from 142.94% at March 31, 2004 and
154.52% at December 31, 2003. The allowance for loan losses was $121.0 million
at June 30, 2004, compared to $124.9 million at March 31, 2004, $116.5 million
at December 31, 2003 and $107.8 million at June 30, 2003. As reflected in the
table below, a $1.0 million specific reserve was established in December 2003
for the estimated loss associated with the $5.3 million unfunded letter of
credit. As discussed above, the letter of credit was subsequently funded as a
loan on January 5, 2004, and the related $1.0 million specific reserve was
transferred to the allowance for loan losses. In addition, on June 30, 2004, we
transferred approximately $1.5 million from the allowance for loan losses to a
contingent liability related to recourse obligations associated with the sale of
certain leases in our commercial leasing portfolio, as further described in
Footnote 2 and Footnote 10 to our Consolidated Financial Statements. We continue
to closely monitor our loan and leasing portfolios and address the ongoing
challenges posed by the current economic environment, including reduced loan
demand within our markets and lower prevailing interest rates. Despite the
improvement in nonperforming assets during the second quarter of 2004,
nonperforming assets continue to remain at somewhat elevated levels that
initially began in late 2001 with the decline in economic conditions. We
anticipate the level of nonperforming assets to remain at these elevated levels
throughout most of 2004 and consider this in our overall assessment of the
adequacy of the allowance for loan losses.
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
the portfolio. Factors are applied to the loan portfolio for each category of
loan risk to determine acceptable levels of allowance for loan losses. We derive
these factors from our actual loss experience and from published national
surveys of norms in the industry. In addition, a quarterly evaluation of each
lending unit is performed based on certain factors, such as lending personnel
experience, recent credit reviews, geographic and credit concentrations, and
other factors. The allowance is adjusted for incremental risk factors identified
for individual segments within the loan portfolio. Based on this evaluation,
additional provisions may be required due to the perceived risk of particular
portfolios. The calculated allowance required for the portfolio is then compared
to the actual allowance balance to determine the provisions necessary to
maintain the allowance at an appropriate level. In addition, management
exercises a certain degree of judgment in its analysis of the overall adequacy
of the allowance for loan losses. In its analysis, management considers the
change 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, provisions are made to the
allowance for loan losses. Such provisions are reflected in our consolidated
statements of income.
The following table is a summary of our loan loss experience for the
three and six months ended June 30, 2004 and 2003:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of period..... $ 124,871 108,696 116,451 99,439
Acquired allowances for loan losses................ -- -- -- 757
Other adjustments (1)(2)........................... (1,479) -- (479) --
--------- -------- --------- --------
123,392 108,696 115,972 100,196
--------- -------- -------- --------
Loans charged-off.................................. (12,801) (14,928) (24,295) (23,665)
Recoveries of loans previously charged-off......... 7,375 4,080 13,539 10,317
--------- -------- -------- --------
Net loan charge-offs............................... (5,426) (10,848) (10,756) (13,348)
--------- -------- -------- --------
Provision for loan losses.......................... 3,000 10,000 15,750 21,000
--------- -------- -------- --------
Allowance for loan losses, end of period........... $ 120,966 107,848 120,966 107,848
========= ======== ======== ========
---------------
(1) In December 2003, we established a $1.0 million specific reserve for estimated losses on a $5.3 million letter of
credit that was recorded in accrued and other liabilities in our consolidated balance sheets. On January 5, 2004,
the letter of credit was fully funded as a loan. Consequently, the related $1.0 million specific reserve was
reclassified from accrued and other liabilities to the allowance for loan losses.
(2) On June 30, 2004, we reclassified $1.5 million from the allowance for loan losses to accrued and other liabilities to
establish a specific reserve associated with the lease portfolio sale and related recourse obligations for certain
leases sold.
Liquidity
Our liquidity is the ability to maintain a cash flow that is adequate
to fund operations, service debt obligations and meet other commitments on a
timely basis. First Bank receives 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 Federal Home Loan Bank and other borrowings, including our
revolving credit line. The aggregate funds acquired from these sources were
$1.01 billion and $726.9 million at June 30, 2004 and December 31, 2003,
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,
other borrowings and our note payable, at June 30, 2004:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less..................................... $174,255 175,548 349,803
Over three months through six months..................... 59,670 -- 59,670
Over six months through twelve months.................... 85,743 -- 85,743
Over twelve months....................................... 155,865 357,000 512,865
-------- -------- ---------
Total............................................... $475,533 532,548 1,008,081
======== ======== =========
In addition to these sources of funds, First Bank has established a
borrowing relationship with the Federal Reserve Bank. This borrowing
relationship, which is secured by commercial loans, provides an additional
liquidity facility that may be utilized for contingency purposes. At June 30,
2004 and December 31, 2003, First Bank's borrowing capacity under the agreement
was approximately $809.2 million and $909.3 million, respectively. In addition,
First Bank's borrowing capacity through its relationship with the Federal Home
Loan Bank was approximately $460.7 million and $449.5 million at June 30, 2004
and December 31, 2003, respectively. Exclusive of the Federal Home Loan Bank
advances outstanding of $7.0 million at June 30, 2004 and December 31, 2003,
First Bank had no amounts outstanding under either of these borrowing
arrangements at June 30, 2004 and December 31, 2003.
In addition to our owned banking facilities, we have entered into
long-term leasing arrangements to support our ongoing activities. The required
payments under such commitments and other obligations at June 30, 2004 are as
follows:
Over 1 Year
Less than But Less Than Over
1 Year 5 Years 5 Years Total
------ ------- ------- -----
(dollars expressed in thousands)
Operating leases.................................. $ 4,435 20,119 21,161 45,715
Certificates of deposit........................... 1,204,489 730,621 251 1,935,361
Other borrowings.................................. 175,548 356,000 1,000 532,548
Subordinated debentures........................... -- -- 206,795 206,795
Other contractual obligations..................... 586 2,717 29 3,332
---------- ---------- -------- ---------
Total........................................ $1,385,058 1,109,457 229,236 2,723,751
========== ========== ======== =========
Management believes the available liquidity and operating results of
First Bank will be sufficient to provide funds for growth and to permit the
distribution of dividends to us sufficient to meet our operating and debt
service requirements, both on a short-term and long-term basis, and to pay
interest on the subordinated debentures that we issued to our affiliated
statutory and business financing trusts.
Effects of New Accounting Standards
In December 2003, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51, a revision to FASB Interpretation No. 46,
Consolidation of Variable Interest Entities issued in January 2003. This
Interpretation is intended to achieve more consistent application of
consolidation policies to variable interest entities and, thus to improve
comparability between enterprises engaged in similar activities even if some of
those activities are conducted through variable interest entities. The
provisions of this Interpretation are effective for financial statements issued
for fiscal years ending after December 15, 2003. We have several statutory and
business trusts that were formed for the sole purpose of issuing trust preferred
securities. On December 31, 2003, we implemented FASB Interpretation No. 46, as
amended, which resulted in the deconsolidation of our five statutory and
business trusts. The implementation of this Interpretation had no material
effect on our consolidated financial position or results of operations.
Furthermore, in July 2003, the Board of Governors of the Federal Reserve System,
or Board, issued a supervisory letter instructing bank holding companies to
continue to include the trust preferred securities in their Tier I capital for
regulatory capital purposes, subject to applicable limits, until notice is given
to the contrary. As discussed in Note 7 to our Consolidated Financial
Statements, the Board requested public comment on newly proposed rules that
would allow bank holding companies to retain trust preferred securities in their
Tier 1 capital, subject to stricter quantitative and qualitative standards,
which would result in a reduction of our regulatory capital ratios
On July 27, 2004, the FASB's Derivatives Implementation Group issued
guidance on Statement of Financial Accounting Standards, or SFAS, No. 133
Implementation Issue No. G25, or DIG Issue G25. DIG Issue G25 clarifies the
FASB's position on the ability of entities to hedge the variability in interest
receipts or overall changes in cash flows on a group of prime-rate based loans.
The new guidance permits the use of the first-payments-received technique in a
cash flow hedge of the variable prime-rate based or other variable
non-benchmark-rate-based interest payments for a rolling portfolio of prepayable
interest-bearing loans, provided the hedging relationship meets all other
conditions in FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, for cash flow hedge accounting. If a pre-existing cash flow
hedging relationship has identified the hedged transactions in a manner
inconsistent with the guidance in DIG Issue G25, the hedging relationship must
be de-designated at the effective date, as further discussed below, and any
derivative gains or losses in other comprehensive income related to the
de-designated hedging relationships should be accounted for under paragraphs 31
and 32 under SFAS No. 133. We currently have pre-existing cash flow hedging
relationships that are inconsistent with the guidance in DIG Issue G25. As of
June 30, 2004, our other comprehensive income included a $7.4 million gain
attributable to these pre-existing cash flow hedging relationships. However,
$4.4 million of this gain is attributable to hedges that will mature prior to
the effective date of the implementation of DIG Issue G25. We may be required
to de-designate the remaining specific hedging relationships and accrete the
associated gain into noninterest income over the remaining lives of the
respective hedging relationships. The guidance from DIG Issue G25 is effective
for the fiscal quarter beginning after August 9, 2004 and should be applied to
all hedging relationships as of the effective date. We are currently evaluating
the requirements of the guidance from the FASB on DIG Issue G25 and the overall
impact on our consolidated financial statements or results of operations.
In March 2004, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin No. 105 -- Application of Accounting Principles to
Loan Commitments, or SAB 105, which provides guidance regarding the application
of generally accepted accounting principles to loan commitments accounted for as
derivative instruments. Through specific guidance on valuation-recognition model
inputs to measure loan commitments accounted for at fair value, SAB 105 limits
the opportunity for recognition of an asset related to a commitment to originate
a mortgage loan that will be held for sale prior to funding. SAB 105 requires
that the measurement of fair value include only differences between the
guaranteed interest rate in the loan commitment and a market interest rate,
excluding any expected future cash flows related to the customer relationship or
loan servicing. SAB 105 is effective for all mortgage loan commitments that are
accounted for as derivative instruments that are entered into after March 31,
2004, and permits continued use of previously applied accounting policies to
loan commitments entered into on or before March 31, 2004. The implementation of
SAB 105 did not have a material impact on our consolidated financial statements
or results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2003, our risk management program's simulation model
indicated a loss of projected net interest income in the event of a decline in
interest rates. We are "asset-sensitive," indicating that our assets would
generally reprice with changes in rates more rapidly than our liabilities. While
a decline in interest rates of less than 100 basis points was projected to have
a relatively minimal impact on our net interest income, an instantaneous,
parallel decline in the interest yield curve of 100 basis points indicated a
pre-tax projected loss of approximately 7.9% of net interest income, based on
assets and liabilities at December 31, 2003. At June 30, 2004, 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 income
associated with our interest rate swap agreements offset by reductions in
prevailing interest rates throughout 2002 and 2003, is reflected in our net
interest margin for the three and six months ended June 30, 2004 as compared to
the comparable periods in 2003 and further discussed under "--Results of
Operations." During the three and six months ended June 30, 2004, our
asset-sensitive position and overall susceptibility to market risks have not
changed materially.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, our
Chief Executive Officer evaluated the effectiveness of our "disclosure controls
and procedures" (as defined in rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934) and concluded on the basis of the evaluation
that, as of the date of such evaluation, our disclosure controls and procedures
were effective. There have been no significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of that evaluation.
Part II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
Exhibit Number Description
-------------- -----------
10.3 Service Agreement by and between First Services,
L.P. and First Banks, Inc., dated May 1, 2004 -
filed herewith.
10.4 Service Agreement by and between First Services,
L.P. and First Bank, dated May 1, 2004 - filed
herewith.
10.5 Service Agreement by and between First Banks, Inc.
and First Services, L.P., dated May 1, 2004 -
filed herewith.
31 Rule 13a-14(a) / 15d-14 (a) Certifications - filed
herewith.
32 Section 1350 Certifications - filed herewith.
(b) We filed a Current Report on Form 8-K on April 23, 2004. Item 12 of the
report referenced a press release announcing First Banks, Inc.'s
financial results for the three months ended March 31, 2004. A copy of
the press release was included as Exhibit 99.2.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST BANKS, INC.
August 13, 2004 By: /s/ Allen H. Blake
--------------------------------------------
Allen H. Blake
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
Exhibit 10.3
SERVICE AGREEMENT
THIS SERVICE AGREEMENT is made and entered into as of the 1st day of
May, 2004, by and between FIRST SERVICES, L.P., a Missouri Limited Partnership
and FIRST BANKS, INC., a bank holding company duly organized and existing by
virtue of the laws of the State of Missouri.
WHEREAS, FIRST BANKS, INC. and FIRST SERVICES, L.P. entered into a
Service Agreement dated October 15, 2001; and
WHEREAS, said Service Agreement was assigned to First Services, L.P. on
or about October 15, 2001; and
WHEREAS, FIRST SERVICES, L.P. and FIRST BANKS, INC. desire to amend and
restate said Service Agreement in its entirety.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the sum of Ten Dollars ($10.00) in hand paid,
each to the other, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
I TERMINATION AND REVOCATION
The Parties hereto hereby revoke, cancel and hold for naught the
Service Agreement dated October 15, 2001, and hereby substitute in its
place the Service Agreement herein contained.
II SERVICES
A. First Services, L.P. shall furnish First Banks, Inc. data
processing services selected by First Banks, Inc. from the
Product and Price Schedule as per Attachment 1, attached hereto
and incorporated herein by reference thereto. Additional services
may be selected upon prior written notice to First Services, L.P.
at First Services, L.P.'s then current list price by executing an
amended Summary Page.
B. First Services, L.P. will provide conversion and training
services for the fees specified from the Product and Price
Schedule (Attachment 1). Classroom training in the use and
operation of the system for the number of First Banks, Inc.
personnel mutually agreed upon in the conversion planning process
will be provided at a training facility mutually agreed upon.
Conversion services are those activities designed to transfer the
processing of First Banks, Inc.'s data from its present
processing company to First Services, L.P.
C. First Services, L.P. will also provide Network Support Service
consisting of communication line monitoring and diagnostic
equipment and support personnel to discover, diagnose, repair or
report line problems to the appropriate telephone company. The
fee for this service is also listed on the Product and Price
Schedule (Attachment 1).
D. First Services, L.P. shall upon request act as First Banks,
Inc.'s designated representative to arrange for the purchase and
installation of data lines necessary to access the First
Services, L.P. system. Where requested, additional dial-up lines
and equipment to be utilized as a backup to the regular data
lines may also be ordered. First Services, L.P. shall bill First
Banks, Inc. for the actual charges incurred for the data lines
and for the maintenance of the modems and other interface
devices.
E. First Services, L.P. will provide e-mail, Internet and Intranet
capabilities at a fee listed on the Product and Pricing Schedule
(Attachment 1).
F. Processing priorities will be determined by mutual agreement of
the parties hereto.
III. TERM
The term of this Agreement shall be twelve (12) months commencing on
May 1, 2004. Upon expiration, the Agreement will automatically renew
for successive t erms of twelve (12) months each unless either party
shall have provided written notice to the other at least one-hundred
eighty (180) days prior to the expiration of the then current term, of
its intent not to renew. In the event of termination, First Services,
L.P. shall provide a reasonable time allowance to allow First Banks,
Inc. to convert to another system.
IV. SOFTWARE / FIRMWARE
Unmodified third party software or firmware ("Software") may be
supplied as part of the Agreement. All such Software shall be provided
subject to Software License Agreements.
V. PRICE AND PAYMENT
A. Fees for First Services, L.P.'s services are set forth on the
Product and Price Schedule (Attachment 1) including, where
applicable, minimum monthly charges and payment schedules for
one-time fees.
B. Standard Fees shall be invoiced no later than the fifteenth
(15th) of each month for the then current month. Terms of payment
shall be net cash.
C. The Base Service Charge listed on the Product and Price Schedule
(Attachment 1) shall not change more than twice a year. The fee
schedule shall be reviewed annually to ensure fair market value
in pricing. Comparisons will be made with peers and other
providers of similar services. New products and services may be
added as they become available and will be priced accordingly.
D. This above limitation shall not apply to pass-thru expenses. A
pass-thru expense is a charge for goods or services by First
Services, L.P. on First Banks, Inc.'s behalf that are to be
billed to First Banks, Inc. without mark-up.
E. The fees listed on the Product and Price Schedule (Attachment 1)
do not include and First Banks, Inc. is responsible for
furnishing transportation or transmission of information between
First Services, L.P.'s data center and First Banks, Inc.'s sites.
Where First Banks, Inc. has elected to have First Services, L.P.
provide Telecommunication Services, the price for the Services
will be provided and billed as a pass-thru expense.
F. Network Support Service Fees and Local Network Feed are based
upon services rendered from First Services, L.P.'s premises.
Off-premise support will be provided upon First Banks, Inc.'s
request on an as available basis at First Services, L.P.'s then
current charges for time and materials, plus reasonable travel
and living expenses.
VI. CLIENT OBLIGATIONS
A. First Banks, Inc. shall be solely responsible for the input,
transmission or delivery of all information and data required by
First Services, L.P. to perform the services except where First
Banks, Inc. has retained First Services, L.P. to handle such
responsibilities on its behalf. The data shall be provided in a
format and manner approved by First Services, L.P. First Banks,
Inc. will provide at its own expense or procure from First
Services, L.P., all equipment, computer software communication
lines and interface devices required to access the First
Services, L.P. System. If First Banks, Inc. has elected to
provide such items itself, First Services, L.P. shall provide
First Banks, Inc. with a list of compatible equipment and
software.
B. First Banks, Inc. shall designate appropriate First Banks, Inc.
personnel for training in the use of the First services, L.P.
System, shall allow First Services, L.P. access to First Banks,
Inc.'s sites during normal business hours for conversion and
shall cooperate with First services, L.P. personnel in the
conversion and implementation of the services.
C. First Banks, Inc. shall comply with any operating instructions on
the use of the First Services, L.P. reports furnished by First
Services, L.P. for accuracy and shall work with First Services,
L.P. to reconcile any out of balance conditions. First Banks,
Inc. shall determine and be responsible for the authenticity and
accuracy of all information and data submitted to First Services,
L.P.
D. First Banks, Inc. shall furnish or, if First Services, L.P.
agrees to so furnish, reimburse First Services, L.P. for courier
services applicable to the services requested.
VII. GENERAL ADMINISTRATION
First Services, L.P. is continually reviewing and modifying the First
Services, L.P. system to improve service and to comply with federal
government regulations applicable to the data utilized in providing
services to First Banks, Inc. First Services, L.P. reserves the right
to make changes in the service, including, but not limited to
operating procedures, security procedures, the type of equipment
resident at and the location of First Services, L.P.'s data center.
VIII. CLIENT CONFIDENTIAL INFORMATION
A. First Services, L.P. shall treat all information and data
relating to First Banks, Inc.'s business provided to First
Services, L.P. by First Banks, Inc., or information relating to
First Banks, Inc.'s customers, as confidential and shall
safe-guard First Banks, Inc.'s information with the same degree
of care used to protect First Services, L.P.'s confidential
information. First Services, L.P. and First Banks, Inc. agree
that master and transaction data files are owned by and
constitute property of First Banks, Inc. data and records shall
be subject to regulation and examination by State and Federal
supervisory agencies to the same extent as if such information
were on First Banks, Inc.'s premises. First Services, L.P.'s
obligations under this Section VIII shall survive the termination
or expiration of this Agreement.
B. First Services, L.P. agrees now and at all times in the future
that all such confidential information shall be held in strict
confidence and disclosed only to those employees whose duties
reasonably require access to such information. First Services,
L.P. may use such confidential information only in connection
with its performance under this Agreement. Confidential
information shall be returned to First Banks, Inc. or destroyed
upon First Banks, Inc.'s request once the services contemplated
by this Agreement have been completed or upon termination of this
Agreement.
C. First Services, L.P. shall maintain adequate backup procedures
including storage of duplicate record files as necessary to
reproduce First Banks, Inc.'s records and data. In the event of a
service disruption due to reasons beyond First Services, L.P.'s
control, First Services L.P. shall use diligent efforts to
mitigate the effects of such an occurrence.
D. First Services, L.P. shall establish and maintain policies and
procedures to insure compliance with this section. First
Services, L.P. agrees to permit First Banks, Inc. to audit First
Services, L.P.'s compliance with this section during regular
business hours upon reasonable notice to First Services, L.P. The
provisions of this section shall survive any termination of this
Agreement.
IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION
A. First Banks, Inc. shall not use or disclose to any third persons
any confidential information concerning First Services, L.P.
Confidential information is that which relates to First Services,
L.P.'s software, research, development, trade secrets or business
affairs including, but not limited to, the terms and conditions
of this Agreement but does not include information in the public
domain through no fault of First Banks, Inc. First Banks, Inc.'s
obligations under this Section IX shall survive the termination
or expiration of this Agreement.
B. First Services, L.P.'s system contains information and computer
software that is proprietary and confidential information of
First Services, L.P., its suppliers and licensees. First Banks,
Inc. agrees not to attempt to circumvent the devices employed by
First Services, L.P. to prevent unauthorized access to First
Services, L.P.'s system.
X. WARRANTIES
First Services, L.P. will accurately process First Banks, Inc.'s work
provided that First Banks, Inc. supplies accurate data and follows the
procedures described in First Services, L.P.'s user manuals, notices
and advices. First Services, L.P. personnel will exercise due care
in the processing of First Banks, Inc.'s work. In the event of an error
caused by First Services, L.P.'s personnel, programs or equipment,
First Services, L.P. shall correct the data and/or reprocess the
affected report at no additional cost to First Banks, Inc.
XI. LIMITATION OF LIABILITY
IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL,
OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM FIRST BANKS, INC.'S USE OF FIRST SERVICES, L.P.'S SERVICES, OR
FIRST SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE UNDER THIS
AGREEMENT, REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN
CONTRACT. FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL
CAUSES OF ACTION RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE
OR LOSS INCURRED OR SUSTAINED BY FIRST BANKS, INC. RELATING TO THIS
AGREEMENT AND THE SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE
AMOUNT OF TOTAL FEES PAID BY FIRST BANKS, INC. TO FIRST SERVICES, L.P.
IN THE THREE (3) MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED.
FIRST SERVICES, L.P.'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO
EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID FOR THE
EQUIPMENT OR SOFTWARE.
XII. PERFORMANCE STANDARDS
A. On-Line Availability - First Services, L.P.'s standard of
performance shall be on-line availability of the system 98% of
the time that it is scheduled to be so available over a three (3)
month period (the "Measurement Period"). Actual on-line
performance will be calculated monthly by comparing the number of
hours which the system was scheduled to be operational on an
on-line basis with the number of hours, or a portion thereof, it
was actually operational on an on-line basis. Downtime may be
caused by operator error, hardware malfunction or failure, or
environmental failures such as loss of power or air conditioning.
Downtime caused by reasons beyond First Services, L.P.'s control
should not be considered in the statistics.
B. Report Availability - First Services, L.P.'s standard of
performance for report availability shall be that, over a three
(3) month period, ninety-five percent (95%) of all Critical Daily
Reports shall be available for remote printing on time without
significant errors. A Critical Daily Report shall mean priority
group reports, which First Services, L.P. and First Banks, Inc.
have mutually agreed upon in writing, are necessary to properly
account for the previous day's activity and properly notify First
Banks, Inc. of overdraft, NSF or return items. A significant
error is one that impairs First Banks, Inc.'s ability to properly
account for the previous days activity and/or properly account
for overdraft, NSF or return items. Actual performance will be
calculated monthly by comparing the total number of First Banks,
Inc. reports scheduled to be available from First Services, L.P.
to the number of reports which were available on time and without
error.
C. Exclusive Remedy - In the event that First Services, L.P.'s
performance fails to meet the standards listed above and such
failure is not the result of First Banks, Inc.'s error or
omission, First Banks, Inc.'s sole and exclusive remedy for such
default shall be the right to terminate this Agreement in
accordance with the provisions of this paragraph. In the event
that First Services, L.P. fails to achieve any performance
standards, alone or in combination, for the prescribed
measurement period, First Banks, Inc. shall notify First
Services, L.P. of its intent to terminate this Agreement if First
Services, L.P. fails to restore performance to the committed
levels. First Services, L.P. shall advise First Banks, Inc.
promptly upon correction of the system deficiencies (in no event
shall corrective action exceed sixty (60) days from the notice
date) and shall begin an additional measurement period. Should
First Services, L.P. fail to achieve the required performance
standards during the re-measurement period, First Banks, Inc. may
terminate this Agreement and First Services, L.P. shall cooperate
with First Banks, Inc. to achieve an orderly transition to First
Banks, Inc.'s replacement processing system. First Banks, Inc.
may also terminate this Agreement if First Services, L.P.'s
performance for the same standard is below the relevant
performance standard for more than two (2) measurement periods in
any consecutive twelve (12) months or for more than five (5)
measurement periods during the term of this Agreement. During the
period of transition, First Banks, Inc. shall pay only such
charges as are incurred for monthly fees until the date of
deconversion. First Services, L.P. shall not charge First Banks,
Inc. for services relating to First Banks, Inc.'s deconversion.
D. Audit - First Banks, Inc. shall have the right to perform
reasonable audits, at its cost, upon giving written notice to
First Services, L.P. of its intent to do so. First Services, L.P.
shall provide, upon request, financial information to First
Banks, Inc.
XIII. BUSINESS CONTINUITY / DISASTER RECOVERY
A. A disaster shall mean any unplanned interruption of the
operations of or inaccessibility to the First Services, L.P. data
center which appears in First Services, L.P.'s reasonable
judgment to require relocation of processing to an alternative
site. First Services, L.P. shall notify First Banks, Inc. as soon
as possible after it deems a service outage to be a disaster.
First Services, L.P. shall move the processing of First Banks,
Inc.'s critical services to an alternative processing center as
expeditiously as possible. First Services, L.P. shall work with
First Banks, Inc. to define those services deemed as critical to
the operation, revenue, and capital preservation of First Banks,
Inc. First Banks, Inc. shall maintain adequate records of all
transactions during the period of service interruption and shall
have personnel available to assist First Services, L.P., in
implementing the switch over to the alternative processing site.
During a disaster, non-critical, optional or on-request services
shall be provided by First Services, L.P. only to the extent
there is adequate capacity at the alternate center and only after
stabilizing the provision of critical services.
B. First Services, L.P. shall work with First Banks, Inc. to
establish a plan for alternative data communications in the event
of a disaster. First Banks, Inc. shall be responsible for
furnishing any additional communications equipment and data lines
required under the adopted plan.
C. First Services, L.P. shall test the Business Continuity Plan by
conducting, at least, one annual test. First Banks, Inc. agrees
to participate in and assist First Services, L.P. with such
testing. Test results will be made available to First Banks,
Inc.'s regulators, internal and external auditors, and (upon
request) to First Banks, Inc.'s insurance underwriters.
D. First Banks, Inc. understands and agrees the Business Continuity
Plan is designed to minimize but not eliminate risks associated
with a disaster affecting First Services, L.P.'s data center.
First Services, L.P. does not warrant that service will be
uninterrupted or error free in the event of a disaster. First
Banks, Inc. maintains responsibility for adopting a business
continuity plan relating to disasters affecting First Banks,
Inc.'s facilities and for securing resources necessary to
properly protect First Banks, Inc.'s revenues in the event of a
disaster.
XIV. DEFAULT
A. In the event that First Banks, Inc. is thirty (30) days in
arrears in making any payment required, or in the event of any
other material default by either First Services, L.P. or First
Banks, Inc. in the performance of their obligations hereunder,
the affected party shall have the right to give written notice to
the other of the default and its intent to terminate this
Agreement stating with reasonable particularity the nature of the
claimed default. This Agreement shall terminate if the default
has not been cured within a reasonable time with a minimum being
thirty (30) days from the effective date of the notice.
B. Upon the expiration of this Agreement, or its termination, First
Services, L.P. shall furnish to First Banks, Inc. such copies of
First Banks, Inc.'s data files as First Banks, Inc. may request
in machine readable format along with such other information and
assistance as or is reasonable and customary to enable First
Banks, Inc. to deconvert from the First Services, L.P. system.
First Banks, Inc. shall reimburse First Services, L.P. for the
production of data records and other services at First Services,
L.P.'s then current fees for such services.
XV. INSURANCE
First Services, L.P. carries Comprehensive General Liability
insurance, Commercial Crime Insurance covering Employee Dishonesty,
all-risk replacement cost coverage on all equipment used at First
Services, L.P.'s data center and Worker Compensation coverage on First
Services, L.P. employees wherever located in the United States. In
addition, First Services, L.P. carries coverage for computer/computer
related theft. First Banks, Inc. shall carry adequate insurance to
cover liability for source documents while in transit and in case of
data loss through errors and omissions.
XVI. GENERAL
A. This Agreement is binding upon the parties and their respective
successors and permitted assigns. Neither party may assign this
Agreement in whole or in part without the consent of First Banks,
Inc. and/or First Services, L.P., provided, however, that First
Services, L.P. may subcontract any or all of the services to be
performed under this Agreement without the written consent of
First Banks, Inc. Any such subcontractors shall be required to
comply with all of the applicable terms and conditions of this
Agreement.
B. The parties agree that, in connection with the performance of
their obligations hereunder, they will comply with applicable
Federal, State, and local laws including the laws and regulations
regarding Equal Employment Opportunities.
C. First Services, L.P. agrees the Federal Reserve Bank, and FDIC
will have the authority and responsibility pursuant to the Bank
Service Corporation Act, 12 U.S.C. 1867(c) relating to services
performed by contract or otherwise. First Services, L.P. also
agrees that its services shall be subject to oversight by the
Federal Reserve Bank, FDIC or state banking departments as may be
applicable under laws and regulations pertaining to First Banks,
Inc.'s and shall, if applicable, provide the Federal Reserve Bank
and FDIC with a copy of First Services, L.P.'s current audit and
financial statements and a copy of any current third party review
report when a review has been performed.
D. Neither party shall be liable for any errors, delays or
non-performance due to events beyond its reasonable control
including, but not limited to, acts of God, failure or delay of
power or communications, changes in law or regulation or other
acts of governmental authority, strike, weather conditions or
transportation.
E. All written notices required to be given under this Agreement
shall be sent by Registered or Certified Mail, Return Receipt
Requested, postage prepaid, or by confirmed facsimile to the
persons and at the addresses listed below or to such other
address or person as a party shall have designated in writing.
First Services, L.P. First Banks, Inc.
600 James S. McDonnell Blvd. 135 North Meramec
Hazelwood, MO 63042 Clayton, MO 63105
F. The failure of either party to exercise in any respect any right
provided for herein shall not be deemed a waiver of any rights.
G. Each party acknowledges that is has read this Agreement,
understands it, and agrees that it is the complete and exclusive
statement of the Agreement between the parties and supersedes and
merges any prior or simultaneous proposals, understandings and
all other agreements with respect to the subject matter. This
Agreement may not be modified or altered except by a written
instrument duly executed by both parties.
H. No waiver of any of the terms of this Agreement shall be
effective unless in writing and signed by the duly authorized
representative of the party charged therewith. No waiver of any
provision hereof shall extend to or affect any obligation not
expressly waived, impair any rights consequent on such obligation
or imply a subsequent waiver of that or any other provision.
I. This Agreement shall be governed by, construed and interpreted in
accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the parties have executed this Agreement the date first
above written.
First Banks, Inc. First Services, L.P.
135 North Meramec 600 James S. McDonnell Boulevard
Clayton, Missouri 63105 Hazelwood, Missouri 63042
BY: /s/Allen H. Blake BY: /s/Steven L. Schlansky
---------------------------------- ------------------------------
Allen H. Blake Steven L. Schlansky
President and Vice President
Chief Executive Officer
Attachment A
First Services, L.P.
Product and Price Schedule
EFFECTIVE MAY 1, 2004
USER BASED SERVICES
- -------------------
WAN / LAN $32.00 per user
Technical Support $60.00 per user
Help Desk $15.00 per user
Microsoft Application Licenses - Delete $20.00 per user
Email $10.00 per user
Web (Internet) Access $20.00 per user
Dial-In (Remote) Access $30.00 per user
Information Security $33.00 per user
User Based Services include:
Network Technical Support Network Infrastructure
Technical Support Security Monitoring
Help Desk MS Word - Delete
MS Excel -Delete MS Access - Delete
MS Powerpoint - Delete Anti-Virus
Email usage Web usage
Dial-In Access capability User/Password Administration
Access Control
BRANCH BASED SERVICES
- ---------------------
Support Data Connections
MAN $6,000.00 per location
Branch Data Connections
Branches $1,000.00 per location
ATM Connections
ATM Connections $100.00 per location
Dierbergs Market ATM $700.00 per location
Contingency Planning/Disaster Recovery $300.00 per location
Branch Courier Routes $900.00 per location
Branch Based Services include:
Data Communication Lines
Contingency Planning
Disaster Recovery Exercises
Courier Service
First Services, L.P.
Product and Price Schedule
EFFECTIVE MAY 1, 2004
ACCOUNT / ITEM / TRANSACTION BASED SERVICES
- -------------------------------------------
Accounts Processed
DDA .700
Savings .650
Time .650
Loan .700
Accounts Processed Based Services Include:
Collection System (Cyber Resources) ACH Origination
Recovery System (Cyber Resources) ATM/Debit Card Processing
Organizational Profitability (IPS) General Ledger
Asset/Liability (Bankware) Loan Tracking (Baker Hill)
Fixed Asset Interface Optical System (RVI)
Loan Spread Sheet (Baker Hill) Interactive Voice
MCIF (Okra) Credit Scoring (Fair Issac)
Card Management System Loan Documentation (FTI/CFI)
Business Online Banking (BOB) Wire Transfer (Fundtech)
Retail Online Banking Commercial Analysis
Marketing Website Accounts Payable Interface
Bank Audit Long Distance Management
NOW Reclassification Teller (Encore)
Charge Back System Platform (Encore)
Remote Laser Printing Call Center (Encore)
Automated Reconciliation System (ARP) Query Report Writer
Mortgage (Unify) Forms and Supplies
Currency Transaction Reporting Year-end Processing
CBS, Platform, Internet Maintenance .130
ATM/Debit Cards Supported .100
Statements Produced
DDA .300
Savings .100
Time .020
Loans .150
Year End $1.00
5498 $1.00
Transactions Processed
Proof Items .040 per item
POD and EFT items .014 per item
Inclearing and Transmission items .014 per item
Wire Activity $5.00 per item
BOB / Firstlink $30.00 per customer
ACH Activity .042 per item
Research Requests $15.00 per item
Adjustments Processed $15.00 per item
First Services, L.P.
Product and Price Schedule
Effective May 1, 2004
Transactions Processed Base Services Include:
MICR Rejects Serial Sort Teller Adjustments
Transit Float Analysis Microfilming Deposit Corrections
Endorsement Services Forms and Supplies Check Truncation
Exception Item Sort Statement Sort Interest Check Mailings
Statement Enclosures Notice Mailings
Lockbox Support
Lockbox Transactions .450
Postage As incurred
Copies .080
Mail Services $500.00
APPLICATION/PROJECT BASED SERVICES
- ----------------------------------
Information Systems
Core Systems $11,000.00
Commercial Systems $9,800.00
Retail Systems $9,800.00
Corporate $9,800.00
Technology Services
Server Support $9,800.00
Internet / Intranet $9,800.00
Technology Planning/Support
Project Office/Planning $9,800.00
Database Support $9,800.00
Asset Mgmt./Tech. Purchasing $5,000.00
Acquisition/New Business Services $9,800.00
Deposit Services
Operations Support $5,000.00
IRA Support $3,000.00
Bookkeeping $3,500.00
Recon/Appl. Balancing $2,500.00
Records Management $5,500.00
Application/Project Based Services Include:
Production problem support Application Q/A
Application software upgrades/releases Project Management
Project Office tracking and reporting Acquisition Conversions
Branch De-conversions Mergers
Equipment quotes, orders, and delivery Asset tracking
Invoice payment
Deposit Services includes:
Returns Large Item Notification Signature Verification
Chargebacks Kiting Savings Bonds
Unposted Items OFAC American Express
NSF Notices Year-End Notifications
Exhibit 10.4
SERVICE AGREEMENT
THIS SERVICE AGREEMENT is made and entered into as of the 1st day of
May, 2004, by and between FIRST SERVICES, L.P., a Missouri Limited Partnership
and FIRST BANK, a banking institution duly organized and existing by virtue of
the laws of the State of Missouri.
WHEREAS, FIRST BANK and FIRST SERVICES, L.P. entered into a Service
Agreement dated December 30, 2002; and
WHEREAS, said Service Agreement was assigned to First Services, L.P. on
or about December 30, 2002; and
WHEREAS, FIRST SERVICES, L.P. and FIRST BANK desire to amend and
restate said Service Agreement in its entirety.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the sum of Ten Dollars ($10.00) in hand paid,
each to the other, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
I. TERMINATION AND REVOCATION
The Parties hereto hereby revoke, cancel and hold for naught the
Service Agreement dated December 30, 2002, and hereby substitute in
its place the Service Agreement herein contained.
II. SERVICES
A. First Services, L.P. shall furnish First Bank data processing and
item processing services selected by First Bank from the Product
and Price Schedule as per Attachment 1, attached hereto and
incorporated herein by reference thereto. Additional services may
be selected upon prior written notice to First Services, L.P. at
First Services, L.P.'s then current list price by executing an
amended Summary Page.
B. First Services, L.P. will provide conversion and training
services for the fees specified from the Product and Price
Schedule (Attachment 1). Classroom training in the use and
operation of the system for the number of First Bank personnel
mutually agreed upon in the conversion planning process will be
provided at a training facility mutually agreed upon. Conversion
services are those activities designed to transfer the processing
of First Bank's data from its present processing company to First
Services, L.P.
C. First Services, L.P. will also provide Network Support Service
consisting of communication line monitoring and diagnostic
equipment and support personnel to discover, diagnose, repair or
report line problems to the appropriate telephone company. The
fee for this service is also listed on the Product and Price
Schedule (Attachment 1).
D. First Services, L.P. shall upon request act as First Bank's
designated representative to arrange for the purchase and
installation of data lines necessary to access the First
Services, L.P. system. Where requested, additional dial-up lines
and equipment to be utilized as a backup to the regular data
lines may also be ordered. First Services, L.P. shall bill First
Bank for the actual charges incurred for the data lines and for
the maintenance of the modems and other interface devices.
E. First Services, L.P. will provide and support an Internet Banking
application capability, at a fee listed on the Product and
Pricing Schedule (Attachment 1). First Services, L.P. will ensure
access to this system by employees and those customers who meet
the requirements established by the First Bank Internet Banking
Group. Any request for access that is denied will be resolved by
mutual agreement of the parties hereto.
F. First Services, L.P. will provide e-mail, Internet and Intranet
capabilities at a fee listed on the Product and Pricing Schedule
(Attachment 1).
G. Processing priorities will be determined by mutual agreement of
the parties hereto.
H. In addition, First Services, L.P. acknowledges that First Bank
acts as a correspondent bank to certain affiliate banks and that
as part of its duties hereunder First Services, L.P. will be
performing certain services for First Bank which are necessary
because of its status as a correspondent bank.
III. TERM
The term of this Agreement shall be sixty (60) months commencing on
May 1, 2004. Upon expiration, the Agreement will automatically renew
for successive terms of sixty (60) months each unless either party
shall have provided written notice to the other at least one-hundred
eighty (180) days prior to the expiration of the then current term, of
its intent not to renew. In the event of termination, First Services,
L.P. shall provide a reasonable time allowance to allow First Bank to
convert to another system.
IV. SOFTWARE / FIRMWARE
Unmodified third party software or firmware ("Software") may be
supplied as part of the Agreement. All such Software shall be provided
subject to Software License Agreements.
V. PRICE AND PAYMENT
A. Fees for First Services, L.P.'s services are set forth on the
Product and Price Schedule (Attachment 1) including, where
applicable, minimum monthly charges and payment schedules for
one-time fees.
B. Standard Fees shall be invoiced no later than the fifteenth
(15th) of each month for the then current month. Terms of payment
shall be net cash.
C. The Base Service Charge listed on the Product and Price Schedule
(Attachment 1) shall not change more than twice a year. The fee
schedule shall be reviewed annually to ensure fair market value
in pricing. Comparisons will be made with peers and other
providers of similar services. New products and services may be
added as they become available and will be priced accordingly.
D. This above limitation shall not apply to pass-thru expenses. A
pass-thru expense is a charge for goods or services by First
Services, L.P. on First Bank's behalf that are to be billed to
First Bank without mark-up.
E. The fees listed on the Product and Price Schedule (Attachment 1)
do not include and First Bank is responsible for furnishing
transportation or transmission of information between First
Services, L.P.'s data center, First Bank's site and any
applicable clearing house, regulatory agency or Federal Reserve
Bank. Where First Bank has elected to have First Services, L.P.
provide Telecommunication Services, the price for the Services
will be provided and billed as a pass-thru expense.
F. Network Support Service Fees and Local Network Fees are based
upon services rendered from First Services, L.P.'s premises.
Off-premise support will be provided upon First Bank's request on
an as available basis at First Services, L.P.'s then current
charges for time and materials, plus reasonable travel and living
expenses.
G. First Services, L.P.'s Price Schedule for First Bank shall allow
for a discount from the Product and Price Schedule (Attachment 1)
in return for the use by First Services, L.P. of certain computer
hardware, software and equipment owned by First Bank. The monthly
discount is determined by adding the monthly depreciation of the
assets used, a reasonable cost of funds factor, said cost of
funds factor may be changed from time to time with the written
consent of the parties hereto, and a market value mark-up
adjustment. In the event of termination of this Agreement, First
Services, L.P. maintains first right of refusal to purchase said
assets, from First Bank, at the then current market value.
VI. CLIENT OBLIGATIONS
A. First Bank shall be solely responsible for the input,
transmission or delivery of all information and data required by
First Services, L.P. to perform the services except where First
Bank has retained First Services, L.P. to handle such
responsibilities on its behalf. The data shall be provided in a
format and manner approved by First Services, L.P. First Bank
will provide at its own expense or procure from First Services,
L.P., all equipment, computer software communication lines and
interface devices required to access the First Services, L.P.
System. If First Bank has elected to provide such items itself,
First Services, L.P. shall provide First Bank with a list of
compatible equipment and software.
B. First Bank shall designate appropriate First Bank personnel for
training in the use of the First services, L.P. System, shall
allow First Services, L.P. access to First Bank's sites during
normal business hours for conversion and shall cooperate with
First services, L.P. personnel in the conversion and
implementation of the services.
C. First Bank shall comply with any operating instructions on the
use of the First Services, L.P. reports furnished by First
Services, L.P. for accuracy and shall work with First Services,
L.P. to reconcile any out of balance conditions. First Bank shall
determine and be responsible for the authenticity and accuracy of
all information and data submitted to First Services, L.P.
D. First Bank shall furnish or, if First Services, L.P. agrees to so
furnish, reimburse First Services, L.P. for courier services
applicable to the services requested.
VII. GENERAL ADMINISTRATION
First Services, L.P. is continually reviewing and modifying the First
Services, L.P. system to improve service and to comply with federal
government regulations applicable to the data utilized in providing
services to First Bank. First Services, L.P. reserves the right to
make changes in the service, including, but not limited to operating
procedures, security procedures, the type of equipment resident at and
the location of First Services, L.P.'s data center.
VIII. CLIENT CONFIDENTIAL INFORMATION
A. First Services, L.P. shall treat all information and data
relating to First Bank's business provided to First Services,
L.P. by First Bank, or information relating to First Bank's
customers, as confidential and shall safe-guard First Bank's
information with the same degree of care used to protect First
Services, L.P.'s confidential information. First Services, L.P.
and First Bank agree that master and transaction data files are
owned by and constitute property of First Bank data and records
shall be subject to regulation and examination by State and
Federal supervisory agencies to the same extent as if such
information were on First Bank's premises. First Services, L.P.'s
obligations under this Section VIII shall survive the termination
or expiration of this Agreement.
B. First Services, L.P. agrees now and at all times in the future
that all such confidential information shall be held in strict
confidence and disclosed only to those employees whose duties
reasonably require access to such information. First Services,
L.P. may use such confidential information only in connection
with its performance under this Agreement. Confidential
information shall be returned to First Bank or destroyed upon
First Bank's request once the services contemplated by this
Agreement have been completed or upon termination of this
Agreement.
C. First Services, L.P. shall maintain adequate backup procedures
including storage of duplicate record files as necessary to
reproduce First Bank's records and data. In the event of a
service disruption due to reasons beyond First Services, L.P.'s
control, First Services L.P. shall use diligent efforts to
mitigate the effects of such an occurrence.
D. First Services, L.P. shall establish and maintain policies and
procedures to insure compliance with this section. First
Services, L.P. agrees to permit First Bank to audit First
Services, L.P.'s compliance with this section during regular
business hours upon reasonable notice to First Services, L.P. The
provisions of this section shall survive any termination of this
Agreement.
IX. FIRST SERVICES, L.P. CONFIDENTIAL INFORMATION
A. First Bank shall not use or disclose to any third persons any
confidential information concerning First Services, L.P.
Confidential information is that which relates to First Services,
L.P.'s software, research, development, trade secrets or business
affairs including, but not limited to, the terms and conditions
of this Agreement but does not include information in the public
domain through no fault of First Bank. First Bank obligations
under this Section IX shall survive the termination or expiration
of this agreement.
B. First Services, L.P.'s system contains information and computer
software that is proprietary and confidential information of
First Services, L.P., its suppliers and licensees. First Bank
agrees not to attempt to circumvent the devices employed by First
Services, L.P. to prevent unauthorized access to First Services,
L.P.'s system.
X. WARRANTIES
First Services, L.P. will accurately process First Bank's work
provided that First Bank supplies accurate data and follows the
procedures described in First Services, L.P.'s user manuals, notices
and advices. First Services, L.P. personnel will exercise due care in
the processing of First Bank's work. In the event of an error caused
by First Services, L.P.'s personnel, programs or equipment, First
Services, L.P. shall correct the data and/or reprocess the affected
report at no additional cost to First Bank.
XI. LIMITATION OF LIABILITY
IN NO EVENT SHALL FIRST SERVICES, L.P. BE LIABLE FOR LOSS OF GOODWILL,
OR FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM FIRST BANK'S USE OF FIRST SERVICES, L.P.'S SERVICES, OR FIRST
SERVICES, L.P.'S SUPPLY OF EQUIPMENT OR SOFTWARE UNDER THIS AGREEMENT,
REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. FIRST
SERVICES, L.P.'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION
RELATING TO SERVICES PERFORMED HEREUNDER OR ANY DAMAGE OR LOSS
INCURRED OR SUSTAINED BY FIRST BANK RELATING TO THIS AGREEMENT AND THE
SERVICES PERFORMED HEREUNDER SHALL BE LIMITED TO THE AMOUNT OF TOTAL
FEES PAID BY FIRST BANK TO FIRST SERVICES, L.P. IN THE THREE (3) MONTH
PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FIRST SERVICES, L.P.'S
AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE
SHALL BE LIMITED TO THE AMOUNT PAID FOR THE EQUIPMENT OR SOFTWARE.
XII. PERFORMANCE STANDARDS
A. On-Line Availability - First Services, L.P.'s standard of
performance shall be on-line availability of the system 98% of
the time that it is scheduled to be so available over a three (3)
month period (the "Measurement Period"). Actual on-line
performance will be calculated monthly by comparing the number of
hours which the system was scheduled to be operational on an
on-line basis with the number of hours, or a portion thereof, it
was actually operational on an on-line basis. Downtime may be
caused by operator error, hardware malfunction or failure, or
environmental failures such as loss of power or air conditioning.
Downtime caused by reasons beyond First Services, L.P.'s control
should not be considered in the statistics.
B. Report Availability - First Services, L.P.'s standard of
performance for report availability shall be that, over a three
(3) month period, ninety-five percent (95%) of all Critical Daily
Reports shall be available for remote printing on time without
significant errors. A Critical Daily Report shall mean priority
group reports, which First Services, L.P. and First Bank have
mutually agreed upon in writing, are necessary to properly
account for the previous day's activity and properly notify First
Bank of overdraft, NSF or return items. A significant error is
one that impairs First Bank's ability to properly account for the
previous day's activity and/or properly account for overdraft,
NSF or return items. Actual performance will be calculated
monthly by comparing the total number of First Bank reports
scheduled to be available from First Services, L.P. to the number
of reports which were available on time and without error.
C. Exclusive Remedy - In the event that First Services, L.P.'s
performance fails to meet the standards listed above and such
failure is not the result of First Bank's error or omission,
First Bank's sole and exclusive remedy for such default shall be
the right to terminate this Agreement in accordance with the
provisions of this paragraph. In the event that First Services,
L.P. fails to achieve any performance standards, alone or in
combination, for the prescribed measurement period, First Bank
shall notify First Services, L.P. of its intent to terminate this
Agreement if First Services, L.P. fails to restore performance to
the committed levels. First Services, L.P. shall advise First
Bank promptly upon correction of the system deficiencies (in no
event shall corrective action exceed sixty (60) days from the
notice date) and shall begin an additional measurement period.
Should First Services, L.P. fail to achieve the required
performance standards during the re-measurement period, First
Bank may terminate this Agreement and First Services, L.P. shall
cooperate with First Bank to achieve an orderly transition to
First Bank's replacement processing system. First Bank may also
terminate this Agreement if First Services, L.P.'s performance
for the same standard is below the relevant performance standard
for more than two (2) measurement periods in any consecutive
twelve (12) months or for more than five (5) measurement periods
during the term of this Agreement. During the period of
transition, First Bank shall pay only such charges as are
incurred for monthly fees until the date of deconversion. First
Services, L.P. shall not charge First Bank for services relating
to First Bank's deconversion.
D. Audit - First Bank shall have the right to perform reasonable
audits, at its cost, upon giving written notice to First
Services, L.P. of its intent to do so. First Services, L.P. shall
provide, upon request, financial information to First Bank.
XIII. BUSINESS CONTINUITY / DISASTER RECOVERY
A. A disaster shall mean any unplanned interruption of the
operations of or inaccessibility to the First Services, L.P. data
center which appears in First Services, L.P.'s reasonable
judgment to require relocation of processing to an alternative
site. First Services, L.P. shall notify First Bank as soon as
possible after it deems a service outage to be a disaster. First
Services, L.P. shall move the processing of First Bank's critical
services to an alternative processing center as expeditiously as
possible. First Services, L.P. shall work with First Bank to
define those services deemed as critical to the operation,
revenue, and capital preservation of First Bank. First Bank shall
maintain adequate records of all transactions during the period
of service interruption and shall have personnel available to
assist First Services, L.P., in implementing the switch over to
the alternative processing site. During a disaster, non-critical,
optional or on-request services shall be provided by First
Services, L.P. only to the extent there is adequate capacity at
the alternate center and only after stabilizing the provision of
critical services.
B. First Services, L.P. shall work with First Bank to establish a
plan for alternative data communications in the event of a
disaster. First Bank shall be responsible for furnishing any
additional communications equipment and data lines required under
the adopted plan.
C. First Services, L.P. shall test the Business Continuity Plan by
conducting, at least, one annual test. First Bank agrees to
participate in and assist First Services, L.P. with such testing.
Test results will be made available to First Bank's regulators,
internal and external auditors, and (upon request) to First
Bank's insurance underwriters.
D. First Bank understands and agrees the Business Continuity Plan is
designed to minimize but not eliminate risks associated with a
disaster affecting First Services, L.P.'s data center. First
Services, L.P. does not warrant that service will be
uninterrupted or error free in the event of a disaster. First
Bank maintains responsibility for adopting a business continuity
plan relating to disasters affecting First Bank's facilities and
for securing resources necessary to properly protect First Bank's
revenues in the event of a disaster.
XIV. DEFAULT
A. In the event that First Bank is thirty (30) days in arrears in
making any payment required, or in the event of any other
material default by either First Services, L.P. or First Bank in
the performance of their obligations hereunder, the affected
party shall have the right to give written notice to the other of
the default and its intent to terminate this Agreement stating
with reasonable particularity the nature of the claimed default.
This Agreement shall terminate if the default has not been cured
within a reasonable time with a minimum being thirty (30) days
from the effective date of the notice.
B. Upon the expiration of this Agreement, or its termination, First
Services, L.P. shall furnish to First Bank such copies of First
Bank's data files as First Bank may request in machine readable
format along with such other information and assistance as or is
reasonable and customary to enable First Bank to deconvert from
the First Services, L.P. system. First Bank shall reimburse First
Services, L.P. for the production of data records and other
services at First Services, L.P.'s then current fees for such
services.
XV. INSURANCE
First Services, L.P. carries Comprehensive General Liability
insurance, Commercial Crime Insurance covering Employee Dishonesty,
all-risk replacement cost coverage on all equipment used at First
Services, L.P.'s data center and Worker Compensation coverage on First
Services, L.P. employees wherever located in the United States. In
addition, First Services, L.P. carries coverage for computer/computer
related theft. First Bank shall carry adequate insurance to cover
liability for source documents while in transit and in case of data
loss through errors and omissions.
XVI. GENERAL
A. This Agreement is binding upon the parties and their respective
successors and permitted assigns. Neither party may assign this
Agreement in whole or in part without the consent of First Bank
and/or First Services, L.P., provided, however, that First
Services, L.P. may subcontract any or all of the services to be
performed under this Agreement without the written consent of
First Bank. Any such subcontractors shall be required to comply
with all of the applicable terms and conditions of this
Agreement.
B. The parties agree that, in connection with the performance of
their obligations hereunder, they will comply with applicable
Federal, State, and local laws including the laws and regulations
regarding Equal Employment Opportunities.
C. First Services, L.P. agrees the Federal Reserve Bank, and FDIC
will have the authority and responsibility pursuant to the Bank
Service Corporation Act, 12 U.S.C. 1867(c) relating to services
performed by contract or otherwise. First Services, L.P. also
agrees that its services shall be subject to oversight by the
Federal Reserve Bank, FDIC or state banking departments as may be
applicable under laws and regulations pertaining to First Bank
and shall, if applicable, provide the Federal Reserve Bank and
FDIC with a copy of First Services, L.P.'s current audit and
financial statements and a copy of any current third party review
report when a review has been performed.
D. Neither party shall be liable for any errors, delays or
non-performance due to events beyond its reasonable control
including, but not limited to, acts of God, failure or delay of
power or communications, changes in law or regulation or other
acts of governmental authority, strike, weather conditions or
transportation.
E. All written notices required to be given under this Agreement
shall be sent by Registered or Certified Mail, Return Receipt
Requested, postage prepaid, or by confirmed facsimile to the
persons and at the addresses listed below or to such other
address or person as a party shall have designated in writing.
First Services, L.P. First Bank
600 James S. McDonnell Blvd. 11901 Olive Blvd.
Hazelwood, MO 63042 Creve Coeur, MO 63141
F. The failure of either party to exercise in any respect any right
provided for herein shall not be deemed a waiver of any rights.
G. Each party acknowledges that is has read this Agreement,
understands it, and agrees that it is the complete and exclusive
statement of the Agreement between the parties and supersedes and
merges any prior or simultaneous proposals, understandings and
all other agreements with respect to the subject matter. This
Agreement may not be modified or altered except by a written
instrument duly executed by both parties.
H. No waiver of any of the terms of this Agreement shall be
effective unless in writing and signed by the duly authorized
representative of the party charged therewith. No waiver of any
provision hereof shall extend to or affect any obligation not
expressly waived, impair any rights consequent on such obligation
or imply a subsequent waiver of that or any other provision.
I. This Agreement shall be governed by, construed and interpreted in
accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the parties have executed this Agreement the date first
above written.
First Bank First Services, L.P.
11901 Olive Boulevard 600 James S. McDonnell Boulevard
Creve Coeur, Missouri 63141 Hazelwood, Missouri 63042
BY:/s/ Terrance M. McCarthy BY:/s/ Steven L. Schlansky
----------------------------- --------------------------
Terrance M. McCarthy Steven L. Schlansky
President and Vice President
Chief Executive Officer
Attachment A
First Services, L.P.
Product and Price Schedule
Effective May 1, 2004
USER BASED SERVICES
- -------------------
WAN / LAN $32.00 per user
Technical Support $60.00 per user
Help Desk $15.00 per user
Microsoft Application Licenses - Delete $20.00 per user
Email $10.00 per user
Web (Internet) Access $20.00 per user
Dial-In (Remote) Access $30.00 per user
Information Security $33.00 per user
User Based Services include:
Network Technical Support Network Infrastructure
Technical Support Security Monitoring
Help Desk MS Word - Delete
MS Excel -Delete MS Access - Delete
MS Powerpoint - Delete Anti-Virus
Email usage Web usage
Dial-In Access capability User/Password Administration
Access Control
BRANCH BASED SERVICES
- ---------------------
Support Data Connections
MAN $6,000.00 per location
Branch Data Connections
Branches $1,000.00 per location
ATM Connections
ATM Connections $100.00 per location
Dierbergs Market ATM $700.00 per location
Contingency Planning/Disaster Recovery $300.00 per location
Branch Courier Routes $900.00 per location
Branch Based Services include:
Data Communication Lines
Contingency Planning
Disaster Recovery Exercises
Courier Service
First Services, L.P.
Product and Price Schedule
Effective May 1, 2004
ACCOUNT / ITEM / TRANSACTION BASED SERVICES
- -------------------------------------------
Accounts Processed
DDA .700
Savings .650
Time .650
Loan .700
Accounts Processed Based Services Include:
Collection System (Cyber Resources) ACH Origination
Recovery System (Cyber Resources) ATM/Debit Card Processing
Organizational Profitability (IPS) General Ledger
Asset/Liability (Bankware) Loan Tracking (Baker Hill)
Fixed Asset Interface Optical System (RVI)
Loan Spread Sheet (Baker Hill) Interactive Voice
MCIF (Okra) Credit Scoring (Fair Issac)
Card Management System Loan Documentation (FTI/CFI)
Business Online Banking (BOB) Wire Transfer (Fundtech)
Retail Online Banking Commercial Analysis
Marketing Website Accounts Payable Interface
Bank Audit Long Distance Management
NOW Reclassification Teller (Encore)
Charge Back System Platform (Encore)
Remote Laser Printing Call Center (Encore)
Automated Reconciliation System (ARP) Query Report Writer
Mortgage (Unify) Forms and Supplies
Currency Transaction Reporting Year-end Processing
CBS, Platform, Internet Maintenance .130
ATM/Debit Cards Supported .100
Statements Produced
DDA .300
Savings .100
Time .020
Loans .150
Year End $1.00
5498 $1.00
Transactions Processed
Proof Items .040 per item
POD and EFT items .014 per item
Inclearing and Transmission items .014 per item
Wire Activity $5.00 per item
BOB / Firstlink $30.00 per customer
ACH Activity .042 per item
Research Requests $15.00 per item
Adjustments Processed $15.00 per item
First Services, L.P.
Product and Price Schedule
Effective May 1, 2004
Transactions Processed Base Services Include:
MICR Rejects Serial Sort Teller Adjustments
Transit Float Analysis Microfilming Deposit Corrections
Endorsement Services Forms and Supplies Check Truncation
Exception Item Sort Statement Sort Interest Check Mailings
Statement Enclosures Notice Mailings
Lockbox Support
Lockbox Transactions .450
Postage As incurred
Copies .080
Mail Services $500.00
APPLICATION/PROJECT BASED SERVICES
- ----------------------------------
Information Systems
Core Systems $11,000.00
Commercial Systems $9,800.00
Retail Systems $9,800.00
Corporate $9,800.00
Technology Services
Server Support $9,800.00
Internet / Intranet $9,800.00
Technology Planning/Support
Project Office/Planning $9,800.00
Database Support $9,800.00
Asset Mgmt./Tech. Purchasing $5,000.00
Acquisition/New Business Services $9,800.00
Deposit Services
Operations Support $5,000.00
IRA Support $3,000.00
Bookkeeping $3,500.00
Recon/Appl. Balancing $2,500.00
Records Management $5,500.00
Application/Project Based Services Include:
Production problem support Application Q/A
Application software upgrades/releases Project Management
Project Office tracking and reporting Acquisition Conversions
Branch De-conversions Mergers
Equipment quotes, orders, and delivery Asset tracking
Invoice payment
Deposit Services includes:
Returns Large Item Notification Signature Verification
Chargebacks Kiting Savings Bonds
Unposted Items OFAC American Express
NSF Notices Year-End Notifications
Exhibit 10.5
SERVICE AGREEMENT
THIS SERVICE AGREEMENT is made and entered into as of the 1st day of
May, 2004, by and between FIRST BANKS, INC., a bank holding company duly
organized and existing by virtue of the laws of the State of Missouri and FIRST
SERVICES, L.P., a Missouri Limited Partnership.
WHEREAS, FIRST BANKS, INC. and FIRST SERVICES, L.P. entered into a
Service Agreement dated December 15, 2002; and
WHEREAS, said Service Agreement was assigned to First Banks, Inc. on or
about December 15, 2002; and
WHEREAS, FIRST SERVICES, L.P. and FIRST BANKS, INC. desire to amend and
restate said Service Agreement in its entirety.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, and the sum of Ten Dollars ($10.00) in hand paid,
each to the other, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
I. TERMINATION AND REVOCATION
The Parties hereto hereby revoke, cancel and hold for naught the
Service Agreement dated December 15, 2002, and hereby substitute in
its place the Service Agreement herein contained.
II. SERVICES
A. First Banks, Inc. shall furnish First Services, L.P. Human
Resources services. These services include recruitment/employee
relation's assistance and payroll and benefits administration.
The cost of these services will be allocated to First Services,
L.P. by First Banks, Inc., based on a mutually agreed corporate
allocation method.
B. First Banks, Inc. shall furnish First Services, L.P. Training
services. These services include internal courses and in-house
vendor courses. In addition, First Banks, Inc. shall provide the
use of training facilities for large groups. The cost of these
services will be charged to First Services, L.P. by First Banks,
Inc., based on a published quarterly course catalog.
C. First Banks, Inc. will provide Financial Services to First
Services, L.P. This includes accounting, tax, and audit services.
The cost of these services will be allocated to First Services,
L.P. by First Banks, Inc., based on a mutually agreed corporate
allocation method.
D. First Banks, Inc. will provide First Services, L.P. Property
Management services. These services include occupancy and other
space-related requirements. The cost of these services will be
allocated to First Services, L.P. by First Banks, Inc., based on
a mutually agreed corporate allocation method.
E. Priority of services offered will be determined by mutual
agreement of the parties hereto.
III. TERM
The term of this Agreement shall be twelve (12) months commencing on
May 1, 2004. Upon expiration, the Agreement will automatically renew
for successive terms of twelve (12) months each unless either party
shall have provided written notice to the other at least one-hundred
eighty (180) days prior to the expiration of the then current term, of
its intent not to renew. In the event of termination, First Banks,
Inc. shall provide a reasonable time allowance to allow First
Services, L.P. to obtain services from another provider.
IV. PRICE AND PAYMENT
A. Fees for the First Banks, Inc. services will be based on a
mutually agreed corporate allocation method. This allocation of
expense will occur on a monthly basis.
V. GENERAL ADMINISTRATION
First Banks, Inc. is continually reviewing and modifying the services
it provides to First Services, L.P. First Banks, Inc. reserves the
right to make changes to these services, as needed.
VI. CLIENT CONFIDENTIAL INFORMATION
A. First Banks, Inc. shall treat all information and data relating
to First Services, L.P as confidential and shall safeguard First
Services L.P.'s information with the same degree of care used to
protect First Banks, Inc.'s confidential information. First Banks
Inc.'s obligations under this Section VI shall survive the
termination or expiration of this Agreement.
B. First Banks, Inc. agrees now and at all times in the future that
all such confidential information shall be held in strict
confidence and disclosed only to those employees whose duties
reasonably require access to such information. First Banks, Inc.
may use such confidential information only in connection with its
performance under this Agreement. Confidential information shall
be returned to First Services, L.P or destroyed upon First
Services, L.P.'s request once the services contemplated by this
Agreement have been completed or upon termination of this
Agreement.
C. First Banks, Inc. shall maintain adequate backup procedures
including storage of duplicate record files as necessary to
reproduce First Services, L.P.'s records and data. In the event
of a service disruption due to reasons beyond First Banks, Inc.'s
control, First Banks, Inc. shall use diligent efforts to mitigate
the effects of such an occurrence.
D. First Banks, Inc. shall establish and maintain policies and
procedures to insure compliance with this section. First Banks,
Inc. agrees to permit First Services, L.P to audit First Banks,
Inc.'s compliance with this section during regular business hours
upon reasonable notice to First Banks, Inc. The provisions of
this section shall survive any termination of this Agreement.
VII. GENERAL
A. This Agreement is binding upon the parties and their respective
successors and permitted assigns. Neither party may assign this
Agreement in whole or in part without the consent of First Banks,
Inc. and First Services, L.P.
B. The parties agree that, in connection with the performance of
their obligations hereunder, they will comply with applicable
Federal, State, and local laws including the laws and regulations
regarding Equal Employment Opportunities.
C. Neither party shall be liable for any errors, delays or
non-performance due to events beyond its reasonable control
including, but not limited to, acts of God, failure or delay of
power or communications, changes in law or regulation or other
acts of governmental authority, strike, weather conditions or
transportation.
D. All written notices required to be given under this Agreement
shall be sent by Registered or Certified Mail, Return Receipt
Requested, postage prepaid, or by confirmed facsimile to the
persons and at the addresses listed below or to such other
address or person as a party shall have designated in writing.
First Services, L.P. First Banks, Inc.
600 James S. McDonnell Blvd. 135 North Meramec
Hazelwood, MO 63042 Clayton, MO 63105
E. The failure of either party to exercise in any respect any right
provided for herein shall not be deemed a waiver of any rights.
F. Each party acknowledges that is has read this Agreement,
understands it, and agrees that it is the complete and exclusive
statement of the Agreement between the parties and supersedes and
merges any prior or simultaneous proposals, understandings and
all other agreements with respect to the subject matter. This
Agreement may not be modified or altered except by a written
instrument duly executed by both parties.
G. No waiver of any of the terms of this Agreement shall be
effective unless in writing and signed by the duly authorized
representative of the party charged therewith. No waiver of any
provision hereof shall extend to or affect any obligation not
expressly waived, impair any rights consequent on such obligation
or imply a subsequent waiver of that or any other provision.
H. This Agreement shall be governed by, construed and interpreted in
accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the parties have executed this Agreement the date first
above written.
First Banks, Inc. First Services, L.P.
135 North Meramec 600 James S. McDonnell Boulevard
Clayton, Missouri 63105 Hazelwood, Missouri 63042
BY:/s/ Allen H. Blake BY:/s/ Steven L. Schlansky
--------------------------------- -----------------------------
Allen H. Blake Steven L. Schlansky
President and Vice President
Chief Executive Officer
EXHIBIT 31
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) (17 CFR 240.13a-14(a))
OR RULE 15d-14(a) (17 CFR 240.15d-14(a))
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Allen H. Blake, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (the "Report") of First
Banks, Inc. (the "Registrant");
2. Based on my knowledge, this Report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this Report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this Report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this Report based on such evaluation; and
c) Disclosed in this Report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: August 13, 2004 By:/s/ Allen H. Blake
-------------------------------------------
Allen H. Blake
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
EXHIBIT 32
CERTIFICATIONS REQUIRED BY
RULE 13a-14(b) (17 CFR 240.13a-4(b))
OR RULE 15d-14(b) (17 CFR 240.15d-14(b))
AND SECTION 1350 OF CHAPTER 63 OF
TITLE 18 OF THE UNITED STATES CODE (18 U.S.C. 1350)
I, Allen H. Blake, President, Chief Executive Officer and Chief
Financial Officer of First Banks, Inc. (the Company), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Quarterly Report on Form 10-Q of the Company for the
quarterly period ended June 30, 2004 (the Report) fully complies
with the requirements of Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: August 13, 2004 By: /s/ Allen H. Blake
-----------------------------------------------
Allen H. Blake
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)