Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] 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 April 30, 2005
----- ------------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS............................................................... 1
CONSOLIDATED STATEMENTS OF INCOME......................................................... 2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME............................................................... 3
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................................. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 30
ITEM 4. CONTROLS AND PROCEDURES................................................................... 31
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 32
SIGNATURE.............................................................................................. 33
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
March 31, December 31,
2005 2004
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks.............................................................. $ 160,089 149,605
Short-term investments............................................................... 79,660 117,505
---------- ---------
Total cash and cash equivalents................................................. 239,749 267,110
---------- ---------
Investment securities:
Available for sale................................................................... 1,689,083 1,788,063
Held to maturity (fair value of $24,894 and $25,586, respectively)................... 24,898 25,286
---------- ---------
Total investment securities..................................................... 1,713,981 1,813,349
---------- ---------
Loans:
Commercial, financial and agricultural............................................... 1,530,384 1,575,232
Real estate construction and development............................................. 1,306,385 1,318,413
Real estate mortgage................................................................. 3,118,422 3,061,581
Consumer and installment............................................................. 52,178 54,546
Loans held for sale.................................................................. 154,590 133,065
---------- ---------
Total loans..................................................................... 6,161,959 6,142,837
Unearned discount.................................................................... (5,513) (4,869)
Allowance for loan losses............................................................ (144,154) (150,707)
---------- ---------
Net loans....................................................................... 6,012,292 5,987,261
---------- ---------
Bank premises and equipment, net of accumulated depreciation and amortization............. 140,642 144,486
Goodwill.................................................................................. 152,529 156,849
Bank-owned life insurance................................................................. 107,961 102,239
Deferred income taxes..................................................................... 132,551 127,397
Other assets.............................................................................. 99,619 134,150
---------- ---------
Total assets.................................................................... $8,599,324 8,732,841
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand........................................................... $1,237,776 1,194,662
Interest-bearing demand.............................................................. 881,621 875,489
Savings.............................................................................. 2,150,889 2,249,644
Time deposits of $100 or more........................................................ 817,816 807,220
Other time deposits.................................................................. 1,966,327 2,024,955
---------- ---------
Total deposits.................................................................. 7,054,429 7,151,970
Other borrowings.......................................................................... 556,009 594,750
Note payable.............................................................................. 4,000 15,000
Subordinated debentures................................................................... 271,835 273,300
Deferred income taxes..................................................................... 27,948 34,812
Accrued expenses and other liabilities.................................................... 79,895 62,116
---------- ---------
Total liabilities............................................................... 7,994,116 8,131,948
---------- ---------
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......................................................................... 599,767 577,836
Accumulated other comprehensive loss...................................................... (19,447) (1,831)
---------- ---------
Total stockholders' equity...................................................... 605,208 600,893
---------- ---------
Total liabilities and stockholders' equity...................................... $8,599,324 8,732,841
========== =========
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
March 31,
----------------------
2005 2004
---- ----
Interest income:
Interest and fees on loans......................................................... $ 94,170 84,220
Investment securities.............................................................. 17,549 11,621
Short-term investments............................................................. 509 286
-------- --------
Total interest income......................................................... 112,228 96,127
-------- --------
Interest expense:
Deposits:
Interest-bearing demand.......................................................... 888 967
Savings.......................................................................... 5,744 4,777
Time deposits of $100 or more.................................................... 5,354 2,956
Other time deposits.............................................................. 13,979 8,487
Other borrowings................................................................... 3,300 644
Note payable....................................................................... 138 105
Subordinated debentures............................................................ 4,746 3,538
-------- --------
Total interest expense........................................................ 34,149 21,474
-------- --------
Net interest income........................................................... 78,079 74,653
Provision for loan losses............................................................... -- 12,750
-------- --------
Net interest income after provision for loan losses........................... 78,079 61,903
-------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees...................... 9,299 8,949
Gain on loans sold and held for sale............................................... 4,516 4,229
Bank-owned life insurance investment income........................................ 1,260 1,343
Investment management income....................................................... 2,026 1,544
Other.............................................................................. 4,000 4,494
-------- --------
Total noninterest income...................................................... 21,101 20,559
-------- --------
Noninterest expense:
Salaries and employee benefits..................................................... 32,930 27,686
Occupancy, net of rental income.................................................... 5,239 4,637
Furniture and equipment............................................................ 4,024 4,413
Postage, printing and supplies..................................................... 1,628 1,322
Information technology fees........................................................ 8,150 7,996
Legal, examination and professional fees........................................... 2,371 1,563
Amortization of intangibles associated with the purchase of subsidiaries........... 1,209 658
Communications..................................................................... 509 465
Advertising and business development............................................... 1,647 1,281
Other.............................................................................. 6,048 2,581
-------- --------
Total noninterest expense..................................................... 63,755 52,602
-------- --------
Income before provision for income taxes...................................... 35,425 29,860
Provision for income taxes.............................................................. 13,298 11,591
-------- --------
Net income.................................................................... 22,127 18,269
Preferred stock dividends............................................................... 196 196
-------- --------
Net income available to common stockholders................................... $ 21,931 18,073
======== ========
Basic earnings per common share......................................................... $ 926.87 763.81
======== ========
Diluted earnings per common share....................................................... $ 915.04 753.93
======== ========
Weighted average shares of common stock outstanding..................................... 23,661 23,661
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Three Months Ended March 31, 2005 and 2004 and Nine Months Ended December 31, 2004
(dollars expressed in thousands, except per share data)
Accu-
Adjustable Rate mulated
Preferred Stock Other
--------------- Compre- Total
Class A Additional hensive Stock-
Conver- Common Paid-In Retained Income holders'
tible Class B Stock Capital Earnings (Loss) Equity
----- ------- ----- ------- -------- ------ ------
Consolidated balances, December 31, 2003............. $12,822 241 5,915 5,910 495,714 29,213 549,815
-------
Three months ended March 31, 2004:
Comprehensive income:
Net income..................................... -- -- -- -- 18,269 -- 18,269
Other comprehensive income (loss), net of tax:
Unrealized gains on securities............... -- -- -- -- -- 5,491 5,491
Derivative instruments:
Current period transactions................ -- -- -- -- -- (4,643) (4,643)
-------
Total comprehensive income....................... 19,117
Class A preferred stock dividends,
$0.30 per share.............................. -- -- -- -- (192) -- (192)
Class B preferred stock dividends,
$0.03 per share.............................. -- -- -- -- (4) -- (4)
------- --- ----- ----- ------- ------- -------
Consolidated balances, March 31, 2004................ 12,822 241 5,915 5,910 513,787 30,061 568,736
-------
Nine months ended December 31, 2004:
Comprehensive income:
Net income..................................... -- -- -- -- 64,639 -- 64,639
Other comprehensive loss, net of tax:
Unrealized losses on securities.............. -- -- -- -- -- (11,202) (11,202)
Reclassification adjustment for gains
included net income........................ -- -- -- -- -- (167) (167)
Derivative instruments:
Current period transactions................ -- -- -- -- -- (20,523) (20,523)
-------
Total comprehensive income....................... 32,747
Class A preferred stock dividends,
$0.90 per share.............................. -- -- -- -- (577) -- (577)
Class B preferred stock dividends,
$0.08 per share.............................. -- -- -- -- (13) -- (13)
------- --- ----- ----- -------- ------- -------
Consolidated balances, December 31, 2004............. 12,822 241 5,915 5,910 577,836 (1,831) 600,893
-------
Three months ended March 31, 2005:
Comprehensive income:
Net income..................................... -- -- -- -- 22,127 -- 22,127
Other comprehensive loss, net of tax:
Unrealized losses on securities ............. -- -- -- -- -- (14,189) (14,189)
Derivative instruments:
Current period transactions................ -- -- -- -- -- (3,427) (3,427)
-------
Total comprehensive income....................... 4,511
Class A preferred stock dividends,
$0.30 per share.............................. -- -- -- -- (192) -- (192)
Class B preferred stock dividends,
$0.03 per share.............................. -- -- -- -- (4) -- (4)
------- --- ----- ----- ------- ------- -------
Consolidated balances, March 31, 2005................ $12,822 241 5,915 5,910 599,767 (19,447) 605,208
======= === ===== ===== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Three Months Ended
March 31,
--------------------------
2005 2004
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 22,127 18,269
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of bank premises and equipment..................... 4,353 4,810
Amortization, net of accretion................................................... 3,892 4,566
Originations and purchases of loans held for sale................................ (291,932) (251,421)
Proceeds from sales of loans held for sale....................................... 243,422 221,196
Provision for loan losses........................................................ -- 12,750
Provision for income taxes....................................................... 13,298 11,591
Receipts (payments) of income taxes.............................................. 3,044 (63)
Decrease in accrued interest receivable.......................................... 2,059 2,891
Interest accrued on liabilities.................................................. 34,149 21,474
Payments of interest on liabilities.............................................. (34,451) (21,581)
Gain on loans sold and held for sale............................................. (4,516) (4,229)
Gain on sales of branches, net of expenses....................................... -- (390)
Other operating activities, net.................................................. 6,596 1,801
--------- ---------
Net cash provided by operating activities..................................... 2,041 21,664
--------- ---------
Cash flows from investing activities:
Maturities of investment securities available for sale............................. 190,348 115,532
Maturities of investment securities held to maturity............................... 580 1,012
Purchases of investment securities available for sale.............................. (99,249) (318,293)
Purchases of investment securities held to maturity................................ (210) (100)
Net decrease (increase) in loans................................................... 23,145 (15,460)
Recoveries of loans previously charged-off......................................... 6,083 6,164
Purchases of bank premises and equipment........................................... (3,188) (4,449)
Other investing activities, net.................................................... 2,437 11,255
--------- ---------
Net cash provided by (used in) investing activities........................... 119,946 (204,339)
--------- ---------
Cash flows from financing activities:
(Decrease) increase in demand and savings deposits................................. (49,509) 105,784
Decrease in time deposits.......................................................... (49,902) (5,602)
Decrease in Federal Home Loan Bank advances........................................ (6,000) --
(Decrease) increase in securities sold under agreements to repurchase.............. (32,741) 144,535
Repayments of note payable......................................................... (11,000) (12,500)
Cash paid for sales of branches, net of cash and cash equivalents sold............. -- (6,724)
Payment of preferred stock dividends............................................... (196) (196)
--------- ---------
Net cash (used in) provided by financing activities........................... (149,348) 225,297
--------- ---------
Net (decrease) increase in cash and cash equivalents.......................... (27,361) 42,622
Cash and cash equivalents, beginning of period.......................................... 267,110 213,537
--------- ---------
Cash and cash equivalents, end of period................................................ $ 239,749 256,159
========= =========
Noncash investing and financing activities:
Loans transferred to other real estate............................................. $ 357 1,480
========= =========
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 2004
Annual Report on Form 10-K. The consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles and
conform to predominant practices within the banking industry. Management of
First Banks has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare the consolidated financial statements in conformity with
U.S. generally accepted accounting principles. Actual results could differ from
those estimates. In the opinion of management, all adjustments, consisting of
normal recurring accruals considered necessary for a fair presentation of the
results of operations for the interim periods presented herein, have been
included. Operating results for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005.
The consolidated financial statements include the accounts of the
parent company and its subsidiaries, as more fully described below. All
significant intercompany accounts and transactions have been eliminated. Certain
reclassifications of 2004 amounts have been made to conform to the 2005
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 January 10, 2005, First Banks entered into an Agreement and Plan of
Reorganization providing for the acquisition of FBA Bancorp, Inc. (FBA) and its
wholly owned subsidiary bank, First Bank of the Americas, S.S.B. (FBOTA) for
approximately $10.5 million in cash. FBA is headquartered in Chicago, Illinois,
and through FBOTA, operates three banking offices in the southwestern Chicago
metropolitan area. As further described in Note 11 to the Consolidated Financial
Statements, First Banks completed its acquisition of FBA and FBOTA on April 29,
2005.
During the three months ended March 31, 2005, First Banks recorded
certain acquisition-related adjustments pertaining to its acquisition of
Hillside Investors, Ltd. (Hillside) and its wholly owned banking subsidiary, CIB
Bank, which was completed on November 30, 2004. Acquisition-related adjustments
included additional purchase accounting adjustments necessary to appropriately
adjust the preliminary goodwill of $4.3 million recorded at the time of the
acquisition, which was based upon current estimates available at that time, to
reflect the receipt of additional valuation data. The aggregate adjustments
resulted in a purchase price reallocation among goodwill, core deposit
intangibles and bank premises and equipment. The purchase price reallocation
resulted in the reallocation of $3.1 million of negative goodwill to core
deposit intangibles and bank premises and equipment, thereby reducing such
assets by $2.8 million and $2.4 million, net of the related tax effect of $1.1
million and $941,000, respectively. Following the recognition of the
acquisition-related adjustments, goodwill recorded was reduced from $4.3 million
to zero and the core deposit intangibles, which are being amortized over seven
years utilizing the straight-line method, were reduced from $13.4 million to
$10.6 million, net of the related tax effect. The individual components of the
$4.3 million acquisition-related adjustments to goodwill and the $3.1 million
purchase price reallocation recorded in the first quarter of 2005 are summarized
as follows:
>> a $1.6 million increase in goodwill to adjust time deposits, net
of the related tax effect, to their estimated fair value;
>> a $967,000 increase in goodwill to adjust other real estate
owned, net of the related tax effect, to its estimated fair
value;
>> a $10.0 million reduction in goodwill to adjust loans held for
sale, net of the related tax effect, to their estimated fair
value. These adjustments were based upon the receipt of loan
payoffs received on certain loans held for sale, in addition to
significantly higher sales prices received over and above the
original third-party bid estimates for certain loans held for
sale. As of March 31, 2005, all of the acquired nonperforming
loans that had been held for sale as of December 31, 2004 had
either been sold or had been paid off, with the exception of one
credit relationship, which was subsequently sold in April 2005;
>> a $1.7 million increase in goodwill, net of the related tax
effect, and a related decrease in core deposit intangibles of
$2.8 million, resulting from the purchase price reallocation; and
>> a $1.4 million increase in goodwill, net of the related tax
effect, and a related decrease to bank premises and equipment of
$2.4 million, resulting from the purchase price reallocation.
First Banks accrues certain costs associated with its acquisitions as
of the respective consummation dates. The accrued costs relate 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
that First Banks incurs 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 periods 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 respective consummation
date and are expensed in the consolidated statements of income as incurred. The
accrued severance balance of $687,000, as summarized in the following table, is
comprised of contractual obligations under salary continuation agreements to six
individuals with remaining terms ranging from approximately two to 11 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 information
technology 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 acquisition, is listed below. These
acquisition and integration costs are reflected in accrued and other liabilities
in the consolidated balance sheets.
Severance
---------
(dollars expressed in thousands)
Balance at December 31, 2004......................................... $ 761
Three Months Ended March 31, 2005:
Payments............................................................. (74)
------
Balance at March 31, 2005............................................ $ 687
======
On January 18, 2005, First Bank opened a de novo branch office in
Farmington, Missouri, and on March 25, 2005, First Bank completed the merger of
two branch offices in Hillside, located in Chicago, Illinois.
(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 March 31, 2005 and December 31,
2004:
March 31, 2005 December 31, 2004
---------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles.............. $ 30,040 (8,177) 32,823 (7,003)
Goodwill associated with
purchases of branch offices......... 2,210 (1,038) 2,210 (1,003)
--------- ------- ------- --------
Total............................ $ 32,250 (9,215) 35,033 (8,006)
========= ======= ======= ========
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 151,357 155,642
========= =======
Amortization of intangibles associated with the purchase of
subsidiaries and branch offices was $1.2 million and $658,000 for the three
months ended March 31, 2005 and 2004, respectively. Amortization of intangibles
associated with the purchase of subsidiaries, including amortization of core
deposit intangibles and branch office purchases, has been estimated in the
following table, and does not take into consideration any pending or potential
future acquisitions or branch office purchases.
(dollars expressed in thousands)
Year ending December 31:
2005 remaining.................................. $ 3,314
2006............................................ 4,419
2007............................................ 4,419
2008............................................ 4,419
2009 ........................................... 2,515
2010 ........................................... 2,055
Thereafter...................................... 1,894
--------
Total........................................ $ 23,035
========
Changes in the carrying amount of goodwill for the three months ended
March 31, 2005 and 2004 were as follows:
Three Months Ended
March 31,
-------------------------
2005 2004
---- ----
(dollars expressed in thousands)
Balance, beginning of period..................................................... $ 156,849 145,548
Acquisition-related adjustments (1).............................................. (4,285) --
Amortization - purchases of branch offices....................................... (35) (35)
--------- --------
Balance, end of period........................................................... $ 152,529 145,513
========= ========
------------------
(1) Acquisition-related adjustments of $4.3 million recorded in the first quarter of 2005 pertain to the acquisition
of CIB Bank, as further described in Note 2 to the Consolidated Financial Statements.
(4) SERVICING RIGHTS
Mortgage Banking Activities. At March 31, 2005 and December 31, 2004,
First Banks serviced mortgage loans for others amounting to $1.04 billion and
$1.06 billion, respectively. Borrowers' escrow balances held by First Banks on
such loans were $6.9 million and $4.4 million at March 31, 2005 and December 31,
2004, respectively.
Changes in mortgage servicing rights, net of amortization, for the
three months ended March 31, 2005 and 2004 were as follows:
Three Months Ended
March 31,
------------------------
2005 2004
---- ----
(dollars expressed in thousands)
Balance, beginning of period..................................................... $ 10,242 15,408
Originated mortgage servicing rights............................................. 213 354
Amortization..................................................................... (1,274) (1,802)
-------- -------
Balance, end of period........................................................... $ 9,181 13,960
======== =======
The fair value of mortgage servicing rights was approximately $14.0
million and $16.6 million at March 31, 2005 and 2004, respectively, and $14.6
million at December 31, 2004. The excess of the fair value of mortgage servicing
rights over the carrying value was approximately $4.8 million and $2.6 million
at March 31, 2005 and 2004, respectively, and $4.4 million at December 31, 2004.
Amortization of mortgage servicing rights at March 31, 2005 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2005 remaining.............................. $ 2,889
2006........................................ 3,292
2007........................................ 1,985
2008........................................ 754
2009........................................ 261
--------
Total.................................. $ 9,181
========
Other Servicing Activities. At March 31, 2005 and December 31, 2004,
First Banks serviced SBA loans for others amounting to $167.5 million and $174.7
million, respectively. Changes in SBA servicing rights, net of amortization, for
the three months ended March 31, 2005 were as follows:
Three Months Ended
March 31, 2005
--------------
(dollars expressed in thousands)
Balance, beginning of period..................................................... $ 13,013
Originated servicing rights...................................................... 191
Amortization..................................................................... (609)
--------
Balance, end of period........................................................... $ 12,595
========
The fair value of SBA servicing rights was approximately $12.8 million
at March 31, 2005 and $13.0 million at December 31, 2004.
Amortization of SBA servicing rights at March 31, 2005 has been
estimated in the following table:
(dollars expressed in thousands)
Year ending December 31:
2005 remaining...................................................... $ 1,680
2006................................................................ 1,927
2007................................................................ 1,622
2008................................................................ 1,362
2009................................................................ 1,141
2010................................................................ 953
Thereafter.......................................................... 3,910
--------
Total.......................................................... $ 12,595
========
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted earnings per
share computations for the three months ended March 31, 2005 and 2004:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except share and per share data)
Three months ended March 31, 2005:
Basic EPS - income available to common stockholders............... $ 21,931 23,661 $ 926.87
Effect of dilutive securities:
Class A convertible preferred stock............................. 192 516 (11.83)
--------- ------- ----------
Diluted EPS - income available to common stockholders............. $ 22,123 24,177 $ 915.04
========= ======= ==========
Three months ended March 31, 2004:
Basic EPS - income available to common stockholders............... $ 18,073 23,661 $ 763.81
Effect of dilutive securities:
Class A convertible preferred stock............................. 192 565 (9.88)
--------- ------- ----------
Diluted EPS - income available to common stockholders............. $ 18,265 24,226 $ 753.93
========= ======= ==========
(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. were $6.7
million and $6.6 million for the three months ended March 31, 2005 and 2004,
respectively. First Services, L.P. leases information technology and other
equipment from First Bank. During each of the three month periods ended March
31, 2005 and 2004, First Services, L.P. paid First Bank $1.1 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 $704,000 and $886,000 for the three months ended March 31, 2005
and 2004, respectively, 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 $87,000 and $99,000 for
the three months ended March 31, 2005 and 2004, respectively, in commissions for
policies purchased by First Banks or customers of First Bank from unaffiliated,
third-party insurers. The insurance premiums on which the aforementioned
commissions were earned were competitively bid, and First Banks deems the
commissions First Title earned from unaffiliated third-party companies to be
comparable to those that would have been earned by an unaffiliated third-party
agent.
First Bank leases certain of its in-store branch offices and ATM sites
from Dierbergs Markets, Inc., a grocery store chain headquartered in St. Louis,
Missouri that is owned and operated by Robert J. Dierberg and members of his
immediate family. Robert J. Dierberg is the brother of First Banks' Chairman.
Total rent expense incurred by First Bank under the lease obligation contracts
with Dierbergs Markets, Inc. was $79,000 and $71,000 for the three months ended
March 31, 2005 and 2004, respectively.
First Bank has had in the past, and may have in the future, loan
transactions in the ordinary course of business with its directors or
affiliates. These loan transactions have been on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and did not involve more than the normal
risk of collectibility or present other unfavorable features. Loans to
directors, their affiliates and executive officers of First Banks, Inc. were
approximately $28.8 million and $31.0 million at March 31, 2005 and December 31,
2004, respectively. First Bank does not extend credit to its officers or to
officers of First Banks, Inc., except extensions of credit secured by mortgages
on personal residences, loans to purchase automobiles, personal credit card
accounts and deposit account overdraft protection under a plan whereby a credit
limit has been established in accordance with First Bank's standard credit
criteria.
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, a written option to purchase 735 Membership Interests of Small Business
Loan Source LLC (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 could have been 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. On December 31,
2004, First Bank extended the written option under the same terms through March
31, 2005, and on March 31, 2005, First Bank further extended the written option
under the same terms through June, 30, 2005. First Bank anticipates that FCA
will exercise its option during the second quarter of 2005, 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' 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 March 31, 2005, First Banks and First Bank were each well
capitalized.
As of March 31, 2005, 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 March 31, 2005 and December 31, 2004, First Banks' and First Bank's
required and actual capital ratios were as follows:
Actual Under New Guidelines For To Be Well
------------------------ ------------------------ Capital Capitalized Under
March 31, December 31, March 31, December 31, Adequacy Prompt Corrective
2005 2004 2005 2004 Purposes Action Provisions
---- ---- ---- ---- -------- -----------------
Total capital (to risk-weighted assets):
First Banks....................... 11.06% 10.61% 11.06% 10.61% 8.0% 10.0%
First Bank........................ 10.84 10.73 10.84 10.73 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks....................... 8.98 8.43 8.29 7.72 4.0 6.0
First Bank........................ 9.58 9.47 9.58 9.47 4.0 6.0
Tier 1 capital (to average assets):
First Banks....................... 7.76 7.89 7.16 7.22 3.0 5.0
First Bank........................ 8.28 8.86 8.28 8.86 3.0 5.0
On March 1, 2005, the Board of Governors of the Federal Reserve System
(Board) adopted a final rule, Risk-Based Capital Standards: Trust Preferred
Securities and the Definition of Capital, which allows for the continued limited
inclusion of trust preferred securities in Tier 1 capital. The Board's final
rule limits restricted core capital elements to 25% of the sum of all core
capital elements, including restricted core capital elements, net of goodwill
less any associated deferred tax liability. Amounts of restricted core capital
elements in excess of these limits may generally be included in Tier 2 capital.
Amounts of qualifying trust preferred securities and cumulative perpetual
preferred stock in excess of the 25% limit may be included in Tier 2 capital,
but limited, together with subordinated debt and limited-life preferred stock,
to 50% of Tier 1 capital. In addition, the final rule provides that in the last
five years before the maturity of the underlying subordinated note, the
outstanding amount of the associated trust preferred securities is excluded from
Tier 1 capital and included in Tier 2 capital, subject to one-fifth amortization
per year. The final rule provides for a five-year transition period, ending
March 31, 2009, for the application of the quantitative limits. Until March 31,
2009, the aggregate amount of qualifying cumulative perpetual preferred stock
and qualifying trust preferred securities that may be included in Tier 1 capital
is limited to 25% of the sum of the following core capital elements: qualifying
common stockholders' equity, qualifying noncumulative and cumulative perpetual
preferred stock, qualifying minority interest in the equity accounts of
consolidated subsidiaries and qualifying trust preferred securities. First Banks
has evaluated the impact of the final rule on the Company's financial condition
and results of operations, and determined the implementation of the Board's
final rule, as adopted, will reduce First Banks' regulatory capital ratios as
set forth in the table above.
(8) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business
segments are 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 Banks' 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
-------------------------- ------------------------ --------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $1,703,516 1,803,454 10,465 9,895 1,713,981 1,813,349
Loans, net of unearned discount......... 6,156,446 6,137,968 -- -- 6,156,446 6,137,968
Goodwill................................ 152,529 156,849 -- -- 152,529 156,849
Total assets............................ 8,585,717 8,720,331 13,607 12,510 8,599,324 8,732,841
Deposits................................ 7,076,246 7,161,636 (21,817) (9,666) 7,054,429 7,151,970
Note payable............................ -- -- 4,000 15,000 4,000 15,000
Subordinated debentures................. -- -- 271,835 273,300 271,835 273,300
Stockholders' equity.................... 856,379 877,473 (251,171) (276,580) 605,208 600,893
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
----------------------- ----------------------- -----------------------
Three Months Ended Three Months Ended Three Months Ended
March 31, March 31, March 31,
---------------------- ----------------------- -----------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income......................... $ 112,062 95,987 166 140 112,228 96,127
Interest expense........................ 29,279 17,847 4,870 3,627 34,149 21,474
---------- --------- -------- -------- --------- ---------
Net interest income................ 82,783 78,140 (4,704) (3,487) 78,079 74,653
Provision for loan losses............... -- 12,750 -- -- -- 12,750
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses........ 82,783 65,390 (4,704) (3,487) 78,079 61,903
---------- --------- -------- -------- --------- ---------
Noninterest income...................... 21,352 20,719 (251) (160) 21,101 20,559
Noninterest expense..................... 62,064 51,517 1,691 1,085 63,755 52,602
---------- --------- -------- -------- --------- ---------
Income before provision
for income taxes................. 42,071 34,592 (6,646) (4,732) 35,425 29,860
Provision for income taxes.............. 15,620 13,244 (2,322) (1,653) 13,298 11,591
---------- --------- -------- -------- --------- ---------
Net income......................... $ 26,451 21,348 (4,324) (3,079) 22,127 18,269
========== ========= ======== ======== ========= =========
- ------------------
(1) Corporate and other includes $3.1 million and $2.3 million of interest expense on subordinated debentures, after applicable
income tax benefit of $1.6 million and $1.2 million, for the three months ended March 31, 2005 and 2004, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
--------- ------------
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily............................................................... $ 176,365 209,106
Term................................................................ 350,000 350,000
FHLB advances............................................................ 29,644 35,644
--------- -------
Total other borrowings.......................................... $ 556,009 594,750
========= =======
The maturity dates, par amounts, interest rate paid and interest rate
spread on First Bank's term reverse repurchase agreements as of March 31, 2005
and December 31, 2004 were as follows:
Par Interest Rate Interest Rate Cap
Maturity Date Amount Minus Spread (1) Strike Price (1)
------------- ------ ---------------- ----------------
(dollars expressed in thousands)
March 31, 2005:
August 15, 2006................................. $ 50,000 LIBOR - 0.8250% 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 - 0.9150% 3.50%
---------
$ 350,000
=========
December 31, 2004:
August 15, 2006................................. $ 50,000 LIBOR - 0.8250% 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 - 0.9150% 3.50%
---------
$ 350,000
=========
-------------------------
(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 associated with the interest rate cap agreements.
On March 21, 2005, First Bank modified its term reverse repurchase
agreements under master repurchase agreements with unaffiliated third parties to
terminate the interest rate cap agreements embedded within the agreements and
simultaneously enter into interest rate floor agreements, also embedded within
the agreements. The effect of these modifications resulted in related
modifications to the existing interest rate spread from LIBOR for the underlying
agreements, which will result in increased interest expense on these agreements
when the modifications become effective. The modified terms of the term reverse
repurchase agreements will become effective immediately following the next
respective quarterly scheduled interest payment dates, which will occur in the
second quarter of 2005. First Bank did not incur any costs in conjunction with
the modifications of the agreements.
(10) CONTINGENT LIABILITIES
In October 2000, First Banks entered into two continuing guaranty
contracts. For value received, and for the purpose of inducing a pension fund
and its trustees and a welfare fund and its trustees (the Funds) to conduct
business with Missouri Valley Partners, Inc. (MVP), First Bank's institutional
investment management subsidiary, First Banks irrevocably and unconditionally
guaranteed payment of and promised to pay to each of the Funds any amounts up to
the sum of $5.0 million to the extent MVP is liable to the Funds for a breach of
the Investment Management Agreements (including the Investment Policy Statement
and Investment Guidelines), by and between MVP and the Funds and/or any
violation of the Employee Retirement Income Security Act by MVP resulting in
liability to the Funds. The guaranties are continuing guaranties of all
obligations that may arise for transactions occurring prior to termination of
the Investment Management Agreements and are co-existent with the term of the
Investment Management Agreements. The Investment Management Agreements have no
specified term but may be terminated at any time upon written notice by the
Trustees or, at First Banks' option, upon thirty days written notice to the
Trustees. In the event of termination of the Investment Management Agreements,
such termination shall have no effect on the liability of First Banks with
respect to obligations incurred before such termination. The obligations of
First Banks are joint and several with those of MVP. First Banks does not have
any recourse provisions that would enable it to recover from third parties any
amounts paid under the contracts nor does First Banks hold any assets as
collateral that, upon occurrence of a required payment under the contract, could
be liquidated to recover all or a portion of the amount(s) paid. At March 31,
2005 and December 31, 2004, 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, First Bank completed the sale of a significant
portion of the leases in its commercial leasing portfolio. In conjunction with
the transaction, First Bank recorded a liability of $2.0 million for recourse
obligations related to the completion of the sale. For value received, First
Bank, as seller, indemnified the buyer of certain leases from any liability or
loss resulting from defaults subsequent to the 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. As of March 31, 2005 and December 31, 2004, this
liability was $1.6 million, reflecting reductions in the related lease balances
for the specific pools of leases sold from borrower payments or repayments.
On August 31, 2004, SBLS LLC acquired substantially all of the assets
and assumed certain liabilities of Small Business Loan Source, Inc. 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 March 31, 2005 and December 31,
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.
(11) SUBSEQUENT EVENTS
On April 29, 2005, First Banks completed its acquisition of FBA, and
its wholly owned subsidiary, FBOTA, in exchange for $10.5 million in cash. The
acquisition served to expand First Banks' banking franchise in Chicago,
Illinois. The transaction was funded through internally generated funds. FBA was
headquartered in Chicago, Illinois, and through FBOTA, operated three banking
offices in the southwestern Chicago metropolitan communities of Back of the
Yards, Little Village and Cicero. At the time of the acquisition, FBA had
consolidated assets of $73.3 million, loans, net of unearned discount, of $54.3
million, deposits of $55.7 million and stockholders' equity of $7.1 million. The
transaction was accounted for using the purchase method of accounting and
accordingly, the assets acquired and liabilities assumed were recorded at their
estimated fair value on the acquisition date. The fair value adjustments
represent current estimates and are subject to further adjustments as the
valuation data is finalized. Preliminary goodwill, which is not deductible for
tax purposes, was approximately $880,000, and the core deposit intangibles,
which are not deductible for tax purposes and will be amortized over seven years
utilizing the straight-line method, were approximately $1.7 million. FBA was
merged with and into SFC and FBOTA was merged with and into First Bank.
On April 27, 2005, First Banks and Northway State Bank (NSB) entered
into an Agreement and Plan of Reorganization that provides for First Banks to
acquire NSB for approximately $10.3 million in cash. NSB is headquartered in
Grayslake, Illinois, and operates one banking office that is located in Lake
County in the northern Chicago metropolitan area. At March 31, 2005, NSB
reported total assets of approximately $51.1 million, loans, net of unearned
discount, of approximately $40.5 million, total deposits of approximately $45.7
million and stockholders' equity of $5.1 million. The transaction, which is
subject to regulatory approvals and the approval of NSB's shareholders, is
expected to be completed during the third or fourth quarter of 2005.
On May 2, 2005, First Banks and International Bank of California (IBOC)
entered into an Agreement and Plan of Reorganization that provides for First
Banks to acquire IBOC for approximately $33.7 million in cash. IBOC,
headquartered in Los Angeles, California, operates seven banking offices,
including one in downtown Los Angeles, four branches in eastern Los Angeles
County, in Alhambra, Arcadia, Artesia and Rowland Heights, one branch west of
downtown Los Angeles, and one branch in downtown San Francisco. At March 31,
2005, IBOC reported total assets of approximately $171.0 million, loans, net of
unearned discount, of approximately $125.7 million, total deposits of
approximately $151.8 million and stockholders' equity of $18.0 million. The
transaction, which is subject to regulatory approvals and the approval of IBOC's
shareholders, is expected to be completed during the fourth quarter of 2005.
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. 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 167 branch banking offices in California, Illinois, Missouri
and Texas. At March 31, 2005, we had total assets of $8.60 billion, loans, net
of unearned discount, of $6.16 billion, total deposits of $7.05 billion and
total stockholders' equity of $605.2 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 $8.60 billion and $8.73 billion at March 31, 2005 and
December 31, 2004, respectively, reflecting a decrease of $133.5 million, or
1.53%, for the three months ended March 31, 2005. The decrease in total assets
is primarily attributable to a decline in total deposits of $97.5 million to
$7.05 billion at March 31, 2005, from $7.15 billion at December 31, 2004,
resulting from an anticipated level of attrition associated with the deposits
acquired from CIB Bank, particularly savings and time deposits, as further
discussed below. The decline in total deposits was funded from available cash
and cash equivalents as well as maturities of investment securities. Available
cash and cash equivalents decreased $27.4 million to $239.7 million at March 31,
2005, from $267.1 million at December 31, 2004. Investment securities decreased
$99.4 million, or 5.48%, to $1.71 billion at March 31, 2005, from $1.81 billion
at December 31, 2004, primarily reflecting maturities of $190.9 million and
purchases of $99.5 million. Loans, net of unearned discount, increased $18.5
million to $6.16 billion at March 31, 2005, from $6.14 billion at December 31,
2004, reflecting continued internal loan growth partially offset by loan sales
and/or payoffs associated with certain acquired loans, as further discussed
under "--Loans and Allowance for Loan Losses." Goodwill declined $4.3 million to
$152.5 million at March 31, 2005, from $156.8 million at December 31, 2004, and
reflects the reallocation of the purchase price associated with our acquisition
of CIB Bank, as further discussed in Note 2 to our Consolidated Financial
Statements. Other assets decreased $34.5 million to $99.6 million at March 31,
2005, from $134.2 million at December 31, 2004. This decrease is attributable to
a $10.8 million decline in our derivative financial instruments from $4.7
million at December 31, 2004, due to a decline in the fair value of certain
derivative financial instruments, the maturity of $200.0 million notional amount
of interest rate swap agreements on March 21, 2005 and the termination of $150.0
million interest rate swap agreements on February 25, 2005, as further discussed
under "--Interest Rate Risk Management." Additionally, the decline in other
assets reflects the receipt of certain receivables during the first quarter of
2005, including a receivable for current income taxes of $8.3 million and a
receivable for fiduciary related fees of $3.4 million.
Total deposits decreased $97.5 million, or 1.36%, to $7.05 billion at
March 31, 2005, from $7.15 billion at December 31, 2004. The decrease is
attributable to an anticipated level of attrition associated with the deposits
acquired from CIB Bank, particularly savings and time deposits, including
brokered and internet deposits. The acquisition of CIB Bank, which was completed
on November 30, 2004, provided total deposits of $1.10 billion. 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 some deposit growth despite continued
aggressive competition within our market areas and the anticipated level of
attrition associated with our recent acquisitions. 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 decreased $38.7 million to $556.0 million at March 31,
2005, from $594.8 million at December 31, 2004. The decrease is attributable to
a $32.7 million decrease in daily securities sold under agreements to repurchase
and our repayment of $6.0 million of Federal Home Loan Bank advances at their
respective maturity dates. We reduced our note payable by $11.0 million to $4.0
million at March 31, 2005 with funds generated from dividends from our
subsidiary bank. Our subordinated debentures decreased to $271.8 million at
March 31, 2005 from $273.3 million at December 31, 2004 due to changes 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.
Our deferred income tax liability decreased to $27.9 million at March
31, 2005, from $34.8 million at December 31, 2004. The decrease is primarily
attributable to deferred 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 $605.2 million and $600.9 million at March 31,
2005 and December 31, 2004, respectively, reflecting an increase of $4.3
million. The increase is primarily attributable to net income of $22.1 million,
partially offset by a $17.6 million decrease in accumulated other comprehensive
income. The decrease in accumulated other comprehensive income is comprised of
$3.4 million associated with changes in our derivative financial instruments and
$14.2 million associated with changes in our unrealized gains and losses on
available-for-sale investment securities. The decrease is reflective of
increases in prevailing interest rates, a decline in the fair value of our
derivative financial instruments, and the maturity of $200.0 million notional
amount of our interest rate swap agreements designated as cash flow hedges
during the first quarter of 2005, as further discussed under "--Interest Rate
Risk Management."
Results of Operations
Net Income
Net income was $22.1 million and $18.3 million for the three months
ended March 31, 2005 and 2004, respectively. Results for the three months ended
March 31, 2005 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. Our return on average
assets was 1.04% for the three months ended March 31, 2005, compared to 1.01%
for the comparable period in 2004. Our return on average stockholders' equity
was 14.67% for the three months ended March 31, 2005, compared to 13.16% for the
comparable period in 2004. 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 a gain, net of expenses, of $390,000, before applicable income
taxes, recorded in February 2004 on the sale of a Midwest branch banking office.
The increase in earnings in 2005 reflects our focus to continue to
improve asset quality, maintain an acceptable net interest margin, improve our
noninterest income and control operating expenses. Net interest-earning assets
provided by our 2004 acquisitions, higher-yielding investment securities and
internal loan growth have contributed to increased net interest income. This
increase was partially offset by increased interest expense associated with
higher deposit rates, increased levels of other borrowings and the issuance of
additional subordinated debentures late in 2004 to partially fund our
acquisition of CIB Bank. Net interest income was adversely affected by a decline
in 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. This decline was the result of the
maturity and termination of certain interest rate swap agreements, as further
discussed under "--Interest Rate Risk Management." The current interest rate
environment, conditions within our markets and the impact of the decline in
earnings on our interest rate swap agreements continue to exert pressure on our
net interest income and net interest margin.
Our overall asset quality levels reflect improvement during 2005,
resulting in an $8.2 million reduction in nonperforming assets since December
31, 2004. The reduction in nonperforming assets was attributable to the sale of
certain acquired nonperforming loans, net loan charge-offs, loan payoffs and/or
refinancings of various credits, and loan renewals. These factors contributed to
a notable decrease in our provision for loan losses. We did not record a
provision for loan losses for the three months ended March 31, 2005, compared to
a $12.8 million provision for loan losses for the comparable period in 2004. A
significant portion of our nonperforming assets at March 31, 2005 includes
nonperforming loans associated with our recent acquisitions, particularly CIB
Bank, which we completed in November 2004. Residual problems in our loan
portfolio that primarily resulted from weak economic conditions in our markets,
as well as these acquired nonperforming loans, remain a primary focus of
management as we continue our ongoing efforts to further reduce our
nonperforming asset levels. While we have made substantial progress in improving
asset quality, both the number and amount of nonperforming loans acquired in our
recent acquisitions has contributed to generally high levels of problem loans.
We continue to closely monitor our loan portfolio and consider this in our
overall assessment of the adequacy of the allowance for loan losses. While we
continue our efforts to reduce nonperforming loans, we expect the overall level
of such loans to remain at somewhat elevated levels in the near future primarily
as a result of the significant level of nonperforming loans associated with the
CIB Bank acquisition.
Noninterest income was $21.1 million and $20.6 million for the three
months ended March 31, 2005 and 2004, respectively. The increase for the first
quarter of 2005 is attributable to increased service charges on deposit accounts
and customer service fees related to higher deposit balances, increased loan
servicing fees, increased investment management income associated with our
institutional money management subsidiary and a recovery of loan collection
expenses. This increase was partially offset by a net loss on the disposal of
certain fixed assets, primarily associated with the demolition of a drive-thru
facility, a decline in rental income associated with reduced leasing activities
and net losses on derivative instruments. In addition, we recorded a
nonrecurring gain, net of expenses, on the sale of a Midwest branch banking
office in February 2004.
Noninterest expense was $63.8 million and $52.6 million for the three
months ended March 31, 2005 and 2004, respectively. Our efficiency ratio, which
is defined as the ratio of noninterest expense to the sum of net interest income
and noninterest income, was 64.28% and 55.25% for the three months ended March
31, 2005 and 2004, respectively. Overall increases in our noninterest expenses
associated with our 2004 acquisitions and certain nonrecurring transactions, as
further discussed below, contributed to the increase in our efficiency ratio for
the three months ended March 31, 2005, as compared to the comparable period in
2004. The $11.2 million increase in noninterest expense in the first quarter of
2005 is primarily attributable to an overall increase in expenses resulting from
our 2004 acquisitions, an increase in salary and employee benefit expenses and
an increase in expenses and losses, net of gains, on other real estate. Salary
and employee benefit expenses increased due to the impact of our recent
acquisitions, which added 18 branch offices, the addition of four de novo branch
offices in 2004 and one in January 2005, and generally higher costs of employing
and retaining qualified personnel, including higher employee benefit costs.
Noninterest expenses also increased due to a $2.7 million nonrecurring gain
recorded in February 2004 on the sale of a residential and recreational
development property that was foreclosed on in January 2003.
Net Interest Income
Net interest income (expressed on a tax-equivalent basis) increased to
$78.4 million for the three months ended March 31, 2005, compared to $75.0
million for the comparable period in 2004, reflecting an increase of 4.59%. Net
interest margin was 3.97% and 4.56% for the three months ended March 31, 2005
and 2004, respectively. 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 during the first quarter of 2005 primarily to net interest-earning assets
provided by our 2004 acquisitions, higher-yielding investment securities and
internal loan growth, partially offset by increased interest expense associated
with higher deposit rates, increased levels of other borrowings and the issuance
of additional subordinated debentures in late 2004 to partially fund our
acquisition of CIB Bank. Net interest income was adversely impacted by a decline
in earnings on our interest rate swap agreements that were entered into in
conjunction with our interest rate risk management program to mitigate the
effects of decreasing interest rates. As further discussed under "--Interest
Rate Risk Management," our derivative financial instruments used to hedge our
interest rate risk contributed $3.6 million and $16.2 million to net interest
income for the three months ended March 31, 2005 and 2004, respectively. The
decreased earnings on our interest rate swap agreements reflect the impact of
higher interest rates and maturities of interest rate swap agreements of $800.0
million during 2004 and $200.0 million in March 2005, as well as the termination
of $150.0 million of interest rate swap agreements on February 25, 2005.
Although the Company has implemented other methods to mitigate the reduction in
net interest income, including the funding of investment security purchases
through the issuance of term reverse repurchase agreements, the reduction in our
interest rate swap agreements will result in a reduction of future net interest
income and further compression of our net interest margin unless interest rates
increase.
Average interest-earning assets increased to $8.01 billion for the
three months ended March 31, 2005, from $6.61 billion for the three months ended
March 31, 2004. The increase is primarily attributable to our three acquisitions
completed in 2004, which provided assets of $1.38 billion in aggregate. In
addition, we purchased $250.0 million of callable U.S. Government agency
securities in conjunction with the issuance of $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. The
current interest rate environment, overall economic conditions and the maturity
and termination of certain interest rate swap agreements, as discussed above,
continue to exert pressure on our net interest margin.
Average investment securities were $1.74 billion and $1.15 billion for
the three months ended March 31, 2005 and 2004, respectively, reflecting an
increase of $587.2 million. The yield on our investment portfolio was 4.14% for
the three months ended March 31, 2005, compared to 4.12% for the comparable
period in 2004. The overall increase in the average balance of investment
securities relates primarily to our 2004 acquisitions, which provided investment
securities of $438.0 million. Funds available from maturities of investment
securities were used to fund a decrease in deposits, primarily related to the
deposits acquired from CIB Bank, and a reinvestment in additional investment
securities. Additionally, a portion of excess short-term investments, which
include federal funds sold and interest-bearing deposits, was also utilized to
fund deposit attrition and to purchase higher-yielding available-for-sale
investment securities, resulting in a decline in average short-term investments
of $39.5 million to $83.3 million for the three months ended March 31, 2005,
from $122.8 million for the comparable period in 2004. During 2004, our
investment securities purchases included the purchase of $250.0 million of
callable U.S. Government agency securities, representing 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 $6.18 billion for the
three months ended March 31, 2005, in comparison to $5.33 billion for the
comparable period in 2004, reflecting an increase of $850.8 million. The yield
on our loan portfolio decreased to 6.18% for the three months ended March 31,
2005, in comparison to 6.36% for the comparable period in 2004. Although our
loan portfolio yields increased with rising interest rates, total interest
income on our loan portfolio was adversely impacted by decreased earnings on our
interest rate swap agreements designated as cash flow hedges. Higher interest
rates and the maturities of interest rate swap agreements of $750.0 million in
2004 and $200.0 million in March 2005 resulted in decreased earnings on our swap
agreements of approximately $10.9 million, contributing to the decrease in
yields on our loan portfolio, and a compression of our net interest margin of
approximately 55 basis points for the three months ended March 31, 2005. We
attribute the increase in the average balance for 2005 primarily to our
acquisitions completed during 2004, which provided total loans of $780.9
million. The increase is also the result of internal loan growth, partially
offset by reductions in our nonperforming loan portfolio due to the sale of
certain nonperforming loans, loan payoffs and/or refinancings. Average
commercial, financial and agricultural loans increased $134.4 million for the
three months ended March 31, 2005, over the comparable period in 2004. Average
real estate construction and development loans increased approximately $258.8
million in 2005, over the comparable period in 2004, primarily as a result of
our recent acquisitions in 2004 and seasonal increases on existing and available
credit lines as well as new loan production. Average real estate mortgage loans
increased approximately $502.9 million for the three months ended March 31,
2005, over the comparable period in 2004, due to our recent acquisitions in 2004
and our business strategy decision to retain a portion of our residential
mortgage loan production that would have been previously sold in the secondary
market. Average mortgage loans held for sale increased approximately $8.2
million for the three months ended March 31, 2005, over the comparable period in
2004, resulting from increased volumes of loan originations coupled with the
timing of loan sales in the secondary mortgage market. Average lease financing
volumes decreased approximately $53.7 million during the three months ended
March 31, 2005, from the comparable period in 2004, primarily resulting from our
business strategy initiated in late 2002 to reduce our commercial leasing
activities and the subsequent sale of a significant portion of the remaining
leases in our commercial leasing portfolio in June 2004.
Average deposits increased to $7.09 billion for the three months ended
March 31, 2005, from $5.99 billion for the comparable period in 2004. The
increase is primarily reflective of our acquisitions completed during 2004,
which provided deposits of $1.21 billion. For the three months ended March 31,
2005, the aggregate weighted average rate paid on our deposit portfolio
increased to 1.79% from 1.39% for the comparable period in 2004, and is
primarily attributable to the current rising interest rate environment and the
mix of the CIB Bank deposit base. In addition, the decreased earnings associated
with certain of our interest rate swap agreements designated as fair value
hedges, as well as the termination of $150.0 million of fair value hedges on
February 25, 2005, also contributed to an increase in interest paid on our time
deposits. Although overall average deposit levels have increased as a result of
our 2004 acquisitions, the overall increase was partially offset by a
significant decrease in deposits due to an anticipated level of attrition
associated with the deposits acquired from CIB Bank. Excluding the impact of our
acquisitions, the change in our 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 were $4.29 billion and $4.05 billion for the three
months ended March 31, 2005 and 2004, respectively. Average total time deposits
increased $856.1 million to $2.80 billion for the three months ended March 31,
2005, from $1.94 billion for the comparable period in 2004.
Average other borrowings increased $189.2 million to $578.0 million for
the three months ended March 31, 2005, compared to $388.8 million for the
comparable period in 2004. The aggregate weighted average rate paid on our other
borrowings was 2.32% for the three months March 31, 2005, compared to 0.67% for
the comparable period in 2004. The increased rate paid on our other borrowings
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 7.30%
for the three months ended March 31, 2005, compared to 5.06% for the three
months ended March 31, 2004. The weighted average rate paid reflects unused
credit commitment and letter of credit facility fees on our secured credit
facility 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 $273.8 million for the three
months ended March 31, 2005, compared to $210.9 million for the three months
ended March 31, 2004. The aggregate weighted average rate paid on our
subordinated debentures was 7.03% and 6.75% for the three months ended March 31,
2005 and 2004, respectively. Interest expense on our subordinated debentures was
$4.7 million for the three months ended March 31, 2005, compared to $3.5 million
for the comparable period in 2004. As previously discussed, the increase for the
three months ended March 31, 2005 primarily reflects the issuance of $61.9
million of additional subordinated debentures in late 2004 to partially fund our
acquisition of CIB Bank, as well as the earnings impact of our interest rate
swap agreements, as further discussed under "--Interest Rate Risk Management."
The issuance of the additional subordinated debentures resulted in a decrease in
our net interest income and net interest margin of approximately $698,000 and
four basis points, respectively.
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 March 31,
---------------------------------------------------------
2005 2004
---------------------------- --------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
ASSETS
------
Interest-earning assets:
Loans (1)(2)(3)(4)..................................... $6,184,119 94,270 6.18% $5,333,353 84,328 6.36%
Investment securities (4).............................. 1,741,900 17,785 4.14 1,154,663 11,831 4.12
Short-term investments................................. 83,303 509 2.48 122,757 286 0.94
---------- -------- ---------- -------
Total interest-earning assets................... 8,009,322 112,564 5.70 6,610,773 96,445 5.87
-------- -------
Nonearning assets.......................................... 654,435 652,521
---------- ----------
Total assets.................................... $8,663,757 $7,263,294
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand deposits.................... $ 885,555 888 0.41% $ 868,712 967 0.45%
Savings deposits.................................... 2,198,086 5,744 1.06 2,161,910 4,777 0.89
Time deposits of $100 or more....................... 807,398 5,354 2.69 438,418 2,956 2.71
Other time deposits (3)............................. 1,990,790 13,979 2.85 1,503,636 8,487 2.27
---------- -------- ---------- -------
Total interest-bearing deposits................. 5,881,829 25,965 1.79 4,972,676 17,187 1.39
Other borrowings....................................... 577,997 3,300 2.32 388,793 644 0.67
Note payable (5)....................................... 7,667 138 7.30 8,346 105 5.06
Subordinated debentures (3)............................ 273,801 4,746 7.03 210,890 3,538 6.75
---------- -------- ---------- -------
Total interest-bearing liabilities.............. 6,741,294 34,149 2.05 5,580,705 21,474 1.55
-------- -------
Noninterest-bearing liabilities:
Demand deposits........................................ 1,207,253 1,021,744
Other liabilities...................................... 103,387 102,323
---------- ----------
Total liabilities............................... 8,051,934 6,704,772
Stockholders' equity....................................... 611,823 558,522
---------- ----------
Total liabilities and stockholders' equity...... $8,663,757 $7,263,294
========== ==========
Net interest income........................................ 78,415 74,971
======== =======
Interest rate spread....................................... 3.65 4.32
Net interest margin (6).................................... 3.97% 4.56%
===== =====
- --------------------
(1) For purposes of these calculations, nonaccrual loans are included in average loan amounts.
(2) Interest income on loans includes loan fees.
(3) Interest income 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 $336,000 and $318,000 for the three months ended March 31, 2005 and 2004, respectively.
(5) Interest expense on our 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 Company did not record a provision for loan losses for the three
months ended March 31, 2005, in comparison to a $12.8 million provision for loan
losses recorded for the three months ended March 31, 2004. The reduced provision
for loan losses during the first quarter of 2005 resulted from the recent sale
of certain nonperforming loans, payoffs and/or refinancings as well as an
overall improvement in asset quality, as further discussed under "--Loans and
Allowance for Loan Losses." Net loan charge-offs were $6.6 million and $5.3
million for the three months ended March 31, 2005 and 2004, respectively.
Nonperforming loans at March 31, 2005, decreased 7.03% to $79.8 million from
$85.8 million at December 31, 2004. The decrease in nonperforming loans and
problem loans during 2005 primarily reflects the sale of approximately $2.8
million of certain acquired nonperforming loans, net loan charge-offs of $6.6
million, loan payoffs and/or refinancings of various credits, and loan renewals,
as further discussed under "--Loans and Allowance for Loan Losses." Our
allowance for loan losses was $144.2 million at March 31, 2005, compared to
$150.7 million at December 31, 2004. Our allowance for loan losses as a
percentage of loans, net of unearned discount, was 2.34% at March 31, 2005,
compared to 2.46% at December 31, 2004, and our allowance for loan losses as a
percentage of nonperforming loans was 180.71% at March 31, 2005, compared to
175.65% at December 31, 2004. 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 in the near future primarily as a result of the significant level of
nonperforming loans associated with the CIB Bank acquisition. Management
considers these trends in its overall assessment of the adequacy of the
allowance for loan losses.
Tables summarizing nonperforming assets, past due loans and charge-off
and recovery experience are presented under "--Loans and Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $21.1 million and $20.6 million for the three
months ended March 31, 2005 and 2004, respectively. Noninterest income consists
primarily of service charges on deposit accounts and customer service fees,
mortgage-banking revenues, net gains on sales of available-for-sale investment
securities, investment management income, bank owned life insurance investment
income and other income.
Service charges on deposit accounts and customer service fees were $9.3
million and $8.9 million for the three months ended March 31, 2005 and 2004,
respectively. The increase in service charges and customer service fees is
primarily attributable to increased demand deposit account balances associated
with our acquisitions of Continental Community Bank and Trust Company, or CCB,
and CIB Bank completed in July 2004 and November 2004, respectively. The
increase is also attributable to additional products and services available and
utilized by our expanded retail and commercial customer base, higher earnings
allowances on commercial deposit accounts and increased income associated with
automated teller machine services and debit cards.
The gain on loans sold and held for sale was $4.5 million and $4.2
million for the three months ended March 31, 2005 and 2004, respectively. We
attribute the slight increase in 2005 to an increase in the volume of mortgage
loans originated and sold as well as the timing of the completion of loan sales
in the secondary mortgage market.
Investment management income was $2.0 million and $1.5 million for the
three months ended March 31, 2005 and 2004, respectively, reflecting increased
portfolio management fees generated by our Institutional Money Management
Division.
Other income was $4.0 million and $4.5 million for the three months
ended March 31, 2005 and 2004, respectively. We attribute the primary components
of the fluctuations in 2005 to:
>> an increase of $932,000 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 Small Business Loan Source, Inc. in August 2004, 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;
>> a $500,000 nonrecurring recovery of loan collection expenses;
>> an increase of $176,000 in fees from fiduciary activities; and
>> our acquisitions of CCB and CIB Bank completed during 2004;
partially offset by
>> net losses on derivative instruments in 2005 compared to net
gains on derivative instruments in 2004 resulting from changes in
the fair value of our fair value hedges and underlying hedged
liabilities. Net losses on derivative instruments were $590,000
for the three months ended March 31, 2005, compared to net gains
of $32,000 for the three months ended March 31, 2004;
>> a decline of $493,000 in rental income associated with our
reduced commercial leasing activities;
>> a gain, net of expenses, of $390,000 on the sale of a Midwest
branch banking office in February 2004. There were no sales of
branch banking offices during the three months ended March 31,
2005;
>> a decline of $267,000 in income associated with standby letters
of credit;
>> a decline of $65,000 in brokerage revenue primarily associated
with overall market conditions and reduced customer demand; and
>> a net increase in losses on the disposition of certain assets,
primarily attributable to a $319,000 net loss on the demolition
of a branch drive-thru facility in the first quarter of 2005.
Noninterest Expense
Noninterest expense was $63.8 million and $52.6 million for the three
months ended March 31, 2005 and 2004, respectively. Our efficiency ratio was
64.28% and 55.25% for the three months ended March 31, 2005 and 2004,
respectively. 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 was primarily attributable to an overall
increase in expenses resulting from our 2004 acquisitions, an increase in salary
and employee benefit expenses and an increase in expenses and losses, net of
gains, on other real estate owned, partially offset by a decrease in write-downs
on various operating leases associated with our commercial leasing business.
Salaries and employee benefits expense was $32.9 million and $27.7
million for the three months ended March 31, 2005 and 2004, respectively. We
attribute the overall increase to increased salaries and employee benefits
expenses associated with 18 additional branches acquired in 2004, four de novo
branches opened in 2004 and one de novo branch opened in January 2005, in
addition to generally higher salary and employee benefit costs associated with
employing and retaining qualified personnel, including higher employee benefits
expense. Our number of employees on a full-time equivalent basis increased to
approximately 2,200 at March 31, 2005, from approximately 1,980 at March 31,
2004.
Occupancy, net of rental income, and furniture and equipment expense
totaled $9.3 million and $9.1 million for the three months ended March 31, 2005
and 2004, respectively. The increase is attributable to higher levels of expense
resulting from recent acquisitions, as well as technology equipment
expenditures, continued expansion and renovation of various corporate and branch
offices, and increased depreciation expense associated with capital expenditures
and acquisitions.
Information technology fees were $8.2 million and $8.0 million for the
three months ended March 31, 2005 and 2004, respectively. 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 our
recent acquisitions, growth and technological advancements consistent with our
product and service offerings, continued expansion and upgrades to technological
equipment, networks and communication channels, partially offset by expense
reductions resulting from the information technology conversions of our
acquisitions completed in 2004, as well as the achievement of certain
efficiencies associated with the implementation of various technology projects.
The information technology conversions of CCB and CIB Bank were completed in
September 2004 and February 2005, respectively.
Legal, examination and professional fees were $2.4 million and $1.6
million for the three months ended March 31, 2005 and 2004. 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 primarily related to acquired entities have all
contributed to the overall expense levels in 2004 and 2005. The increase in 2005
is also attributable to $386,000 of fees paid for information technology,
accounting and other services provided by the seller of CIB Bank pursuant to a
service agreement to provide services from the date of sale, November 30, 2004,
through the date of system conversion, mid-February 2005.
Amortization of intangibles associated with the purchase of
subsidiaries was $1.2 million and $658,000 million for the three months ended
March 31, 2005 and 2004, respectively. The increase is primarily attributable to
core deposit intangibles associated with our acquisitions of CCB and CIB Bank
completed in 2004.
Communications and advertising and business development expenses
increased to $2.2 million from $1.7 million for the three months ended March 31,
2005 and 2004, respectively. 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 $6.0 million and $2.6 million for the three months
ended March 31, 2005 and 2004, respectively. 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 increase is
primarily attributable to:
>> an increase of $2.8 million of expenditures and losses, net of
gains, on other real estate. Expenditures and losses, net of
gains, on other real estate were $38,000 for the three months
ended March 31, 2005, in comparison to net gains of $2.7 million
for the comparable period in 2004. The increase in these
noninterest expenses for the three months ended March 31, 2005,
as compared to the comparable period in 2004, was primarily due
to a $2.7 million gain recorded in February 2004 on the sale of a
residential and recreational development property that was
transferred to other real estate in January 2003;
>> expenses associated with our acquisitions completed during 2004,
particularly CIB Bank; and
>> continued growth and expansion of our banking franchise.
Provision for Income Taxes
The provision for income taxes was $13.3 million and $11.6 million for
the three months ended March 31, 2005 and 2004, respectively. The effective tax
rate was 37.54% and 38.82% for the three months ended March 31, 2005 and 2004,
respectively. The lower effective tax rate for the first three months of 2005
was the result of a lower effective state tax rate.
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 financial
instruments we held as of March 31, 2005 and December 31, 2004 are summarized as
follows:
March 31, 2005 December 31, 2004
------------------------ -------------------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
(dollars expressed in thousands)
Cash flow hedges..................................... $ 300,000 834 500,000 1,233
Fair value hedges.................................... 126,200 2,773 276,200 9,609
Interest rate lock commitments....................... 6,100 -- 5,400 --
Forward commitments to sell
mortgage-backed securities......................... 37,000 -- 34,000 --
========== ====== ======= ======
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 months ended March 31, 2005 and 2004, we realized net
interest income on our derivative financial instruments of $3.6 million and
$16.2 million, respectively. The decrease is primarily attributable to an
increase in prevailing interest rates that began in mid-2004 and continued into
2005, the maturity of $800.0 million notional amount of interest rate swap
agreements in 2004, the maturity of $200.0 million notional amount of interest
rate swap agreements designated as cash flow hedges in March 2005, and the
termination of $150.0 million of interest rate swap agreements designated as
fair value hedges in February 2005, as further discussed below. Although the
Company has implemented other methods to mitigate the reduction in net interest
income, as further discussed below, the maturity and termination of the swap
agreements will result in a reduction of future net interest income and further
compression of our net interest margin unless interest rates increase. We
recorded net losses on derivative instruments, which are included in noninterest
income in our consolidated statements of income, of $590,000 for the three
months ended March 31, 2005, in comparison to net gains of $32,000 for the
comparable period in 2004. The decrease in 2005 reflects valuation changes in
the fair value of our fair value hedges and the underlying hedged liabilities.
Cash Flow Hedges. During September 2000, March 2001, April 2001, March 2002 and
July 2003, we entered into interest rate swap agreements of $600.0 million,
$200.0 million, $175.0 million, $150.0 million and $200.0 million notional
amount, respectively, to effectively lengthen the repricing characteristics of
certain interest-earning assets to correspond more closely with their funding
source with the objective of stabilizing cash flow, and accordingly, net
interest income over time. The underlying hedged assets are certain loans within
our commercial loan portfolio. The swap agreements, which have been designated
as cash flow hedges, provide for us to receive a fixed rate of interest and pay
an adjustable rate of interest equivalent to the weighted average prime lending
rate minus 2.70%, 2.82%, 2.82%, 2.80% and 2.85%, respectively. The terms of the
swap agreements provide for us to pay and receive interest on a quarterly basis.
In November 2001, we terminated $75.0 million notional amount of the swap
agreements originally entered into in April 2001, which would have expired in
April 2006, in order to appropriately modify our overall hedge position in
accordance with our interest rate risk management program. In addition, the
$150.0 million notional amount swap agreement that we entered into in March 2002
matured on March 14, 2004, the $600.0 million notional amount swap agreements
that we entered into in September 2000 matured on September 20, 2004, and the
$200.0 million notional amount swap agreements that we entered into in March
2001 matured on March 21, 2005. The amount receivable by us under the swap
agreements was $2.4 million and $2.7 million at March 31, 2005 and December 31,
2004, respectively, and the amount payable by us under the swap agreements was
$1.5 million and $1.4 million at March 31, 2005 and December 31, 2004,
respectively.
In October 2004, we implemented the guidance required by the FASB's
Derivatives Implementation Group on Statement of Financial Accounting Standards
No. 133 Implementation Issue No. G25, Cash Flow Hedges: Using the
First-Payments-Received Technique in Hedging the Variable Interest Payments on a
Group of Non-Benchmark-Rate-Based Loans, or DIG issue G25, and de-designated all
of the specific pre-existing 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 at
September 30, 2004, is being amortized to interest income over the remaining
lives of the respective hedging relationships, which ranged from approximately
six months to three years at the date of implementation. 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 interest rate risk management program.
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 March 31, 2005 and December 31, 2004 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
March 31, 2005:
April 2, 2006................................... $ 100,000 2.93% 5.45% $ 1,461
July 31, 2007................................... 200,000 2.90 3.08 (5,236)
---------- --------
$ 300,000 2.91 3.87 $ (3,775)
========== ===== ===== ========
December 31, 2004:
March 21, 2005.................................. $ 200,000 2.43% 5.24% $ 1,155
April 2, 2006................................... 100,000 2.43 5.45 2,678
July 31, 2007................................... 200,000 2.40 3.08 (2,335)
---------- --------
$ 500,000 2.42 4.42 $ 1,498
========== ===== ===== ========
Fair Value Hedges. We entered into the following interest rate swap agreements,
designated as fair value hedges, to effectively shorten the repricing
characteristics of certain interest-bearing liabilities to correspond more
closely with their funding source with the objective of stabilizing net interest
income over time:
>> During January 2001, we entered into $50.0 million notional
amount of three-year interest rate swap agreements and $150.0
million notional amount of five-year interest rate swap
agreements that provide for us to receive a fixed rate of
interest and pay an adjustable rate of interest equivalent to the
three-month London Interbank Offering Rate. The underlying hedged
liabilities are a portion of our other time deposits. The terms
of the swap agreements provide for us to pay interest on a
quarterly basis and receive interest on a semiannual basis. The
amount receivable by us under the swap agreements was $3.9
million at December 31, 2004, and the amount payable by us under
the swap agreements was $695,000 at December 31, 2004. 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 resulting $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 of
approximately three months. This $50.0 million notional swap
agreement matured in January 2004. Effective February 25, 2005,
we terminated the remaining $150.0 million notional amount of
five-year interest rate swap agreements that hedged a portion of
our other time deposits. The termination of the swap agreements
resulted from an increasing level of ineffectiveness associated
with the correlation of the hedge positions between the swap
agreements and the underlying hedged liabilities that had been
anticipated as the swap agreements neared their originally
scheduled maturity dates in January 2006. The resulting $3.1
million basis adjustment of the underlying hedged liabilities is
being recorded as interest expense over the remaining weighted
average maturity of the underlying hedged liabilities of
approximately ten months.
>> 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%. 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 March 31, 2005 or
December 31, 2004.
>> 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 March 31,
2005 or December 31, 2004.
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 March 31, 2005 and December 31, 2004 were as follows:
Notional Interest Rate Interest Rate Fair
Maturity Date Amount Paid Received Value
------------- ------ ---- -------- -----
(dollars expressed in thousands)
March 31, 2005:
December 31, 2031................................ $ 55,200 4.86% 9.00% $ 1,160
March 20, 2033................................... 25,000 5.11 8.10 (1,267)
June 30, 2033.................................... 46,000 5.14 8.15 (2,252)
--------- --------
$ 126,200 5.01 8.51 $ (2,359)
========= ===== ===== ========
December 31, 2004:
January 9, 2006 (1).............................. $ 150,000 2.06% 5.51% $ 3,610
December 31, 2031................................ 55,200 4.27 9.00 2,171
March 20, 2033................................... 25,000 4.52 8.10 (929)
June 30, 2033.................................... 46,000 4.55 8.15 (1,689)
--------- --------
$ 276,200 3.14 6.88 $ 3,163
========= ===== ===== ========
------------------
(1) The interest rate swap agreements were terminated effective February 25, 2005, as further discussed above.
Interest Rate Cap Agreements. During 2003 and 2004, we entered into five term
reverse repurchase agreements under master repurchase agreements with
unaffiliated third parties, as further described in Note 9 to our Consolidated
Financial Statements. The underlying securities associated with the term reverse
repurchase agreements are mortgage-backed securities and callable U.S.
Government agency securities and are held by other financial institutions under
safekeeping agreements. The term reverse repurchase agreements were entered into
with the objective of stabilizing net interest income over time and further
protecting net interest margin against changes in interest rates. The interest
rate cap agreements included within the term reverse repurchase agreements
represent embedded derivative instruments which, in accordance with existing
accounting literature governing derivative instruments, are not required to be
separated from the term reverse repurchase agreements and accounted for
separately as a derivative financial instrument. As such, 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. As further
described in Note 9 to our Consolidated Financial Statements, on March 21, 2005,
we modified our term reverse repurchase agreements under master repurchase
agreements with unaffiliated third parties to terminate the interest rate cap
agreements embedded within the agreements and simultaneously enter into interest
rate floor agreements, also embedded within the agreements. The effect of these
modifications resulted in related modifications to the existing interest rate
spread from LIBOR for the underlying agreements. The modified terms of the term
reverse repurchase agreements will become effective immediately following the
next respective quarterly scheduled interest payment dates, which will occur in
the second quarter of 2005. We did not incur any costs associated with the
modifications of the agreements nor did the modifications result in a change to
the accounting treatment of the embedded derivative instruments.
Pledged Collateral. At March 31, 2005 and December 31, 2004, 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 fair value of $230,000
and $527,000, respectively, in connection with our interest rate swap
agreements. At March 31, 2005, we had pledged cash of $9.1 million as collateral
in connection with our interest rate swap agreements. At December 31, 2004, we
had accepted cash of $6.0 million as collateral in connection with our interest
rate swap agreements.
Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed
Securities. Derivative financial instruments issued by us consist of interest
rate lock commitments to originate fixed-rate loans to be sold. Commitments to
originate fixed-rate loans consist primarily of residential real estate loans.
These net loan commitments and loans held for sale are hedged with forward
contracts to sell mortgage-backed securities. The carrying value of these
interest rate lock commitments included in derivative instruments in the
consolidated balance sheets was $45,000 and $20,000 at March 31, 2005 and
December 31, 2004, respectively.
Loans and Allowance for Loan Losses
Interest earned on our loan portfolio represents the principal source
of income for First Bank. Interest and fees on loans were 83.9% and 87.6% of
total interest income for the three months ended March 31, 2005 and 2004,
respectively. Total loans, net of unearned discount, increased $18.5 million to
$6.16 billion, or 71.6% of total assets, at March 31, 2005, compared to $6.14
billion, or 70.3% of total assets, at December 31, 2004. The overall increase in
loans, net of unearned discount, in 2005 is primarily attributable to:
>> an increase of $56.8 million in our real estate mortgage
portfolio primarily attributable to internal growth, management's
business strategy decision in mid-2003 to retain a portion of the
new loan production in our real estate mortgage portfolio as a
result of 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 $21.5 million in loans held for sale resulting
from the timing of loan sales in the secondary mortgage market,
coupled with an overall increase in loan origination volumes as
compared to the fourth quarter 2004 partially offset by the sale
of certain acquired loans; partially offset by
>> a decrease of $44.8 million in our commercial, financial and
agricultural portfolio, due partially to a decline in internal
loan volumes and an anticipated amount of attrition associated
with our acquisitions completed during 2004, particularly CIB
Bank, as well as general runoff of balances within this
portfolio;
>> a decrease of $12.0 million in our real estate construction and
development portfolio resulting primarily from seasonal
fluctuations on existing and available credit lines; and
>> a decrease of $3.0 million in consumer and installment loans,
reflecting continued reductions in new non-real estate consumer
lending volumes and the repayment of principal on our existing
portfolio.
Nonperforming assets include nonaccrual loans, restructured loans and
other real estate. The following table presents the categories of nonperforming
assets and certain ratios as of March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
---- ----
(dollars expressed in thousands)
Commercial, financial and agricultural:
Nonaccrual......................................................... $ 8,430 10,147
Restructured....................................................... -- 4
Real estate construction and development:
Nonaccrual......................................................... 16,848 13,435
Real estate mortgage:
One-to-four family residential:
Nonaccrual...................................................... 11,342 9,881
Restructured.................................................... 11 11
Multi-family residential loans:
Nonaccrual...................................................... 419 434
Commercial real estate loans:
Nonaccrual...................................................... 41,604 50,671
Lease financing:
Nonaccrual......................................................... 832 907
Consumer and installment:
Nonaccrual......................................................... 286 310
----------- ----------
Total nonperforming loans................................... 79,772 85,800
Other real estate.................................................... 1,822 4,030
----------- ----------
Total nonperforming assets.................................. $ 81,594 89,830
=========== ==========
Loans, net of unearned discount...................................... $ 6,156,446 6,137,968
=========== ==========
Loans past due 90 days or more and still accruing.................... $ 8,846 28,689
=========== ==========
Ratio of:
Allowance for loan losses to loans................................. 2.34% 2.46%
Nonperforming loans to loans....................................... 1.30 1.40
Allowance for loan losses to nonperforming loans................... 180.71 175.65
Nonperforming assets to loans and other real estate................ 1.32 1.46
=========== ==========
Nonperforming loans, consisting of loans on nonaccrual status and
certain restructured loans, were $79.8 million at March 31, 2005, in comparison
to $85.8 million at December 31, 2004. Other real estate owned was $1.8 million
and $4.0 million at March 31, 2005 and December 31, 2004, respectively.
Nonperforming assets, consisting of nonperforming loans and other real estate
owned, improved by 9.17% during the first quarter of 2005 to $81.6 million at
March 31, 2005, compared to $89.8 million at December 31, 2004. A significant
portion of nonperforming assets includes nonperforming loans associated with our
recent acquisition of CIB Bank in November 2004, which have decreased to $43.7
million at March 31, 2005 from $50.5 million at December 31, 2004. Nonperforming
loans were 1.30% of loans, net of unearned discount, at March 31, 2005, compared
to 1.40% at December 31, 2004. Additionally, loans past due 90 days or more and
still accruing decreased from $28.7 million at December 31, 2004 to $8.8 million
at March 31, 2005. The decrease in nonperforming loans and problem loans during
the three months ended March 31, 2005 primarily resulted from the sale of
approximately $2.8 million of certain acquired nonperforming loans, net loan
charge-offs of $6.6 million, loan payoffs and/or refinancings of various
credits, and loan renewals. A portion of the loan payoffs and sales during the
first quarter of 2005 pertaining to certain acquired nonperforming loans that
were classified as loans held for sale as of December 31, 2004 contributed to a
reallocation of the purchase price on our acquisition of Hillside, as further
discussed in Note 2 to our Consolidated Financial Statements. Additionally, we
recorded an addition write-down on an acquired parcel of other real estate owned
to its estimated fair value based upon additional data received. This $1.6
million write-down on other real estate owned, which was also recorded as an
acquisition-related adjustment and is further discussed in Note 2 to our
Consolidated Financial Statements, further contributed to the decrease in
nonperforming assets.
Loan charge-offs were $12.6 million and $11.5 million for the three
months ended March 31, 2005 and 2004, respectively. Loan charge-offs, net of
recoveries, were $6.6 million and $5.3 million for the three months ended March
31, 2005 and 2004, respectively. The allowance for loan losses was $144.2
million at March 31, 2005, compared to $150.7 million at December 31, 2004. Our
allowance for loan losses as a percentage of loans, net of unearned discount,
was 2.34% at March 31, 2005, compared to 2.46% at December 31, 2004, and our
allowance for loan losses as a percentage of nonperforming loans was 180.71% at
March 31, 2005, compared to 175.65% at December 31, 2004. We continue to closely
monitor our loan portfolio and address the ongoing challenges posed by the
current economic environment, including reduced loan demand within our certain
sectors of our loan portfolio. We consider this in our overall assessment of the
adequacy of the allowance for loan losses. Despite the improvement in
nonperforming assets during 2005, we anticipate nonperforming assets will
continue to remain at somewhat elevated levels in the near future as a result of
the significant level of acquired nonperforming loans associated with our three
acquisitions in the later part of 2004, particularly, our acquisition of CIB
Bank in November 2004.
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. In
addition, a quarterly evaluation of each lending unit is performed based on
certain factors, such as lending personnel experience, recent credit reviews,
loan concentrations and other factors. Based on this evaluation, 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 appropriate levels. 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.
Changes in the allowance for loan losses for the three months ended
March 31, 2005 and 2004 were as follows:
Three Months Ended
March 31,
------------------------
2005 2004
---- ----
(dollars expressed in thousands)
Balance, beginning of period................................................. $ 150,707 116,451
Other adjustments (1)........................................................ -- 1,000
--------- --------
150,707 117,451
--------- --------
Loans charged-off............................................................ (12,636) (11,494)
Recoveries of loans previously charged-off................................... 6,083 6,164
--------- --------
Net loan charge-offs..................................................... (6,553) (5,330)
--------- --------
Provision for loan losses.................................................... -- 12,750
--------- --------
Balance, end of period....................................................... $ 144,154 124,871
========= ========
---------------
(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. In January 2004,
the letter of credit was fully funded as a loan and the related $1.0 million specific reserve was reclassified
from accrued and other liabilities to the allowance for loan losses.
Liquidity
Our liquidity is the ability to maintain a cash flow that is adequate
to fund operations, service debt obligations and meet obligations and other
commitments on a timely basis. We receive funds for liquidity from customer
deposits, loan payments, maturities of loans and investments, sales of
investments and earnings. In addition, we may avail ourselves of other sources
of funds by issuing certificates of deposit in denominations of $100,000 or
more, borrowing federal funds, selling securities under agreements to repurchase
and utilizing borrowings from the Federal Home Loan Banks and other borrowings,
including our revolving credit line. The aggregate funds acquired from these
sources were $1.38 billion and $1.42 billion at March 31, 2005 and December 31,
2004, respectively.
The following table presents the maturity structure of these other
sources of funds, which consists of certificates of deposit of $100,000 or more
and other borrowings, including our note payable, at March 31, 2005:
Certificates of Deposit Other
of $100,000 or More Borrowings Total
------------------- ---------- -----
(dollars expressed in thousands)
Three months or less..................................... $198,416 176,365 374,781
Over three months through six months..................... 130,263 4,144 134,407
Over six months through twelve months.................... 239,066 -- 239,066
Over twelve months....................................... 250,071 379,500 629,571
-------- -------- ---------
Total............................................... $817,816 560,009 1,377,825
======== ======== =========
In addition to these sources of funds, First Bank has established a
borrowing relationship with the Federal Reserve Bank of St. Louis. This
borrowing relationship, which is secured by commercial loans, provides an
additional liquidity facility that may be utilized for contingency purposes. At
March 31, 2005 and December 31, 2004, First Bank's borrowing capacity under the
agreement was approximately $796.5 million and $778.7 million, respectively. In
addition, First Bank's borrowing capacity through its relationship with the
Federal Home Loan Bank was approximately $465.4 million and $505.2 million at
March 31, 2005 and December 31, 2004, respectively. Exclusive of the Federal
Home Loan Bank advances outstanding of $29.6 million and $35.6 million at March
31, 2005 and December 31, 2004, respectively, which represent advances assumed
in conjunction with various acquisitions, First Bank had no amounts outstanding
under its borrowing arrangement with the Federal Home Loan Bank at March 31,
2005 and December 31, 2004.
In addition to our owned banking facilities, we have entered into
long-term leasing arrangements to support our ongoing activities. The required
payments under such commitments and other obligations at March 31, 2005 are as
follows:
Less than 1-3 3-5 Over
1 Year Years Years 5 Years Total
------ ------ ----- ------- -----
(dollars expressed in thousands)
Operating leases............................... $ 9,967 14,720 9,898 17,762 52,347
Certificates of deposit (1).................... 1,904,314 685,074 156,165 38,590 2,784,143
Other borrowings (1)........................... 176,509 365,500 3,000 11,000 556,009
Note payable (1)............................... 4,000 -- -- -- 4,000
Subordinated debentures (1).................... -- -- -- 271,835 271,835
Other contractual obligations.................. 2,387 336 102 20 2,845
---------- --------- ------- ------- ---------
Total..................................... $2,097,177 1,065,630 169,165 339,207 3,671,179
========== ========= ======= ======= =========
---------------
(1) Amounts exclude the related interest expense accrued on these obligations as of March 31, 2005.
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 November 2003, the Emerging Issues Task Force, or EITF, reached a
consensus on certain disclosure requirements under EITF Issue No 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The new disclosure requirements apply to investment in debt and
marketable equity securities that are accounted for under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and SFAS No.
124, Accounting for Certain Investments Held by Not-for-Profit Organizations.
Effective for fiscal years ending after December 15, 2003, companies are
required to disclose information about debt or marketable equity securities with
market values below carrying values. We previously adopted the disclosure
requirements of EITF Issue No. 03-1. In March 2004, the EITF came to a consensus
regarding EITF 03-1. Securities in scope are those subject to SFAS 115 and SFAS
124. The EITF adopted a three-step model that requires management to determine
if impairment exists, decide whether it is other than temporary, and record
other-than-temporary losses in earnings. In September 2004, the FASB approved
issuing a Staff Position to delay the requirement to record impairment losses
under EITF 03-1, but broadened the scope to include additional types of
securities. As proposed, the delay would have applied only to those debt
securities described in paragraph 16 of EITF 03-1, the Consensus that provides
guidance for determining whether an investment's impairment is other than
temporary and should be recognized in income. The approved delay will apply to
all securities within the scope of EITF 03-1 and is expected to end when new
guidance is issued and comes into effect.
In December 2003, the Accounting Standards Executive Committee, or
AcSEC, issued SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired
in a Transfer, effective for loans acquired in fiscal years beginning after
December 15, 2004. The scope of SOP 03-3 applies to problem loans that have been
acquired, either individually in a portfolio, or in an acquisition. These loans
must have evidence of credit deterioration and the purchaser must not expect to
collect contractual cash flows. SOP 03-3 updates Practice Bulletin No. 6,
Amortization of Discounts on Certain Acquired Loans, for more recently issued
literature, including FASB Statements No. 114, Accounting by Creditors for
Impairment of a Loan; No. 115, Accounting for Certain Investments in Debt and
Equity Securities; and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Additionally, it addresses
FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases, which
requires that discounts be recognized as an adjustment of yield over a loan's
life. SOP 03-3 states that an institution may no longer display discounts on
purchased loans within the scope of SOP 03-3 on the balance sheet and may not
carry over the allowance for loan losses. For those loans within the scope of
SOP 03-3, this statement clarifies that a buyer cannot carry over the seller's
allowance for loan losses for the acquisition of loans with credit
deterioration. Loans acquired with evidence of deterioration in credit quality
since origination will need to be accounted for under a new method using an
income recognition model. This prohibition also applies to purchases of problem
loans not included in a purchase business combination, which would include
syndicated loans purchased in the secondary market and loans acquired in
portfolio purchases. We are further evaluating certain of the requirements of
SOP 03-3 to determine its impact on our consolidated financial statements and
results of operations as it relates to the recently completed and announced
acquisitions, as further described in Note 2 to our Consolidated Financial
Statements, and future transactions.
On March 1, 2005, the Board of Governors of the Federal Reserve System,
or Board, adopted a final rule, Risk-Based Capital Standards: Trust Preferred
Securities and the Definition of Capital, that allows for the continued limited
inclusion of trust preferred securities in Tier 1 capital, as further discussed
in Note 7 to our Consolidated Financial Statements. The Board's final rule
limits restricted core capital elements to 25% of the sum of all core capital
elements, including restricted core capital elements, net of goodwill less any
associated deferred tax liability. Amounts of restricted core capital elements
in excess of these limits may generally be included in Tier 2 capital. Amounts
of qualifying trust preferred securities and cumulative perpetual preferred
stock in excess of the 25% limit may be included in Tier 2 capital, but limited,
together with subordinated debt and limited-life preferred stock, to 50% of Tier
1 capital. In addition, the final rule provides that in the last five years
before the maturity of the underlying subordinated note, the outstanding amount
of the associated trust preferred securities is excluded from Tier 1 capital and
included in Tier 2 capital, subject to one-fifth amortization per year. The
final rule provides for a five-year transition period, ending March 31, 2009,
for the application of the quantitative limits. Until March 31, 2009, the
aggregate amount of qualifying cumulative perpetual preferred stock and
qualifying trust preferred securities that may be included in Tier 1 capital is
limited to 25% of the sum of the following core capital elements: qualifying
common stockholders' equity, qualifying noncumulative and cumulative perpetual
preferred stock, qualifying minority interest in the equity accounts of
consolidated subsidiaries and qualifying trust preferred securities. First Banks
has evaluated the impact of the final rule on the Company's financial condition
and results of operations, and determined the implementation of the Board's
final rule, as adopted, will reduce First Banks' regulatory capital ratios, as
set forth in Note 7 to our Consolidated Financial Statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2004, our risk management program's simulation model
indicated a loss of projected net interest income in the event of a decline in
interest rates. We are "asset-sensitive," indicating that our assets would
generally reprice with changes in rates more rapidly than our liabilities. While
a decline in interest rates of less than 100 basis points was projected to have
a relatively minimal impact on our net interest income, an instantaneous,
parallel decline in the interest yield curve of 100 basis points indicated a
pre-tax projected loss of approximately 8.9% in net interest income, based on
assets and liabilities at December 31, 2004. At March 31, 2005, 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 declines in
income associated with our interest rate swap agreements and increases in
prevailing interest rates beginning in mid-2004 and continuing in 2005, is
reflected in our net interest margin for the three months ended March 31, 2005
as compared to the comparable period in 2004 and further discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations." During the three months ended March 31,
2005, our asset-sensitive position and overall susceptibility to market risks
have not changed materially. However, prevailing interest rates have continued
to rise during the three months ended March 31, 2005.
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, or the 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 effected, or are reasonably 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
-------------- -----------
31 Rule 13a-14(a)/15d-14(a) Certifications - filed herewith.
32 Section 1350 Certifications - filed herewith.
(b) Reports on Form 8-K.
During the quarter ended March 31, 2005, we filed the following Current
Reports on Form 8-K:
>> Current Report on Form 8-K, filed January 27, 2005 - Item 2.02 of
the report referenced a press release announcing First Banks,
Inc.'s financial results for the three months and year ended
December 31, 2004. A copy of the press release was included as
Exhibit 99.
>> Current Report on Form 8-K/A, filed March 30, 2005 - Amendment
No. 1 to the Current Report on Form 8-K, filed November 30, 2004,
which reported the completion of the Company's acquisition of
Hillside Investors, Ltd. and its wholly owned banking subsidiary,
CIB Bank. Parts (a) and (b) of Item 9.01 of the Form 8-K/A
referenced amendment of such report to include the financial
statements required pursuant to Regulation S-X and for the
periods specified in Rule 3-05(b) of Regulation S-X (17 CFR
210.3-05(b)) and the pro forma financial information required
pursuant to Article 11 of Regulation S-X (17 CFR 210). The
required consolidated financial statements of Hillside Investors,
Ltd. as of December 31, 2003 and 2002, and for the years ended
December 31, 2003, 2002 and 2001 were included as Exhibit 99.2.
The required pro forma financial information as of September 30,
2004 and for the nine months ended September 30, 2004 and the
year ended December 31, 2003 was included as Exhibit 99.3.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRST BANKS, INC.
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)
Date: May 13, 2005
EXHIBIT 31
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OR RULE 15d-14(a)
UNDER 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 (the Registrant's fourth fiscal quarter in
the case of an annual report) 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: May 13, 2005
FIRST BANKS, INC.
By: /s/ Allen H. Blake
----------------------------------------------
Allen H. Blake
President, Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
EXHIBIT 32
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 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 March 31, 2005 (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: May 13, 2005
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)