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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0-20632
FIRST BANKS, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1175538
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 North Meramec, Clayton, Missouri 63105
(Address of principal executive offices) (Zip code)
(314) 854-4600
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Shares Outstanding
Class at October 31, 2004
----- -------------------
Common Stock, $250.00 par value 23,661
FIRST BANKS, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS............................................................... 1
CONSOLIDATED STATEMENTS OF INCOME......................................................... 2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME.............................................................. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS..................................................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................. 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 34
ITEM 4. CONTROLS AND PROCEDURES................................................................... 35
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... 36
SIGNATURES................................................................................................ 37
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANKS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars expressed in thousands, except share and per share data)
September 30, December 31,
2004 2003
---- ----
(unaudited)
ASSETS
------
Cash and cash equivalents:
Cash and due from banks.............................................................. $ 152,184 179,802
Short-term investments............................................................... 115,736 33,735
---------- ---------
Total cash and cash equivalents................................................. 267,920 213,537
---------- ---------
Investment securities:
Available for sale................................................................... 1,246,595 1,038,787
Held to maturity (fair value of $26,724 and $11,341, respectively)................... 26,273 10,927
---------- ---------
Total investment securities..................................................... 1,272,868 1,049,714
---------- ---------
Loans:
Commercial, financial and agricultural............................................... 1,438,183 1,407,626
Real estate construction and development............................................. 1,227,553 1,063,889
Real estate mortgage................................................................. 2,715,869 2,582,264
Lease financing...................................................................... 7,541 67,282
Consumer and installment............................................................. 53,912 71,652
Loans held for sale.................................................................. 128,801 145,746
---------- ---------
Total loans..................................................................... 5,571,859 5,338,459
Unearned discount.................................................................... (10,236) (10,384)
Allowance for loan losses............................................................ (127,970) (116,451)
---------- ---------
Net loans....................................................................... 5,433,653 5,211,624
---------- ---------
Derivative instruments.................................................................... 12,159 49,291
Bank premises and equipment, net of accumulated depreciation and amortization............. 133,580 136,739
Goodwill.................................................................................. 151,783 145,548
Bank-owned life insurance................................................................. 101,041 97,521
Deferred income taxes..................................................................... 97,469 102,844
Other assets.............................................................................. 103,484 100,122
---------- ---------
Total assets.................................................................... $7,573,957 7,106,940
========== =========
LIABILITIES
-----------
Deposits:
Noninterest-bearing demand........................................................... $1,120,630 1,034,367
Interest-bearing demand.............................................................. 842,913 843,001
Savings.............................................................................. 2,174,209 2,128,683
Time deposits of $100 or more........................................................ 515,780 436,439
Other time deposits.................................................................. 1,474,274 1,519,125
---------- ---------
Total deposits.................................................................. 6,127,806 5,961,615
Other borrowings.......................................................................... 550,262 273,479
Note payable.............................................................................. -- 17,000
Subordinated debentures................................................................... 232,311 209,320
Deferred income taxes..................................................................... 23,824 41,683
Accrued expenses and other liabilities.................................................... 50,403 54,028
---------- ---------
Total liabilities............................................................... 6,984,606 6,557,125
---------- ---------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
$1.00 par value, 5,000,000 shares authorized, no shares issued and outstanding....... -- --
Class A convertible, adjustable rate, $20.00 par value, 750,000
shares authorized, 641,082 shares issued and outstanding........................... 12,822 12,822
Class B adjustable rate, $1.50 par value, 200,000 shares authorized,
160,505 shares issued and outstanding.............................................. 241 241
Common stock, $250.00 par value, 25,000 shares authorized,
23,661 shares issued and outstanding................................................. 5,915 5,915
Additional paid-in capital................................................................ 5,910 5,910
Retained earnings......................................................................... 559,210 495,714
Accumulated other comprehensive income.................................................... 5,253 29,213
---------- ---------
Total stockholders' equity...................................................... 589,351 549,815
---------- ---------
Total liabilities and stockholders' equity...................................... $7,573,957 7,106,940
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(dollars expressed in thousands, except share and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Interest and fees on loans............................................ $ 86,201 88,504 254,176 268,796
Investment securities................................................. 12,784 7,315 37,098 24,564
Short-term investments................................................ 476 345 899 1,099
-------- -------- -------- --------
Total interest income............................................ 99,461 96,164 292,173 294,459
-------- -------- -------- --------
Interest expense:
Deposits:
Interest-bearing demand............................................. 801 1,195 2,592 4,346
Savings............................................................. 5,116 5,520 14,486 18,091
Time deposits of $100 or more....................................... 3,358 3,028 9,353 10,049
Other time deposits................................................. 8,636 8,865 25,296 32,147
Other borrowings...................................................... 1,982 550 3,383 1,671
Note payable.......................................................... 229 388 398 574
Subordinated debentures............................................... 3,731 3,538 10,798 14,325
-------- -------- -------- --------
Total interest expense........................................... 23,853 23,084 66,306 81,203
-------- -------- -------- --------
Net interest income.............................................. 75,608 73,080 225,867 213,256
Provision for loan losses.................................................. 7,500 15,000 23,250 36,000
-------- -------- -------- --------
Net interest income after provision for loan losses.............. 68,108 58,080 202,617 177,256
-------- -------- -------- --------
Noninterest income:
Service charges on deposit accounts and customer service fees......... 9,837 9,175 28,578 26,824
Gain on mortgage loans sold and held for sale......................... 4,676 6,484 12,866 14,616
Net gain on sales of available-for-sale investment securities......... 257 266 257 6,832
(Loss) gain on sales of branches, net of expenses..................... (20) -- 1,000 --
Bank-owned life insurance investment income........................... 1,255 1,325 3,874 4,029
Other................................................................. 5,977 2,992 16,070 12,413
-------- -------- -------- --------
Total noninterest income......................................... 21,982 20,242 62,645 64,714
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits........................................ 29,936 23,481 85,825 71,736
Occupancy, net of rental income....................................... 4,674 4,916 13,744 15,399
Furniture and equipment............................................... 4,099 4,610 12,802 13,714
Postage, printing and supplies........................................ 1,222 1,311 3,765 3,909
Information technology fees........................................... 7,977 8,126 23,965 24,568
Legal, examination and professional fees.............................. 1,644 1,781 4,895 5,552
Amortization of intangibles associated with
the purchase of subsidiaries..................................... 733 658 2,049 1,848
Communications........................................................ 469 677 1,333 1,950
Advertising and business development.................................. 1,297 762 3,902 2,996
Other................................................................. 6,340 8,208 14,118 23,990
-------- -------- -------- --------
Total noninterest expense........................................ 58,391 54,530 166,398 165,662
-------- -------- -------- --------
Income before provision for income taxes......................... 31,699 23,792 98,864 76,308
Provision for income taxes................................................. 11,951 10,092 34,844 28,877
-------- -------- -------- --------
Net income....................................................... 19,748 13,700 64,020 47,431
Preferred stock dividends.................................................. 196 196 524 524
-------- -------- -------- --------
Net income available to common stockholders...................... $ 19,552 13,504 63,496 46,907
======== ======== ======== ========
Basic earnings per common share............................................ $ 826.33 570.75 2,683.56 1,982.48
======== ======== ======== ========
Diluted earnings per common share.......................................... $ 815.20 565.09 2,642.12 1,954.63
======== ======== ======== ========
Weighted average common stock outstanding.................................. 23,661 23,661 23,661 23,661
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED)
Nine Months Ended September 30, 2004 and 2003 and Three Months Ended December 31, 2003
(dollars expressed in thousands, except per share data)
Adjustable Rate Accu-
Preferred Stock mulated
---------------- Other Total
Class A Additional Compre- Compre- Stock-
Conver- Common Paid-In hensive Retained hensive holders'
tible Class B Stock Capital Income Earnings Income Equity
----- ------- ------ ------- ------- -------- ------ ------
Consolidated balances, December 31, 2002......... $12,822 241 5,915 5,910 433,689 60,464 519,041
Nine months ended September 30, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 47,431 47,431 -- 47,431
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (9,335) -- (9,335) (9,335)
Derivative instruments:
Current period transactions............ -- -- -- -- (14,156) -- (14,156) (14,156)
-------
Comprehensive income....................... 23,940
=======
Class A preferred stock dividends,
$0.80 per share.......................... -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share.......................... -- -- -- -- (11) -- (11)
------- ----- ----- ----- ------- ------- -------
Consolidated balances September 30, 2003......... 12,822 241 5,915 5,910 480,596 36,973 542,457
Three months ended December 31, 2003:
Comprehensive income:
Net income................................. -- -- -- -- 15,380 15,380 -- 15,380
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (651) -- (651) (651)
Derivative instruments:
Current period transactions............ -- -- -- -- (7,109) -- (7,109) (7,109)
-------
Comprehensive income....................... 7,620
=======
Class A preferred stock dividends,
$0.40 per share.......................... -- -- -- -- (256) -- (256)
Class B preferred stock dividends,
$0.04 per share.......................... -- -- -- -- (6) -- (6)
------- ----- ----- ----- ------- ------- -------
Consolidated balances, December 31, 2003......... 12,822 241 5,915 5,910 495,714 29,213 549,815
Nine months ended September 30, 2004:
Comprehensive income:
Net income................................. -- -- -- -- 64,020 64,020 -- 64,020
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1)........ -- -- -- -- (1,886) -- (1,886) (1,886)
Derivative instruments:
Current period transactions............ -- -- -- -- (22,074) -- (22,074) (22,074)
-------
Comprehensive income....................... 40,060
=======
Class A preferred stock dividends,
$0.80 per share.......................... -- -- -- -- (513) -- (513)
Class B preferred stock dividends,
$0.07 per share.......................... -- -- -- -- (11) -- (11)
------- ----- ----- ----- ------- ------- -------
Consolidated balances, September 30, 2004........ $12,822 241 5,915 5,910 559,210 5,253 589,351
======= ===== ===== ===== ======= ======= =======
- -------------------------
(1) Disclosure of reclassification adjustment:
Three Months Ended Nine Months Ended Three Months Ended
September 30, September 30, December 31,
------------------ -----------------
2004 2003 2004 2003 2003
---- ---- ---- ---- ----
Unrealized gains (losses) on investment securities
arising during the period................................... $17,397 (2,874) (1,719) (4,894) 603
Less reclassification adjustment for gains
included in net income....................................... 167 173 167 4,441 1,254
------- ------ ------ ------- ------
Unrealized gains (losses) on investment securities.............. $17,230 (3,047) (1,886) (9,335) (651)
======= ====== ====== ======= ======
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(dollars expressed in thousands)
Nine Months Ended
September 30,
2004 2003
---- ----
Cash flows from operating activities:
Net income......................................................................... $ 64,020 47,431
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of bank premises and equipment..................... 13,921 14,596
Amortization, net of accretion................................................... 12,602 20,599
Originations and purchases of loans held for sale................................ (881,860) (1,815,712)
Proceeds from sales of loans held for sale....................................... 741,108 1,661,363
Provision for loan losses........................................................ 23,250 36,000
Provision for income taxes....................................................... 34,844 28,877
Payments of income taxes......................................................... (35,480) (27,441)
Decrease in accrued interest receivable.......................................... 1,814 5,032
Interest accrued on liabilities.................................................. 66,306 81,203
Payments of interest on liabilities.............................................. (65,603) (83,778)
Gain on mortgage loans sold and held for sale.................................... (12,866) (14,616)
Net gain on sales of available-for-sale investment securities.................... (257) (6,832)
Gain on sales of branches, net of expenses....................................... (1,000) --
Other operating activities, net.................................................. (5,483) 950
--------- ----------
Net cash used in operating activities......................................... (44,684) (52,328)
--------- ----------
Cash flows from investing activities:
Cash (paid) received for acquired entities, net of cash
and cash equivalents received (paid)............................................. (35,348) 14,870
Proceeds from sales of investment securities available for sale.................... 26,340 6,009
Maturities of investment securities available for sale............................. 364,312 1,152,354
Maturities of investment securities held to maturity............................... 3,149 4,143
Purchases of investment securities available for sale.............................. (503,776) (746,511)
Purchases of investment securities held to maturity................................ (18,524) (103)
Net increase in loans.............................................................. (81,606) (3,863)
Recoveries of loans previously charged-off......................................... 18,129 17,024
Purchases of bank premises and equipment........................................... (4,585) (4,213)
Other investing activities, net.................................................... 12,078 11,165
--------- ----------
Net cash (used in) provided by investing activities........................... (219,831) 450,875
--------- ----------
Cash flows from financing activities:
Increase in demand and savings deposits............................................ 101,615 28,967
Decrease in time deposits.......................................................... (13,078) (269,674)
Decrease in federal funds purchased................................................ -- (55,000)
Decrease in Federal Home Loan Bank advances........................................ (2,000) (3,548)
Increase in securities sold under agreements to repurchase......................... 248,619 62,072
Advances drawn on note payable..................................................... -- 34,500
Repayments of note payable......................................................... (17,000) (10,500)
Proceeds from issuance of subordinated debentures.................................. 20,619 70,907
Payments for redemptions of subordinated debentures................................ -- (136,341)
Cash paid for sales of branches, net of cash
and cash equivalents sold........................................................ (19,353) --
Payment of preferred stock dividends............................................... (524) (524)
--------- ----------
Net cash provided by (used in) financing activities........................... 318,898 (279,141)
--------- ----------
Net increase in cash and cash equivalents..................................... 54,383 119,406
Cash and cash equivalents, beginning of period.......................................... 213,537 203,251
--------- ----------
Cash and cash equivalents, end of period................................................ $ 267,920 322,657
========= ==========
Noncash investing and financing activities:
Loans transferred to other real estate............................................. $ 4,246 11,999
========= ==========
The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements of First Banks, Inc. and subsidiaries
(First Banks or the Company) are unaudited and should be read in conjunction
with the consolidated financial statements contained in the 2003 Annual Report
on Form 10-K. The consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles and conform to
predominant practices within the banking industry. Management of First Banks has
made a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities to
prepare the consolidated financial statements in conformity with U.S. generally
accepted accounting principles. Actual results could differ from those
estimates. In the opinion of management, all adjustments, consisting of normal
recurring accruals considered necessary for a fair presentation of the results
of operations for the interim periods presented herein, have been included.
Operating results for the three and nine months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004.
The consolidated financial statements include the accounts of First Banks,
Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications of 2003 amounts
have been made to conform to the 2004 presentation.
First Banks operates through its wholly owned subsidiary bank holding
company, The San Francisco Company (SFC), headquartered in San Francisco,
California, and SFC's wholly owned subsidiary bank, First Bank, headquartered in
St. Louis County, Missouri.
(2) ACQUISITIONS, INTEGRATION COSTS AND OTHER CORPORATE TRANSACTIONS
On July 30, 2004, First Banks completed its acquisition of Continental
Mortgage Corporation - Delaware (CMC), and its wholly owned banking subsidiary,
Continental Community Bank and Trust Company (CCB), acquiring all of the
outstanding common stock of CMC in exchange for $4.2 million in cash. In
addition, First Banks redeemed in full all of the outstanding subordinated
promissory notes of CMC, including accumulated accrued and unpaid interest,
totaling $4.5 million in aggregate. The transaction was funded through
internally generated funds. CMC, through CCB, operated two banking offices in
the Chicago suburban communities of Aurora and Villa Park. At the time of the
transaction, CMC had total assets of $140.7 million, loans, net of unearned
discount, of $73.6 million and total deposits of $104.6 million. Preliminary
goodwill, which is not expected to be deductible for tax purposes, was
approximately $1.8 million and the core deposit intangibles, which are being
amortized over seven years utilizing the straight-line method, were
approximately $2.0 million. CMC was merged with and into SFC and CCB was merged
with and into First Bank.
On August 12, 2004, First Banks entered into a Stock Purchase Agreement
(the Agreement) by and among First Banks, SFC, CIB Marine Bancshares, Inc., a
Wisconsin corporation, Hillside Investors, Ltd. (Hillside), an Illinois
corporation, and CIB Bank (CIB), an Illinois banking corporation. The Agreement
provides for the acquisition of Hillside and its wholly owned banking
subsidiary, CIB, for approximately $62.0 million in cash and the subsequent
mergers of Hillside with and into SFC, and of CIB with and into First Bank. The
acquisition will be funded through the issuance of subordinated debentures
associated with two private placements of $60.0 million in aggregate of trust
preferred securities, of which $20.0 million was issued on September 20, 2004
through First Banks' newly formed affiliated statutory trust, First Bank
Statutory Trust II (FBST II). CIB is headquartered in Hillside, Illinois, and
operates 16 banking offices in the Chicago, Illinois metropolitan area. As of
September 30, 2004, CIB reported total assets of approximately $1.24 billion,
loans, net of unearned discount, of approximately $724.7 million and total
deposits of approximately $1.14 billion. The transaction, which was approved by
the Board of Governors of the Federal Reserve System (the Board) on November 1,
2004 and is still subject to the receipt of certain state regulatory approvals,
is expected to be completed during the fourth quarter of 2004.
On August 31, 2004, Small Business Loan Source LLC (SBLS LLC), a newly
formed Nevada-based limited liability company and subsidiary of First Bank,
purchased substantially all of the assets and assumed certain liabilities of
Small Business Loan Source, Inc. (SBLS), headquartered in Houston, Texas, in
exchange for cash and certain payments contingent on future valuations of
specifically identified assets, including servicing assets and retained
interests in securitizations, as further described in Note 12 to the
Consolidated Financial Statements. The transaction was funded through internally
generated funds. At the time of the transaction, SBLS LLC purchased from SBLS
assets of $47.1 million, including $24.0 million of United States Small Business
Administration (SBA) loans, net of unearned discount, and $15.1 million of SBA
servicing rights and assumed $1.5 million of liabilities, resulting in a net
cash payment of $45.6 million. Preliminary goodwill was approximately $4.8
million and is expected to be deductible for tax purposes. In conjunction with
this transaction, on August 30, 2004, First Bank granted to First Capital
America, Inc. (FCA), a corporation owned by First Banks' Chairman and members of
his immediate family, an option to purchase Membership Interests of SBLS LLC.
Upon exercise of this option, SBLS LLC will become 51.0% owned by First Bank and
49.0% owned by FCA, as further discussed in Note 6 to the Consolidated Financial
Statements.
The aforementioned acquisitions of CMC and SBLS were accounted for using
the purchase method of accounting and, accordingly, the consolidated financial
statements include the financial position and results of operations for the
periods subsequent to the respective acquisition dates, and the assets acquired
and liabilities assumed were recorded at their estimated fair value as of the
acquisition dates. These fair value adjustments represent current estimates and
are subject to further adjustments as the valuation data, including the receipt
of certain third party valuation data, is finalized.
First Banks accrues certain costs associated with its acquisitions as of
the respective consummation dates. Essentially all of these accrued costs relate
either to adjustments to the staffing levels of the acquired entities or to the
anticipated termination of information technology or item processing contracts
of the acquired entities prior to their stated contractual expiration dates. The
most significant costs incurred relate to salary continuation agreements, or
other similar agreements, of executive management and certain other employees of
the acquired entities that were in place prior to the acquisition dates. These
agreements provide for payments over various time periods generally ranging from
two to 15 years and are triggered as a result of the change in control of the
acquired entity. Other severance benefits for employees that are terminated in
conjunction with the integration of the acquired entities into First Banks'
existing operations are normally paid to the recipients within 90 days of the
applicable consummation date and are expensed in the consolidated statements of
income as incurred. The accrued severance balance of $921,000 identified in the
following table is comprised of contractual obligations under salary
continuation agreements to nine individuals and have remaining terms ranging
from approximately three months to 12 years. As the obligation to make payments
under these agreements is accrued at the consummation date, such payments do not
have any impact on the consolidated statements of income. First Banks also
incurs costs associated with acquisitions that are expensed in the consolidated
statements of income. These costs relate principally to additional costs
incurred in conjunction with the data processing conversions of the respective
entities.
A summary of the cumulative acquisition and integration costs attributable
to the Company's acquisitions, which were accrued as of the consummation dates
of the respective acquisitions, is listed below. These acquisition and
integration costs are reflected in accrued and other liabilities in the
consolidated balance sheets.
Information
Severance Technology Fees Total
--------- --------------- -----
(dollars expressed in thousands)
Balance at December 31, 2003....................... $ 1,412 -- 1,412
Nine Months Ended September 30, 2004:
Amounts accrued at acquisition date.............. 180 496 676
Payments......................................... (671) (496) (1,167)
------- ------ -------
Balance at September 30, 2004...................... $ 921 -- 921
======= ====== =======
During the nine months ended September 30, 2004, First Bank opened the
following four de novo branch offices:
Branch Office Location Date Opened
---------------------- -----------
Houston, Texas February 9, 2004
Wildwood, Missouri February 20, 2004
McKinney, Texas July 19, 2004
San Diego, California August 16, 2004
On February 6, 2004, First Bank completed its divestiture of one branch
office in rural Missouri. This branch divestiture resulted in a reduction of the
deposit base of approximately $8.4 million, and a pre-tax gain of approximately
$392,000, which is included in noninterest income. On April 16, 2004, First Bank
completed its divestiture of one branch office in southern Illinois. This branch
divestiture resulted in a reduction of the deposit base of approximately $15.0
million, and a pre-tax gain of approximately $630,000, which is included in
noninterest income.
On June 30, 2004, First Bank completed the sale of a significant portion of
the leases in its commercial leasing portfolio. The sale reduced the Company's
commercial leasing portfolio by approximately $33.1 million to $9.6 million at
June 30, 2004. No gain or loss was recorded on the transaction. In conjunction
with the transaction, First Bank established a $2.0 million liability associated
with related recourse obligations for certain leases sold, as further discussed
in Note 12 to the Consolidated Financial Statements. The commercial leasing
portfolio has further declined to $7.5 million at September 30, 2004, reflecting
the Company's overall business strategy to reduce its commercial leasing
activities.
(3) INTANGIBLE ASSETS ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES, NET OF
AMORTIZATION
Intangible assets associated with the purchase of subsidiaries, net of
amortization, were comprised of the following at September 30, 2004 and December
31, 2003:
September 30, 2004 December 31, 2003
--------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(dollars expressed in thousands)
Amortized intangible assets:
Core deposit intangibles.............. $ 19,428 (6,149) 17,391 (4,233)
Goodwill associated with
purchases of branch offices......... 2,210 (968) 2,210 (861)
--------- ------- -------- -------
Total............................ $ 21,638 (7,117) 19,601 (5,094)
========= ======= ======== =======
Unamortized intangible assets:
Goodwill associated with the
purchase of subsidiaries............ $ 150,541 144,199
========= ========
Amortization of intangibles associated with the purchase of subsidiaries
and branch offices was $733,000 and $2.0 million for the three and nine months
ended September 30, 2004, respectively, and $658,000 and $1.8 million for the
comparable periods in 2003. Amortization of intangibles associated with the
purchase of subsidiaries, including amortization of core deposit intangibles and
goodwill associated with purchases of branch offices, has been estimated through
2009 in the following table, and does not take into consideration any pending or
potential future acquisitions or branch purchases.
(dollars expressed in thousands)
Year ending December 31:
Remaining 2004...................................................... $ 731
2005................................................................ 2,922
2006................................................................ 2,922
2007................................................................ 2,922
2008................................................................ 2,922
2009 ............................................................... 1,021
-------
Total............................................................ $13,440
=======
Changes in the carrying amount of goodwill for the three and nine months
ended September 30, 2004 and 2003 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period......................... $ 145,255 142,167 145,548 140,112
Goodwill acquired during period...................... 6,564 -- 6,564 1,026
Acquisition-related adjustments...................... -- 1,237 (222) 2,338
Amortization - purchases of branch offices........... (36) (36) (107) (108)
--------- ------- ------- -------
Balance, end of period............................... $ 151,783 143,368 151,783 143,368
========= ======= ======= =======
(4) SERVICING RIGHTS
Mortgage Banking Activities:
---------------------------
At September 30, 2004 and December 31, 2003, First Banks serviced mortgage
loans for others amounting to $1.11 billion and $1.22 billion, respectively.
Borrowers' escrow balances held by First Banks on such loans were $7.5 million
and $4.7 million at September 30, 2004 and December 31, 2003, respectively.
Changes in mortgage servicing rights, net of amortization, for the periods
indicated were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
(dollars expressed in thousands)
Balance, beginning of period........................ $ 12,533 16,979 15,408 14,882
Originated mortgage servicing rights................ 345 3,125 1,164 7,619
Amortization........................................ (1,498) (3,278) (5,192) (5,675)
Impairment valuation allowance...................... -- (800) -- (800)
Reversal of impairment valuation allowance.......... -- 166 -- 166
-------- ------ ------ ------
Balance, end of period.............................. $ 11,380 16,192 11,380 16,192
======== ====== ====== ======
The fair value of mortgage servicing rights was approximately $16.8 million
and $18.3 million at September 30, 2004 and 2003, respectively, and $18.3
million at December 31, 2003. The excess of the fair value of mortgage servicing
rights over the carrying value was approximately $5.4 million and $2.1 million
at September 30, 2004 and 2003, respectively, and $2.9 million at December 31,
2003.
Amortization of mortgage servicing rights has been estimated through 2009
in the following table:
(dollars expressed in thousands)
Year ending December 31:
Remaining 2004...................................................... $ 1,028
2005................................................................ 3,983
2006................................................................ 3,392
2007................................................................ 2,050
2008................................................................ 732
2009................................................................ 195
--------
Total.......................................................... $ 11,380
========
Other Servicing Activities:
--------------------------
At September 30, 2004, First Banks serviced SBA loans for others amounting
to $204.8 million. Changes in SBA servicing rights, net of amortization, for the
periods indicated were as follows:
Three Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
------------------ ------------------
(dollars expressed in thousands)
Balance, beginning of period........................ $ -- --
SBA servicing rights acquired during period......... 15,076 15,076
Amortization ....................................... (163) (163)
-------- ------
Balance, end of period.............................. $ 14,913 14,913
======== ======
The fair value of SBA servicing rights has been estimated by management to
be approximately $14.9 million at September 30, 2004. As further discussed in
Note 2 to the Consolidated Financial Statements, the fair value adjustments
represent current estimates and are subject to further adjustments as the
valuation data, including the receipt of certain third party valuation data, is
finalized.
Amortization of SBA servicing rights has been estimated through 2009 in the
following table:
(dollars expressed in thousands)
Year ending December 31:
Remaining 2004...................................................... $ 479
2005................................................................ 1,789
2006................................................................ 1,627
2007................................................................ 1,475
2008................................................................ 1,334
2009................................................................ 1,203
--------
Total.......................................................... $ 7,907
========
(5) EARNINGS PER COMMON SHARE
The following is a reconciliation of the basic and diluted earnings per
share computations for the periods indicated:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
(dollars in thousands, except share and per share data)
Three months ended September 30, 2004:
Basic EPS - income available to common stockholders............. $ 19,552 23,661 $ 826.33
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 559 (11.13)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 19,744 24,220 $ 815.20
========= ======= ==========
Three months ended September 30, 2003:
Basic EPS - income available to common stockholders............. $ 13,504 23,661 $ 570.75
Effect of dilutive securities:
Class A convertible preferred stock........................... 192 577 (5.66)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 13,696 24,238 $ 565.09
========= ======= ==========
Nine months ended September 30, 2004:
Basic EPS - income available to common stockholders............. $ 63,496 23,661 $ 2,683.56
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 565 (41.44)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 64,009 24,226 $ 2,642.12
========= ======= ==========
Nine months ended September 30, 2003:
Basic EPS - income available to common stockholders............. $ 46,907 23,661 $ 1,982.48
Effect of dilutive securities:
Class A convertible preferred stock........................... 513 600 (27.85)
--------- ------- ----------
Diluted EPS - income available to common stockholders........... $ 47,420 24,261 $ 1,954.63
========= ======= ==========
(6) TRANSACTIONS WITH RELATED PARTIES
First Services, L.P., a limited partnership indirectly owned by First
Banks' Chairman and members of his immediate family, provides information
technology and various related services to First Banks, Inc. and its
subsidiaries. Fees paid under agreements with First Services, L.P. decreased to
$6.7 million and $19.9 million for the three and nine months ended September 30,
2004, respectively, from $6.9 million and $20.6 million for the comparable
periods in 2003. First Services, L.P. recorded reduced information technology
costs as a result of the renegotiation of vendor service contracts and passed
the cost reduction through to First Banks, Inc. and its subsidiaries. First
Services, L.P. leases information technology and other equipment from First
Bank. During the three months ended September 30, 2004 and 2003, First Services,
L.P. paid First Bank $1.0 million and $985,000, respectively, and during the
nine months ended September 30, 2004 and 2003, First Services, L.P. paid First
Bank $3.2 million in rental fees for the use of that equipment.
First Brokerage America, L.L.C., a limited liability company indirectly
owned by First Banks' Chairman and members of his immediate family, received
approximately $870,000 and $2.6 million for the three and nine months ended
September 30, 2004, respectively, and $795,000 and $2.3 million for the
comparable periods in 2003 in commissions paid by unaffiliated third-party
companies. The commissions received were primarily in connection with the sales
of annuities, securities and other insurance products to customers of First
Bank.
First Title Guaranty LLC (First Title), a limited liability company
established and administered by and for the benefit of First Banks' Chairman and
members of his immediate family, received approximately $100,000 and $304,000
for the three and nine months ended September 30, 2004, respectively, and
$128,000 and $379,000 for the comparable periods in 2003 in commissions for
policies purchased by First Banks or customers of First Bank from unaffiliated,
third-party insurers.
First Bank has had in the past, and may have in the future, loan
transactions in the ordinary course of business with its directors or
affiliates. These loan transactions have been on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and did not involve more than the normal
risk of collectibility or present other unfavorable features. Loans to
directors, their affiliates and executive officers of First Banks, Inc. were
approximately $30.7 million and $20.0 million at September 30, 2004 and December
31, 2003, respectively. First Bank does not extend credit to its officers or to
officers of First Banks, Inc., except for extensions of credit secured by
mortgages on personal residences, loans to purchase automobiles and personal
credit card accounts.
On August 30, 2004, First Bank granted to FCA, a corporation owned by First
Banks' Chairman and members of his immediate family, a written option to
purchase 735 Membership Interests of SBLS LLC, a newly organized and wholly
owned limited liability company of First Bank, at a price of $10,000 per
Membership Interest, or $7.35 million in aggregate. The option may be exercised
by FCA at any time prior to December 31, 2004 by written notice to First Bank of
the intention to exercise the option and payment to First Bank of $7.35 million.
First Bank anticipates that FCA will exercise its option, upon which SBLS LLC
will become 51.0% owned by First Bank and 49.0% owned by FCA.
(7) REGULATORY CAPITAL
First Banks and First Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Banks' consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, First Banks and First Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require First Banks and First Bank to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted
assets, and of Tier I capital to average assets. Management believes, as of
September 30, 2004, First Banks and First Bank were each well capitalized.
As of September 30, 2004, the most recent notification from First Banks'
primary regulator categorized First Banks and First Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, First Banks and First Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table below.
At September 30, 2004 and December 31, 2003, First Banks' and First Bank's
required and actual capital ratios were as follows:
Actual To Be Well
--------------------------- Capitalized Under
September 30, December 31, For Capital Prompt Corrective
2004 2003 Adequacy Purposes Action Provisions
---- ---- ----------------- -----------------
Total capital (to risk-weighted assets):
First Banks.................................. 11.06% 10.27% 8.0% 10.0%
First Bank................................... 10.51 10.41 8.0 10.0
Tier 1 capital (to risk-weighted assets):
First Banks.................................. 9.28 8.46 4.0 6.0
First Bank................................... 9.25 9.15 4.0 6.0
Tier 1 capital (to average assets):
First Banks.................................. 8.35 7.62 3.0 5.0
First Bank................................... 8.31 8.22 3.0 5.0
On May 6, 2004, the Board requested public comment on newly proposed rules
that would allow bank holding companies to retain trust preferred securities in
Tier 1 capital, subject to stricter quantitative and qualitative standards. The
proposed rules would implement several significant changes to the current
regulatory capital rules. Under the proposal, the aggregate amount of trust
preferred securities and certain other core capital elements would be limited to
25% of Tier 1 capital, net of goodwill. Additionally, qualifying trust preferred
securities and Class C minority interests in excess of the 25% limit would be
allowable in Tier 2 capital, but limited, together with subordinated debt and
limited-life preferred stock, to 50% of Tier 1 capital. The proposed rules also
provide that in the last five years before maturity of the underlying
subordinated note, the associated trust preferred securities would be treated as
limited-life preferred stock, at one-fifth amortization per year, and would be
excluded from Tier 1 capital and included in Tier 2 capital, subject, together
with subordinated debt and other limited-life preferred stock, to a limit of 50%
of Tier 1 capital. The public comment period on the newly proposed rules ended
on July 11, 2004. First Banks is awaiting further guidance from the Board
pending the outcome of the newly proposed rules, and is continuing to evaluate
the proposed changes and their overall impact on the Company's financial
condition and results of operations. Management expects that implementation of
the Board's proposed rules, as currently stated, would reduce the Company's
regulatory Tier 1 capital ratios. However, management believes its regulatory
capital levels will continue to meet the well capitalized thresholds under the
regulatory framework for prompt corrective action if the rules are adopted in
the form proposed.
In conjunction with the pending acquisition of Hillside and CIB as
described in Note 2 to the Consolidated Financial Statements, First Banks, SFC
and First Bank committed to the Board that each entity will remain well
capitalized before and after consummation of the transaction. This commitment
was made in response to a condition imposed by the Board in connection with its
findings and decision to approve the regulatory applications submitted by First
Banks.
(8) BUSINESS SEGMENT RESULTS
First Banks' business segment is First Bank. The reportable business
segment is consistent with the management structure of First Banks, First Bank
and the internal reporting system that monitors performance. First Bank provides
similar products and services in its defined geographic areas through its branch
network. The products and services offered include a broad range of commercial
and personal deposit products, including demand, savings, money market and time
deposit accounts. In addition, First Bank markets combined basic services for
various customer groups, including packaged accounts for more affluent
customers, and sweep accounts, lock-box deposits and cash management products
for commercial customers. First Bank also offers both consumer and commercial
loans. Consumer lending includes residential real estate, home equity and
installment lending. Commercial lending includes commercial, financial and
agricultural loans, real estate construction and development loans, commercial
real estate loans, asset-based loans and trade financing. Other financial
services include mortgage banking, debit cards, brokerage services,
credit-related insurance, internet banking, automated teller machines, telephone
banking, safe deposit boxes and trust, private banking and institutional money
management services. The revenues generated by First Bank consist primarily of
interest income, generated from the loan and investment security portfolios, and
service charges and fees, generated from the deposit products and services. The
geographic areas include eastern Missouri, Illinois, southern and northern
California and Houston, Dallas, Irving, McKinney and Denton, Texas. The products
and services are offered to customers primarily within First Bank's respective
geographic areas.
The business segment results are consistent with First Banks' internal
reporting system and, in all material respects, with U.S. generally accepted
accounting principles and practices predominant in the banking industry.
The business segment results are summarized as follows:
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
--------------------------- -------------------------- ---------------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance sheet information:
Investment securities................... $1,264,580 1,042,809 8,288 6,905 1,272,868 1,049,714
Loans, net of unearned discount......... 5,561,623 5,328,075 -- -- 5,561,623 5,328,075
Goodwill................................ 151,783 145,548 -- -- 151,783 145,548
Total assets............................ 7,562,558 7,097,635 11,399 9,305 7,573,957 7,106,940
Deposits................................ 6,167,258 5,977,042 (39,452) (15,427) 6,127,806 5,961,615
Note payable............................ -- -- -- 17,000 -- 17,000
Subordinated debentures................. -- -- 232,311 209,320 232,311 209,320
Stockholders' equity.................... 780,462 766,397 (191,111) (216,582) 589,351 549,815
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
----------------------- ----------------------- -------------------------
Three Months Ended Three Months Ended Three Months Ended
September 30, September 30, September 30,
----------------------- ----------------------- -------------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income......................... $ 99,311 96,053 150 111 99,461 96,164
Interest expense........................ 19,916 19,166 3,937 3,918 23,853 23,084
---------- --------- -------- -------- --------- ---------
Net interest income................ 79,395 76,887 (3,787) (3,807) 75,608 73,080
Provision for loan losses............... 7,500 15,000 -- -- 7,500 15,000
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses........ 71,895 61,887 (3,787) (3,807) 68,108 58,080
---------- --------- -------- -------- --------- ---------
Noninterest income...................... 22,133 20,192 (151) 50 21,982 20,242
Noninterest expense..................... 57,398 52,671 993 1,859 58,391 54,530
---------- --------- -------- -------- --------- ---------
Income before provision for
income taxes..................... 36,630 29,408 (4,931) (5,616) 31,699 23,792
Provision for income taxes.............. 13,663 12,040 (1,712) (1,948) 11,951 10,092
---------- --------- -------- -------- --------- ---------
Net income......................... $ 22,967 17,368 (3,219) (3,668) 19,748 13,700
========== ========= ======== ======== ========= =========
Corporate, Other
and Intercompany
First Bank Reclassifications (1) Consolidated Totals
----------------------- ----------------------- -------------------------
Nine Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30,
----------------------- ----------------------- -------------------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement information:
Interest income......................... $ 291,744 293,749 429 710 292,173 294,459
Interest expense........................ 55,162 66,448 11,144 14,755 66,306 81,203
---------- --------- -------- -------- --------- ---------
Net interest income................ 236,582 227,301 (10,715) (14,045) 225,867 213,256
Provision for loan losses............... 23,250 36,000 -- -- 23,250 36,000
---------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan losses........ 213,332 191,301 (10,715) (14,045) 202,617 177,256
---------- --------- -------- -------- --------- ---------
Noninterest income...................... 63,102 58,577 (457) 6,137 62,645 64,714
Noninterest expense..................... 163,303 161,877 3,095 3,785 166,398 165,662
---------- --------- -------- -------- --------- ---------
Income before provision for
income taxes..................... 113,131 88,001 (14,267) (11,693) 98,864 76,308
Provision for income taxes.............. 42,613 32,933 (7,769) (4,056) 34,844 28,877
---------- --------- -------- -------- --------- ---------
Net income......................... $ 70,518 55,068 (6,498) (7,637) 64,020 47,431
========== ========= ======== ======== ========= =========
- ------------------
(1) Corporate and other includes $2.4 million and $2.3 million of interest expense on subordinated debentures, after
applicable income tax benefit of $1.3 million and $1.2 million for the three months ended September 30, 2004 and 2003,
respectively. For the nine months ended September 30, 2004 and 2003, corporate and other includes $7.0 million
and $9.3 million of interest expense on subordinated debentures, after applicable income tax benefits of $3.8 million
and $5.0 million, respectively.
(9) OTHER BORROWINGS
Other borrowings were comprised of the following at September 30, 2004 and
December 31, 2003:
September 30, December 31,
2004 2003
--------------- ----------------
(dollars expressed in thousands)
Securities sold under agreements to repurchase:
Daily............................................................... $ 165,098 166,479
Term................................................................ 350,000 100,000
Federal Home Loan Bank borrowings........................................ 35,164 7,000
--------- -------
Total other borrowings.......................................... $ 550,262 273,479
========= =======
In conjunction with First Banks' interest rate risk management program,
First Banks entered into the following transactions with the objective of
stabilizing net interest income over time:
>> Effective January 12, 2004, First Banks consummated a $150.0 million
three-year reverse repurchase agreement under a master repurchase
agreement with a single unaffiliated third party. Interest is paid
quarterly and is equivalent to the three-month London Interbank
Offering Rate minus 0.8350% plus a floating amount equal to the
differential between the three-month London Interbank Offing Rate
reset in arrears and the strike price of 3.50%, if the three-month
London Interbank Offering Rate reset in arrears exceeds 3.50%. The
underlying securities associated with the reverse repurchase agreement
are callable U.S. Government agency securities and are held by other
financial institutions under safekeeping agreements. In conjunction
with this transaction, First Banks purchased $150.0 million of
callable U.S. Government agency securities.
>> Effective June 14, 2004, First Banks consummated two $50.0 million
three-year reverse repurchase agreements under a master repurchase
agreement with a single unaffiliated third party. Interest is paid
quarterly and is equivalent to the three-month London Interbank
Offering Rate minus 0.60% and 0.61%, respectively, plus a floating
amount equal to the differential between the three-month London
Interbank Offing Rate reset in arrears and the strike price of 5.00%,
if the three-month London Interbank Offering Rate reset in arrears
exceeds 5.00%. The underlying securities associated with the reverse
repurchase agreements are callable U.S. Government agency securities
and are held by other financial institutions under safekeeping
agreements. In conjunction with these transactions, First Banks
purchased $100.0 million of callable U.S. Government agency
securities.
At September 30, 2004 and December 31, 2003, Federal Home Loan Bank
borrowings were $35.2 million and $7.0 million, respectively. The increase
during the nine months ended September 30, 2004 is attributable to First Banks'
acquisition of CMC, which provided $30.2 million of Federal Home Loan Bank
borrowings.
(10) NOTE PAYABLE
On August 12, 2004, First Banks entered into a first amendment to its
revolving credit line with a group of unaffiliated financial institutions. The
material changes in the First Amendment to Secured Credit Agreement (Credit
Agreement) are amendments to the termination date and an increase in the
revolving credit line and letter of credit facility. The Credit Agreement
provides a $75.0 million revolving credit line and a $25.0 million letter of
credit facility. Interest is payable on outstanding principal loan balances at a
floating rate equal to either the lender's prime rate or, at First Banks'
option, the London Interbank Offering Rate plus a margin determined by the
outstanding loan balances and First Banks' net income for the preceding four
calendar quarters. If the loan balances outstanding under the revolving credit
line are accruing at the prime rate, interest is paid monthly. If the loan
balances outstanding under the revolving credit line are accruing at the London
Interbank Offering Rate, interest is payable based on the one, two, three or
six-month London Interbank Offering Rate, as selected by First Banks. Amounts
may be borrowed under the Credit Agreement until August 11, 2005, at which time
the principal and interest outstanding is due and payable. There were no
outstanding loan balances under the Credit Agreement at September 30, 2004.
Outstanding loan balances under the previous credit agreement were $17.0 million
at December 31, 2003. Letters of credit issued to unaffiliated third parties on
behalf of First Banks under the letter of credit facility were $6.3 million and
$5.4 million at September 30, 2004 and December 31, 2003, respectively, and had
not been drawn on by the counterparties.
The Credit Agreement requires maintenance of certain minimum capital ratios
for First Banks and First Bank, certain maximum nonperforming assets ratios for
First Banks and First Bank and a minimum return on assets ratio for First Banks.
In addition, it prohibits the payment of dividends on First Banks' common stock
and contains additional covenants. Loans under the Credit Agreement are secured
by First Banks' ownership interest in the capital stock of its subsidiaries.
(11) SUBORDINATED DEBENTURES
On September 8, 2004, First Banks entered into a commitment letter
providing for the issuance of $60.0 million in aggregate of trust preferred
securities through private placement transactions, to be issued by two newly
formed affiliated statutory trusts of First Banks. The gross amount of the
proceeds from the private placements will be used by the affiliated statutory
trusts to purchase variable rate subordinated debentures from First Banks. First
Banks will use the proceeds from the issuance of the subordinated debentures to
the affiliated statutory trusts to fund its pending acquisition of Hillside and
CIB, as further described in Note 2 to the Consolidated Financial Statements.
The initial private placement was completed on September 20, 2004, with the
first newly formed affiliated statutory trust issuing $20.0 million of trust
preferred securities, as further discussed below. The funds have been
temporarily invested until their use for the acquisition of Hillside and CIB.
Under the terms of the commitment letter, the second private placement will take
place no later than December 17, 2004, and will likely occur in November 2004.
In conjunction with that transaction, First Banks will form a second affiliated
statutory trust, which will issue $40.0 million of additional trust preferred
securities.
On September 20, 2004, FBST II, a newly formed Delaware statutory trust,
issued 20,000 shares of variable rate trust preferred securities at $1,000 per
share in a private placement, and issued 619 shares of common securities to
First Banks at $1,000 per share. First Banks owns all of the common securities
of FBST II. The gross proceeds of the offering were used by FBST II to purchase
$20.6 million of variable rate subordinated debentures from First Banks,
maturing on September 20, 2034. The maturity date of the subordinated debentures
may be shortened to a date not earlier than September 20, 2009, if certain
conditions are met. The subordinated debentures are the sole asset of FBST II.
In connection with the issuance of the FBST II preferred securities, First Banks
made certain guarantees and commitments that, in the aggregate, constitute a
full and unconditional guarantee by First Banks of the obligations of FBST II
under the FBST II preferred securities. Proceeds from the issuance of the
subordinated debentures to FBST II, net of offering expenses, were $20.6
million. The distribution rate on the FBST II securities is equivalent to the
three-month London Interbank Offering Rate plus 205.0 basis points, and is
payable quarterly in arrears beginning December 20, 2004.
(12) CONTINGENT LIABILITIES
First Banks is a party to two continuing guaranty contracts. For value
received, and for the purpose of inducing a pension fund and its trustees and a
welfare fund and its trustees (the Funds) to conduct business with Missouri
Valley Partners, Inc. (MVP), First Bank's institutional investment management
subsidiary, First Banks irrevocably and unconditionally guaranteed payment of
and promised to pay to each of the Funds any amounts up to the sum of $5.0
million to the extent MVP is liable to the Funds for a breach of the Investment
Management Agreements (including the Investment Policy Statement and Investment
Guidelines), by and between MVP and the Funds and/or any violation of the
Employee Retirement Income Security Act by MVP resulting in liability to the
Funds. The guaranties are continuing guaranties of all obligations that may
arise for transactions occurring prior to termination of the Investment
Management Agreements and are co-existent with the term of the Investment
Management Agreements. The Investment Management Agreements have no specified
term but may be terminated at any time upon written notice by the Trustees or,
at First Banks' option, upon thirty days written notice to the Trustees. In the
event of termination of the Investment Management Agreements, such termination
shall have no effect on the liability of First Banks with respect to obligations
incurred before such termination. The obligations of First Banks are joint and
several with those of MVP. First Banks does not have any recourse provisions
that would enable it to recover from third parties any amounts paid under the
contracts nor does First Banks hold any assets as collateral that, upon
occurrence of a required payment under the contract, could be liquidated to
recover all or a portion of the amount(s) paid. At September 30, 2004 and
December 31, 2003, First Banks had not recorded a liability for the obligations
associated with these guaranty contracts, as the likelihood that First Banks
will be required to make payments under the contracts is remote.
On June 30, 2004, as further discussed in Note 2 to the Consolidated
Financial Statements, First Bank recorded a liability of $2.0 million for
recourse obligations related to the completion of the sale of a portion of its
commercial leasing portfolio. For value received, First Bank, as seller,
indemnified the buyer of certain leases from any liability or loss resulting
from defaults subsequent to the transaction sale. First Bank's indemnification
for the recourse obligations is limited to a specified percentage, ranging from
15% to 25%, of the aggregate lease purchase price of specific pools of leases
sold.
On August 31, 2004, SBLS LLC acquired substantially all of the assets and
assumed certain liabilities of SBLS, as further discussed in Note 2 to the
Consolidated Financial Statements. The Amended and Restated Asset Purchase
Agreement (Asset Purchase Agreement) governing this transaction provides for
certain payments to the seller contingent on future valuations of specifically
identified assets, including servicing assets and retained interests in
securitizations. As of September 30, 2004, SBLS LLC had not recorded a liability
for the obligations associated with these contingent payments, as the likelihood
that SBLS LLC will be required to make payments under the Asset Purchase
Agreement is not ascertainable at the present time.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements with respect to our financial condition, results of operations and
business. Generally, forward looking statements may be identified through the
use of words such as: "believe," "expect," "anticipate," "intend," "plan,"
"estimate," or words of similar meaning or future or conditional terms such as:
"will," "would," "should," "could," "may," "likely," "probably," or "possibly."
Examples of forward looking statements include, but are not limited to,
estimates or projections with respect to our future financial condition,
expected or anticipated revenues with respect to our results of operations and
our business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Factors that
may cause our actual results to differ materially from those contemplated by the
forward-looking statements herein include market conditions as well as
conditions affecting the banking industry generally and factors having a
specific impact on us, including but not limited to: fluctuations in interest
rates and in the economy, including the threat of future terrorist activities,
existing and potential wars and/or military actions related thereto, and
domestic responses to terrorism or threats of terrorism; the impact of laws and
regulations applicable to us and changes therein; the impact of accounting
pronouncements applicable to us and changes therein; competitive conditions in
the markets in which we conduct our operations, including competition from
banking and non-banking companies with substantially greater resources than us,
some of which may offer and develop products and services not offered by us; our
ability to control the composition of our loan portfolio without adversely
affecting interest income; the credit risk associated with consumers who may not
repay loans; the geographic dispersion of our offices; the impact our hedging
activities may have on our operating results; the highly regulated environment
in which we operate; and our ability to respond to changes in technology. With
regard to our efforts to grow through acquisitions, factors that could affect
the accuracy or completeness of forward-looking statements contained herein
include the competition of larger acquirers with greater resources; fluctuations
in the prices at which acquisition targets may be available for sale; the impact
of making acquisitions without using our common stock; and possible asset
quality issues, unknown liabilities or integration issues with the businesses
that we have acquired. We do not have a duty to and will not update these
forward-looking statements. Readers of this quarterly report on Form 10-Q should
therefore consider these risks and uncertainties in evaluating forward looking
statements and should not place undo reliance on these statements.
General
We are a registered bank holding company incorporated in Missouri in 1978
and headquartered in St. Louis County, Missouri. Through the operation of our
subsidiaries, we offer a broad array of financial services to consumer and
commercial customers. We operate through our wholly owned subsidiary bank
holding company, The San Francisco Company, or SFC, headquartered in San
Francisco, California, and its wholly owned subsidiary bank, First Bank,
headquartered in St. Louis County, Missouri. First Bank currently operates 151
branch banking offices in California, Illinois, Missouri and Texas. At September
30, 2004, we had total assets of $7.57 billion, loans, net of unearned discount,
of $5.56 billion, total deposits of $6.13 billion and total stockholders' equity
of $589.4 million.
Through First Bank, we offer a broad range of commercial and personal
deposit products, including demand, savings, money market and time deposit
accounts. In addition, we market combined basic services for various customer
groups, including packaged accounts for more affluent customers, and sweep
accounts, lock-box deposits and cash management products for commercial
customers. We also offer both consumer and commercial loans. Consumer lending
includes residential real estate, home equity and installment lending.
Commercial lending includes commercial, financial and agricultural loans, real
estate construction and development loans, commercial real estate loans,
asset-based loans and trade financing. Other financial services include mortgage
banking, debit cards, brokerage services, credit-related insurance, internet
banking, automated teller machines, telephone banking, safe deposit boxes and
trust, private banking and institutional money management services.
Primary responsibility for managing our banking unit rests with the
officers and directors of each unit, but we centralize overall corporate
policies, procedures and administrative functions and provide centralized
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our banking units to focus
on customer service.
Financial Condition
Total assets were $7.57 billion and $7.11 billion at September 30, 2004 and
December 31, 2003, respectively, an increase of 6.57%. The $467.0 million
increase in total assets is primarily attributable to increases in investment
securities and loans, net of unearned discount, which were primarily funded by
increases in deposits and other borrowings, primarily term reverse repurchase
agreements. Our acquisitions of Continental Community Bank and Trust Company, or
CCB, and Small Business Loan Source, Inc., or SBLS, in the third quarter of 2004
provided assets of $140.7 million and $47.1 million, respectively, resulting in
an increase in total assets of $187.8 million. Investment securities increased
$223.2 million, or 21.26%, to $1.27 billion at September 30, 2004 from $1.05
billion at December 31, 2003, reflecting purchases of $522.3 million and
maturities of $367.5 million. Loans, net of unearned discount, increased $233.5
million to $5.56 billion at September 30, 2004 from $5.33 billion at December
31, 2003. Our acquisitions of CCB and SBLS provided loans, net of unearned
discount, of $73.6 million and $24.0 million, respectively, resulting in a total
increase in loans of $97.6 million. The allowance for loan losses increased to
$128.0 million at September 30, 2004 from $116.5 million at December 31, 2003,
as further discussed under "--Loans and Allowance for Loan Losses." The overall
increase in total assets was partially offset by a $37.1 million decline in our
derivative instruments to $12.2 million from $49.3 million due to a decline in
the fair value of certain derivative financial instruments and the maturity of
$800.0 million notional amount of interest rate swap agreements during 2004, as
further discussed under "--Interest Rate Risk Management." In addition, other
assets increased $3.4 million, reflecting a $14.9 million increase attributable
to SBA servicing rights purchased from SBLS, partially offset by a $7.8 million
net decrease in other real estate, as further discussed under "--Loans and
Allowance for Loan Losses," and a $4.0 million decrease in mortgage servicing
rights, as further discussed in Note 4 to our Consolidated Financial Statements.
Total deposits increased $166.2 million, or 2.79%, to $6.13 billion at
September 30, 2004 from $5.96 billion at December 31, 2003. The increase is
primarily attributable to our acquisition of CCB, which provided total deposits
of $104.6 million. The increase is also due to the expansion of our banking
franchise with the opening of four de novo branch offices in 2004, in West St.
Louis County, Missouri, Houston, Texas, McKinney, Texas and San Diego,
California. The increase was partially offset by the divestiture of two Midwest
branch offices during the first and second quarters of 2004, which resulted in a
reduction of our deposit base of approximately $23.4 million. Our continued
deposit marketing efforts and efforts to further develop multiple account
relationships with our customers, in addition to slightly higher deposit rates
on certain products, have contributed to deposit growth despite continued
aggressive competition within our market areas and an anticipated level of
attrition associated with ongoing low deposit rates. The deposit mix reflects
our continued efforts to restructure the composition of our deposit base as the
majority of our deposit development programs are directed toward increased
transaction accounts, such as demand and savings accounts, rather than
higher-cost time deposits.
Other borrowings increased $276.8 million to $550.3 million at September
30, 2004 from $273.5 million at December 31, 2003. The increase is primarily
attributable to $250.0 million of term reverse repurchase agreements that we
entered into in conjunction with our interest rate risk management program
during the first and second quarters of 2004, as further discussed under
"--Interest Rate Risk Management" and in Note 9 to our Consolidated Financial
Statements. Our note payable was fully repaid in April 2004 through dividends
from our subsidiary bank, resulting in a decrease of $17.0 million since
December 31, 2003. Our subordinated debentures increased $23.0 million to $232.3
million at September 30, 2004 from $209.3 million at December 31, 2003. This
increase is primarily attributable to the issuance of $20.6 million of
subordinated debentures to First Bank Statutory Trust II, or FBST II, a newly
formed affiliated statutory trust, on September 20, 2004, as further discussed
in Note 11 to our Consolidated Financial Statements, to fund our acquisition of
Hillside and CIB. The increase is also attributable to an increase in the fair
value of our interest rate swap agreements that are designated as fair value
hedges and utilized to hedge certain issues of our subordinated debentures, as
well as the continued amortization of debt issuance costs during the first nine
months of 2004.
Our deferred income tax liability decreased to $23.8 million at September
30, 2004 from $41.7 million at December 31, 2003. The decrease is primarily
attributable to taxes associated with reductions in our derivative financial
instruments and changes in unrealized gains and losses on available-for-sale
investment securities.
Stockholders' equity was $589.4 million and $549.8 million at September 30,
2004 and December 31, 2003, respectively, reflecting an increase of $39.5
million. The increase is primarily attributable to net income of $64.0 million,
partially offset by a $24.0 million decrease in accumulated other comprehensive
income. The decrease in accumulated other comprehensive income is comprised of
$22.1 million associated with changes in our derivative financial instruments
and $1.9 million associated with the change in our unrealized gains and losses
on available-for-sale investment securities. The decrease is reflective of
changes in prevailing interest rates, a decline in the fair value of our
derivative financial instruments, and the maturity of $750.0 million notional
amount of our interest rate swap agreements throughout 2004, as further
discussed under "--Interest Rate Risk Management."
Results of Operations
Net Income
Net income was $19.7 million and $64.0 million for the three and nine
months ended September 30, 2004, respectively, compared to $13.7 million and
$47.4 million for the comparable periods in 2003. Results for the three months
ended September 30, 2004 reflect increased net interest and noninterest income,
and a reduced provision for loan losses, partially offset by increased
noninterest expense and an increased provision for income taxes. Results for the
nine months ended September 30, 2004 over the comparable period in 2003 reflect
increased net interest income and a reduced provision for loan losses, partially
offset by decreased noninterest income, slightly increased noninterest expenses
and an increased provision for income taxes. Our return on average assets was
1.04% and 1.16% for the three and nine months ended September 30, 2004,
respectively, compared to 0.76% and 0.88% for the comparable periods in 2003.
Our return on average stockholders' equity was 13.89% and 15.11% for the three
and nine months ended September 30, 2004, respectively, compared to 10.01% and
11.86% for the comparable periods in 2003. Net income for 2004 includes a gain
of $2.7 million, before applicable income taxes, recorded in February 2004
relating to the sale of a residential and recreational development property that
was foreclosed on in January 2003, and gains, net of expenses, totaling $1.0
million, before applicable income taxes, recorded in February and April 2004 on
the sale of two Midwest branch banking offices. Net income for 2003 includes a
nonrecurring gain of $6.3 million, before applicable income taxes, recorded in
the first quarter relating to the exchange of part of our investment in
Allegiant Bancorp, Inc., or Allegiant, for a 100% ownership interest in Bank of
Ste. Genevieve, or BSG, located in Ste. Genevieve, Missouri.
The increase in earnings in 2004 continues to reflect our adaptation to the
current interest rate environment and weak economic conditions that have
prevailed in recent years. Our ongoing efforts to improve asset quality,
maintain an acceptable net interest margin in the current low interest rate
environment, improve our noninterest income and control operating expenses are
reflected in our financial performance. We continued to maintain strong net
interest income, partially attributable to the earnings on our interest rate
swap agreements that were entered into in conjunction with our interest rate
risk management program to mitigate the effects of decreasing interest rates.
However, the benefits of the swap agreements have declined during the third
quarter of 2004 due to rising interest rates and the maturity of $600.0 million
notional amount of interest rate swap agreements on September 20, 2004. Although
the Company is implementing other methods to offset the reduction in net
interest income, including the funding of investment security purchases through
the issuance of term reverse repurchase agreements, the maturity of the swap
agreements will result in a sizeable decline in future net interest income,
which may be further adversely affected if prevailing interest rates decrease.
In addition, the Company reduced its subordinated debentures by $63.1 million
during the second quarter of 2003, further contributing to the improvement in
net interest income. However, in addition to the impact of the interest rate
swap agreements that matured in the third quarter of 2004, the current interest
rate environment, generally weak loan demand and overall economic conditions
continue to exert pressure on our net interest income.
Our overall asset quality levels have substantially improved during 2004,
resulting in a $19.9 million reduction in nonperforming assets since December
31, 2003. The reduction in nonperforming assets was attributable to significant
loan payoffs, the liquidation of foreclosed property and the sale of a
significant portion of our commercial leasing portfolio, partially offset by
additions to nonperforming assets associated with our acquisitions of CCB and
SBLS. We also sold a majority of the leases in our commercial leasing portfolio
on June 30, 2004 to further reduce our outstanding balances within this segment
of our portfolio, consistent with our business strategy initiated in late 2002
to reduce our commercial leasing activities. Residual problems in our loan
portfolio that primarily resulted from weak economic conditions in our markets
remain a primary focus of management as we continue our ongoing efforts to
further reduce our nonperforming asset levels. Due to economic conditions within
our markets, we experienced higher-than-historical levels of loan charge-offs,
loan delinquencies and nonperforming loans in 2003, which resulted in an
increased provision for loan losses. Although we have realized a substantial
reduction in nonperforming assets in 2004, we continue to monitor our loan and
leasing portfolios and focus on asset quality and related challenges stemming
from the current economic environment, including weak loan demand and low
prevailing interest rates.
Noninterest income was $22.0 million and $62.6 million for the three and
nine months ended September 30, 2004, respectively, in comparison to $20.2
million and $64.7 million for the comparable periods in 2003. The decrease for
the nine months ended September 30, 2004 is primarily attributable to a
nonrecurring $6.3 million gain recorded in the first quarter of 2003 on the
exchange of part of our investment in the common stock of Allegiant for a 100%
ownership interest in BSG. Excluding this transaction, noninterest income for
the three and nine months ended September 30, 2004 increased $1.7 million, or
8.60%, and $4.2 million, or 7.17%, respectively, over the comparable period in
2003. The increase for 2004 is attributable to increased service charges on
deposit accounts and customer service fees, increased loan servicing fees,
increased portfolio management fees associated with our institutional money
management subsidiary, gains, net of expenses, recognized on the sale of two
Midwest branch banking offices and a decrease in losses on the valuation or sale
of certain assets related to our commercial leasing portfolio. This increase was
partially offset by reduced gains on mortgage loans sold and held for sale and a
decline in rental income associated with our reduced commercial leasing
activities.
Noninterest expense was $58.4 million and $166.4 million for the three and
nine months ended September 30, 2004, respectively, in comparison to $54.5
million and $165.7 million for the comparable periods in 2003. Our efficiency
ratio, which is defined as the ratio of noninterest expense to the sum of net
interest income and noninterest income, was 59.83% and 57.67% for the three and
nine months ended September 30, 2004, respectively, in comparison to 58.43% and
59.60% for the comparable periods in 2003. The increase in noninterest expense
in 2004 reflects an increase in salary and employee benefit costs associated
with generally higher costs of employing and retaining qualified personnel,
additions to staff to enhance senior management expertise and expand product
lines, and recent acquisitions. This increase is also attributable to a lower
allocation of direct loan origination costs from salaries and employee benefit
expense to gain on mortgage loans sold and held for sale due to a slowdown in
the volume of mortgage loans originated and sold, an increase in the volume of
mortgage loans originated that we retained in our loan portfolio, as further
discussed under "--Loans and Allowance for Loan Losses," and a change in the
fallout percentage associated with the allocation. The overall increase in
noninterest expense was partially offset by a decrease in write-downs on
commercial operating leases resulting from reductions in estimated residual
values realized during 2003, as well as a reduction in expenses and losses, net
of gains, on other real estate, primarily related to a $2.7 million gain
recorded in February 2004 on the sale of a residential and recreational
development property that was foreclosed on in January 2003, as further
discussed under "--Loans and Allowance for Loan Losses." The decrease also
reflects a decrease in occupancy and furniture and equipment expenses due to
various lease termination obligations incurred in 2003.
Net Interest Income
Net interest income (expressed on a tax-equivalent basis) increased to
$75.9 million and $226.8 million for the three and nine months ended September
30, 2004, respectively, compared to $73.4 million and $214.3 million for the
comparable periods in 2003, reflecting increases of 3.42% and 5.83%,
respectively. Net interest margin was 4.37% and 4.50% for the three and nine
months ended September 30, 2004, respectively, in comparison to 4.49% and 4.43%
for the comparable periods in 2003. Net interest income is the difference
between interest earned on our interest-earning assets, such as loans and
securities, and interest paid on our interest-bearing liabilities, such as
deposits and borrowings. Net interest income is affected by the level and
composition of assets, liabilities and stockholders' equity, as well as the
general level of interest rates and changes in interest rates. Interest income
on a tax-equivalent basis includes the additional amount of interest income that
would have been earned if our investment in certain tax-exempt interest earning
assets had been made in assets subject to federal, state and local income taxes
yielding the same after-tax income. Net interest margin is determined by
dividing net interest income on a tax-equivalent basis by average
interest-earning assets. The interest rate spread is the difference between the
average equivalent yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities. We credit the increase in net interest
income primarily to lower rates on deposits and other borrowings, increased
average investment securities with higher yields, increased average loan
balances associated with our acquisitions and internal growth, and a $63.1
million net reduction in our outstanding subordinated debentures in 2003. The
earnings on our interest rate swap agreements that were entered into in
conjunction with our interest rate risk management program to mitigate the
effects of decreasing interest rates also contributed to the maintenance of our
net interest margin for the nine months ended September 30, 2004. As further
discussed under "--Interest Rate Risk Management," our derivative financial
instruments used to hedge our interest rate risk contributed $13.0 million and
$44.7 million to net interest income for the three and nine months ended
September 30, 2004, respectively, compared to $17.3 million and $48.1 million
for the comparable periods in 2003. However, the benefits of the swap agreements
declined during the third quarter of 20