First American Bank Corporation
and Subsidiaries
Consolidated Financial Report
December 31, 2007
McGladrey & Pullen, LLP is a member firm of RSM International –
an affiliation of separate and independent legal entities.
Contents
Independent Auditor’s Report
1
Consolidated Financial Statements
Consolidated Balance Sheets
2
Consolidated Statements of Income
3
Consolidated Statements of Stockholders' Equity
4
Consolidated Statements of Cash Flows
5-6
Notes to Consolidated Financial Statements
7 - 29
Independent Auditor’s Report
To the Board of Directors and Stockholders
First American Bank Corporation
We have audited the accompanying consolidated balance sheets of First American Bank Corporation and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of First American Bank Corporation and subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2007, in conformity with accounting principles generally accepted in the United States of America.
Schaumburg, Illinois
March 24, 2008
McGladrey & Pullen, LLP is a member firm of RSM International –
an affiliation of separate and independent legal entities.
1
First American Bank Corporation
and Subsidiaries
Consolidated Balance Sheets
December 31, 2007 and 2006
2007
Assets
2006
(In Thousands, except share data)
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Interest-bearing deposits in other banks
Securities available for sale
Federal Home Loan Bank stock, at cost
Loans, net
Premises and equipment, net
Intangibles, net
Other assets
$
57,520
25,000
82,520
5,146
252,394
8,780
2,128,651
94,958
3,880
18,691
$
77,700
97,000
174,700
117
263,138
7,771
1,934,151
92,199
30,132
$
2,595,020
$
2,502,208
$
329,019
1,881,998
2,211,017
$
338,880
1,867,876
2,206,756
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Federal funds purchased
Note payable and borrowed funds
Junior subordinated notes issued to capital trusts
Other liabilities
Dividends payable
Total liabilities
Stockholders' Equity
Common stock, no par value, stated value $25 per share;
authorized 1,200,000 shares; issued 927,401 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less treasury stock, at cost, 2007 140,011 shares; 2006 144,919 shares
$
See Notes to Consolidated Financial Statements.
2
1,500
121,841
80,000
14,572
2
2,428,932
23,016
80,000
25,403
2
2,335,177
23,185
1,501
184,769
1,944
211,399
45,311
166,088
23,185
1,627
189,377
(174)
214,015
46,984
167,031
2,595,020
$
2,502,208
First American Bank Corporation
and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2007, 2006 and 2005
2007
Interest and dividend income:
Loans, including fees
Investment securities
Taxable
Tax-exempt
Federal funds sold and other
Total interest income
$
Interest expense:
Deposits
Federal funds purchased, note payable and
borrowed funds
Junior subordinated notes issued to capital trusts
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Non interest income:
Customer services fees
Net gain on sales of loans
Net (loss) gain on available for sales securities
Data processing
Trust fees
Consulting fees
Other
Noninterest expenses:
Salaries and employee benefits
Occupancy
Furniture and equipment
Other
Income before income taxes
Income taxes
Net income
Earnings per common share
2006
(In Thousands, except share data)
160,491
$
147,413
$
2005
118,875
11,385
916
3,150
175,942
14,473
638
1,704
164,228
9,625
104
1,591
130,195
81,945
66,680
41,030
2,625
5,484
90,054
3,916
3,268
73,864
571
41,601
85,888
90,364
88,594
14,950
4,800
15,000
70,938
85,564
73,594
14,911
677
(440)
375
6,426
2,122
1,125
25,196
14,757
758
62
391
6,183
1,210
23,361
15,253
775
55
563
5,463
1,039
23,148
48,776
11,130
9,825
18,102
87,833
46,895
9,464
9,407
17,010
82,776
44,351
8,547
8,798
15,487
77,183
8,301
26,149
19,559
5,584
9,581
7,555
$
2,717
$
16,568
$
12,004
$
3.46
$
20.34
$
13.03
Weighted average common shares outstanding
785,874
See Notes to Consolidated Financial Statements.
3
814,369
921,102
First American Bank Corporation
and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2007, 2006 and 2005
(In Thousands, except share data)
Additional
Paid-in
Capital
Common
Stock
Balance, December 31, 2004
$
Comprehensive income:
Net income
Other comprehensive loss:
Unrealized securities losses, net of
taxes of $829
Reclassification adjustments for
gains on sale of investments included
in net income, net of taxes of $19
Total comprehensive income
Cash dividends
Issuance of 6,255 shares
Cost of 8,050 shares acquired
Sales of 50 shares
Balance, December 31, 2005
Comprehensive income:
Net income
Other comprehensive income:
Unrealized securities gains, net of
taxes of $546
Reclassification adjustments for
gains on sale of investments included
in net income, net of taxes of $21
Total comprehensive income
Cash dividends
Cost of 135,375 shares acquired
Balance, December 31, 2006
$
Cash dividends
Sale of 5,028 Shares
Cost of 120 shares acquired
$
545
Retained
Earnings
$
163,709
-
-
-
-
-
-
-
-
1,082
-
(2,037)
-
23,185
1,627
173,676
-
-
-
-
-
-
-
-
1,627
12,004
(1,533)
-
(1,533)
(36)
-
(36)
10,435
(1,155)
-
(2,619)
10
(2,037)
1,238
(2,619)
10
(2,755)
194,578
-
1,022
-
(41)
-
(41)
17,549
(867)
-
-
(44,229)
(867)
(44,229)
(174)
(46,984)
167,031
-
-
-
-
-
(126)
-
4
187,551
1,022
-
See Notes to Consolidated Financial Statements.
$
-
-
189,377
2,717
-
(7,213)
(112)
$
(146)
16,568
-
1,501
$
Total
-
-
$
414
Treasury
Stock
-
16,568
-
23,185
$
12,004
156
-
23,185
Comprehensive income:
Net income
Other comprehensive income:
Unrealized securities gains, net of
tax benefit of $22
Reclassification adjustments for
losses on sale of investments included
in net income, net of taxes of $66
Total comprehensive income
Balance, December 31, 2007
23,029
Accumulated
Other
Comprehensive
Income
(Loss)
184,769
$
-
2,717
1,612
-
1,612
506
-
506
4,835
-
1,710
(37)
(7,213)
1,472
(37)
1,944
$
(45,311)
$
166,088
First American Bank Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2007, 2006 and 2005
2007
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Amortization of intangibles
(Accretion) amortization on securities, net
Provision for loan losses
Gains on sales of loans, net
Proceeds from sales of loans
Originations of loans held for sale
Deferred income taxes
Securities losses (gains), net
(Gain) loss on sale of premises and equipment, net
Loss (gain) on sale of other real estate
Decrease (increase) in other assets
(Decrease) increase in other liabilities
Net cash provided by operating activities
$
Cash Flows From Investing Activities
Net (increase) decrease in interest-bearing deposits in other banks
Proceeds from sales of securities available for sale
Proceeds from maturities of securities available for sale
Purchase of securities available for sale
Purchase of Federal Home Loan bank stock
Net increase in loans
Purchase of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of other real estate
Cash paid for business acquisition
Net cash used in investing activities
Cash Flows From Financing Activities
Net (decrease) increase in noninterest-bearing deposits
Net increase in interest-bearing deposits
Net increase in federal funds purchased
Proceeds from note payable
Repayment of note payable
Proceeds from issuances of junior subordinated notes
Net increase (decrease) in borrowed funds
Purchase of common stock for the treasury
Proceeds from sale of treasury stock
Proceeds from issuance of common stock
Dividends paid
Net cash provided by financing activities
(continued)
5
2006
(In Thousands)
2,717
$
16,568
2005
$
12,004
8,705
228
(455)
14,950
(677)
52,841
(50,549)
440
(111)
213
9,018
(11,353)
25,967
8,094
97
4,800
(758)
54,429
(54,768)
(539)
(62)
23
(49)
(5,873)
6,210
28,172
6,931
818
15,000
(775)
58,157
(57,382)
(2,847)
(55)
(9)
168
(2,683)
9,044
38,371
(5,029)
36,768
84,744
(108,113)
(1,009)
(212,602)
(13,051)
1,698
4,116
(4,477)
(216,955)
50,384
896
47,125
(102,600)
(342)
(139,435)
(10,810)
789
(153,993)
(49,730)
341
81,318
(79,790)
(684)
(119,649)
(21,199)
24
2,387
(186,982)
(9,861)
14,122
1,500
98,825
(37)
1,472
(7,213)
98,808
1,624
140,554
(11,100)
80,000
8,500
(44,229)
(1,885)
173,464
17,030
192,800
8,600
(369)
(2,619)
10
1,238
(1,938)
214,752
First American Bank Corporation
and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2007, 2006 and 2005
2007
$
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents:
Beginning
2006
(92,180)
$
174,700
Ending
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest on deposits
Interest on borrowed funds
Income taxes
6
47,643
$
127,057
66,141
60,916
$
82,520
$
174,700
$
127,057
$
82,550
2,273
(234)
$
65,667
3,631
10,470
$
40,164
563
9,748
1,536
2
$
1,028
2
$
952
1,019
Supplemental Schedules of Noncash Investing and Financing Activities
$
Real estate acquired in the settlement of loans
Dividends declared not paid
See Notes to Consolidated Financial Statements.
2005
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 1.
Summary of Significant Accounting Policies
Principles of consolidation and nature of business: The consolidated financial statements of First American Bank
Corporation (the Company) include the accounts of the Company and its subsidiaries, First American Bank (the
Bank) and Sandhill Life Insurance Company. All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company provides a full range of banking services to individuals and corporate
customers through its locations throughout Northeastern Illinois. The Company’s subsidiary, First American Bank,
also owns all of the issued and outstanding common stock of FAB Real Estate, an Illinois corporation, and FAB Real
Estate No. 2, an Illinois corporation, making such corporations subsidiaries of the Bank for financial reporting
purposes. Their primary activity is disposal of real estate acquired in the settlement of loans. The Bank conducts
such activity through these limited liability corporations.
HPL&S, Inc. (HPL&S) was acquired by the Company August 31, 2007, and became a subsidiary of the Bank.
HPL&S is a human resources consulting firm based in a northwest suburb of Chicago, Illinois engaged in the
business of providing employee benefit administration and consulting services to primarily middle market commercial
enterprises. The initial payment of $4,477,000 was allocated to intangible assets ($4,108,000) and goodwill
($369,000). Goodwill is shown in other assets in the financial statements. Results of operations since the date of
acquisition of $868,000 are included in the statement of income. Contingent payments on terms of the purchase
agreement may be paid if certain conditions are met. These contingent payments are not expected to exceed
$5,800,000.
Basis of financial statement presentation: The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of America and general practices within the financial
services industry. In preparing the consolidated financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and
revenues and expenses for the year. Significant estimates which are particularly susceptible to change in a short
period of time include the determination of the allowance for loan losses, fair value of securities and deferred taxes.
Actual results could differ from those estimates.
Trust assets: Assets of the trust department, other than trust cash on deposit at the Company, are not included in
these financial statements because they are not assets of the Company.
Presentation of cash flows: Cash flows from interest bearing deposits in other banks, federal funds sold, loans,
deposits, federal funds purchased, and borrowed funds are reported net.
Interest-bearing deposits in other banks: Interest-bearing deposits in other banks mature within one year and are
carried at cost.
Securities available for sale: Securities classified as available for sale are those securities that the Company intends
to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant movements in interest rates, changes in the
maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other
similar factors. Securities available for sale are reported at fair value with unrealized gains or losses reported as
accumulated other comprehensive income, net of the related deferred tax effect.
7
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 1.
Summary of Significant Accounting Policies (continued)
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the
securities. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included
in earnings. Declines in the fair value of individual securities below their amortized cost that are determined to be
other-than-temporary result in write-downs of the individual securities to their fair value with the resulting write-downs
included in current earnings as realized losses. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the
sale of securities are recorded on the trade date and are determined using the specific identification method.
Federal Home Loan Bank stock: As a member of the Federal Home Loan Bank System, the Bank is required to
maintain an investment in capital stock of the Federal Home Loan Bank in an amount at a minimum of 1% of its
outstanding mortgage loans. No ready market exists for these securities and they have no quoted market value; as
such, the stock is carried at cost and evaluated periodically for impairment. Currently, the FHLB is prohibited from
making any stock repurchases or redemptions, including redemptions upon membership withdrawal or termination
without approval of the Finance Board’s Office of Supervision. In addition, the FHLB ceased payment of dividends
on the outstanding capital stock in the fourth quarter of 2007.
Loans and allowance for loan losses: Loans are stated at the amount of unpaid principal, less an allowance for loan
losses and net deferred fees/costs. Interest on loans is accrued daily on the outstanding balances.
The accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and
in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on
non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest
accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income.
The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual life of the loans.
Commercial loans less than $100,000, residential real estate mortgage, home equity loans and installment loans are
considered small balance homogenous loan pools and, accordingly, are not evaluated for purposes of impairment. All
other loans are specifically evaluated for impairment. Loans are considered impaired when, based on current
information and events, it is probable that the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The impairment is measured based on the present value of expected future
cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for
those loans that are collateral dependent and for which management has determined foreclosure is probable, the
measure of impairment of those loans is based on the fair value of the collateral. The amount of impairment, if any,
and any subsequent changes are included in the allowance for loan losses.
8
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 1.
Summary of Significant Accounting Policies (continued)
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management believes that collectibility of the principal is
unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that
management believes will be adequate to absorb estimated losses on existing loans based on an evaluation of the
collectibility of loans and prior loss experience. This evaluation also takes into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current
economic conditions that may affect the borrower's ability to pay. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be necessary if there are significant
changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process,
periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the
allowance based on their judgment about information available to them at the time of their examination.
Loans held for sale: Loans originated and intended for sale in the secondary market are carried at the lesser of cost
or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance
by charges to income. Loans held for sale are residential real estate loans and are included in net loans on the
balance sheet. Loans held for sale were $1,247,000 and $2,865,000 as of December 31, 2007 and 2006,
respectively.
Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is
computed principally by accelerated methods for furniture and equipment and the straight-line method for buildings
based on estimated useful lives of the assets.
Other real estate owned (OREO): OREO includes real estate assets that have been received in satisfaction of debt
and is included in other assets. OREO is initially recorded and subsequently carried at the lower of cost or fair value
less estimated selling costs. Any valuation adjustments required at the date of transfer are charged to the allowance
for loan losses. Subsequently, unrealized losses and realized gains and losses on sale are included in other
noninterest income. Operating results from OREO are recorded in other non-interest expense.
Goodwill: The excess of the cost of an acquisition over fair value of the net assets acquired consists of goodwill and
customer list (see “Intangibles” section below). Goodwill is not amortized, rather it is assessed at least annually for
impairment and any such impairment will be recognized in the period identified.
Intangibles: The Company’s intangibles consist of a customer list obtained through an acquisition. The customer list
has a finite life and is amortized over 6 years. The balance is also tested for impairment and any such impairment
will be recognized in the period identified.
Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the
assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right, free of conditions that constrain it from
taking advantage of that right, to pledge or exchange the transferred assets, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase them before their maturity.
9
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 1.
Summary of Significant Accounting Policies (continued)
Income taxes: Effective January 1, 2007, the Company and the Bank elected to be taxed as S Corporations under
sections of the federal and state income tax laws that provide that, in lieu of corporation income taxes, the
stockholders separately account for their pro rata shares of the Company’s and the Bank’s items of income,
deductions, losses and credits. As a result, for the periods covered by this election, the only corporate income taxes
recognized in the accompanying financial statements in relation to the Company and the Bank are certain state
income taxes and federal built-in gains taxes.
As a result of this election, deferred taxes related to the Company and the Bank were eliminated and charged to
2007 income tax expense.
The income tax status of Sandhill Life Insurance Company did not change. As a result, deferred taxes for Sandhill
are provided using a liability method that recognizes deferred tax assets for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of enactment.
Earnings per common share: Earnings per common share are based on the weighted average number of shares
outstanding during the year.
Comprehensive income: Accounting principles require that recognized revenue, expenses, gains and losses be
included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities, are reported as a separate component of the equity section of the balance sheets, such
items, along with net income, are components of comprehensive income.
Reclassifications: Certain amounts in 2005 and 2006 have been reclassed to conform to the 2007 presentation.
New Accounting Pronouncements: In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS)157, Fair Value Measurements. This Statement defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It
clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting entity transacts. This Statement does
not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair value. This Statement is effective for fiscal years
beginning after November 15, 2007, with earlier adoption permitted. The Company is currently evaluating the impact
that the adoption of this Statement will have on its financial position, results of operation and cash flows.
10
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 1.
Summary of Significant Accounting Policies (continued)
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of SFAS Statement No. 115 (SFAS 159), which provides all entities, including not-for-profit
organizations, with an option to report selected financial assets and liabilities at fair value. The objective of the
Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings
caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge
accounting. Certain specified items are eligible for the irrevocable fair value measurement option as established by
SFAS 159. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15,
2007. The Company is currently evaluating the impact that the adoption of this Statement will have on its financial
position, results of operation and cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes –
an Interpretation of FASB Statement 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a Company's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.
FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial
statements, tax positions taken or expected to be taken on a tax return. If there are changes in net assets as a result
of application of FIN 48, these will be accounted for as an adjustment to the opening balance of retained earnings.
Additional disclosures about the amounts of such liabilities will be required also. In February 2008, the FASB
delayed the effective date of FIN 48 for certain nonpublic enterprises to annual financial statements for fiscal years
beginning after December 15, 2007. The Company will be required to adopt FIN 48 in its 2008 annual financial
statements. The Company does not expect that the adoption of this Statement will have a material impact on its
financial position, results of operations or cash flows.
Note 2.
Restrictions on Cash and Due From Banks
The Bank is required to maintain cash reserve balances in cash or on deposit with the Federal Reserve Bank based
on a percentage of deposits. The total of these required reserve balances was approximately $12,957,000 and
$10,743,000 at December 31, 2007 and 2006, respectively.
11
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 3.
Securities
Carrying amounts and fair values of securities available for sale are summarized as follows:
Amortized
Cost
December 31, 2007
U.S. Treasury
Government sponsored enterprises
Mortgage-backed securities
Municipal bonds
Corporate securities and other
Gross
Unrealized
Gains
$
Total debt securities
34,990
180,571
25,038
2,100
$
25
1,553
99
13
Gross
Unrealized
Losses
$
-
Fair
Value
1
363
136
-
$
35,014
181,761
25,001
2,113
242,699
1,690
500
243,889
4,749
2,591
1,240
75
4,749
3,756
Mutual funds
Marketable equity securities
$ 250,039
$
2,930
$
575
$ 252,394
$
$
592
110
1
$
142
183
856
129
-
$
December 31, 2006
U.S. Treasury
Government sponsored enterprises
Mortgage-backed securities
Municipal bonds
Corporate securities and other
29,923
49,604
123,962
22,766
1,799
29,781
49,421
123,698
22,747
1,800
Total debt securities
228,054
703
1,310
227,447
Mutual funds
Marketable equity securities
32,295
3,073
1,196
818
55
31,477
4,214
2,183
$ 263,138
$ 263,422
12
$
1,899
$
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 3.
Securities (continued)
The following table shows the Company’s gross unrealized losses and fair value on investments, aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss position:
Description of Securities
As of December 31, 2007:
Government sponsored enterprises
Mortgage-backed securities
Municipal bonds
Marketable equity securities
Total temporarily
impaired securities
As of December 31, 2006:
U.S. Treasury
Government sponsored enterprises
Mortgage-backed securities
Municipal bonds
Mutual funds
Marketable equity securities
Total temporarily
impaired securities
Continuous unrealized
losses existing for less
than 12 months
Unrealized
Fair Value
Losses
Continuous unrealized
losses existing greater
than 12 months
Unrealized
Fair Value
Losses
Total
Unrealized
Fair Value
Losses
$ 9,991
35,452
4,944
293
$
1
122
22
46
$
17,191
6,644
48
$
241
114
29
$
9,991
52,643
11,588
341
$
1
363
136
75
$ 50,680
$
191
$ 23,883
$
384
$ 74,563
$
575
$
24,956
14,675
9,980
49
$
36
45
78
5
$ 29,781
24,465
52,110
3,058
29,365
104
$
142
147
811
51
818
50
$ 29,781
49,421
66,785
13,038
29,365
153
$
142
183
856
129
818
55
$ 49,660
$
164
$ 138,883
$
2,019
$ 188,543
$
2,183
13
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 3.
Securities (continued)
Management does not believe that any individual loss as of December 31, 2007, represents an other-than-temporary
impairment. The unrealized losses for mortgage-backed securities and mutual funds related primarily to changes in
interest rates and are expected to vary with the movement of interest rates. No credit issues have been identified
that cause management to believe the declines in market values are other than temporary. In analyzing the issuer's
financial condition, management considers industry analysts' reports, financial performance and projected target
prices of investment analysts within a one-year time frame.
The amortized cost and fair value of debt securities as of December 31, 2007, by contractual maturity are shown
below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, these
securities are not included in the maturity categories in the following maturity summary.
Cost
Due in one year or less
Due after one year through five years
Due after five through ten years
Due over 10 years
Mortgage-backed securities
Fair Value
$
35,337
1,051
14,940
10,800
180,571
$
35,360
1,065
14,995
10,708
181,761
$
242,699
$
243,889
Gross realized gains and losses on securities available for sale are as follows:
2007
Gross realized gains
Gross realized losses
Years Ended December 31,
2006
2005
$
572
1,012
$
195
133
$
138
83
$
(440)
$
62
$
55
Securities available for sale with a carrying amount of $125,140,000 at December 31, 2007 and $95,449,000 at
December 31, 2006, were pledged as collateral on public deposits and for other purposes as required or permitted by
law.
14
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 4.
Loans
The composition of loans is as follows:
December 31,
2007
Construction and land development
Commercial real estate
Commercial, other
Retail, primarily residential real estate
Home equity line of credit
$
143,906
489,693
629,499
320,731
566,181
2,150,010
5,571
2,155,581
26,930
$
152,481
454,993
499,762
271,745
571,339
1,950,320
4,647
1,954,967
20,816
$
2,128,651
$
1,934,151
Plus deferred costs, net
Less allowance for loan losses
Loans, net
2006
An analysis of the allowance for loan losses is as follows:
2007
Years Ended December 31,
2006
2005
Balance, beginning
Provision for losses
Loan recoveries
Loans charged off
$
20,816
14,950
142
(8,978)
$
18,100
4,800
523
(2,607)
$
13,543
15,000
146
(10,589)
Balance, ending
$
26,930
$
20,816
$
18,100
The following is a summary of information pertaining to impaired loans:
December 31,
2007
Impaired loans without a valuation allowance
Impaired loans with a valuation allowance
Total impaired loans
$
Valuation allowance related to impaired loans
15
2006
$
$
26,165
22,154
48,319
$
5,523
$
$
3,629
3,629
-
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 4.
Loans (continued)
2007
Average investment in impaired loans
Interest income recognized on impaired loans
Interest income recognized on a cash basis on
impaired loans
$
Years Ended December 31,
2006
23,273
106
$
7,251
3
-
$
2005
11,518
369
3
383
The following table summarizes the amounts of nonperforming loans and assets:
December 31,
2007
Non-accruing loans
Loans 90 days or more past due,
still accruing interest
Non-performing loans
Other real estate owned
Non-performing assets
$
38,285
$
12,548
50,833
1,049
51,882
2006
$
4,348
$
19,014
23,362
3,576
26,938
Loans to directors, principal officers and companies in which they have a 10% or more beneficial ownership were
made by the Company in the ordinary course of business on substantially the same terms, including rates and
collateral as those prevailing at the time for comparable transactions with other persons and, in the opinion of
management, did not involve more than the normal risk of collectibility or present unfavorable features. As of
December 31, 2007 and 2006, loans aggregating $844,000 and $814,000, respectively, were outstanding to
directors, certain officers and related companies.
16
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 5.
Premises and Equipment
Premises and equipment consist of:
December 31,
2007
Land
Building and improvements
Equipment
Leasehold improvements
Construction in progress
$
31,717
69,860
33,654
5,335
2,858
143,424
48,466
$
32,344
64,234
34,912
3,680
3,147
138,317
46,118
$
94,958
$
92,199
Less accumulated depreciation
Premises and equipment, net
2006
The Bank conducts a portion of its operations from leased facilities under leases with nonaffiliated parties which will
expire at various dates through December 2020. All leases for these facilities are classified as operating leases and
some contain an option to renew or extend the lease term for periods of 2-10 years. In addition to the minimum
rental, certain leases require the payment of taxes, insurance and maintenance costs.
Minimum annual rentals for future years under operating leases having an original term of more than one year are as
follows:
Year ending December 31:
2008
2009
2010
2011
2012
Thereafter
$
1,231
1,197
619
585
406
3,060
$
7,098
Total rental expense for operating leases, including contractual real estate tax and operational costs, amounted to
$1,129,000 in 2007, $984,000 in 2006, and $696,000 in 2005.
17
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 6.
Intangibles
In 2007, the Company acquired a customer list with the acquisition of HPL&S. It has a remaining weighted average
amortization period of approximately six years. The following table presents the changes in the carrying amount of
the intangible, gross carrying amount, accumulated amortization, and net book value as of December 31, 2007.
Balance at beginning of period
Customer list related to HPL&S acquisition
Amortization expense
Balance at end of period
$
Gross carrying amount
Accumulated amortization
Net book value
$
$
$
4,108
(228)
3,880
4,108
(228)
3,880
The following presents the estimated amortization expense of the intangible asset:
Year ending December 31:
2008
2009
2010
2011
2012
Thereafter
18
$
685
685
685
685
685
455
$
3,880
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 7.
Deposits
The composition of interest bearing deposits is as follows:
December 31,
2007
NOW and money market accounts
Savings deposits
Time certificates, less than $100,000
Other time certificates
2006
$
771,434
67,706
686,615
356,243
$
672,435
82,523
721,583
391,335
$
1,881,998
$
1,867,876
$
979,778
42,405
13,931
6,731
13
$
1,042,858
At December 31, 2007, the scheduled maturities of time certificates are as follows:
Due in one year or less
Due after one year through two years
Due after two years through three years
Due after three years through five years
Due after five years
The Company had brokered certificates of deposits totaling $53,021,000 at December 31, 2007 and $106,074,000 at
December 31, 2006.
19
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 8.
Note Payable and Borrowed Funds
The Company has a revolving credit agreement due March 26, 2008, which is secured by the stock of First American
Bank with interest at the Company's option of the prime rate or the one-month LIBOR plus 1.00%. The Company did
not have any borrowings under this agreement as of December 31, 2007 or 2006. Total borrowings under this
agreement may not exceed $25,000,000.
Borrowed funds at December 31 consisted of:
2007
U.S. Treasury demand notes
FHLB advances:
FHLB advance, due August 2009, 1 month LIBOR floating rate
FHLB advance, due November 2009, 4.29% fixed rate
FHLB advance, due August 2010, 4.87% fixed rate
FHLB advance, due August 2010, 5.05% fixed rate
FHLB advance, due November 2010, 4.19% fixed rate
FHLB advance, due December 2010, 3.94% fixed rate
FHLB advance, due December 2011, 3.97% fixed rate
FHLB advance, due June 2011, 5.22% fixed rate
FHLB advance, due May 2012, 4.93% fixed rate
FHLB advance, due May 2012, 5.03% fixed rate
FHLB advance, due May 2012, 5.05% fixed rate
FHLB advance, due November 2012, 4.35% fixed rate
$
5,041
$
20,000
10,000
10,000
9,500
9,300
10,000
8,000
10,000
2,500
7,500
10,000
10,000
121,841
2006
$
3,016
$
20,000
23,016
Demand notes to the United States Treasury bear interest at 0.25% below the federal funds rate (3.06% at
December 31, 2007).
The Company has a credit agreement with the Federal Home Loan Bank of Chicago. Borrowings are secured by
residential real estate mortgages totaling $318,241,000 and $125,178,000 at December 31, 2007 and 2006,
respectively.
Note 9.
Junior Subordinated Notes Issued to Capital Trusts
First American Bank Corporation has established statutory trusts for the sole purpose of issuing trust preferred
securities and related trust common securities. The proceeds from such issuances were used by the trusts to
purchase junior subordinated notes of the Company, which are the sole assets of each trust. Concurrent with the
issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust
preferred securities. The trust preferred securities are issues that qualify, and are treated by the Company, as Tier 1
regulatory capital, subject to certain limitations. The Company owns all of the common securities of each trust. The
trust preferred securities issued by each trust rank equally with the common securities in right of payment, except
that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred
securities will rank senior to the common securities in right of payment.
20
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 9.
Junior Subordinated Notes Issued to Capital Trusts (continued)
The table below summarizes the outstanding junior subordinated notes and the related trust preferred securities
issued by each trust as of December 31, 2007:
First American
Bank Capital
Trust I
Junior Subordinated Notes:
Principal balance
Annual interest rate
Stated maturity date
Call date
Trust Preferred Securities:
Face value
Annual interest rate
Issuance date
Distribution dates*
$
First American
Bank Capital
Trust II
51,547 $
15,464 $
6.694%
7.492%
March 15, 2036 September 15, 2036
March 15, 2011 September 15, 2011
$
50,000 $
6.694%
March 2006
Quarterly
15,000 $
7.492%
June 2006
Quarterly
First American
Bank Capital
Trust III
15,464
6.753%
March 15, 2037
March 15, 2012
15,000
6.753%
December 2006
Quarterly
* All cash distributions are cumulative.
The Company deconsolidates the capital trust entities per FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, as revised in December 2003. The trust preferred securities are subject to mandatory redemption,
in whole or in part, upon the repayment of the junior subordinated notes at the stated maturity date or upon
redemption on a date no earlier than the call dates noted in the table above. Prior to these respective redemption
dates, the junior subordinated notes may also be redeemed by the Company (in which case the trust preferred
securities would also be redeemed) after the occurrence of certain events that would have a negative tax effect on
the Company or the trusts, would cause the trust preferred securities to no longer qualify for Tier 1 capital, or would
result in a trust being treated as an investment company. Each trust’s ability to pay amounts due on the trust
preferred securities is solely dependent upon the Company making payment on the related junior subordinated
notes. The Company’s obligations under the junior subordinated notes and other relevant trust agreements, in
aggregate, constitute a full and unconditional guarantee by the Company of each trust’s obligations under the trust
preferred securities issued by each trust. The Company has the right to defer payment of interest on the notes and,
therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity date in
the table above. During any such deferral period, the Company may not pay cash dividends on its common stock
and generally may not repurchase its common stock.
21
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 9.
Junior Subordinated Notes Issued to Capital Trusts (continued)
In March 2005, the Board of Governors of the Federal Reserve System issued a final rule allowing bank holding
companies to continue to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital
purposes, subject to a 25% limitation to all core (Tier 1) capital elements, net of goodwill less any associated deferred
tax liability. Any amount not included in Tier 1 Capital can generally be included in Total Capital. The final rule
provides a five-year transition period, ending March 31, 2009, for the applications of the aforementioned quantitative
limitation. As of December 31, 2007, $56,362,000 of the trust preferred securities noted in the table above qualified
as Tier 1 capital under the final rule adopted in March 2005. The remaining $23,638,000 is included within total
capital of the Company.
Note 10.
Employee Benefit Plans
First American Bank has a profit-sharing plan. The annual contributions are determined by First American Bank’s
Board of Directors and are based on a formulated percent of eligible compensation for plan participants. The plan
may be terminated by action of the Board of Directors. The profit sharing contributions are allocated between the
Company’s 401(k) plan and Employee Stock Ownership Plan (ESOP).
The Company’s 401(k) plan covers all employees who have completed 1,000 hours of service within a plan year.
The Company established an Employee Stock Ownership Plan (ESOP) in 2006. The ESOP is a Qualified
Retirement Plan, intended to satisfy the requirements of section 401(a) of the Internal Revenue Code of 1986 (as
amended). The purpose of the Plan is to enable employees to acquire stock ownership in the Company. The Plan
covers employees of the Company who are at least 21 years of age and have been employed for at least one year.
The Company made a cash contribution of $1,472,000 which was used to purchase 5,028 shares of the Company’s
common stock in 2007. There were no cash contributions in 2006.
The ESOP is non-leveraged. It is expected that all shares contributed by the Company will be allocated upon deposit
into the ESOP Trust. In addition to contributions by the Company, the ESOP will accept rollovers and transfers of
Company stock held in the First American Bank Corporation Profit Sharing Plan or in individual IRAs owned by Plan
participants. Dividends paid on ESOP shares are allocated to the individual employees' accounts within the ESOP.
In the event terminated Plan participants desire to sell their allocated shares of the Company’s stock, or certain
employees elect to diversify their account balances, the Company may be required to purchase the shares from the
participant at their fair market value. The ESOP held 41,903 shares of Company stock in participants’ Transfer
Accounts and Rollover Accounts as of December 31, 2007 and 36,945 shares as of December 31, 2006. The fair
market value of those shares totaled $12,264,000 and $12,561,000 as of December 31, 2007 and 2006, respectively.
For so long as either the Company is an “S-Corporation” for federal income tax purposes, or the articles of
incorporation or the by-laws of the Company restrict ownership of substantially all outstanding shares of stock of the
Company to current employees of the Bank and to the ESOP Trust, distribution of the balance of a participant’s
Company stock account shall be made either in cash or in Company stock. Such distribution of Company stock will
be subject to the requirement that the Stock must immediately be sold to the Company or to the Trust at a price equal
to its fair market value. The Company or the Trustee shall have the option to pay the purchase price for Company
stock in one lump sum or in substantially equal annual installments over a period not exceeding five years, with
adequate security provided and with interest payable at a reasonable rate on any unpaid installment balance, as
determined by the Company or the Trustee.
22
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 10.
Employee Benefit Plans (continued)
The amounts charged to expense in relation to these plans for the years ended December 31, 2007, 2006 and 2005,
were $2,054,000, $2,019,000, and $1,602,000, respectively.
The Company assumed the 401(k) Profit Sharing Plan in the acquisition of HPL&S which covers all employees of
HPL&S who have completed 90 days of service. The terms of the Plan allow HPL&S employees to defer up to the
IRS prescribed dollar maximum. HPL&S will match these deferrals at the rate of $0.50 per dollar on the first $1,000
deferred and $0.25 per dollar thereafter up to 25% of the employee’s eligible compensation. Matching contributions
are fully vested when made. Annual profit sharing contributions are discretionary and based on a percentage of
eligible compensation as determined by HPL&S. These contributions are subject to a six-year graded vesting
schedule. The Company is committed to honor and contribute on this plan until September 1, 2010 at which time the
Company has the option of terminating, merging or continuing the benefit. The benefit plan expense for the fourmonth period August 31, to December 31, 2007, totaled $77,000 and was recorded in compensation expense for the
Company.
Note 11.
Income Taxes
Effective January 1, 2007, the Bank and the Company elected S Corporation status under the Internal Revenue
Code. Subsequently, all deferred taxes related to the Company and Bank were eliminated. The remaining deferred
taxes relate to Sandhill Life Insurance Company as there was no change in its income tax status.
The deferred taxes which are included in other assets and other liabilities consist of the following components:
December 31,
2007
Deferred tax assets:
Allowance for loan losses
Premises and equipment
Accrued vacation pay
Other real estate owned
Interest on nonaccrual loans
Securities available for sale
Other
$
Deferred tax liabilities:
Deferred gain on marketable equity security
Deferred loan costs
Deferred gain on nonmarketable securities
Securities available for sale
Other
2006
-
$
411
411
Net deferred tax (liability) asset
$
23
(411)
8,264
1,212
757
199
142
110
44
10,728
355
2,894
820
434
4,503
$
6,225
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 11.
Income Taxes (continued)
The components of income tax expense are as follows:
2007
Current
Deferred
Elimination of deferred taxes due to change
in tax status
$
$
Years Ended December 31,
2006
(531)
-
$
6,115
5,584
$
10,120
(539)
9,581
$
$
2005
10,402
(2,847)
7,555
The reasons for the differences between income tax expense and the amount computed at the applicable statutory
federal rate of 35 percent were as follows:
Years Ended December 31,
2006
2005
Federal income tax at statutory rate
Increase (decrease) due to:
Tax exempt income
State income taxes
Other
$
$
(1,008)
826
611
$
Note 12.
9,152
9,581
6,846
(352)
819
242
$
7,555
Commitments, Contingencies and Credit Risk
Financial instruments with off-balance-sheet risk: The Company is party to financial instruments with off-balancesheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract
amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial
instruments and the Company's exposure to credit loss, subject to availability of collateral in the event of
nonperformance by the other party to the financial instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet instruments.
24
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 12.
Commitments, Contingencies and Credit Risk (continued)
A summary of the contractual amount of the Company's exposure to off-balance-sheet risk is as follows:
December 31,
2007
Commitments to extend credit
Letters of credit
$
1,069,752
106,894
2006
$
1,032,772
112,285
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company evaluates each
customer’s credit worthiness and determines the amount of collateral required based on management’s credit
evaluation of the counterparty.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts
receivable, inventory, property and equipment, income producing properties, supporting those commitments if
deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with
the third party, the Company would be required to fund the commitment. The maximum potential amount of future
payments the Company could be required to make is represented by the contractual amount shown in the summary
above. If the commitment is funded, the Company would be entitled to seek recovery from the customer. At
December 31, 2007 and 2006, no amounts have been recorded as liabilities for the Company’s potential obligations
under these guarantees.
Collateral held for both commitments to extend credit and letters of credit varies but may include securities, accounts
receivable, inventories, property and equipment, and income-producing commercial properties.
Contingencies: Due to the nature of its business activities, the Company is subject to pending and threatened legal
action which arises in the normal course of business. In the opinion of management, after considering the advice of
its legal counsel, there is no pending or threatened legal action of any material consequence at December 31, 2007.
Concentrations of credit risk: In addition to financial instruments with off-balance-sheet risk, the Company, to a
certain extent, is exposed to varying risks associated with concentrations of credit. Concentrations of credit risk
generally exist if a number of counterparties are engaged in similar activities and have similar economic
characteristics that would cause their ability to meet contractual obligations to be similarly affected by economic or
other conditions.
25
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 12.
Commitments, Contingencies and Credit Risk (continued)
The Company conducts substantially all of its lending activities throughout northeastern Illinois. Loans granted to
businesses are primarily secured by business assets, owner-occupied real estate or personal assets of commercial
borrowers. Loans to individuals are primarily secured by automobiles, residential real estate or other personal assets.
Since the Company's borrowers and its loan collateral have geographic concentration in the greater Chicago
metropolitan area, the Company could have exposure to a decline in the local economy and real estate market.
However, management believes that the diversity of its customer base and local economy, its knowledge of the local
market, and its proximity to customers limits the risk of exposure to adverse economic conditions.
The nature of the Company's business requires that it maintain amounts due from banks and federal funds sold
which, at times, may exceed federally insured limits. Management monitors these correspondent relationships and
the Company has not experienced any losses in such accounts.
Derivative financial instruments: The Company offers derivative contracts to its customers and offsets its exposure
from such contracts by purchasing offsetting financial contracts. The customer accommodations and any offsetting
financial contracts are treated as non-hedging derivative instruments which do not qualify for hedge accounting. At
December 31, 2007, these contracts have a notional amount of $13,120,000 and expire in November 2012. In
accordance with SFAS No. 133 and FIN 39, the fair value of $187,000 is recorded as an other asset with a
corresponding other liability in the balance sheet. The change in fair value is netted in the income statement. There
were no derivative contracts for the year ended December 31, 2006.
Note 13.
Dividend Restrictions and Regulatory Capital Requirements
Bank regulations place restrictions upon the amount of dividends that can be paid to the Company by its subsidiary
bank. The availability of dividends may be further limited because of the need to maintain capital ratios satisfactory
to applicable regulatory agencies.
The Company and the subsidiary bank are subject to various regulatory capital requirements administered by the
federal 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 the financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and the 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. The capital amounts and
classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the following tables) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital to average assets. Management believes the
Company and the subsidiary bank meet all capital adequacy requirements to which they are subject as of
December 31, 2007.
As of December 31, 2007, the most recent notification from the Federal Reserve Bank categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table
below. There are no conditions or events since that notification that management believes have changed the Bank’s
categories.
26
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 13.
Dividend Restrictions and Regulatory Capital Requirements (continued)
The Company’s and the subsidiary bank’s actual capital amounts and ratios are also presented in the table.
Actual
Amount
As of December 31, 2007
Total Capital (to Risk-Weighted Assets)
Consolidated
First American Bank
$
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
To be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
267,162
263,758
10.5% $
10.4%
202,707
202,547
8.0%
8.0% $
N/A
253,184
10.0%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated
First American Bank
216,069
236,291
8.5%
9.3%
101,353
101,273
4.0%
4.0%
N/A
151,910
6.0%
Tier 1 Capital (to Average Assets)
Consolidated
First American Bank
216,069
236,291
8.2%
9.0%
104,908
104,794
4.0%
4.0%
N/A
130,993
5.0%
Actual
Amount
As of December 31, 2006
Total Capital (to Risk-Weighted Assets)
Consolidated
First American Bank
$
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
267,974
252,629
11.3% $
10.6%
190,279
190,114
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated
First American Bank
222,627
231,720
9.4%
9.8%
Tier 1 Capital (to Average Assets)
Consolidated
First American Bank
222,627
231,720
8.5%
8.8%
27
To be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
8.0%
8.0% $
N/A
237,643
10.0%
95,139
95,057
4.0%
4.0%
N/A
142,586
6.0%
105,188
105,011
4.0%
4.0%
N/A
131,263
5.0%
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 14.
Fair Values of Financial Instruments
The fair value of a financial instrument is the current amount that would be exchanged between willing parties other
than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company’s various financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement
of the instruments and exclude certain financial instruments and all nonfinancial instruments. Accordingly, the
aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating the fair value of its financial
instruments:
Cash, due from banks, federal funds sold and interest-bearing deposits in other banks: The carrying amounts
reported in the balance sheets for cash and these short-term instruments approximate their fair values.
Securities available for sale: Fair values for securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market prices of comparable instruments.
Nonmarketable equity securities: These stocks are redeemable at par; therefore, market value equals cost.
Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are
based on carrying values. The fair values for other loans are determined using estimated future cash flows,
discounted at the interest rates currently being offered for loans with similar terms to borrowers with similar credit
quality.
Deposit liabilities: The fair value of deposits with no stated maturity, such as noninterest bearing deposits, savings,
NOW accounts, and money market accounts are estimated using a discounted cash flow calculation that applies the
US Treasury yield curve to a schedule of decay rates provided by the OTS. Fair values for fixed rate certificates of
deposit are estimated using a discounted cash flow calculation that applies the Brokered CD Average yield curve to a
schedule of aggregated expected monthly maturities on time deposits.
Note payable: The carrying amount of the Company’s note payable approximates its fair value.
Borrowed funds: The fair values for Federal Home Loan Bank advances are estimated using discounted cash flow
analyses using interest rates currently being offered for advances with similar terms. The carrying amounts of U.S.
treasury demand notes approximate their fair values.
Junior subordinated notes issued to capital trust: The fair value of the fixed rate junior subordinated notes were
estimated using a discounted cash flow analysis using interest rates currently being offered for junior subordinated
notes with similar terms.
Accrued interest: The carrying amounts of accrued interest receivable and payable approximate their fair values.
28
First American Bank Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Table Amounts in Thousands)
Note 14.
Fair Values of Financial Instruments (continued)
Off-balance-sheet instruments: Fair values for the Company's off-balance-sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the remaining term of the agreements and the
counterparties' credit standing. There is no material difference between the notional amount and the estimated fair
value of off-balance-sheet items which are primarily comprised of commitments to extend credit and are typically
priced at market at the time of funding.
The estimated fair values of financial instruments follow:
2007
Carrying
Amount
Financial assets
Cash and due from banks
Federal funds sold
Interest-bearing deposits in other banks
Securities available for sale
Nonmarketable equity securities
Loans, net
Accrued interest receivable
$
57,520
25,000
5,146
252,394
8,780
2,128,651
9,875
2006
Fair
Value
$
57,520
25,000
5,146
252,394
8,780
2,145,838
9,875
Carrying
Amount
$
77,700
97,000
117
263,138
7,771
1,934,151
11,086
Fair
Value
$
77,700
97,000
117
263,138
7,771
1,910,355
11,086
Financial liabilities
Deposits
Federal funds purchased
Borrowed funds
Junior subordinated notes issued to capital
trust
Accrued interest payable
Note 15.
$ 2,211,017
1,500
121,841
$ 2,183,578
1,500
122,147
$ 2,206,756
23,016
$ 2,148,745
23,010
80,000
3,598
80,741
3,598
80,000
4,063
81,030
4,063
Regulatory Matters
Following a regulatory compliance examination on March 1, 2004, banking regulators terminated a Cease and Desist
Order issued in 2003 to the Bank. In its place, bank regulators and the Bank agreed on a Memorandum of
Understanding requiring the Bank to take a number of actions intended to ensure continued compliance with all
recommendations cited in the March 1, 2004, examination report. The Bank has completed all actions suggested and
continues to file required communications of its progress with the regulatory authorities. Pursuant to satisfactory
ratings from the 2007 regulatory exam, the Memo of Understanding was terminated as of June 21, 2007. The Bank
has agreed to submit annual progress reports with the regulators.
In July 2004, the Department of Justice and the Bank agreed to the entry of a Consent Order (“Order”) in which the
Bank would undertake a number of initiatives to ensure compliance with consumer and anti-discrimination laws. The
total financial commitment for the initiatives related to offering Bank products to certain geographical segments in
which the Bank conducts business required by the Order totals $5.7 million through July 2009.
29