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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 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 1