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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 September 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 October 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............................................................. 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 34
ITEM 4. CONTROLS AND PROCEDURES................................................................... 35
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 36
SIGNATURES................................................................................................ 37
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
September 30, December 31,
2004 2003
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks.............................................................. $ 152,184 179,802
Short-term investments............................................................... 115,736 33,735
---------- ---------
Total cash and cash equivalents................................................. 267,920 213,537
---------- ---------
Investment securities:
Available for sale................................................................... 1,246,595 1,038,787
Held to maturity (fair value of $26,724 and $11,341, respectively)................... 26,273 10,927
---------- ---------
Total investment securities..................................................... 1,272,868 1,049,714
---------- ---------
Loans:
Commercial, financial and agricultural............................................... 1,438,183 1,407,626
Real estate construction and development............................................. 1,227,553 1,063,889
Real estate mortgage................................................................. 2,715,869 2,582,264
Lease financing...................................................................... 7,541 67,282
Consumer and installment............................................................. 53,912 71,652
Loans held for sale.................................................................. 128,801 145,746
---------- ---------
Total loans..................................................................... 5,571,859 5,338,459
Unearned discount.................................................................... (10,236) (10,384)
Allowance for loan losses............................................................ (127,970) (116,451)
---------- ---------
Net loans....................................................................... 5,433,653 5,211,624
---------- ---------
Derivative instruments.................................................................... 12,159 49,291
Bank premises and equipment, net of accumulated depreciation and amortization............. 133,580 136,739
Goodwill.................................................................................. 151,783 145,548
Bank-owned life insurance................................................................. 101,041 97,521
Deferred income taxes..................................................................... 97,469 102,844
Other assets.............................................................................. 103,484 100,122
---------- ---------
Total assets.................................................................... $7,573,957 7,106,940
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand........................................................... $1,120,630 1,034,367
Interest-bearing demand.............................................................. 842,913 843,001
Savings.............................................................................. 2,174,209 2,128,683
Time deposits of $100 or more........................................................ 515,780 436,439
Other time deposits.................................................................. 1,474,274 1,519,125
---------- ---------
Total deposits.................................................................. 6,127,806 5,961,615
Other borrowings.......................................................................... 550,262 273,479
Note payable.............................................................................. -- 17,000
Subordinated debentures................................................................... 232,311 209,320
Deferred income taxes..................................................................... 23,824 41,683
Accrued expenses and other liabilities.................................................... 50,403 54,028
---------- ---------
Total liabilities............................................................... 6,984,606 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......................................................................... 559,210 495,714
Accumulated other comprehensive income.................................................... 5,253 29,213
---------- ---------
Total stockholders' equity...................................................... 589,351 549,815
---------- ---------
Total liabilities and stockholders' equity...................................... $7,573,957 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Interest and fees on loans............................................ $ 86,201 88,504 254,176 268,796
Investment securities................................................. 12,784 7,315 37,098 24,564
Short-term investments................................................ 476 345 899 1,099
-------- -------- -------- --------
Total interest income............................................ 99,461 96,164 292,173 294,459
-------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................. 801 1,195 2,592 4,346
Savings............................................................. 5,116 5,520 14,486 18,091
Time deposits of $100 or more....................................... 3,358 3,028 9,353 10,049
Other time deposits................................................. 8,636 8,865 25,296 32,147
Other borrowings...................................................... 1,982 550 3,383 1,671
Note payable.......................................................... 229 388 398 574
Subordinated debentures............................................... 3,731 3,538 10,798 14,325
-------- -------- -------- --------
Total interest expense........................................... 23,853 23,084 66,306 81,203
-------- -------- -------- --------
Net interest income.............................................. 75,608 73,080 225,867 213,256
Provision for loan losses.................................................. 7,500 15,000 23,250 36,000
-------- -------- -------- --------
Net interest income after provision for loan losses.............. 68,108 58,080 202,617 177,256
-------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees......... 9,837 9,175 28,578 26,824
Gain on mortgage loans sold and held for sale......................... 4,676 6,484 12,866 14,616
Net gain on sales of available-for-sale investment securities......... 257 266 257 6,832
(Loss) gain on sales of branches, net of expenses..................... (20) -- 1,000 --
Bank-owned life insurance investment income........................... 1,255 1,325 3,874 4,029
Other................................................................. 5,977 2,992 16,070 12,413
-------- -------- -------- --------
Total noninterest income......................................... 21,982 20,242 62,645 64,714
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits........................................ 29,936 23,481 85,825 71,736
Occupancy, net of rental income....................................... 4,674 4,916 13,744 15,399
Furniture and equipment............................................... 4,099 4,610 12,802 13,714
Postage, printing and supplies........................................ 1,222 1,311 3,765 3,909
Information technology fees........................................... 7,977 8,126 23,965 24,568
Legal, examination and professional fees.............................. 1,644 1,781 4,895 5,552
Amortization of intangibles associated with
the purchase of subsidiaries..................................... 733 658 2,049 1,848
Communications........................................................ 469 677 1,333 1,950
Advertising and business development.................................. 1,297 762 3,902 2,996
Other................................................................. 6,340 8,208 14,118 23,990
-------- -------- -------- --------
Total noninterest expense........................................ 58,391 54,530 166,398 165,662
-------- -------- -------- --------
Income before provision for income taxes......................... 31,699 23,792 98,864 76,308
Provision for income taxes................................................. 11,951 10,092 34,844 28,877
-------- -------- -------- --------
Net income....................................................... 19,748 13,700 64,020 47,431
Preferred stock dividends.................................................. 196 196 524 524
-------- -------- -------- --------
Net income available to common stockholders...................... $ 19,552 13,504 63,496 46,907
======== ======== ======== ========
Basic earnings per common share............................................ $ 826.33 570.75 2,683.56 1,982.48
======== ======== ======== ========
Diluted earnings per common share.......................................... $ 815.20 565.09 2,642.12 1,954.63
======== ======== ======== ========
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)
Nine Months Ended September 30, 2004 and 2003 and Three Months Ended December 31, 2003
(dollars expressed in thousands, except per share data)
Adjustable Rate Accu-
Preferred Stock mulated
---------------- Other Total
Class A Additional Compre- Compre- Stock-
Conver- Common Paid-In hensive Retained hensive holders'
tible Class B Stock Capital Income Earnings Income Equity
----- ------- ------ ------- ------- -------- ------ ------
Consolidated balances, December 31, 2002......... $12,822 241 5,915 5,910 433,689 60,464 519,041
Nine months ended September 30, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 47,431 47,431 -- 47,431
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (9,335) -- (9,335) (9,335)
Derivative instruments:
Current period transactions............ -- -- -- -- (14,156) -- (14,156) (14,156)
-------
Comprehensive income....................... 23,940
=======
Class A preferred stock dividends,
$0.80 per share.......................... -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share.......................... -- -- -- -- (11) -- (11)
------- ----- ----- ----- ------- ------- -------
Consolidated balances September 30, 2003......... 12,822 241 5,915 5,910 480,596 36,973 542,457
Three months ended December 31, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 15,380 15,380 -- 15,380
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (651) -- (651) (651)
Derivative instruments:
Current period transactions............ -- -- -- -- (7,109) -- (7,109) (7,109)
-------
Comprehensive income....................... 7,620
=======
Class A preferred stock dividends,
$0.40 per share.......................... -- -- -- -- (256) -- (256)
Class B preferred stock dividends,
$0.04 per share.......................... -- -- -- -- (6) -- (6)
------- ----- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2003......... 12,822 241 5,915 5,910 495,714 29,213 549,815
Nine months ended September 30, 2004:
Comprehensive income:
Net income................................. -- -- -- -- 64,020 64,020 -- 64,020
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (1,886) -- (1,886) (1,886)
Derivative instruments:
Current period transactions............ -- -- -- -- (22,074) -- (22,074) (22,074)
-------
Comprehensive income....................... 40,060
=======
Class A preferred stock dividends,
$0.80 per share.......................... -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share.......................... -- -- -- -- (11) -- (11)
------- ----- ----- ----- ------- ------- -------
Consolidated balances, September 30, 2004........ $12,822 241 5,915 5,910 559,210 5,253 589,351
======= ===== ===== ===== ======= ======= =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Nine Months Ended Three Months Ended
September 30, September 30, December 31,
------------------ -----------------
2004 2003 2004 2003 2003
---- ---- ---- ---- ----
Unrealized gains (losses) on investment securities
arising during the period................................... $17,397 (2,874) (1,719) (4,894) 603
Less reclassification adjustment for gains
included in net income....................................... 167 173 167 4,441 1,254
------- ------ ------ ------- ------
Unrealized gains (losses) on investment securities.............. $17,230 (3,047) (1,886) (9,335) (651)
======= ====== ====== ======= ======
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)
Nine Months Ended
September 30,
2004 2003
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 64,020 47,431
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of bank premises and equipment..................... 13,921 14,596
Amortization, net of accretion................................................... 12,602 20,599
Originations and purchases of loans held for sale................................ (881,860) (1,815,712)
Proceeds from sales of loans held for sale....................................... 741,108 1,661,363
Provision for loan losses........................................................ 23,250 36,000
Provision for income taxes....................................................... 34,844 28,877
Payments of income taxes......................................................... (35,480) (27,441)
Decrease in accrued interest receivable.......................................... 1,814 5,032
Interest accrued on liabilities.................................................. 66,306 81,203
Payments of interest on liabilities.............................................. (65,603) (83,778)
Gain on mortgage loans sold and held for sale.................................... (12,866) (14,616)
Net gain on sales of available-for-sale investment securities.................... (257) (6,832)
Gain on sales of branches, net of expenses....................................... (1,000) --
Other operating activities, net.................................................. (5,483) 950
--------- ----------
Net cash used in operating activities......................................... (44,684) (52,328)
--------- ----------
Cash flows from investing activities:
Cash (paid) received for acquired entities, net of cash
and cash equivalents received (paid)............................................. (35,348) 14,870
Proceeds from sales of investment securities available for sale.................... 26,340 6,009
Maturities of investment securities available for sale............................. 364,312 1,152,354
Maturities of investment securities held to maturity............................... 3,149 4,143
Purchases of investment securities available for sale.............................. (503,776) (746,511)
Purchases of investment securities held to maturity................................ (18,524) (103)
Net increase in loans.............................................................. (81,606) (3,863)
Recoveries of loans previously charged-off......................................... 18,129 17,024
Purchases of bank premises and equipment........................................... (4,585) (4,213)
Other investing activities, net.................................................... 12,078 11,165
--------- ----------
Net cash (used in) provided by investing activities........................... (219,831) 450,875
--------- ----------
Cash flows from financing activities:
Increase in demand and savings deposits............................................ 101,615 28,967
Decrease in time deposits.......................................................... (13,078) (269,674)
Decrease in federal funds purchased................................................ -- (55,000)
Decrease in Federal Home Loan Bank advances........................................ (2,000) (3,548)
Increase in securities sold under agreements to repurchase......................... 248,619 62,072
Advances drawn on note payable..................................................... -- 34,500
Repayments of note payable......................................................... (17,000) (10,500)
Proceeds from issuance of subordinated debentures.................................. 20,619 70,907
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............................................... (524) (524)
--------- ----------
Net cash provided by (used in) financing activities........................... 318,898 (279,141)
--------- ----------
Net increase in cash and cash equivalents..................................... 54,383 119,406
Cash and cash equivalents, beginning of period.......................................... 213,537 203,251
--------- ----------
Cash and cash equivalents, end of period................................................ $ 267,920 322,657
========= ==========
Noncash investing and financing activities:
Loans transferred to other real estate............................................. $ 4,246 11,999
========= ==========
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 nine months ended September 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
On July 30, 2004, First Banks completed its acquisition of Continental
Mortgage Corporation - Delaware (CMC), and its wholly owned banking subsidiary,
Continental Community Bank and Trust Company (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,
totaling $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 total assets of $140.7 million, loans, net of unearned
discount, of $73.6 million and total deposits of $104.6 million. Preliminary
goodwill, which is not expected to be deductible for tax purposes, was
approximately $1.8 million and the core deposit intangibles, which are being
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 Stock Purchase Agreement
(the Agreement) by and among First Banks, SFC, CIB Marine Bancshares, Inc., a
Wisconsin corporation, Hillside Investors, Ltd. (Hillside), an Illinois
corporation, and CIB Bank (CIB), an Illinois banking corporation. The Agreement
provides for the acquisition of Hillside and its wholly owned banking
subsidiary, CIB, for approximately $62.0 million in cash and the subsequent
mergers of Hillside with and into SFC, and of CIB with and into First Bank. The
acquisition will be funded through the issuance of subordinated debentures
associated with two private placements of $60.0 million in aggregate of trust
preferred securities, of which $20.0 million was issued on September 20, 2004
through First Banks' newly formed affiliated statutory trust, First Bank
Statutory Trust II (FBST II). CIB is headquartered in Hillside, Illinois, and
operates 16 banking offices in the Chicago, Illinois metropolitan area. As of
September 30, 2004, CIB reported total assets of approximately $1.24 billion,
loans, net of unearned discount, of approximately $724.7 million and total
deposits of approximately $1.14 billion. The transaction, which was approved by
the Board of Governors of the Federal Reserve System (the Board) on November 1,
2004 and is still subject to the receipt of certain state regulatory approvals,
is expected to be completed during the fourth quarter of 2004.
On August 31, 2004, Small Business Loan Source LLC (SBLS LLC), a newly
formed Nevada-based limited liability company and subsidiary of First Bank,
purchased substantially all of the assets and assumed certain liabilities of
Small Business Loan Source, Inc. (SBLS), headquartered in Houston, Texas, in
exchange for cash and certain payments contingent on future valuations of
specifically identified assets, including servicing assets and retained
interests in securitizations, as further described in Note 12 to the
Consolidated Financial Statements. The transaction was funded through internally
generated funds. At the time of the transaction, SBLS LLC purchased from SBLS
assets of $47.1 million, including $24.0 million of United States Small Business
Administration (SBA) loans, net of unearned discount, and $15.1 million of SBA
servicing rights and assumed $1.5 million of liabilities, resulting in a net
cash payment of $45.6 million. Preliminary goodwill was approximately $4.8
million and is expected to be deductible for tax purposes. In conjunction with
this transaction, on August 30, 2004, First Bank granted to First Capital
America, Inc. (FCA), a corporation owned by First Banks' Chairman and members of
his immediate family, an option to purchase Membership Interests of SBLS LLC.
Upon exercise of this option, SBLS LLC will become 51.0% owned by First Bank and
49.0% owned by FCA, as further discussed in Note 6 to the Consolidated Financial
Statements.
The aforementioned acquisitions of CMC and SBLS were accounted for using
the purchase method of accounting and, accordingly, the consolidated financial
statements include the financial position and results of operations for the
periods subsequent to the respective acquisition dates, and the assets acquired
and liabilities assumed were recorded at their estimated fair value as of the
acquisition dates. These fair value adjustments represent current estimates and
are subject to further adjustments as the valuation data, including the receipt
of certain third party valuation data, is finalized.
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 and are expensed in the consolidated statements of
income as incurred. The accrued severance balance of $921,000 identified in the
following table is comprised of contractual obligations under salary
continuation agreements to nine individuals and have remaining terms ranging
from approximately three 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.
Information
Severance Technology Fees Total
--------- --------------- -----
(dollars expressed in thousands)
Balance at December 31, 2003....................... $ 1,412 -- 1,412
Nine Months Ended September 30, 2004:
Amounts accrued at acquisition date.............. 180 496 676
Payments......................................... (671) (496) (1,167)
------- ------ -------
Balance at September 30, 2004...................... $ 921 -- 921
======= ====== =======
During the nine months ended September 30, 2004, First Bank opened the
following four de novo branch offices:
Branch Office Location Date Opened
---------------------- -----------
Houston, Texas February 9, 2004
Wildwood, Missouri February 20, 2004
McKinney, Texas July 19, 2004
San Diego, California August 16, 2004
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
$392,000, 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 12 to the Consolidated Financial Statements. The commercial leasing
portfolio has further declined to $7.5 million at September 30, 2004, reflecting
the Company's overall business strategy to reduce its commercial leasing
activities.
(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 September 30, 2004 and December
31, 2003:
September 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.............. $ 19,428 (6,149) 17,391 (4,233)
Goodwill associated with
purchases of branch offices......... 2,210 (968) 2,210 (861)
--------- ------- -------- -------
Total............................ $ 21,638 (7,117) 19,601 (5,094)
========= ======= ======== =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 150,541 144,199
========= ========
Amortization of intangibles associated with the purchase of subsidiaries
and branch offices was $733,000 and $2.0 million for the three and nine months
ended September 30, 2004, respectively, and $658,000 and $1.8 million for the
comparable periods in 2003. Amortization of intangibles associated with the
purchase of subsidiaries, including amortization of core deposit intangibles and
goodwill associated with purchases of branch offices, has been estimated through
2009 in the following table, and does not take into consideration any pending or
potential future acquisitions or branch purchases.
(dollars expressed in thousands)
Year ending December 31:
Remaining 2004...................................................... $ 731
2005................................................................ 2,922
2006................................................................ 2,922
2007................................................................ 2,922
2008................................................................ 2,922
2009 ............................................................... 1,021
-------
Total............................................................ $13,440
=======
Changes in the carrying amount of goodwill for the three and nine months
ended September 30, 2004 and 2003 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period......................... $ 145,255 142,167 145,548 140,112
Goodwill acquired during period...................... 6,564 -- 6,564 1,026
Acquisition-related adjustments...................... -- 1,237 (222) 2,338
Amortization - purchases of branch offices........... (36) (36) (107) (108)
--------- ------- ------- -------
Balance, end of period............................... $ 151,783 143,368 151,783 143,368
========= ======= ======= =======
(4) SERVICING RIGHTS
Mortgage Banking Activities:
---------------------------
At September 30, 2004 and December 31, 2003, First Banks serviced mortgage
loans for others amounting to $1.11 billion and $1.22 billion, respectively.
Borrowers' escrow balances held by First Banks on such loans were $7.5 million
and $4.7 million at September 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 Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $ 12,533 16,979 15,408 14,882
Originated mortgage servicing rights................ 345 3,125 1,164 7,619
Amortization........................................ (1,498) (3,278) (5,192) (5,675)
Impairment valuation allowance...................... -- (800) -- (800)
Reversal of impairment valuation allowance.......... -- 166 -- 166
-------- ------ ------ ------
Balance, end of period.............................. $ 11,380 16,192 11,380 16,192
======== ====== ====== ======
The fair value of mortgage servicing rights was approximately $16.8 million
and $18.3 million at September 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 $5.4 million and $2.1 million
at September 30, 2004 and 2003, respectively, and $2.9 million at December 31,
2003.
Amortization of mortgage servicing rights has been estimated through 2009
in the following table:
(dollars expressed in thousands)
Year ending December 31:
Remaining 2004...................................................... $ 1,028
2005................................................................ 3,983
2006................................................................ 3,392
2007................................................................ 2,050
2008................................................................ 732
2009................................................................ 195
--------
Total.......................................................... $ 11,380
========
Other Servicing Activities:
--------------------------
At September 30, 2004, First Banks serviced SBA loans for others amounting
to $204.8 million. Changes in SBA servicing rights, net of amortization, for the
periods indicated were as follows:
Three Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
------------------ ------------------
(dollars expressed in thousands)
Balance, beginning of period........................ $ -- --
SBA servicing rights acquired during period......... 15,076 15,076
Amortization ....................................... (163) (163)
-------- ------
Balance, end of period.............................. $ 14,913 14,913
======== ======
The fair value of SBA servicing rights has been estimated by management to
be approximately $14.9 million at September 30, 2004. As further discussed in
Note 2 to the Consolidated Financial Statements, the fair value adjustments
represent current estimates and are subject to further adjustments as the
valuation data, including the receipt of certain third party valuation data, is
finalized.
Amortization of SBA servicing rights has been estimated through 2009 in the
following table:
(dollars expressed in thousands)
Year ending December 31:
Remaining 2004...................................................... $ 479
2005................................................................ 1,789
2006................................................................ 1,627
2007................................................................ 1,475
2008................................................................ 1,334
2009................................................................ 1,203
--------
Total.......................................................... $ 7,907
========
(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 September 30, 2004:
Basic EPS - income available to common stockholders............. $ 19,552 23,661 $ 826.33
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 559 (11.13)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 19,744 24,220 $ 815.20
========= ======= ==========
Three months ended September 30, 2003:
Basic EPS - income available to common stockholders............. $ 13,504 23,661 $ 570.75
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 577 (5.66)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 13,696 24,238 $ 565.09
========= ======= ==========
Nine months ended September 30, 2004:
Basic EPS - income available to common stockholders............. $ 63,496 23,661 $ 2,683.56
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 565 (41.44)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 64,009 24,226 $ 2,642.12
========= ======= ==========
Nine months ended September 30, 2003:
Basic EPS - income available to common stockholders............. $ 46,907 23,661 $ 1,982.48
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 600 (27.85)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 47,420 24,261 $ 1,954.63
========= ======= ==========
(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
$6.7 million and $19.9 million for the three and nine months ended September 30,
2004, respectively, from $6.9 million and $20.6 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. First
Services, L.P. leases information technology and other equipment from First
Bank. During the three months ended September 30, 2004 and 2003, First Services,
L.P. paid First Bank $1.0 million and $985,000, respectively, and during the
nine months ended September 30, 2004 and 2003, First Services, L.P. paid First
Bank $3.2 million in rental fees for the use of that equipment.
First Brokerage America, L.L.C., a limited liability company indirectly
owned by First Banks' Chairman and members of his immediate family, received
approximately $870,000 and $2.6 million for the three and nine months ended
September 30, 2004, respectively, and $795,000 and $2.3 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 $100,000 and $304,000
for the three and nine months ended September 30, 2004, respectively, and
$128,000 and $379,000 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 $30.7 million and $20.0 million at September 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.
On August 30, 2004, First Bank granted to FCA, a corporation owned by First
Banks' Chairman and members of his immediate family, a written option to
purchase 735 Membership Interests of SBLS LLC, a newly organized and wholly
owned limited liability company of First Bank, at a price of $10,000 per
Membership Interest, or $7.35 million in aggregate. The option may be exercised
by FCA at any time prior to December 31, 2004 by written notice to First Bank of
the intention to exercise the option and payment to First Bank of $7.35 million.
First Bank anticipates that FCA will exercise its option, upon which SBLS LLC
will become 51.0% owned by First Bank and 49.0% owned by FCA.
(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
September 30, 2004, First Banks and First Bank were each well capitalized.
As of September 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 September 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
September 30, December 31, For Capital Prompt Corrective
2004 2003 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks.................................. 11.06% 10.27% 8.0% 10.0%
First Bank................................... 10.51 10.41 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks.................................. 9.28 8.46 4.0 6.0
First Bank................................... 9.25 9.15 4.0 6.0
Tier 1 capital (to average assets):
First Banks.................................. 8.35 7.62 3.0 5.0
First Bank................................... 8.31 8.22 3.0 5.0
On May 6, 2004, the Board requested public comment on newly proposed rules
that would allow bank holding companies to retain trust preferred securities in
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 interests 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 Tier 1 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.
In conjunction with the pending acquisition of Hillside and CIB as
described in Note 2 to the Consolidated Financial Statements, First Banks, SFC
and First Bank committed to the Board that each entity will remain well
capitalized before and after consummation of the transaction. This commitment
was made in response to a condition imposed by the Board in connection with its
findings and decision to approve the regulatory applications submitted by First
Banks.
(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
--------------------------- -------------------------- ---------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $1,264,580 1,042,809 8,288 6,905 1,272,868 1,049,714
Loans, net of unearned discount......... 5,561,623 5,328,075 -- -- 5,561,623 5,328,075
Goodwill................................ 151,783 145,548 -- -- 151,783 145,548
Total assets............................ 7,562,558 7,097,635 11,399 9,305 7,573,957 7,106,940
Deposits................................ 6,167,258 5,977,042 (39,452) (15,427) 6,127,806 5,961,615
Note payable............................ -- -- -- 17,000 -- 17,000
Subordinated debentures................. -- -- 232,311 209,320 232,311 209,320
Stockholders' equity.................... 780,462 766,397 (191,111) (216,582) 589,351 549,815
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
----------------------- ----------------------- -------------------------
Three Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
----------------------- ----------------------- -------------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income......................... $ 99,311 96,053 150 111 99,461 96,164
Interest expense........................ 19,916 19,166 3,937 3,918 23,853 23,084
---------- --------- -------- -------- --------- ---------
Net interest income................ 79,395 76,887 (3,787) (3,807) 75,608 73,080
Provision for loan losses............... 7,500 15,000 -- -- 7,500 15,000
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses........ 71,895 61,887 (3,787) (3,807) 68,108 58,080
---------- --------- -------- -------- --------- ---------
Noninterest income...................... 22,133 20,192 (151) 50 21,982 20,242
Noninterest expense..................... 57,398 52,671 993 1,859 58,391 54,530
---------- --------- -------- -------- --------- ---------
Income before provision for
income taxes..................... 36,630 29,408 (4,931) (5,616) 31,699 23,792
Provision for income taxes.............. 13,663 12,040 (1,712) (1,948) 11,951 10,092
---------- --------- -------- -------- --------- ---------
Net income......................... $ 22,967 17,368 (3,219) (3,668) 19,748 13,700
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
----------------------- ----------------------- -------------------------
Nine Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30,
----------------------- ----------------------- -------------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income......................... $ 291,744 293,749 429 710 292,173 294,459
Interest expense........................ 55,162 66,448 11,144 14,755 66,306 81,203
---------- --------- -------- -------- --------- ---------
Net interest income................ 236,582 227,301 (10,715) (14,045) 225,867 213,256
Provision for loan losses............... 23,250 36,000 -- -- 23,250 36,000
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses........ 213,332 191,301 (10,715) (14,045) 202,617 177,256
---------- --------- -------- -------- --------- ---------
Noninterest income...................... 63,102 58,577 (457) 6,137 62,645 64,714
Noninterest expense..................... 163,303 161,877 3,095 3,785 166,398 165,662
---------- --------- -------- -------- --------- ---------
Income before provision for
income taxes..................... 113,131 88,001 (14,267) (11,693) 98,864 76,308
Provision for income taxes.............. 42,613 32,933 (7,769) (4,056) 34,844 28,877
---------- --------- -------- -------- --------- ---------
Net income......................... $ 70,518 55,068 (6,498) (7,637) 64,020 47,431
========== ========= ======== ======== ========= =========
- ------------------
(1) Corporate and other includes $2.4 million and $2.3 million of interest expense on subordinated debentures, after
applicable income tax benefit of $1.3 million and $1.2 million for the three months ended September 30, 2004 and 2003,
respectively. For the nine months ended September 30, 2004 and 2003, corporate and other includes $7.0 million
and $9.3 million of interest expense on subordinated debentures, after applicable income tax benefits of $3.8 million
and $5.0 million, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at September 30, 2004 and
December 31, 2003:
September 30, December 31,
2004 2003
--------------- ----------------
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily............................................................... $ 165,098 166,479
Term................................................................ 350,000 100,000
Federal Home Loan Bank borrowings........................................ 35,164 7,000
--------- -------
Total other borrowings.......................................... $ 550,262 273,479
========= =======
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 held by other
financial institutions under safekeeping agreements. 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 held by other financial institutions under safekeeping
agreements. In conjunction with these transactions, First Banks
purchased $100.0 million of callable U.S. Government agency
securities.
At September 30, 2004 and December 31, 2003, Federal Home Loan Bank
borrowings were $35.2 million and $7.0 million, respectively. The increase
during the nine months ended September 30, 2004 is attributable to First Banks'
acquisition of CMC, which provided $30.2 million of Federal Home Loan Bank
borrowings.
(10) NOTE PAYABLE
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. There were no
outstanding loan balances under the Credit Agreement at September 30, 2004.
Outstanding loan balances under the previous credit agreement were $17.0 million
at December 31, 2003. Letters of credit issued to unaffiliated third parties on
behalf of First Banks under the letter of credit facility were $6.3 million and
$5.4 million at September 30, 2004 and December 31, 2003, respectively, and had
not been drawn on by the counterparties.
The Credit Agreement requires maintenance of certain minimum capital ratios
for First Banks and First Bank, certain maximum nonperforming assets ratios for
First Banks and First 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.
(11) SUBORDINATED DEBENTURES
On September 8, 2004, First Banks entered into a commitment letter
providing for the issuance of $60.0 million in aggregate of trust preferred
securities through private placement transactions, to be issued by two newly
formed affiliated statutory trusts of First Banks. The gross amount of the
proceeds from the private placements will be used by the affiliated statutory
trusts to purchase variable rate subordinated debentures from First Banks. First
Banks will use the proceeds from the issuance of the subordinated debentures to
the affiliated statutory trusts to fund its pending acquisition of Hillside and
CIB, as further described in Note 2 to the Consolidated Financial Statements.
The initial private placement was completed on September 20, 2004, with the
first newly formed affiliated statutory trust issuing $20.0 million of trust
preferred securities, as further discussed below. The funds have been
temporarily invested until their use for the acquisition of Hillside and CIB.
Under the terms of the commitment letter, the second private placement will take
place no later than December 17, 2004, and will likely occur in November 2004.
In conjunction with that transaction, First Banks will form a second affiliated
statutory trust, which will issue $40.0 million of additional trust preferred
securities.
On September 20, 2004, FBST II, a newly formed Delaware statutory trust,
issued 20,000 shares of variable rate trust preferred securities at $1,000 per
share in a private placement, and issued 619 shares of common securities to
First Banks at $1,000 per share. First Banks owns all of the common securities
of FBST II. The gross proceeds of the offering were used by FBST II to purchase
$20.6 million of variable rate subordinated debentures from First Banks,
maturing on September 20, 2034. The maturity date of the subordinated debentures
may be shortened to a date not earlier than September 20, 2009, if certain
conditions are met. The subordinated debentures are the sole asset of FBST II.
In connection with the issuance of the FBST II preferred securities, First Banks
made certain guarantees and commitments that, in the aggregate, constitute a
full and unconditional guarantee by First Banks of the obligations of FBST II
under the FBST II preferred securities. Proceeds from the issuance of the
subordinated debentures to FBST II, net of offering expenses, were $20.6
million. The distribution rate on the FBST II securities is equivalent to the
three-month London Interbank Offering Rate plus 205.0 basis points, and is
payable quarterly in arrears beginning December 20, 2004.
(12) CONTINGENT LIABILITIES
First Banks is a party to 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 September 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.
On August 31, 2004, SBLS LLC acquired substantially all of the assets and
assumed certain liabilities of SBLS, as further discussed in Note 2 to the
Consolidated Financial Statements. The Amended and Restated Asset Purchase
Agreement (Asset Purchase Agreement) governing this transaction provides for
certain payments to the seller contingent on future valuations of specifically
identified assets, including servicing assets and retained interests in
securitizations. As of September 30, 2004, SBLS LLC had not recorded a liability
for the obligations associated with these contingent payments, as the likelihood
that SBLS LLC will be required to make payments under the Asset Purchase
Agreement is not ascertainable at the present time.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. Generally, forward looking statements may be identified through the
use of words such as: "believe," "expect," "anticipate," "intend," "plan,"
"estimate," or words of similar meaning or future or conditional terms such as:
"will," "would," "should," "could," "may," "likely," "probably," or "possibly."
Examples of forward looking statements include, but are not limited to,
estimates or projections with respect to our future financial condition,
expected or anticipated revenues with respect to our results of operations and
our business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause our actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and in the economy, including the threat of future terrorist activities,
existing and potential wars and/or military actions related thereto, and
domestic responses to terrorism or threats of terrorism; the impact of laws and
regulations applicable to us and changes therein; the impact of accounting
pronouncements applicable to us and changes therein; competitive conditions in
the markets in which we conduct our operations, including competition from
banking and non-banking companies with substantially greater resources than us,
some of which may offer and develop products and services not offered by us; our
ability to control the composition of our loan portfolio without adversely
affecting interest income; the credit risk associated with consumers who may not
repay loans; the geographic dispersion of our offices; the impact our hedging
activities may have on our operating results; the highly regulated environment
in which we operate; and our ability to respond to changes in technology. With
regard to our efforts to grow through acquisitions, factors that could affect
the accuracy or completeness of forward-looking statements contained herein
include 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 consider these risks and uncertainties in evaluating forward looking
statements and should not place undo reliance on these statements.
General
We are a registered bank holding company incorporated in Missouri in 1978
and headquartered in St. Louis 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 151
branch banking offices in California, Illinois, Missouri and Texas. At September
30, 2004, we had total assets of $7.57 billion, loans, net of unearned discount,
of $5.56 billion, total deposits of $6.13 billion and total stockholders' equity
of $589.4 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 $7.57 billion and $7.11 billion at September 30, 2004 and
December 31, 2003, respectively, an increase of 6.57%. The $467.0 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 deposits and other borrowings, primarily term reverse repurchase
agreements. Our acquisitions of Continental Community Bank and Trust Company, or
CCB, and Small Business Loan Source, Inc., or SBLS, in the third quarter of 2004
provided assets of $140.7 million and $47.1 million, respectively, resulting in
an increase in total assets of $187.8 million. Investment securities increased
$223.2 million, or 21.26%, to $1.27 billion at September 30, 2004 from $1.05
billion at December 31, 2003, reflecting purchases of $522.3 million and
maturities of $367.5 million. Loans, net of unearned discount, increased $233.5
million to $5.56 billion at September 30, 2004 from $5.33 billion at December
31, 2003. Our acquisitions of CCB and SBLS provided loans, net of unearned
discount, of $73.6 million and $24.0 million, respectively, resulting in a total
increase in loans of $97.6 million. The allowance for loan losses increased to
$128.0 million at September 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 $37.1 million decline in our
derivative instruments to $12.2 million from $49.3 million due to a decline in
the fair value of certain derivative financial instruments and the maturity of
$800.0 million notional amount of interest rate swap agreements during 2004, as
further discussed under "--Interest Rate Risk Management." In addition, other
assets increased $3.4 million, reflecting a $14.9 million increase attributable
to SBA servicing rights purchased from SBLS, partially offset by a $7.8 million
net decrease in other real estate, as further discussed under "--Loans and
Allowance for Loan Losses," and a $4.0 million decrease in mortgage servicing
rights, as further discussed in Note 4 to our Consolidated Financial Statements.
Total deposits increased $166.2 million, or 2.79%, to $6.13 billion at
September 30, 2004 from $5.96 billion at December 31, 2003. The increase is
primarily attributable to our acquisition of CCB, which provided total deposits
of $104.6 million. The increase is also due to the expansion of our banking
franchise with the opening of four de novo branch offices in 2004, in West St.
Louis County, Missouri, Houston, Texas, McKinney, Texas and San Diego,
California. The increase was partially offset by 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. 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-cost time deposits.
Other borrowings increased $276.8 million to $550.3 million at September
30, 2004 from $273.5 million at December 31, 2003. The increase is primarily
attributable to $250.0 million of term reverse repurchase agreements that we
entered into in conjunction with our interest rate risk management program
during the first and second quarters of 2004, as further discussed under
"--Interest Rate Risk Management" and 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 increased $23.0 million to $232.3
million at September 30, 2004 from $209.3 million at December 31, 2003. This
increase is primarily attributable to the issuance of $20.6 million of
subordinated debentures to First Bank Statutory Trust II, or FBST II, a newly
formed affiliated statutory trust, on September 20, 2004, as further discussed
in Note 11 to our Consolidated Financial Statements, to fund our acquisition of
Hillside and CIB. The increase is also attributable to an increase 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, as
well as the continued amortization of debt issuance costs during the first nine
months of 2004.
Our deferred income tax liability decreased to $23.8 million at September
30, 2004 from $41.7 million at December 31, 2003. The decrease is primarily
attributable to taxes associated with reductions in our derivative financial
instruments and changes in unrealized gains and losses on available-for-sale
investment securities.
Stockholders' equity was $589.4 million and $549.8 million at September 30,
2004 and December 31, 2003, respectively, reflecting an increase of $39.5
million. The increase is primarily attributable to net income of $64.0 million,
partially offset by a $24.0 million decrease in accumulated other comprehensive
income. The decrease in accumulated other comprehensive income is comprised of
$22.1 million associated with changes in our derivative financial instruments
and $1.9 million associated with the change in our unrealized gains and losses
on available-for-sale investment securities. The decrease is reflective of
changes in prevailing interest rates, a decline in the fair value of our
derivative financial instruments, and the maturity of $750.0 million notional
amount of our interest rate swap agreements throughout 2004, as further
discussed under "--Interest Rate Risk Management."
Results of Operations
Net Income
Net income was $19.7 million and $64.0 million for the three and nine
months ended September 30, 2004, respectively, compared to $13.7 million and
$47.4 million for the comparable periods in 2003. Results for the three months
ended September 30, 2004 reflect increased net interest and noninterest income,
and a reduced provision for loan losses, partially offset by increased
noninterest expense and an increased provision for income taxes. Results for the
nine months ended September 30, 2004 over the comparable period in 2003 reflect
increased net interest income and a reduced provision for loan losses, partially
offset by decreased noninterest income, slightly increased noninterest expenses
and an increased provision for income taxes. Our return on average assets was
1.04% and 1.16% for the three and nine months ended September 30, 2004,
respectively, compared to 0.76% and 0.88% for the comparable periods in 2003.
Our return on average stockholders' equity was 13.89% and 15.11% for the three
and nine months ended September 30, 2004, respectively, compared to 10.01% and
11.86% for the comparable periods in 2003. Net income for 2004 includes a gain
of $2.7 million, before applicable income taxes, recorded in February 2004
relating to the sale of a residential and recreational development property that
was foreclosed on in January 2003, and gains, net of expenses, totaling $1.0
million, before applicable income taxes, recorded in February and April 2004 on
the sale of two Midwest branch banking offices. Net income for 2003 includes a
nonrecurring gain of $6.3 million, before applicable income taxes, recorded in
the first quarter 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 continued to maintain strong net
interest income, partially attributable to 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.
However, the benefits of the swap agreements have declined during the third
quarter of 2004 due to rising interest rates and the maturity of $600.0 million
notional amount of interest rate swap agreements on September 20, 2004. Although
the Company is implementing other methods to offset the reduction in net
interest income, including the funding of investment security purchases through
the issuance of term reverse repurchase agreements, the maturity of the swap
agreements will result in a sizeable decline in future net interest income,
which may be further adversely affected if prevailing interest rates decrease.
In addition, the Company reduced its subordinated debentures by $63.1 million
during the second quarter of 2003, further contributing to the improvement in
net interest income. However, in addition to the impact of the interest rate
swap agreements that matured in the third quarter of 2004, the current interest
rate environment, 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 2004,
resulting in a $19.9 million reduction in nonperforming assets since December
31, 2003. The reduction in nonperforming assets was attributable to significant
loan payoffs, the liquidation of foreclosed property and the sale of a
significant portion of our commercial leasing portfolio, partially offset by
additions to nonperforming assets associated with our acquisitions of CCB and
SBLS. 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 low
prevailing interest rates.
Noninterest income was $22.0 million and $62.6 million for the three and
nine months ended September 30, 2004, respectively, in comparison to $20.2
million and $64.7 million for the comparable periods in 2003. The decrease for
the nine months ended September 30, 2004 is primarily attributable 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 three and nine months ended September 30, 2004 increased $1.7 million, or
8.60%, and $4.2 million, or 7.17%, respectively, over the comparable period in
2003. The increase for 2004 is attributable to increased service charges on
deposit accounts and customer service fees, increased loan servicing 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 related to our commercial leasing portfolio. This increase was
partially offset by reduced gains on mortgage loans sold and held for sale and a
decline in rental income associated with our reduced commercial leasing
activities.
Noninterest expense was $58.4 million and $166.4 million for the three and
nine months ended September 30, 2004, respectively, in comparison to $54.5
million and $165.7 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, was 59.83% and 57.67% for the three and
nine months ended September 30, 2004, respectively, in comparison to 58.43% and
59.60% for the comparable periods in 2003. The increase in noninterest expense
in 2004 reflects an increase in salary and employee benefit costs associated
with generally higher costs of employing and retaining qualified personnel,
additions to staff to enhance senior management expertise and expand product
lines, and recent acquisitions. This increase is also attributable to a lower
allocation of direct loan origination costs from salaries and employee benefit
expense to gain on mortgage loans sold and held for sale due to a slowdown in
the volume of mortgage loans originated and sold, 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," and a change in the
fallout percentage associated with the allocation. The overall increase in
noninterest expense was partially offset by a decrease in write-downs on
commercial operating leases resulting from reductions in estimated residual
values realized during 2003, as well as 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 decrease in occupancy and furniture and equipment expenses due to
various lease termination obligations incurred in 2003.
Net Interest Income
Net interest income (expressed on a tax-equivalent basis) increased to
$75.9 million and $226.8 million for the three and nine months ended September
30, 2004, respectively, compared to $73.4 million and $214.3 million for the
comparable periods in 2003, reflecting increases of 3.42% and 5.83%,
respectively. Net interest margin was 4.37% and 4.50% for the three and nine
months ended September 30, 2004, respectively, in comparison to 4.49% and 4.43%
for the comparable periods in 2003. Net interest income is the difference
between interest earned on our interest-earning assets, such as loans and
securities, and interest paid on our interest-bearing liabilities, such as
deposits and borrowings. Net interest income is affected by the level and
composition of assets, liabilities and stockholders' equity, as well as the
general level of interest rates and changes in interest rates. Interest income
on a tax-equivalent basis includes the additional amount of interest income that
would have been earned if our investment in certain tax-exempt interest earning
assets had been made in assets subject to federal, state and local income taxes
yielding the same after-tax income. Net interest margin is determined by
dividing net interest income on a tax-equivalent basis by average
interest-earning assets. The interest rate spread is the difference between the
average equivalent yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities. We credit the increase in net interest
income primarily to lower rates on deposits and other borrowings, increased
average investment securities with higher yields, increased average loan
balances associated with our acquisitions and internal growth, and a $63.1
million net reduction in our outstanding subordinated debentures in 2003. 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 also contributed to the maintenance of our
net interest margin for the nine months ended September 30, 2004. As further
discussed under "--Interest Rate Risk Management," our derivative financial
instruments used to hedge our interest rate risk contributed $13.0 million and
$44.7 million to net interest income for the three and nine months ended
September 30, 2004, respectively, compared to $17.3 million and $48.1 million
for the comparable periods in 2003. However, the benefits of the swap agreements
declined during the third quarter of 2004 due to rising interest rates and the
maturity of $600.0 million notional amount of interest rate swap agreements in
late September 2004. These swap agreements provided net interest income of
approximately $6.7 million and $23.0 million during the three and nine months
ended September 30, 2004, respectively, and $8.2 million and $23.8 million for
the comparable periods in 2003. Although the Company is implementing other
methods to offset the reduction in net interest income, including the funding of
investment security purchases through the issuance of term reverse repurchase
agreements, the maturity of the swap agreements will result in a sizeable
reduction of future net interest income, which may be further adversely affected
if prevailing interest rates decrease.
Average interest-earning assets increased to $6.90 billion and $6.74
billion for the three and nine months ended September 30, 2004, respectively,
compared to $6.49 billion and $6.47 billion for the three and nine months ended
September 30, 2003. The increase is primarily attributable to our acquisitions
of CCB and SBLS in the third quarter of 2004, which provided assets of $187.8
million in aggregate and our acquisition of BSG in March 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, and the issuance of $73.2 million of additional
subordinated debentures at lower interest rates in the second quarter of 2003.
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. Furthermore, on September 20, 2004, we issued $20.6 million of
additional subordinated debentures to FBST II to fund our pending acquisition of
Hillside and CIB, as further discussed in Note 11 to our Consolidated Financial
Statements.
Average investment securities were $1.25 billion and $1.22 billion for the
three and nine months ended September 30, 2004, respectively, in comparison to
$926.7 million and $948.8 million for the comparable periods in 2003, reflecting
increases of $321.1 million and $273.2 million, respectively. The yield on our
investment portfolio increased to 4.14% and 4.12% for the three and nine months
ended September 30, 2004, respectively, compared to 3.23% and 3.56% for the
comparable periods in 2003. Funds available from maturities of investment
securities were used to purchase additional investment securities during the
first nine months of 2004, including purchases of $250.0 million of callable
U.S. Government agency securities. These securities represent the underlying
securities associated with $250.0 million, in aggregate, of three-year reverse
repurchase agreements under master repurchase agreements 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 $5.52 billion and $5.41
billion for the three and nine months ended September 30, 2004, respectively,
compared to $5.42 billion and $5.39 billion for the comparable periods in 2003,
reflecting increases of $98.6 million and $17.9 million, respectively. The yield
on our loan portfolio decreased to 6.22% and 6.28% for the three and nine months
ended September 30, 2004, respectively, compared to 6.48% and 6.67% for the
comparable periods in 2003. We attribute the increase in the average balance for
2004 primarily to internal growth and our acquisitions completed during the
third quarter of 2004, partially offset by reductions in our loans held for sale
and lease financing portfolios. In addition, increased competition and general
economic conditions within our market areas have contributed to continued weak
loan demand and generally low prevailing interest rates, despite the recent
increases in the prime lending rate experienced in the third quarter of 2004.
Average real estate construction and development loans increased approximately
$93.7 million in 2004 primarily as a result of seasonal increases on existing
and available credit lines as well as new loan production. Average mortgage
loans held for sale declined approximately $162.8 million for the nine months
ended September 30, 2004 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 the increase in average real estate
mortgage loans of approximately $176.9 million for the nine months ended
September 30, 2004. Average lease financing volumes decreased approximately
$70.4 million in 2004 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 were $6.12 billion and $6.04 billion for the three and
nine months ended September 30, 2004, respectively, and $6.05 billion and $6.06
billion for the comparable periods in 2003. For the three and nine months ended
September 30, 2004, the aggregate weighted average rate paid on our deposit
portfolio decreased to 1.42% and 1.39%, respectively, from 1.48% and 1.71% 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 $4.14 billion
and $4.09 billion for the three and nine months ended September 30, 2004,
respectively, from $4.06 billion and $3.99 billion for the comparable periods in
2003. Average total time deposits decreased to $1.98 billion and $1.95 billion
for the three and nine months ended September 30, 2004, respectively, from $1.99
billion and $2.07 billion for the comparable periods in 2003.
Average other borrowings increased to $541.1 million and $456.6 million for
the three and nine months ended September 30, 2004, respectively, compared to
$246.8 million and $200.4 million for the comparable periods in 2003. The
aggregate weighted average rate paid on our other borrowings was 1.46% and 0.99%
for the three and nine months ended September 30, 2004, respectively, compared
to 0.88% and 1.11% for the comparable periods in 2003. This reflects the
increased short-term interest rate environment that began in the second quarter
of 2004. The increase in average other borrowings is primarily attributable to
$250.0 million of term reverse repurchase agreements 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 16.97% for
the nine months ended September 30, 2004, compared to 4.80% and 6.33% for the
three and nine months ended September 30, 2003. Our note payable was paid in
full in April 2004. The unusually high weighted average rate paid in 2004
reflects commitment, arrangement and other fees paid on the annual renewal of
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 $211.8 million and $210.6 million for
the three and nine months ended September 30, 2004, respectively, compared to
$209.3 million and $262.3 million for the comparable periods in 2003. The
aggregate weighted average rate paid on our subordinated debentures was 7.01%
and 6.85% for the three and nine months ended September 30, 2004, respectively,
and 6.71% and 7.30% for the comparable periods in 2003. Interest expense on our
subordinated debentures was $3.7 million and $10.8 million for the three and
nine months ended September 30, 2004, respectively, compared to $3.5 million and
$14.3 million for the comparable periods in 2003. As previously discussed, the
decrease for the nine months ended September 30, 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 in 2003,
partially offset by the issuance of $20.6 million of additional subordinated
debentures in September 2004, 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 September 30, Nine Months Ended September 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)........... $5,518,978 86,315 6.22% $5,420,342 88,588 6.48% $5,409,545 254,504 6.28% $5,391,656 269,128 6.67%
Investment securities (4).... 1,247,820 12,972 4.14 926,698 7,548 3.23 1,221,985 37,697 4.12 948,757 25,280 3.56
Federal funds sold and other. 135,987 476 1.39 145,589 345 0.94 105,748 899 1.14 133,474 1,099 1.10
---------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-earning
assets................ 6,902,785 99,763 5.75 6,492,629 96,481 5.90 6,737,278 293,100 5.81 6,473,887 295,507 6.10
------ ------ ------- -------
Nonearning assets............... 618,644 692,494 634,085 709,270
---------- ---------- ---------- ----------
Total assets............ $7,521,429 $7,185,123 $7,371,363 $7,183,157
========== ========== ========== ==========
Liabilities and
Stockholders' Equity
--------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
deposits................. $ 842,855 801 0.38% $ 851,014 1,195 0.56% $ 855,434 2,592 0.40% $ 852,663 4,346 0.68%
Savings deposits........... 2,180,594 5,116 0.93 2,152,529 5,520 1.02 2,162,174 14,486 0.89 2,145,089 18,091 1.13
Time deposits of $100
or more.................. 501,660 3,358 2.66 413,724 3,028 2.90 466,543 9,353 2.68 429,995 10,049 3.12
Other time deposits (3).... 1,480,167 8,636 2.32 1,575,197 8,865 2.23 1,486,212 25,296 2.27 1,640,299 32,147 2.62
---------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
deposits.............. 5,005,276 17,911 1.42 4,992,464 18,608 1.48 4,970,363 51,727 1.39 5,068,046 64,633 1.71
Other borrowings............. 541,073 1,982 1.46 246,790 550 0.88 456,621 3,383 0.99 200,428 1,671 1.11
Note payable (5)............. -- 229 -- 32,091 388 4.80 3,133 398 16.97 12,131 574 6.33
Subordinated debentures (3).. 211,773 3,731 7.01 209,264 3,538 6.71 210,570 10,798 6.85 262,322 14,325 7.30
---------- ------ ---------- ------ ---------- ------- ---------- -------
Total interest-bearing
liabilities........... 5,758,122 23,853 1.65 5,480,609 23,084 1.67 5,640,687 66,306 1.57 5,542,927 81,203 1.96
------ ------ ------- -------
Noninterest-bearing liabilities:
Demand deposits.............. 1,114,587 1,054,587 1,070,269 992,043
Other liabilities............ 83,109 106,914 94,299 113,386
---------- ---------- ---------- ----------
Total liabilities....... 6,955,818 6,642,110 6,805,255 6,648,356
Stockholders' equity............ 565,611 543,013 566,108 534,801
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity.. $7,521,429 $7,185,123 $7,371,363 $7,183,157
========== ========== ========== ==========
Net interest income............. 75,910 73,397 226,794 214,304
====== ====== ======= =======
Interest rate spread............ 4.10 4.23 4.24 4.14
Net interest margin (6)......... 4.37% 4.49% 4.50% 4.43%
==== ==== ===== ====
- --------------------
(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 $302,000 and $927,000 for the three and nine months ended September 30, 2004, and $317,000 and $1.0
million 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 $7.5 million and $23.3 million for the
three and nine months ended September 30, 2004, respectively, compared to $15.0
million and $36.0 million for the comparable periods in 2003. Net loan
charge-offs were $7.9 million and $18.6 million for the three and nine months
ended September 30, 2004, respectively, compared to $12.1 million and $25.5
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 third 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 $66.6 million at September 30, 2004 and $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 $81.3 million at September 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
placed on 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." These
reductions were partially offset by $8.3 million of nonperforming assets as of
September 30, 2004 associated with the acquisitions of CCB and SBLS. Our
allowance for loan losses was $128.0 million at September 30, 2004, compared to
$121.0 million at June 30, 2004, $124.9 million at March 31, 2004, $116.5
million at December 31, 2003 and $110.7 million at September 30, 2003.
Management continues to closely monitor its operations to address the ongoing
challenges posed by the current economic environment and expects nonperforming
loans to remain at somewhat elevated levels throughout the remainder of 2004.
Management considers these trends in its overall assessment of the adequacy of
the allowance for loan losses. Additionally, management anticipates a
significant increase in nonperforming loans associated with the pending
acquisition of Hillside and CIB.
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 $22.0 million and $62.6 million for the three and
nine months ended September 30, 2004, respectively, in comparison to $20.2
million and $64.7 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, gain on sales of branches, investment income on bank
owned life insurance and other miscellaneous income. The reduction experienced
in the first nine 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 nine months ended
September 30, 2004 increased $1.7 million, or 8.60%, and $4.2 million, or 7.17%,
respectively, from the comparable periods in 2003.
Service charges on deposit accounts and customer service fees were $9.8
million and $28.6 million for the three and nine months ended September 30,
2004, respectively, in comparison to $9.2 million and $26.8 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
acquisitions of CCB and BSG completed in July 2004 and March 2003, respectively,
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 $4.7 million and
$12.9 million for the three and nine months ended September 30, 2004,
respectively, in comparison to $6.5 million and $14.6 million for the comparable
periods in 2003. We attribute the decrease to the continued slowdown in 2004 in
the volume of mortgage loans originated and sold that was initially experienced
in the fourth quarter of 2003, management's decision to retain a portion of new
mortgage loan production in the real estate mortgage portfolio in mid-2003 and a
decrease in the allocation of direct loan origination costs from salaries and
employee benefits expense to gain on mortgage loans sold and held for sale as a
result of a change in the fallout percentage associated with the allocation. 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.
Net gains on sales of available-for-sale investment securities were
$257,000 for the three and nine months ended September 30, 2004 and relate to
sales of certain available-for-sale investment securities held by CCB that did
not meet our investment objectives. Net gains on sales of available-for-sale
investment securities were $266,000 and $6.8 million for the three and nine
months ended September, 30, 2003. As previously discussed, 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.
Gains, net of expenses, on the sale of two Midwest branch banking offices
in 2004 totaled $1.0 million for the nine months ended September 30, 2004. The
adjustment to gains, net of expenses, for the three months ended September 30,
2004, primarily relates to an adjustment to the fourth quarter 2003 gain
recorded on the divestiture of three banking offices associated with an expense
incurred by First Bank to correct certain environmental issues related to one of
the banking offices. There were no sales of branch banking offices during the
nine months ended September 30, 2003. On February 6, 2004, we sold one of our
Missouri branch banking offices, resulting in a $392,000 gain, net of expenses.
Additionally, on April 16, 2004, we sold one of our Illinois banking offices,
resulting in a $630,000 gain, net of expenses.
Other income was $6.0 million and $16.1 million for the three and nine
months ended September 30, 2004, respectively, in comparison to $3.0 million and
$12.4 million for the comparable periods in 2003. We attribute the primary
components of the nine-month fluctuations in 2004 to:
>> an increase of $3.0 million in loan servicing fees. The net increase
is primarily attributable to increased fees from loans serviced for
others, including fees from the SBA servicing asset purchased from
SBLS, decreased amortization of mortgage servicing rights and a lower
level of interest shortfall. 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. Loan servicing fees for 2003 also
included impairment on mortgage servicing rights. No impairment on
mortgage servicing rights was recognized in 2004;
>> increased portfolio management fee income of $1.7 million associated
with our Institutional Money Management division;
>> an increase in income associated with standby letters of credit of
$575,000;
>> an increase of $408,000 in fees from fiduciary activities; and
>> our acquisitions of CCB and BSG completed during 2004 and 2003,
respectively; partially offset by
>> a decline of $943,000 in rental income associated with our reduced
commercial leasing activities;
>> 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 $401,000 and $856,000 for the three and nine months ended
September 30, 2004, respectively, compared to net losses of $383,000
and net gains of $43,000 for the three months ended September 30,
2003, respectively;
>> a decline of $263,000 in brokerage revenue primarily associated with
overall market conditions and reduced customer demand; and
>> a net increase in losses on the sale or reductions in valuations of
certain assets, primarily related to the commercial leasing portfolio.
Net losses for 2004 were $277,000 and included a $750,000 write-down
on repossessed aircraft equipment, partially offset by gains of
$510,000 on the sale other repossessed aircraft equipment, all of
which were associated with our commercial leasing portfolio. Net
losses for 2003 were $237,000 and primarily consisted of $1.1 million
related to the disposition of fixed assets, including approximately
$419,000 in losses on the disposal of certain leasing equipment.
Noninterest Expense
Noninterest expense was $58.4 million and $166.4 million for the three and
nine months ended September 30, 2004, respectively, in comparison to $54.5
million and $165.7 million for the comparable periods in 2003. Our efficiency
ratio was 59.83% and 57.67% for the three and nine months ended September 30,
2004, respectively, compared to 58.43% and 59.60% for the comparable periods in
2003. The efficiency ratio is used by the financial services industry to measure
an organization's operating efficiency. The efficiency ratio represents the
ratio of noninterest expense to net interest income and noninterest income. The
increase in noninterest expense primarily reflects an increase in salary and
employee benefit expense, partially offset by a decline in expenses and losses,
net of gains, on other real estate owned, a decrease in write-downs on various
operating leases associated with our commercial leasing business and a decrease
in occupancy, net of rental income, and furniture and equipment expense.
Salaries and employee benefits expense was $29.9 million and $85.8 million
for the three and nine months ended September 30, 2004, respectively, in
comparison to $23.5 million and $71.7 million for the comparable periods in
2003. We attribute the overall increase to increased salaries and employee
benefits expenses associated with our acquisitions in 2003 and 2004, in addition
to generally higher salary and employee benefit costs associated with employing
and retaining qualified personnel and additions to staff to enhance senior
management expertise and expand product lines. The increase is also attributable
to a lower allocation of direct loan origination costs from salaries and
employee benefits expense to gain 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 $8.8 million and $26.5 million for the three and nine months ended
September 30, 2004, respectively, in comparison to $9.5 million and $29.1
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 relatively high due 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 $24.0 million for the
three and nine months ended September 30, 2004, respectively, in comparison to
$8.1 million and $24.6 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
information technology conversion of BSG completed in 2003, as well as the
achievement of certain efficiencies associated with the implementation of
various technology projects. The information technology conversion of CCB was
completed in September 2004.
Legal, examination and professional fees were $1.6 million and $4.9 million
for the three and nine months ended September 30, 2004, respectively, in
comparison to $1.8 million and $5.6 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 $733,000 and $2.0 million for the three and nine months ended September 30,
2004, respectively, in comparison to $658,000 and $1.8 million for the
comparable periods in 2003. The increase for the first nine months of 2004 is
primarily attributable to core deposit intangibles associated with our
acquisitions of CCB on July 30, 2004 and BSG in March 2003.
Communications and advertising and business development expenses increased
to $1.8 million and $5.2 million for the three and nine months ended September
30, 2004, respectively, from $1.4 million and $4.9 million for the comparable
periods in 2003. The expansion of our sales, marketing and product group in 2004
and broadened advertising campaigns have contributed to higher expenditures and
are consistent with our continued focus on expanding our banking franchise and
the products and services available to our customers. 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.
Other expense was $6.3 million and $14.1 million for the three and nine
months ended September 30, 2004, respectively, in comparison to $8.2 million and
$24.0 million for the comparable periods in 2003. Other expense encompasses
numerous general and administrative expenses including insurance, freight and
courier services, correspondent bank charges, miscellaneous losses and
recoveries, expenses on other real estate owned, memberships and subscriptions,
transfer agent fees, sales taxes and travel, meals and entertainment. The
decrease is primarily attributable to:
>> a decrease of $4.9 million on expenditures and losses, net of gains,
on other real estate. Expenditures and losses, net of gains, on other
real estate reflected net gains of $3.2 million for the first nine
months of 2004, in comparison to net expenses and losses of $1.7
million for the comparable period in 2003. Net gains on sales of other
real estate in 2004 include 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," and 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 nine
months of 2003 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 $4.9 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 nine months
of 2004, we recorded write-downs of $302,000, compared to $5.2 million
for the comparable period in 2003; partially offset by
>> expenses associated with our acquisitions completed during 2003 and
2004; and
>> continued growth and expansion of our banking franchise.
Provision for Income Taxes
The provision for income taxes was $12.0 million and $34.8 million for the
three and nine months ended September 30, 2004, respectively, in comparison to
$10.1 million and $28.9 million for the comparable periods in 2003. The
effective tax rate was 37.7% and 35.2% for the three and nine months ended
September 30, 2004, respectively, in comparison to 42.4% and 37.8% 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 in the second quarter
of 2004 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
38.1% for the nine months ended September 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 September 30, 2004 and December 31, 2003 are summarized as follows:
September 30, 2004 December 31, 2003
------------------------ ------------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $ 500,000 1,655 1,250,000 2,857
Fair value hedges.................................... 276,200 8,290 326,200 12,614
Interest rate cap agreements......................... -- -- 450,000 --
Term reverse repurchase agreements................... 350,000 -- 100,000 --
Interest rate lock commitments....................... 11,500 -- 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 nine months ended September 30, 2004, we realized net
interest income on our derivative financial instruments of $13.0 million and
$44.7 million, respectively, in comparison to $17.3 million and $48.1 million
for the comparable periods in 2003. The decrease is primarily attributable to an
increase in prevailing interest rates in 2004, the maturity of $800.0 million
notional amount of interest rate swap agreements in 2004 and the interest
expense associated with the term reverse repurchase agreements, partially offset
by an increase in interest income associated with the additional swap agreements
that we entered into during March, April and July 2003. The $600.0 million
notional amount of interest rate swaps, designated as cash flow hedges, that
matured on September 20, 2004, provided net interest income of approximately
$6.7 million and $23.0 million during the three and nine months ended September
30, 2004, respectively, and $8.2 million and $23.8 million for the comparable
periods in 2003. Although the Company is implementing other methods to offset
the reduction in net interest income as further discussed below, the maturity of
the swap agreements will result in a sizeable decline in future net interest
income, which may be further adversely affected if prevailing interest rates
decrease. We recorded net losses on derivative instruments, which are included
in noninterest income in our consolidated statements of income, of $401,000 and
$856,000 for the three and nine months ended September 30, 2004, respectively,
in comparison to a net loss of $383,000 and a net gain of $43,000 on derivative
instruments 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 and the $600.0 million notional amount swap agreements
that we entered into in September 2000 matured on September 20, 2004. The amount
receivable by us under the swap agreements was $2.7 million and $3.9 million at
September 30, 2004 and December 31, 2003, respectively, and the amount payable
by us under the swap agreements was $1.1 million at September 30, 2004 and
December 31, 2003.
As further discussed under "--Effects of New Accounting Standards," on
October 1, 2004 we implemented the guidance required by the Financial Accounting
Standards Board's Derivatives Implementation Group on Statement of Financial
Accounting Standards No. 133 Implementation Issue No. G25. The implementation of
this new accounting guidance did not have a material impact on our financial
condition or results of operations.
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 September 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)
September 30, 2004:
March 21, 2005.................................. $ 200,000 1.93% 5.24% $ 2,855
April 2, 2006................................... 100,000 1.93 5.45 3,954
July 31, 2007................................... 200,000 1.90 3.08 (553)
---------- --------
$ 500,000 1.92 4.42 $ 6,256
========== ===== ===== ========
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 $1.9
million and $5.2 million at September 30, 2004 and December 31, 2003,
respectively, and the amount payable by us under the swap agreements
was $553,000 and $537,000 at September 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 $46.0 million notional amount of interest rate
swap agreements that provided 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 1.97%. 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 September 30, 2004 or December 31, 2003. 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 this transaction.
>> 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 September 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 September 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)
September 30, 2004:
January 9, 2006.................................. $ 150,000 1.58% 5.51% $ 5,445
December 31, 2031................................ 55,200 3.88 9.00 2,713
March 20, 2033................................... 25,000 4.13 8.10 (898)
June 30, 2033.................................... 46,000 4.16 8.15 (1,565)
--------- --------
$ 276,200 2.70 6.88 $ 5,695
========= ===== ===== ========
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 matured on September 20, 2004, we had 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. These interest rate cap agreements matured on
September 20, 2004. The interest rate cap agreements provided 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 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.
Term Reverse Repurchase Agreements
During July 2003, August 2003, January 2004 and July 2004, we entered into
$50.0 million four-year, $50.0 million three-year, $150.0 million three-year and
$100.0 million three-year reverse repurchase agreements, respectively, under
master repurchase agreements with an unaffiliated third party. The underlying
securities associated with the reverse repurchase agreements are mortgage-backed
securities and callable U.S. Government agency securities. We entered into the
term reverse repurchase agreements with the objective of stabilizing net
interest income over time and further protecting our net interest margin against
changes in interest rates. The interest rate cap agreements included within the
term reverse repurchase agreements represent embedded derivative instruments.
Consequently, in accordance with existing accounting literature governing
derivative instruments, the embedded derivative instruments are not required to
be separated from the term reverse repurchase agreements and accounted for
separately as a derivative financial instrument. As a result, the term reverse
repurchase agreements are reflected in other borrowings in the consolidated
balance sheets and the related interest expense is reflected as interest expense
on other borrowings in the consolidated statements of income.
The maturity dates, par amounts, interest rate paid and interest rate
spread on our term reverse repurchase agreements as of September 30, 2004 and
December 31, 2003 were as follows:
Par Interest Rate
Maturity Date Amount Minus Spread (1) Strike Price (1)
------------- ------ ---------------- ----------------
(dollars expressed in thousands)
September 30, 2004:
August 15, 2006................................. $ 50,000 LIBOR - 0.5650% 3.00%
January 12, 2007................................ 150,000 LIBOR - 0.8350% 3.50%
June 14, 2007................................... 50,000 LIBOR - 0.6000% 5.00%
June 14, 2007................................... 50,000 LIBOR - 0.6100% 5.00%
August 1, 2007.................................. 50,000 LIBOR - 0.6800% 3.50%
---------
$ 350,000
=========
December 31, 2003:
August 15, 2006................................. $ 50,000 LIBOR - 0.5650% 3.00%
August 1, 2007.................................. 50,000 LIBOR - 0.6800% 3.50%
---------
$ 100,000
=========
-------------------------
(1) The interest rates paid on the term reverse repurchase agreements are based on the three-month
London Interbank Offering Rate reset in arrears minus the spread amount shown above plus a
floating amount equal to the differential between the three-month London Interbank Offering Rate
reset in arrears and the strike price shown above, if the three-month London Interbank Offering
Rate reset in arrears exceeds the strike price.
Pledged Collateral
At September 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 $229,000 in connection
with our interest rate swap agreements. At December 31, 2003, we had pledged
cash of $700,000, as collateral in connection with our interest rate swap
agreements. At September 30, 2004 and December 31, 2003, we had accepted cash of
$11.3 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 87.0% of total
interest income for the three and nine months ended September 30, 2004,
respectively, in comparison to 92.0% and 91.3% for the comparable periods in
2003. Total loans, net of unearned discount, increased $233.5 million, or 4.38%,
to $5.56 billion, or 73.4% of total assets, at September 30, 2004, compared to
$5.33 billion, or 75.0% of total assets, at December 31, 2003. Our recent
acquisitions of CCB and SBLS contributed $97.6 million to the increase in total
loans, net of unearned discount. 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, in 2004 is primarily attributable to:
>> an increase of $163.7 million in our real estate construction and
development portfolio resulting primarily from seasonal increases on
existing and available credit lines;
>> an increase of $133.6 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 a home equity product line
campaign that we held in mid-2004; and
>> an increase of $30.6 million in our commercial, financial and
agricultural portfolio, due partially to our acquisitions in 2004,
partially offset by
>> a decrease of $59.7 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 the
portfolio 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;
>> a decrease of $17.6 million in consumer and installment loans,
reflecting the continued decline of new non-real estate consumer
lending and the repayment of principal on our existing portfolio; and
>> a decrease of $16.9 million in loans held for sale resulting from the
timing of loan sales in the secondary mortgage market, combined with
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 initially experienced during the fourth quarter of
2003 and continuing through 2004.
Nonperforming assets include nonaccrual loans, restructured loans and other
real estate. The following table presents the categories of nonperforming assets
and certain ratios as of September 30, 2004 and December 31, 2003:
September 30, December 31,
2004 2003
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual..................................................... $ 14,923 26,876
Real estate construction and development:
Nonaccrual..................................................... 11,914 6,402
Real estate mortgage:
One-to-four family residential:
Nonaccrual..................................................... 17,059 21,611
Restructured................................................... 12 13
Multi-family residential loans:
Nonaccrual..................................................... 136 804
Commercial real estate loans:
Nonaccrual..................................................... 17,027 13,994
Lease financing:
Nonaccrual..................................................... 1,979 5,328
Consumer and installment:
Nonaccrual..................................................... 233 336
---------- ---------
Total nonperforming loans.................................. 63,283 75,364
Other real estate................................................... 3,294 11,130
---------- ---------
Total nonperforming assets................................. $ 66,577 86,494
========== =========
September 30, December 31,
2004 2003
---- ----
(dollars expressed in thousands)
Loans, net of unearned discount..................................... $ 5,561,623 5,328,075
=========== ==========
Loans past due 90 days or more and still accruing................... $ 3,050 2,776
=========== ==========
Ratio of:
Allowance for loan losses to loans............................. 2.30% 2.19%
Nonperforming loans to loans................................... 1.14 1.41
Allowance for loan losses to nonperforming loans............... 202.22 154.52
Nonperforming assets to loans and other real estate............ 1.20 1.62
=========== ==========
Nonperforming loans, consisting of loans on nonaccrual status and certain
restructured loans, were $63.3 million at September 30, 2004, in comparison to
$65.5 million at June 30, 2004, $87.4 million at March 31, 2004, $75.4 million
at December 31, 2003 and $70.8 million at September 30, 2003. Other real estate
owned was $3.3 million, $1.9 million, $2.9 million, $11.1 million and $10.5
million at September 30, 2004, June 30, 2004, March 31, 2004, December 31, 2003
and September 30, 2003, respectively. Nonperforming assets, consisting of
nonperforming loans and other real estate owned, were $66.6 million at September
30, 2004, compared to $67.4 million at June 30, 2004, $90.2 million at March 31,
2004, $86.5 million at December 31, 2003 and $81.3 million at September 30,
2003. The 23.03% net decrease in nonperforming assets during the first nine
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 placed a $13.9 million commercial credit
relationship in the southern California region on 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 repaid in cash;
>> 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 placed the remaining
balance on 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 $2.0 million at September 30, 2004,
compared to $3.2 million, $3.1 million, $5.3 million and $13.1 million
at June 30, 2004, March 31, 2004, December 31, 2003 and September 30,
2003, respectively; partially offset by
>> Our recent acquisitions of CCB and SBLS, which resulted in an increase
of approximately $8.3 million in nonperforming assets at September 30,
2004. SBLS has a significant concentration of assets associated with
the shrimping vessels industry, which are reflected in both loans and
other repossessed assets. Although we adjusted our asset purchase
price to reflect this concentration, asset quality issues will likely
continue in the near future as a result of this industry concentration
and its currently depressed status.
Loan charge-offs were $12.5 million and $36.8 million for the three and
nine months ended September 30, 2004, respectively, in comparison to $18.8
million and $42.5 million for the comparable periods in 2003. Loan charge-offs,
net of recoveries, were $7.9 million and $18.6 million for the three and nine
months ended September 30, 2004, respectively, in comparison to $12.1 million
and $25.5 million for the comparable periods in 2003. Our allowance for loan
losses as a percentage of loans, net of unearned discount, was 2.30% at
September 30, 2004, 2.24% at June 30, 2004, 2.34% at March 31, 2004, 2.19% at
December 31, 2003 and 2.04% at September 30, 2003. Our allowance for loan losses
as a percentage of nonperforming loans increased to 202.22% at September 30,
2004, from 184.62% at June 30, 2004, 142.94% at March 31, 2004, 154.52% at
December 31, 2003 and 156.32% at September 30, 2003. The allowance for loan
losses was $128.0 million at September 30, 2004, compared to $121.0 million at
June 30, 2004, $124.9 million at March 31, 2004, $116.5 million at December 31,
2003 and $110.7 million at September 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 Note 2 and
Note 12 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 generally low prevailing interest rates. We consider this in our overall
assessment of the adequacy of the allowance for loan losses. Despite the
improvement in nonperforming assets during 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 the remainder of 2004 and
anticipate a significant increase in nonperforming loans associated with our
pending acquisition of Hillside and CIB.
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 nine months ended September 30, 2004 and 2003:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars expressed in thousands)
Allowance for loan losses, beginning of period..... $ 120,966 107,848 116,451 99,439
Acquired allowances for loan losses................ 7,379 -- 7,379 757
Other adjustments (1)(2)........................... -- -- (479) --
--------- -------- -------- --------
128,345 107,848 123,351 100,196
--------- -------- -------- --------
Loans charged-off.................................. (12,465) (18,821) (36,760) (42,486)
Recoveries of loans previously charged-off......... 4,590 6,707 18,129 17,024
--------- -------- -------- --------
Net loan charge-offs............................... (7,875) (12,114) (18,631) (25,462)
--------- -------- -------- --------
Provision for loan losses.......................... 7,500 15,000 23,250 36,000
--------- -------- -------- --------
Allowance for loan losses, end of period........... $ 127,970 110,734 127,970 110,734
========= ======== ======== ========
---------------
(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 commercial leasing 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
$1.07 billion and $726.9 million at September 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 September 30, 2004:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less..................................... $148,693 167,118 315,811
Over three months through six months..................... 62,551 6,000 68,551
Over six months through twelve months.................... 133,741 144 133,885
Over twelve months....................................... 170,795 377,000 547,795
-------- -------- ---------
Total............................................... $515,780 550,262 1,066,042
======== ======== =========
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 September
30, 2004 and December 31, 2003, First Bank's borrowing capacity under the
agreement was approximately $762.5 million and $909.3 million, respectively. In
addition, First Bank's borrowing capacity through its relationship with the
Federal Home Loan Bank was approximately $408.7 million and $449.5 million at
September 30, 2004 and December 31, 2003, respectively. Exclusive of the Federal
Home Loan Bank advances outstanding of $35.2 million at September 30, 2004 (of
which $28.2 million were acquired in conjunction with our acquisition of CCB)
and $7.0 million at December 31, 2003, First Bank had no amounts outstanding
under either of these borrowing arrangements at September 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 September 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.................................. $ 2,245 21,774 22,168 46,187
Certificates of deposit........................... 1,213,814 775,680 560 1,990,054
Other borrowings.................................. 173,262 366,000 11,000 550,262
Subordinated debentures........................... -- -- 232,311 232,311
Other contractual obligations..................... 640 2,691 26 3,357
---------- --------- ------- ---------
Total........................................ $1,389,961 1,166,145 266,065 2,822,171
========== ========= ======= =========
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 all of our 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 accumulated other comprehensive income related to
the de-designated hedging relationships should be accounted for under paragraphs
31 and 32 of SFAS No. 133. We had pre-existing cash flow hedging relationships
that were inconsistent with the guidance in DIG Issue G25. As of September 30,
2004, our accumulated other comprehensive income included a $4.1 million net
gain attributable to these pre-existing cash flow hedging relationships. DIG
Issue G25 is effective for the fiscal quarter beginning after August 9, 2004,
and shall be applied to all hedging relationships as of the effective date. On
October 1, 2004, we implemented DIG Issue G25 and de-designated all of our
specific cash flow hedging relationships that were inconsistent with the
guidance in DIG Issue G25. Consequently, the $4.1 million net gain associated
with the de-designated cash flow hedging relationships will be amortized to
interest income over the remaining lives of the respective hedging
relationships, which range from approximately 6 months to three years. We
elected to prospectively re-designate new cash flow hedging relationships based
upon minor revisions to the underlying hedged items as required by the guidance
in DIG Issue G25. The implementation of DIG Issue G25 did not and is not
expected to have a material impact on our consolidated financial statements,
results of operations or our interest rate risk management program.
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. On April 1, 2004, we
implemented SAB 105, which 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 decline of approximately 7.9% in net interest income, based on
assets and liabilities at December 31, 2003. At September 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 nine months ended September 30, 2004 as
compared to the comparable periods in 2003 and further discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations." During the three and nine months ended
September 30, 2004, our asset-sensitive position and overall susceptibility to
market risks have not changed materially. However, prevailing interest rates
have risen slightly during the three months ended September 30, 2004.
ITEM 4 - CONTROLS AND PROCEDURES
Our Chief Executive Officer, who is our principal executive and principal
financial officer, has evaluated the effectiveness of our "disclosure controls
and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 ("Exchange Act")) as of the end of the period
covered by this report. Based on such evaluation, our Chief Executive Officer
has concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act. There
have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonable likely to materially affect, the
Company's control over financial reporting.
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
-------------- -----------
10.1 First Amendment to Secured Credit Agreement by and among
among First Banks, Inc. and Wells Fargo Bank, National
Association, as Agent, Bank One, N.A., LaSalle Bank National
Association, The Northern Trust Company, Union Bank of
California, N.A., Fifth Third Bank (Chicago) and U.S. Bank
National Association, dated August 12, 2004 - filed
herewith.
31 Rule 13a-14(a) / 15d-14(a) Certifications - filed herewith.
32 Section 1350 Certifications - filed herewith.
(b) Reports on Form 8-K.
We filed a Current Report on Form 8-K on July 23, 2004. Item 12 of the
report referenced a press release announcing First Banks, Inc.'s financial
results for the three and six months ended June 30, 2004. A copy of the
press release was included as Exhibit 99.3.
We filed a Current Report on Form 8-K on August 13, 2004. Item 5 of the
report referenced the signing of a Stock Purchase Agreement on August 12,
2004 by and among First Banks, Inc., a Missouri corporation, The San
Francisco Company, a Delaware corporation, CIB Marine Bancshares, Inc., a
Wisconsin corporation, Hillside Investors, Ltd., an Illinois corporation
and CIB Bank, Hillside, Illinois, an Illinois banking corporation, that
provides for First Banks Inc.'s acquisition of Hillside Investors, Ltd. and
its wholly owned banking subsidiary, CIB Bank. A copy of the Stock Purchase
Agreement was included as Exhibit 10.6. Item 5 of the report also
referenced a press release announcing the signing of the Stock Purchase
Agreement. A copy of the press release was included as Exhibit 99.4.
SIGNATURES
Pursuant to the requirements 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.
November 15, 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 10.1
FIRST AMENDMENT
TO
SECURED CREDIT AGREEMENT
This FIRST AMENDMENT TO SECURED CREDIT AGREEMENT (this "Agreement"),
dated as of August 12, 2004, is made and entered into by and among FIRST BANKS,
INC., a Missouri corporation ("Borrower"), the financial institutions that have
executed this Agreement as lenders (each individually a "Lender" and
collectively the "Lenders") and WELLS FARGO BANK, NATIONAL ASSOCIATION, a
national banking association, as agent ("Agent"). This Agreement is based upon
the following recitals which are made a material part of this Agreement:
A. Pursuant to the terms and conditions of a certain Secured Credit
Agreement (the "Credit Agreement"), dated as of August 14, 2003, and made by and
between Borrower, Lenders and Agent, Lenders agreed to make available to
Borrower a revolving credit facility in the amount of Sixty Million Dollars
($60,000,000.00) and a revolving letter of credit facility in the amount of
Twenty Million Dollars ($20,000,000.00). Capitalized terms not otherwise defined
herein shall have the same meaning as in the Credit Agreement.
B. To further evidence the indebtedness of Borrower to Lenders pursuant
to the Credit Agreement, Borrower executed and delivered to Lenders the Notes,
each dated August 19, 2003.
C. The obligations of Borrower to Lenders pursuant to the Credit
Agreement and the Notes are further evidenced, secured and guaranteed by the
Borrower Pledge Agreement, the San Francisco Company Guaranty and the San
Francisco Company Security Agreement (the foregoing, with the Credit Agreement
and the Notes, are collectively referred to as the "Loan Documents" and
individually as a "Loan Document").
D. Borrower has requested that Lenders (i) severally increase the
revolving credit facility provided for in the Credit Agreement to Seventy-Five
Million Dollars ($75,000,000), (ii) increase the revolving letter of credit
facility provided for in the Credit Agreement to Twenty-Five Million Dollars
($25,000,000), (iii) extend the term of the Credit Agreement, and (iv) amend the
Credit Agreement in certain respects.
E. Lenders are willing to accede to Borrower's requests upon the terms
and conditions herein set forth.
NOW, THEREFORE, in consideration of the recitals and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Borrower and Lenders hereby agree as follows, notwithstanding anything to the
contrary contained in the Loan Documents:
1. Affirmation of Recitals. The recitals are true and correct and
-------------------------
incorporated herein by this reference.
2. Outstanding Principal Balance. As of August 12, 2004, the
--------------------------------
outstanding principal balance of Advances due under the revolving credit
facility provided for in the Credit Agreement was $0.00 and the outstanding
Letters of Credit thereunder (including matured but unsatisfied Obligations of
Reimbursement) aggregated $6,280,000. Borrower hereby stipulates and agrees that
the foregoing balances are true and correct and that such amounts are due and
owing in accordance with the terms of the Loan Documents and are not subject to
any claim of offset or defense whatsoever.
3. Amendments. Effective upon the date each of the conditions provided
----------
for in Section 7 hereof shall have either been satisfied or expressly waived in
writing by Lenders and Agent (the "Effective Date"), the Credit Agreement is
amended in the following respects:
(a) Section 1.01 is amended as follows:
(1) The following shall be inserted as the first definitional
paragraph:
" `Acquisition' shall mean any of (i) the acquisition by Borrower
or any of its Subsidiaries of stock or other equity interest in
any Person, (ii) the acquisition by any Person of stock or other
equity interest in Borrower or any of its Subsidiaries, (iii) the
consolidation or merger of any Person into Borrower or any of its
Subsidiaries, (iv) the consolidation or merger of Borrower or any
of its Subsidiaries into any Person, and (v) the transfer,
outside of the ordinary course of business, of any assets of any
other Person to Borrower or any of its Subsidiaries, or of
Borrower or any of its Subsidiaries to any other Person."
(2) The term "Commitments" shall be amended by substituting for
the words and figures "Sixty Million Dollars ($60,000,000)" the
words and figures "Seventy-Five Million Dollars ($75,000,000)."
(3) "Non-Performing Assets" of any Person means the sum of (i)
all loans and leases classified as past due 90 days or more and
still accruing interest; (ii) all loans classified as
`non-accrual' and no longer accruing interest; (iii) all loans
and leases classified as `restructured loans and leases'; (iv)
without duplication, property acquired in repossession or
foreclosure and property acquired pursuant to in-substance
foreclosure; and (v) if such Person is a Bank Subsidiary, all
other Non-Performing Assets as reported in the then most recent
call report of such Person.
(4) The definitional paragraph "Permitted Acquisition" shall be
amended, in its entirety, to read as follows:
"Permitted Acquisition means any Acquisition by Borrower or any
of its Subsidiaries, in each case so long as:
(i) no Default or Event of Default is continuing at the
time of such Acquisition, or would be caused by such
Acquisition;
(ii) all authorizations of governmental agencies, bodies or
authorities which are necessary to approve the
Acquisition have been obtained and are in full force
and effect, or will be obtained contemporaneously with
the earlier to occur of closing of such Acquisition and
the making of any Advance for such purpose, and no
further approval, consent, order or authorization of or
designation, registration, declaration or filing with
any governmental authority is required in connection
therewith;
(iii) in the case of any Acquisition that is a consolidation
or merger, the continuing or surviving corporation
shall be controlled by the Borrower immediately
following the transaction; provided, however, that (A)
-------- -------
a Subsidiary may merge with and into the Borrower or
another Subsidiary, but (B) under no circumstances may
the Borrower merge into or consolidate with any
Subsidiary; and
(iv) any notice required in connection with such Acquisition
pursuant to Section 5.09 shall have been timely given."
(5) The term "Revolving Credit Termination Date," shall be
amended by substituting for the date "August 12, 2004" the date
"August 11, 2005."
(b) Section 2.03 (a) shall be amended, in its entirety, to read as
follows:
"(a) Generally. The Margin and the L/C Margin through and
---------
including the first adjustment occurring as specified below shall
be 0.875% and 1.00%, respectively. Beginning with the receipt by
the Lenders of the financial statements and Compliance
Certificate for the period ending September 30, 2004, the Margin
and the L/C Margin shall be adjusted each quarter on the basis of
the Funded Debt Ratio as at the end of the previous fiscal
quarter, in accordance with the following table:
Funded Debt Ratio Margin in Basis Points L/C Margin in Basis Points
----------------- ---------------------- --------------------------
1.75 to 1.00 or more 112.5 125.0
1.00 to 1.00 or more, but 100.0 112.50
less than 1.75 to 1.00
Less than 1.00 to 1.00 87.5 100.0
Reductions and increases in the Margin and L/C Margin will be
made quarterly on the first day of the month following the date
the Borrower's financial statements and Compliance Certificate
required under Section 5.01 are due. Notwithstanding the
foregoing, (i) if the Borrower fails to deliver any financial
statements or Compliance Certificates when required under Section
5.01, the Agent may (and, upon request of the Required Lenders,
shall), by notice to the Borrower, increase the Margin and L/C
Margin to the highest rates set forth above until such time as
the Agent has received all such financial statements and
Compliance Certificates, and (ii) no reduction in the Margin or
the L/C Margin will be made if a Default or an Event of Default
has occurred and is continuing at the time that such reduction
would otherwise be made."
(c) Section 2.15 (a) shall be amended by substituting for the sum
"$20,000,000" the sum "$25,000,000."
(d) Section 2.19 (a) shall be amended by substituting for the words
and figures "September 30, 2003" the words and figures "September
30, 2004."
(e) Section 2.19 (c) shall be amended by substituting for the words
and figures "September 30, 2003" the words and figures "September
30, 2004."
(f) Section 5.08 shall be amended by substituting for the figure
"$1,000,000" in the last sentence thereof the figure
"$2,000,000."
(g) Section 5.09 shall be amended, in its entirety, to read as
follows:
"Section 5.09 Notice of Acquisition. Within five (5) days
-----------------------
after the Borrower or a Subsidiary enters into a definitive
agreement in connection with a Permitted Acquisition of an entity
whose assets are equal to or in excess of $500,000,000 or that is
subject to a regulatory order or agreement, the Borrower will
notify the Agent of such acquisition in writing. Any notice
required by the immediately preceding sentence shall be
accompanied by a Schedule in the form of Exhibit I, duly
completed and executed on behalf of the Borrower, demonstrating
that the subject Permitted Acquisition will not result in an
Event of Default."
(h) Section 6.05 shall be amended, in its entirety, to read as
follows:
"Section 6.05 Acquisitions. Neither the Borrower nor any of its
------------
Subsidiaries will engage in an Acquisition with any Person,
whether as acquirer or acquiree, or engage in any other
transaction analogous in purpose or effect to an Acquisition,
except that the foregoing shall not prohibit any Permitted
Acquisition."
(i) Section 7.05 shall be amended to read as follows:
"Section 7.05 Maximum Non-Performing Assets. The Borrower
--------------------------------
will maintain on a consolidated basis, its Non-Performing Assets
at an amount not greater than 20% of its Primary Equity Capital,
determined as of the end of each calendar quarter."
(j) Exhibit A shall be amended, in its entirety, by substituting
therefore Exhibit A hereto.
(k) Exhibit G shall be amended by substituting for the words and
figures "August 19, 2003" the words and figures "August 12,
2004."
(l) Exhibit I shall be amended, in its entirety, by substituting
Exhibit I hereto.
(m) Section 7.06 shall be amended to read as follows:
"Section 7.06 Allowance for Loan and Lease Losses. The
------------------------------------------
Borrower will maintain, on a consolidated basis, its allowance
for loan and lease losses at not less than 100% of its
Non-Performing Assets." The allowance for loan and lease losses
at any time shall be the amount set forth in the most recent
Quarterly Report on Form 10-Q or Annual Report on Form 10-K filed
by the Borrower with the Securities and Exchange Commission (or
any successor report).
4. Other Provisions of Loan Documents. The Loan Documents are and
-----------------------------------
(as modified and amended hereby) shall remain in full force and effect, and all
of the terms and provisions of the Loan Documents (as so modified and amended)
are hereby ratified and reaffirmed in all respects. As hereinafter used in this
Agreement, "Loan Documentation" shall mean the Loan Documents as modified and
amended by this Agreement. All of the Collateral shall remain subject to the
liens, charges and encumbrances of the Loan Documents and nothing herein
contained, and nothing done pursuant hereto, shall affect the liens or
encumbrances of the Loan Documents, or the priority thereof with respect to
other liens or encumbrances, or release or affect the liability of any party or
parties whomsoever who may now or hereafter be liable under or on account of the
Loan Documents.
5. Expenses. Borrower agrees to pay all of Agent's reasonable
--------
out-of-pocket costs, expenses, fees and charges incurred in connection with the
preparation, negotiation, and execution of this Agreement, including, without
limitation, all of Agent's reasonable attorneys' fees and disbursements. Failure
by Borrower to pay any such amounts within five (5) Bank Business Days after
demand by Agent shall constitute an Event of Default. If Borrower fails to
timely pay any such expenses, then Agent shall have the right to pay such
expenses and the same shall constitute additional indebtedness of Borrower to
Agent evidenced, secured and guaranteed by the Loan Documents.
6. Borrower's Representations and Warranties. Borrower hereby
-----------------------------------------------
represents and warrants to Lenders, as of the date of this Agreement, as
follows:
(a) The security interests granted under the Loan Documents have
been, are, and shall remain valid first, prior and paramount
liens on the Collateral, enjoying the same or superior
priority with respect to other claims upon the Collateral as
prevailed prior to the execution of this Agreement;
(b) No Default or Event of Default has occurred and is
continuing on the date of this Agreement or shall have
occurred and be continuing on the Effective Date; and
(c) All resolutions, authorizations or consents on the part of
Borrower which are necessary for Borrower to execute and
deliver this Agreement and to be bound by the provisions
hereof have been obtained and are in full force and effect
on the date hereof, and this Agreement constitutes the
legal, valid and binding obligation of the Borrower and is
enforceable in accordance with the terms hereof.
Borrower acknowledges that Lenders have relied on the foregoing representations
and warranties in entering into this Agreement. In the event Borrower has made
any material misrepresentation to Lenders in connection with this Agreement,
such misrepresentation shall constitute an Event of Default under the Loan
Documents.
7. Conditions to Effectiveness. All of (i) the agreements of Lenders
----------------------------
herein, (ii) the obligation of Lenders to hereafter make any Advances, and (iii)
the obligation of Agent to hereafter issue any letter of credit are subject to
and conditioned upon the Agent having received on or before August 12, 2004, all
of the following, each dated (unless otherwise indicated) as of the date hereof,
and each in form and substance satisfactory to each Lender:
(a) The full execution and delivery of this Agreement by
Borrower.
(b) Execution and delivery of this Agreement by all of the
Lenders.
(c) San Francisco Company's execution and delivery of
Acknowledgement and Consent hereto.
(d) The Notes, in amounts consistent with those set forth in
Exhibit A hereto, properly executed on behalf of the
Borrower.
(e) Current searches of appropriate filing offices showing that
(i) no state or federal tax liens have been filed and remain
in effect against any of the Borrower, First Bank or San
Francisco Company, (ii) no financing statements have been
filed and remain in effect against any of the Borrower,
First Bank or San Francisco Company, except financing
statements perfecting only Liens permitted under Section
6.01 of the Credit Agreement and (iii) no judgment liens are
in effect against any of the Borrower or First Bank or San
Francisco Company.
(f) Separate certificates of the secretaries of the Borrower and
San Francisco Company certifying, in the case of each such
corporation, (i) that the execution, delivery and
performance of this Agreement and all other documents
contemplated hereunder to which such corporation is a party
have been duly approved by all necessary action of the Board
of Directors of such corporation, and attaching true and
correct copies of the applicable resolutions granting such
approval, (ii) that attached to such certificate are true
and correct copies of the articles of incorporation and
bylaws of such corporation, together with such copies, and
(iii) the names of the officers of such corporation who are
authorized to sign this Agreement and all other documents
contemplated hereunder to which such corporation is a party,
including, with respect to the Borrower, requests for
Advances and L/C Applications, together with the true
signatures of such officers. The Agent and the Lenders may
conclusively rely on each such certificate until they shall
receive a further certificate of the Secretary or Assistant
Secretary of the applicable corporation canceling or
amending the prior certificate and submitting the signatures
of the officers named in such further certificate.
(g) Certificates of good standing of each of the Borrower, San
Francisco Company and First Bank, each dated not more than
twenty (20) days before the date of this Agreement.
(h) A signed copy of an opinion of counsel for the Borrower and
San Francisco Company, addressed to the Lenders as to
matters referred to in Sections 4.01, 4.02, 4.03 and 4.07 of
the Credit Agreement as if the representation set forth
therein were made as of the date hereof, and as to such
other matters as the Lenders may reasonably request, with
that opinion being subject to customary assumptions and
limitations and reasonably acceptable to each Lender's
counsel. In the case of Section 4.07, the opinion may be to
the best knowledge of such counsel and subject to the
matters disclosed in Schedule 4.07 hereto, and, in the case
of Section 4.03, insofar as it relates to enforcement of
remedies, it may be subject to applicable bankruptcy,
insolvency, reorganization or similar laws affecting the
rights of creditors generally from time to time, and to
usual equity principles.
(i) Agent shall have received Certificates representing, in the
aggregate, all of the issued and outstanding capital stock
of San Francisco Company and one blank stock power executed
by Borrower for each such certificate.
(j) Agent shall have received Certificates representing, in the
aggregate, all of the issued and outstanding capital stock
of First Bank and one blank stock power executed by San
Francisco Company for each such certificate.
(k) Agent shall have received full payment of all fees owed by
Borrower to Agent pursuant to that certain letter agreement
dated June 4, 2004, between Borrower and Agent.
8. Miscellaneous. This Agreement shall be binding upon Borrower and
-------------
Lenders, and their respective heirs, personal representatives, successors and
assigns. This Agreement may be executed in several counterparts, each of which
shall be deemed an original and all of such counterparts, taken together, shall
constitute one and the same agreement, even though all of the parties hereto may
not have executed the same counterpart of this Agreement. If any provision of
this Agreement shall be unlawful, then such provision shall be null and void,
but the remainder of this Agreement shall remain in full force and effect and be
binding on the parties. This Agreement and the Loan Documents referenced herein
contain all of the agreements of the parties relative to the subject matter of
this Agreement. Any prior agreements or commitments of Lenders, whether oral or
written, relating to the subject matter of this Agreement not expressly set
forth herein or in the exhibits hereto (if any) are null and void and superseded
in their entirety by the provisions hereof. This Agreement shall be binding upon
the execution and delivery of this Agreement by the last party to sign.
9. No Oral Agreements. This notice is provided pursuant to Section
-------------------
432.045, R.S.Mo. As used herein, "Creditor" means Bank and "this writing" means
this Agreement and all the other Loan Documents. ORAL AGREEMENTS OR COMMITMENTS
TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT
INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE, REGARDLESS
OF THE LEGAL THEORY UPON WHICH IT IS BASED THAT IS IN ANY WAY RELATED TO THE
CREDIT AGREEMENT. TO PROTECT YOU (BORROWER) AND US (LENDER) FROM
MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH
MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE
STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING
TO MODIFY IT.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"Borrower"
FIRST BANKS, INC., a Missouri corporation
(SEAL)
By: /s/ Allen H. Blake
---------------------------------------------
Printed Name: Allen H. Blake
------------------------------------
Title: President and Chief Executive Officer
-----------------------------------------
"Lenders"
WELLS FARGO BANK, NATIONAL
ASSOCIATION, as Agent and as Lender
By: /s/ Troy Rosenbrook
--------------------------------------------
Its: Senior Vice President
---------------------------------------
BANK ONE, N.A.
By: /s/ Douglas Gallun
--------------------------------------------
Its: First Vice President
---------------------------------------
LASALLE BANK NATIONAL ASSOCIATION
By: /s/ Robert J. Mathias
----------------------------------------
Its: First Vice President
----------------------------------------
THE NORTHERN TRUST COMPANY
By: /s/ Lisa M. McDermott
----------------------------------------
Its: Vice President
----------------------------------------
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Dennis A. Cattell
----------------------------------------
Its: Vice President
----------------------------------------
FIFTH THIRD BANK (CHICAGO)
By: /s/ Patrick A. Horne
----------------------------------------
Its: Vice President
----------------------------------------
U.S. BANK NATIONAL ASSOCIATION
By: /s/ David C. Buettner
----------------------------------------
Its: Vice President
----------------------------------------
ACKNOWLEDGEMENT AND CONSENT
The San Francisco Company hereby acknowledges and consents to the above and
foregoing First Amendment to Secured Credit Agreement dated August 12, 2004, and
agrees that any and all of its obligations under or on account of the Loan
Documents are and remain in full force and effect unaffected by or on account of
said First Amendment to Secured Credit Agreement, all as of August 12, 2004.
THE SAN FRANCISCO COMPANY, a Delaware
Corporation
By: /s/ Allen H. Blake
------------------------------------
Printed Name: Allen H. Blake
--------------------------
(SEAL) Title: Executive Vice President
---------------------------------
EXHIBIT A
REVOLVING LOAN COMMITMENT AMOUNTS
- -------------------------------------------------------------------------------------------------------------------------
Commitment Percentage
Name Amount Amount Notice Address
- -------------------------------------------------------------------------------------------------------------------------
Wells Fargo Bank, National $18,750,000 25% MAC N2650-140
Association, as a Bank 120 S. Central Avenue, 14th Floor
St. Louis, Missouri 63105-1705
Attention: Holly Heidtbrink
Telecopier:314-726-3173
- -------------------------------------------------------------------------------------------------------------------------
Bank One, N.A. $11,250,000 15% 120 South LaSalle Street
Chicago, Illinois 60603-3400
Attention: Douglas Gallun
Telecopier: (312) 661-9511
- -------------------------------------------------------------------------------------------------------------------------
LaSalle Bank National Association $11,250,000 15% One Metropolitan Square
211 North Broadway, Suite 4050
St. Louis, Missouri 63102
Attention: Robert J. Mathias
Telecopier: (314) 621-3947
- -------------------------------------------------------------------------------------------------------------------------
The Northern Trust Company $7,500,000 10% 50 South LaSalle Street, L-8
Chicago, Illinois 60675
Attention: Thomas E. Bernhardt
Telecopier: (312) 444-4906
- -------------------------------------------------------------------------------------------------------------------------
Union Bank of California, N.A. $7,500,000 10% 445 South Figureroa Street
Los Angeles, California 90071
Attention: Dennis A. Cattell
Telecopier: (213) 236-5548
- -------------------------------------------------------------------------------------------------------------------------
Fifth Third Bank (Chicago) $7,500,000 10% 1701 Golf Road
Tower One, Suite 700
Rolling Meadows, IL 60008
Attention: Patrick A. Horne
Telecopier: (847) 354-7130
- -------------------------------------------------------------------------------------------------------------------------
U.S. Bank National Association $11,250,000 15% Correspondent Banking
SL-TW-11SI
7th & Washington
St. Louis, MO 63101
Attention: David C. Buettner, VP
Telecopier: (314) 418-8394
- -------------------------------------------------------------------------------------------------------------------------
EXHIBIT I
NOTICE OF PERMITTED ACQUISITION
This Notice is being submitted on this ___ day of ________, 200__,
pursuant to Section 5.09 of the Secured Credit Agreement dated as of August 14,
2003, as amended (the "Credit Agreement"), by and among Wells Fargo Bank,
National Association (the "Agent"), the Lenders that are parties thereto, and
First Banks, Inc., as Borrower. Capitalized terms used but not defined herein
shall have the meanings set forth in the Credit Agreement.
The undersigned officer of the Borrower hereby notifies the Lenders
that [the Borrower] [_________ (name of Subsidiary)] has entered into an
agreement to purchase [______% of the voting common stock] [all of the assets of
the business] [all of the assets of the ____ branch(s)] of
__________________________________ (name and organizational details of acquired
entity). A brief description of the transaction, including the form of the
acquisition, amount and nature of the consideration, and expected date of
completion, is attached to this Notice as Annex A.
The undersigned officer hereby certifies to the Lenders that:
A. The representations and warranties contained in Article IV of the
Credit Agreement are correct as of the date hereof and will be
correct after giving effect to the proposed acquisition, except
to the extent that the same relate specifically to an earlier
date; and
B. No Default or Event of Default has occurred and is continuing, or
will occur as a result of the proposed acquisition.
This will confirm that promptly upon request of Agent or any Lender,
First Banks, Inc. will provide to the Agent copies of any applications to
regulatory agencies submitted in connection with the proposed acquisition.
Signed as of the day and year first above written.
FIRST BANKS, INC.
By
---------------------------
[name and office held]
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: November 15, 2004 By: /s/ 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 September 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: November 15, 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)